EPR Properties (EPR) Q2 2016 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to the Second Quarter 2016 EPR Properties Earnings Conference Call. [Operator Instructions] As a reminder, today’s conference may be recorded. I would like to introduce your host for today’s conference, Mr. Brian Moriarty, VP of Corporate Communications. Sir, please go ahead.

Thank you, operator, and thanks to all joining us today. As always, I'll start the call by informing you that this call may include forward-looking statements as defined by the Private Securities Litigation Act of 1995. Identified by such words as will be, intend, continue, believe, may, expect, hope, anticipate or other comparable terms. The company's actual financial condition and results of operations may vary materially from those contemplated by such forward-looking statements. Discussion of these factors that could cause results to differ materially from these forward-looking statements are contained in the company's SEC filings, including the company's reports Form 10-K and 10-Q. Now, I'll turn the call over to company President and CEO, Greg Silvers.

Thank you, Brian, and good afternoon to everyone. I'd like to remind everyone that slides are available to follow along via our website at www.eprkc.com. With me on the call today are the company's CFO, Mark Peterson; and CIO, Jerry Earnest. I'll start with our quarterly headlines and then pass the call to Jerry to discuss the business in greater detail. Today’s first headline, revenue and adjusted FFO per share continued strong momentum. As compared to the same quarter previous year, quarterly revenue grew 17% and adjusted FFO per share grew by 8%. We’re delighted to have delivered this consistent story of quarterly growth. Next, healthy entertainment investment spending anchored by theatre portfolio transaction. While theatre build-to-suits provide our more consistent stream of growth due to our strong relationships, we also opportunistically pursue portfolio deals should they meet our desired characteristics. The $100 million theatre portfolio purchased in the second quarter is very much in line with our targeted characteristics and we're pleased with this immediately accretive transaction. Our third headline is Adelaar infrastructure bonds issued. As we announced in June, the Sullivan County Infrastructure Local Development Corporation issued $110 million of Series 2016 Revenue Bonds which will fund construction costs for infrastructure incurred by EPR Properties in connection with its development at Adelaar. Jerry will have more on this key milestone for Adelaar. Next, private placement transaction nets $340 million of senior unsecured notes. As Mark will speak to further, this transaction expands our options for raising capital. It also demonstrates that our strategy of building a portfolio of durable, strong cash flowing assets is welcomed by insurance companies that focus on long term reliable investments. Our last headline is increasing adjusted FFO per share and investment spending guidance. We're excited to be able to again raise our guidance. As we continue to demonstrate the strength of our focused business model, we’re pleased with our ongoing ability to deliver against our stated strategy and execute the business. With that, I'll turn it over to Jerry and I’ll rejoin you for questions.

Thank you, Greg. During the second quarter of 2016, investment spending accelerated from the previous quarter to $226.7 million, bringing year to date spending to $371.8 million. The quarter’s strong spending pace reflects the continued momentum within our primary investment segments. As such, I am pleased to announce that we anticipate this momentum will continue and we are raising the midpoint of our 2016 investment spending guidance by $50 million to a range of $650 million to $700 million. In the entertainment segment, the theatre exhibition business continued to be solid; box office revenues are up 2% year to date over last year, down from the exceptional growth rate in the first quarter, but in line with industry forecast for relatively flat 2016. As we mentioned previously, we expect 2016 to be a transition year when compared with the outstanding movie schedule of 2015. We anticipate robust box office revenues in 2017, given that much of the franchise content is released in two-year cycles. For the quarter, investment spending in our entertainment segment totaled $116.6 million, consisting primarily the acquisition of a portfolio of six Carmike megaplex theatres for $94.8 million, three build-to-suit theatres, the redevelopment of five existing theatres and investment in two build-to-suit family entertainment centers. The purchase of the six theatre portfolio, which involves the conversion of five high-performing Carmike theatres to the expanded amenity format, demonstrates the additional acquisition opportunities in the theatre exhibition business as a result of the conversion of many theatres to the amenity format. We continue to believe that the current investment environment in megaplex theatres, particularly the expanded amenity format, remains a strong contributor to our investment spending pipeline. Our theatre portfolio already contains 21 renovated theatres, with an additional 23 theatre renovations in process or planned. In the recreation segment, the roll out of our investment in Topgolf properties continues at a steady pace. Topgolf properties maintain their strong performance with lease coverage in excess of three times, strengthening our master lease portfolio. We continue to be encouraged by the strong consumer preference, consistent ramp up and reliable performance of our Topgolf investments. At the end of the second quarter, we had 20 Topgolf properties in service, with a further seven Topgolf properties under construction. We are now in the prime operating season for our waterpark assets. And while it is early to report results, the extended dry hot season that we are experiencing this summer should bode well for the properties. Recreation spending totaled $39.7 million during the quarter, which consisted primarily of over $37 million in spending on our Topgolf properties under construction. During the second quarter, we generated substantial investment spending across our education facilities platform, consisting of public charter schools, early childhood education facilities and private schools. All three of our education property types continue to present significant investment opportunities. We expect that national charter school enrollments will push past the 3 million student enrollment level achieved last year, further early enrollment interest for the coming school year in our private schools and early education centers show strong growth as well. We continue to believe that our performance is demonstrating that our extensive operator relationships combined with our build-to-suit program provides us with a competitive advantage financing the growing need for high quality education facilities. During the second quarter, we invested $70.4 million in the development or expansion of 18 public charter schools, three private schools and 15 early childhood education centers. Two early childhood education centers were placed in service during the quarter. Also during the second quarter, one of our charter schools exercised an option for early lease termination and purchase of the school property. We sold the charter school for $11.2 million, including a $2.3 million lease termination fee as Mark will discuss. The charter school was in our 2016 guidance for investment dispositions. I also want to confirm our guidance that we remain on track to dispose of at least $50 million of our imagined charter school properties during the balance of the year. Construction is proceeding at a brisk pace for the Montreign casino by Empire Resorts and the infrastructure at the Adelaar casino and resort project located in Sullivan County, New York. Further, we anticipate beginning construction on our waterpark resort property prior to year end. As announced in the press release, infrastructure bonds issued by Sullivan County totaled $110 million were sold during the second quarter. We received $43.4 million in reimbursements for construction costs previously extended. Between now and the end of 2017, we will expand additional funds on the infrastructure and receive another $44.9 million of reimbursements as additional tranches are funded by the bond investors pursuant to their commitments. The infrastructure revenue bonds are serviced through special assessments on the Adelaar real property, including the Montreign resort casino, entertainment village, golf course and waterpark resort properties. Our overall property occupancy remains strong at 99%. As today’s update demonstrates, the underlying operator business that supports our properties continues to demonstrate their solid and consistent operating performance with strong growth profiles. We had a robust first half in terms of investment spending and we are benefiting from the strength in our segments with a growing pipeline of opportunities. Consequently, we are raising the midpoint of our 2016 investment spending guidance by $50 million to a range of $650 million to $700 million. This new and increased guidance reflects our confidence in the opportunities today that we are accessing and executing on with our business strategy today. As reflected in our supplemental, we've executed on approximately $77 million of dispositions through June 30 and we remain on track to deliver on our guidance of approximately $75 million to $175 million in asset dispositions and capital recycling for 2016. We are not adjusting the upper end of this guidance, but we are evaluating several disposition opportunities that could further enhance the quality of our portfolio and cause us to exceed the top end of our disposition range. With that, I’ll turn it over to Mark for a discussion of the financials and I’ll rejoin you for questions.

Thank you, Jerry. I'd like to remind everyone on the call that our quarterly investor supplemental can be downloaded from our website. Now, turning to the first slide, FFO for the second quarter increased to $72.2 million or $1.13 per share from $64.3 million or $1.12 per share in the prior year. FFO as adjusted for the quarter increased to $74.7 million versus $62.3 million in the prior year and was $1.17 per share for the quarter versus $1.08 per share in the prior year, an increase of 8%. Before I walk through the key variances, I want to discuss two of the adjustments to FFO to come to FFO as adjusted. First, as I previously discussed, termination fees received related to leases when an operator exercises its option to purchase the property and terminate the lease prior to lease maturity are included in the gain on sale of real estate for GAAP and thus are executed from the NAREIT definition of FFO. However, lease germination fees not associated with the sale as well as prepayment penalties received related to mortgage loan agreements are included in FFO and FFO as adjusted. Therefore, to be consistent with how other lease termination fees and mortgage loan prepayment penalties are treated and also to be consistent with the wording and intent of the lease agreements, we had the portion of gain on sale related to a termination fee back to FFO to come to FFO as adjusted. Accordingly, for the quarter, we had $2.3 million in such termination fees related to an exercise of the tenant purchase option by one of our public charter school operators and I’ve added this amount to FFO to get to FFO as adjusted. Note that this amount was contemplated in our previous annual guidance. Second, we recorded insurance recovery gains included in other income totaling $1.5 million for the second quarter and $2 million year to date. These gains relate to insurance claims primarily associated with the building that was destroyed by a fire at one of our metro ski resorts. Although these amounts are included in FFO per NAREIT's definition, due to the size and nature of these gains, we have excluded them from FFO as adjusted. Now, I’m going to walk through the key line item variances for the quarter versus the prior year. Our total revenue increased 17% compared to the prior year to a quarterly amount of $118 million. Within the revenue category, rental revenue increased by $18.2 million versus the prior year to $96.1 million and resulted primarily from new investments. Percentage rents for the quarter included in rental revenue were $422,000 versus $87,000 in the prior year. The increase was primarily due to $362,000 in percentage rents received from one of our private schools. Other income increased by $978,000 for the quarter versus last year and was primarily due to the insurance recovery gains of approximately $1.5 million I discussed previously and was partially offset by less fee income. Mortgage and other financing income was $16 million for the quarter, a decrease of approximately $2.3 million versus prior year. The decrease was primarily due to the Camelback hotel and indoor waterpark as the mortgage was rolled into the lease on the adjacent ski hill and outdoor water park in the third quarter last year at the tenant's option as well as the payoff of mortgage notes in the first half of 2016. These decreases were partially offset by additional real estate lending activities. Now on the expense side, G&A expense increased to $9 million for the quarter compared to $7.8 million in the prior year, due primarily to increases in our payroll and benefit costs and professional fees. The increase in payroll and benefit costs is due to the addition of personnel to support our growing asset base as well as increases in incentive compensation and amortization of share based awards. Our net interest expense for the quarter increased by about $2.8 million to $22.8 million. This increase resulted from an increase in average borrowings as well as a decrease in capitalized interest primarily associated with the Adelaar project. Capitalized interest related to Adelaar was $444,000 this quarter compared to $2.1 million in the prior year, as a portion of the project leased to Empire Resorts was placed in service during the first quarter. These increases were partially offset by a lower weighted average interest rate. Transaction cost decreased to $1.5 million from $4.4 million in the prior year due to a decrease in costs associated with potential and terminated transactions. Finally, income tax expense of $423,000 for the quarter primarily relates to our Canadian owned properties and taxable REIT subsidiaries. Current income tax expense for the quarter was $441,000 and as the amount included is a reduction of FFO as adjusted for the quarter. In the prior year, income tax benefit of $7.5 million was recognized based primarily on the favorable completion of an examination by the Canadian Revenue Agency on our Canadian Trust. Turning to the next slide, for the six months ended June 30, our total revenue was up 18% and our FFO as adjusted per share was up 10% to $2.33, certainly strong performance in the first half of our fiscal year. Turning to the next slide, I’ll review some of the company's key credit ratios. As you can see, our coverage ratios for the quarter continue to get stronger with fixed charge coverage of 3.2 times, debt service coverage at 3.6 times and interest coverage at 4 times. Our FFO as adjusted payout ratio was 82% and our net debt to adjusted EBITDA ratio was 5.17 times at quarter end, right in line with our stated expected range of 4.6 to 5.6 times. Adjusted net debt to annualized adjusted EBITDA, which I previously discussed, which as I've previously discussed eliminates the penalty for build-to-suit projects under development and annualizes projects placed in service during the quarter was 4.89 times or about 30 basis points lower. As you can tell by these metrics, our balance sheet continues to be in great shape. Now let's turn to the next slide for a capital markets and liquidity update. At quarter end, we had total outstanding debt of $2.1 billion; about 80% of this debt is fixed rate debt or debt that has been fixed through interest rate swaps with a blended coupon of approximately 5.3%. We had $347 million outstanding at quarter-end on our $650 million line of credit and we had $8.5 million of unrestricted cash on hand. We are in excellent shape with respect to debt maturities. As of today, we have scheduled balloon maturities of only $38 million for the remainder of 2016 and $158 million in 2017. Turning to the next slide, during the quarter, we prepaid in full two secured mortgage notes payable for $24.5 million with an average interest rate of 6.37%. Our secured debt as a percentage of total debt continues to decrease and now stands at less than 12%. During the second quarter, we raised approximately $17 million under our direct stock repurchase plan. We also received proceeds of $43.4 million related to the issuance of revenue bonds by Sullivan County, which reimbursed us for infrastructure construction costs related to the Adelaar resort project. We anticipate receiving another $44.9 million under these bonds to reimburse us for future costs over the balance of the construction period through 2017. Remember these bonds are not on our books. Also, subsequent to quarter end, we took advantage of a strong private placement market and signed a note purchase agreement with investors for $340 million of senior unsecured notes with an attractive blended interest rate of 4.47%. As shown on our debt maturities schedule on the next slide, the notes were issued in two tranches with $148 million at 4.35% due in eight years and $192 million at 4.56% due in 10 years. Both notes fund on August 22. Importantly in this transaction we demonstrated access to another source of capital for EPR as investors new to our name strongly embraced our business model. Other benefits of this private placement transaction were the flexibility to fill in gaps in our maturity laddering and to do so at levels less than [we pared] public issuance to be bond index eligible. Before I move to the next slide, I did want to note here that we are still strongly committed to the public unsecured debt market and this private placement does not represent a shift in overall strategy for the sourcing of debt. We have $1.2 billion in public bond issuances outstanding and certainly expect to continue to access this market in the future. Turning to the next slide, we are pleased to announce that we are increasing our guidance for 2016 FFO as adjusted per share to a range of $4.72 to $4.82 from a range of $4.70 to $4.80. Also, we are increasing our guidance for investment spending to a range of $650 million to $700 million from a range of $600 million to $650 million. Guidance for 2016 is detailed on page 30 of our supplemental. Note that our guidance for termination fees related to public charter school buyouts is increased for the year by approximately $1.2 million at the midpoint due to additional schools indicating they will be exercising their purchase options in 2016. And our expectation for percentage rents is up at the midpoint by $300,000 related primarily to our private schools. In addition, our guidance for general and administrative expenses increased by approximately $2.5 million for the year, primarily due to higher expected incentive compensation and higher professional fees. Now, with that, I’ll turn it back over to Greg for his closing remarks.

Thank you. Again, why don't we go to the operator and see if we’re ready for questions?

[Operator Instructions] Our first question comes from the line of Rob Stevenson with Janney Capital Markets.

I don’t know if I missed it, but Greg, did you say what the yield was on the Carmike portfolio?

We did and it was in the upper 7s, it was a brand-new 15-year lease, now there is more money that goes out as those – as we deploy money to those assets, so we think the overall deal will be approximately $115 million as we deploy money, but the initial yield was, like I said, upper seven.

And then the termination fees from the charter schools, is that – how should we be thinking about the incremental $0.03 to $0.05 over the remainder of the year? Is that two or three schools or is it more with smaller termination fees?

Just a couple of schools.

And then while we're on the schools, is there an update on imagine other than that you guys still expect to do the $50 million or so dispositions, are they still current and everything is still running okay with the existing schools?

Yes. Everything is still fine, they're performing, paying rent and we have no adjustment at this time to our stated plans to raise that guidance on dispositions for them.

And then just lastly with the stock price up in this range, how close are we getting to being able to redeem the convertible preferred?

We're getting close. Basically that price today is like $80.68 on the Series E's, the 9% Series Es. So we're getting to a number that obviously in the last I think we've had 10 days over that number and I think we need 20 days out of 30 consecutive days to be in a position to call those preferred.

From the debt issuance, does that in your mind go towards, if you wind up hitting that in the next two weeks or so, does that wind up some of the capital going towards redeeming that?

I don't think, Rob, we've decided – I mean we have the option of cash and shares and we haven't made a decision on that. I mean, again we are monitoring how that works as you have to track the number of days over a stated number, we’re monitoring that. And as we get closer and feel more confident we will make a decision on kind of how we'll look at that conversion, although we do anticipate in our hope that we’re successful in converting that out.

Because we could do it, issuing common shares at our option. We can do a combination of both or all in common. By the way, I think I said $80.68, its $81.68 as far as that price threshold.

And our next question comes from the line of Craig Mailman with KeyBanc Capital Markets.

Just wanted to follow back on the Carmike portfolio, was that contemplated in the previous spending guidance?

What we do is we always have a layer of speculative in there across our entire buying strategy across all the segments and with those filled in, history says we'll find a deal. I wouldn't say that that entire – that was not identified within that, but now what that removes for us is all of the speculative allotment across the entire spending year just with that transaction.

The fact that it's larger and happened earlier than we might have planned other acquisitions and in fact that it's a larger amount is really what’s primary leading us to increase our guidance. That's the primary factor.

I’m getting kind of that, you guys raised spending guidance by $50 million, was any of that related to this or was that all kind of new stuff that's in the pipe that's giving you guys that?

No, it was probably more related to this, Craig. Like I said, we may have had some portion of speculative in our plan; this just kind of aided and then added more to it. It doesn't mean that there won't still be opportunities in the second half of the year to even exceed the number we've had, but again we’re generally fairly conservative as to what we – when we forecast to know that we have it in identifiable fashion to complete it for the year.

And then I’m just curious, the AMC Carmike merger is obviously still going on, but the best and final, was this spun out of that conversation or is this more related to things talked about in the past where landlords don't want to put in their conversion dollars and so they turned to you?

It really had nothing to do with the AMC; it was a portfolio that we had looked at. I mean this includes five of Carmike’s top theatres. Again, including – they're best theatre in their entire chain. So it really was about our underwriting of the quality of the theatres and then their commitment to want to upgrade those and take advantage of where their theatres were and there was a landlord that really didn't want to get involved with that. We kind of knew the parties. Again, our closeness to the environment allowed us to access this and we thought it was a very attractive portfolio and could be further enhanced. I mean when you take their best theatres and then you add over the type of amenitization they're doing, we see only further enhancement for the performance.

And then just last one on theatres, AMC going overseas, would you ever follow them to help financings or are you guys happy to be in North America?

You know we're primarily in North America, I mean we've done Canada. Would we look at a transaction, I'm not – I mean, what we've said internally is that if there was something interesting that we felt we would probably go with an existing tenant or probably wouldn't go out on our own, we have not been contacted by AMC regarding any of this and we've looked at that, what they're doing and there's really not a lot of owned assets that they're looking at. So I don't think we would be involved with that, but it's not something that we couldn’t look at in the future if there was opportunity presented itself.

And then just last one, you guys mentioned the TopGolf as being – market is for sale, is that still in the works?

We're still exploring several, as Jerry, pointed out several dispositions that have generated a lot of interest. We're not willing to commit to anything above our stated, but there is interest that we think can both improve our portfolio and give us additional capital recycling opportunities to fund the balance of our year.

Our next question comes from the line of Nick Joseph with Citigroup.

Do you see the final results of the US election impacting charter schools overall depending on which candidate ultimately wins?

We haven't really seen anything that kind of deviates from where we think we are. Remember, this is fundamentally kind of a state kind of business as opposed to a federal business. That being said, historically both parties have been receptive to the idea of the charter school movement generally and to date we haven't seen anything that that gives us concern.

And then just picking with the dispositions, you mentioned you could exceed the top end, what’s the potential magnitude of where that could ultimately end up, if some of the assets that you’re thinking of selling also?

I think when we look at that, I think it's a little early for us to comment on how much this could go because history says some of these things could happen and some won’t, maybe we won't get to terms. I think what we look at when we said that it could grow; I think we want to give ourselves some opportunity above the range. But I don't think at this time, Nick, we're going to comment on exactly how big that could get just because like I said a lot of this moves so much and then we'll be asking about why it didn't happen and a lot of different things. So we'll just leave it at that.

Our next question comes from the line as Anthony Paolone with J.P. Morgan.

I just wanted to clarify, I think, Craig's question earlier about the investment guidance. So I think previously you had $50 million of kind of speculative acquisitions, if you will, and there you basically are doing $100 million with Carmike deal and you upped your guidance by $50 million, so is that kind of the reconciliation?

That's a great reconciliation. We had about that much; we overcame that; we've taken all of our speculation. Again, that doesn't mean that we won't continue to try to grow our portfolio and maybe exceed that number as we go forward, but it was a quantifiable amount that says within our stated guidance, everything's identified now. It's a matter of just getting it closed and now any additional speculative that came in would grow that.

And I guess on that front, what is the deal pipeline like at this point? Where are yields and how do you think about underwriting given your capital costs really having come down here with the stock where it is?

I would tell you, Tony, for us, I think the deal flow is still very positive as we talked about. Even in the redevelopments, we've got 23 additional that are in planning or some stage. So there's a lot of stuff within our own portfolio. We have people focused on that. I think there's always the opportunity with a cost of capital that's improved to look about the quality, I don't know that I think that we think about because we could pay more we should pay more. That really doesn't enter into our discussion. It really starts down about kind of where we think risk adjusted yields should be. Again, when we looked at this portfolio, we thought it was a portfolio that had performed for 10-plus years. They were entering into a new 15-year lease to get this amenitization. And so we had really good history and we thought that made sense for us. As far as kind of ongoing as we've talked about I think theatres are trading in – as far as buy, they're kind of in the low to mid 7s, of course it could be a little lower. We're building these in low 8s. I think, again when we look at schools kind of mid 8s that we're still seeing. We've seen some trades, especially at some proven properties in the low 7s. But it still seems to be a fairly robust opportunity set out there within our segments and we continue to find what we think are really good strong opportunity sets for us to grow our portfolio.

And I think Jerry had outlined kind of that opportunity for the more enhanced amenity theatres. Is there a dollar amount you could put on there or number of screens that you think are going to undergo this change in the country to get a sense of what the potential pot looks like?

Sure, I’ll speak to ours. So when we talk about 25 or 23 in ours, that's generally an additional call it $3 million to $6 million of capital for us on properties that we own that will get paid on. So again, when we look at just what's in the immediate and there will be more as we work through further into our portfolio, but could you be looking at $75 million to $150 million of just these kind of additional capital flowing into our projects over the next 18 months, I think that's a very realistic possibility.

And is that – so that sounds like [just by math] $100 million or so at the midpoint, like is that in any of your guidance for this year or is part of future pipelines?

We really don't put it into until we sign the agreements and say, okay, this is what we're doing and we have an identifiable number, that 23 number I gave you is we’re in discussions with our various operators trying to identify what they want to do, how they want to do it. Remember, for most of these, we require lease extensions along with putting in capital. So it's working through not only the physical side of it, but the lease side of it, so that those – and it's easier for people that we've done with before say AMC as we roll through those, when we've done many of them, they kind of know the platform as we’re getting that way with Regal as well, so that as those begin to roll out they're fairly straightforward, but some of the newer ones as we do it it's a little more educational as we go through it.

And then can you remind us the 2018 theatre expiration, I think [indiscernible] appreciable amount of expirations, like what the early read is on that?

For us, I will tell you that has the big Cinemark portfolio in it, I would say discussions with them are very strong. They're actually spending money on those assets already and have made some significant improvements in those. So we would anticipate a renewal on that group.

And then just last question for me, you talked about that the potential swing on the disposition side, I think a while back there were some reports about New York City being out there as a potential candidate, is that one of the bigger swing factors of what has happened there?

There are several and I don't think we should kind of comment on any one of them, but there are several and some of them are larger assets and we have had some discussions on that asset in particular, but there could be some bigger numbers like that that would really give us a good capital recycling opportunity.

Our next question comes from the line of Dan Donlan with Ladenburg Thalmann.

Can you just talk about the recreational spending, it looks like its $260 million in 2017, it’s up about $80 million versus where you're at last quarter. So I was just curious what drove that and I think the waterpark hotels is probably a decent portion of that, but we’re just curious what also is in that bucket?

Truly it's probably that and Top Golf investments.

And as far as the waterpark hotel, what is the anticipated completion date of that?

The new one, I mean the one at Camelback is done and open, which was – the new one, as Jerry mentioned, we hope to – we think we will start in the fall and I would think about that if it follows their trajectory of Camelback be in the kind of the same group that's about a 22, 24-month build cycle.

And then going to the charter schools, you talked about some of the schools exercising their purchase options. I was just kind of curious what the nominal amount of – what those sales could potentially – what the purchases could potentially be?

You mean in the future, I think we have a reference to that in our K that lays that out.

From here forward it's probably in the neighborhood of – it's a small number, but the penalties are pretty large, about $12 million July forward, couple of schools.

That's total, that's not the amount of the penalty...

That’s the amount of the sale and then the penalties, our guidance is $8 million at the midpoint and we’ve already incurred between prepayment penalties and termination fees of $5.9 million of that. So we have another call it $2.1 million to go in the last half of the year that we've baked into our midpoint of our guidance.

And so just kind of curious what is the IRR you think you got on the one that already did exercise, I mean, is that something you guys look at and how do you look at that?

I would say low teens.

And then just lastly on Brooklyn school, what's enrollment like looking for next year and has how was that versus your expectations?

Enrollment exceeds our expectations and we think maybe another 250 students more we're looking on top of the 400 that are already there over last year, school year. So pretty big step up.

From 215 total or from 250 to 400?

400 to 650.

And then is it too early to be talking about I think in Western Virginia the other private school?

There’s McLean and we’re planning to open that here this month.

Enrollment is trending how there versus expectations?

It’s right on.

[Operator Instructions] Our next question comes from the line of Rich Moore with RBC Capital Markets.

I saw that you have 20 TopGolfs now and I think you said you had seven that are under development if I got that right. It says nine in the press release, but those are nine new investments. I think you said had seven more underway and I think I always kind of thought of and maybe this isn’t right, the total number under your agreement lets you guys have first choice right around 30, I mean, I know it's a dollar number, but right around 30. So I'm wondering does the TopGolf pipeline begin to slow after we finish the next seven?

I think you're probably right. I mean, again, there are some things that we're working on with them that could potentially keep that like I said – we talked like 30, 32. Could it grow a few more, maybe get to 35, that's probably accurate.

But that's just right of first refusal, right?

That is correct. I'm just saying that’s within our gambit, because we have – it is a dollar number and can we back and reconcile all of those things, I think it will be like I said somewhere between 30 and 35.

And then on the theatres that you just bought, you're saying you're going to probably spend another $20 million, is that right to high amentize five of them?

It's around $115 million, we were at $96 million, so call it $13 million to $15 million.

And then I'm curious, Mark, a couple of companies have done these private bonds this quarter and I'm wondering is there some sort of dislocation going on that makes that capital cheaper today and going forward that won’t be the case, I mean is there kind of like mortgages and unsecured notes, the spread between them shifts around, is that kind of what's happening?

I do think the private placement market is very strong. We were able to get rates more or less on top of what we get in the public markets, but we accomplished a couple of other objectives and that is demonstrating access to another source of capital and we were able to importantly fill in some gaps in our material laddering particularly in 8 and 10-year tranches. So I think it was a combination of a good market and being able to have some flexibility with how we latter the maturities. And there's some minor benefits of little bit lower cost and there's ability to funding a little bit, so we were able to defer funding by a month. But I think in answering the question, I do think the market changes from time to time and I think right now it's strong for the reason I just went over we decided to access it.

I would add, Rich, that one of the questions that we've had before from people is are your assets kind of insurance company quality where people say or people wanting to – who kind of hold buy and hold this paper and I think we've always felt that and we felt it this is a kind of a proof point when these people are buying it private, they're going to put it in their own portfolio. They're probably holding to maturity. So they had to get very comfortable with the durability and the reliability of the cash flows and the assets. And we thought this was another validation point as we kind of mature in our portfolio and our evolvement as a company.

I did want to add, like I said in my comments that we're not moving away from the public unsecured markets. We certainly expect to be doing more of that; of course we have $1.2 billion of public unsecured debt outstanding, so it's not a shift in strategy, it’s much as it was an opportunity to hit a pretty strong market and get a couple other things done with that debt amount.

And then the last thing is the buyouts of the charter schools, the exercise of these options, what is that saying exactly? I mean, why are they making those decisions would you say?

I think it really talks to about the performance of the school and all of these have been buying out to exercise the municipal bond market. So every one of these that's been executed has been – to an execution of a bond and if you think about the valuation, again as we’ve talked about, they're paying all of our costs plus the premium that you hear us talk about, plus all the bond-related cost, reserves everything. This can be 135% and this is a 100% kind of a bond transaction. The equivalent value of this is we're talking about below seven caps as far as value that would be associated with what they're paying. And I think it really talks to – as we've said, we're trying to move our portfolio to this investment grade quality portfolio of charter schools and we're seeing the execution of that with this – when they hit their first maturities at these five-year, seven-year intervals that people are – the realization of that quality is true and we're seeing that with what we're seeing – their ability to access that municipal bond market.

I'm showing no further questions. And I would like to turn the conference back over to Mr. Greg Silvers for any closing remarks.

Thank you. And again thanks everyone for joining us today. As we’ve talked about today it demonstrates our commitment to developing a resilient, strong, cash flowing portfolio that is valued by investors and we think today's quarter is demonstration of that. We appreciate your time and we look forward to talking to you next quarter. Thank you.

Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program and you may all disconnect. Everyone, have a great day.