EPR Properties (EPR) Q4 2017 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to the Fourth Quarter and Year End 2017 EPR Properties Earnings Conference Call. [Operator Instructions] As a reminder, this conference call is being recorded. I would now like to turn the conference over to your host, Brian Moriarty, VP of Corporate Communications. Sir you may begin.

Okay. Thanks to everyone for joining us today for our fourth quarter and year end 2017 earnings I will start the call by informing you that this call may include forward-looking statements as defined in the Private Securities Litigation Reform 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 on form 10-K and 10-Q. Now turn the call over to Company President and CEO, Greg Silvers.

Thank you, Brain. Hello everyone and welcome to our fourth quarter and year-end call. I'd like to start by reminding everyone that slides are available to follow along at the EPR website at www.eprkc.com. With me on the call today are the Company's CFO, Mark Peterson.

Good afternoon.

And CIO Jerry Earnest.

Good afternoon.

As always I will start with our year-end headlines and then pass the call to Jerry to discuss the business in greater detail. Now I'll get started on today's headlines. First, solid year supports our differentiated investing model. In 2017 we had a productive year achieving record levels in revenue, earnings and investment spending. For the year we delivered a 17% year-over-year increase in top line revenue along with a 4% year-over-year increase in FFO as adjusted per share. Our total investment spending of $1.6 billion which was highlighted by our $730 million CNL transaction added high quality assets and further diversified our tenants and geographies across each of our primary investment segments. This performance demonstrates our differentiated investment thesis which is strategically aligned with the experience economy. Secondly, monthly dividend increase. Subsequent to the end of the quarter we were pleased to announce an increase in our monthly common dividend for 2018 of nearly 6%. This equates to a $4.32 annual dividend and represents our eighth consecutive year with a significant dividend increase. Our average increase during the period has been approximately over 6%. While our dividend now represents a yield of over 7%, it remains well supported with an expected payout ratio of about 81% consistent with past years and well within our targeted range. Third, earnings impacted by challenged tenant. As was outlined in our press release, following bankruptcy filings by subsidiaries of Children's Learning Adventure or CLA, we made the decision to fully reserve approximately $6 million in receivables and write-off approximately $9 million in straight line revenue related to CLA. While our restructuring of this tenant may still occur, we felt it prudent to take a conservative approach for 2017 and remove any revenue associated with CLA for 2018. We believe our action should remove any overhang related to this issue. Despite the slow progress so far, several capital partners and operators have expressed serious interest in participating in the recapitalization and restructuring of CLA, or in leasing and operating our locations in the event that restructuring negotiations are not successful. Four, Resorts World Catskills opens for business. We are excited to share the news that on February 8, the Resorts World Catskills casino and hotel the operator on our ground lease opened its doors to the public. The resort has 150 table games and 2,150 slot machines while the hotel tower has 332 all-suite rooms. The ribbon cutting of that was packed with state officials and patrons from all around the region. In addition construction continues at the water park hotel, which we are developing there and we look forward to providing updates in the future regarding our continued progress on our Catskills property. Five, adjusting 2018 earnings and investment spending guidance. In recognition of our decision to remove all revenue associated with CLA, we are reducing our 2018 FFO as adjusted per share guidance to a range of $5.23 to $5.38 from a range of $5.33 to $5.48. The midpoint of this range provides for approximately 6% in earnings growth. However we should – however, should we make the expected progress on CLA, there remains an opportunity to reach the high end of our guidance. Separately, we are widening our 2018 investment spending guidance to reflect the existing market volatility. Previously we had issued investment spending guidance of $700 million to $800 million. However, given our current stock price and the lag in asset repricing, we are widening our range to $400 million to $700 million. Our earnings guidance midpoint is based upon $400 million of investment spending, which can be funded through property dispositions and excess cash flow with no additional issuance of equity. Our pipelines, however, reflects many additional opportunities and should the equity markets rebound or assets reprice, we will grow our investment spending. We are not believers in growth for growth's sake, and will remain disciplined in our underwriting and allocate capital prudently in a manner that drive shareholder value. With that I'll turn it over to Jerry and then rejoin you for questions.

Thank you Greg. 2017 capped an historic year of investment spending for the company. Fourth quarter investment spending was $126.5 million. And as Greg mentioned, full year spending was $1.6 billion. The CNL Lifestyle transaction during the second quarter accounted for $730 million of investments with a balance of about $850 million in investment spending exceeding the previous year spending of $805 million which was also a record at the time. The spending pace for 2017 reflects the strength with each of our primary investment segments. In the entertainment segment, box office revenues for 2017 softened versus the prior year as we predicted. However, this softness followed two record years with box office increasing by about 10%. As we have stated before it year to year box office results are content driven. With that said the studios have a very successful track record of delivering on this content with year-over-year box office performance increasing in 14 of the last 20 years. Even with that success record Hollywood is going to have some years where their content does not resonate. However, even for years where the box office experienced a down year, the largest one year decline during the 20-year period was 5.8% and the average decline was only approximate 3%. This consistent performance demonstrates the low volatility on an annual basis and steady growth of the theatre industry which continues to be the dominant choice in addition to base entertainment in the U.S. The theater industry is off to a strong start in 2018 with year-to-year box office revenues through February up over 13% on a year-over-year basis. The hit movie, Black Panther, which opened over Presidents’ Day weekend had the largest growth in February weekend ever and the second largest four-day gross of all time, demonstrating a compelling movie content is still the driver of success box office performance. This year has a solid lineup including Avengers: Infinity War, Deadpool 2 Star Wars spin off Solo: A Star Wars Story, Jurassic World: Fallen Kingdom and Mission Impossible follow-up among others. With such a strong start we are very optimistic for the year and believe that 2018 box office revenues will return to a positive trajectory. For the fourth quarter, investment spending in our Entertainment segment totaled $54.8 million, consisting primarily of build-to-suit development, redevelopment and acquisition of megaplex theaters, entertainment retail centers and family entertainment centers. In summary, at the end of the fourth quarter, the company had approximately $2.9 billion invested in the Entertainment segment, with four properties under development, 165 properties in service and 23 operators. In the Recreation segment, during the fourth quarter, the company finished a robust year of expansion with the acquisition and financing of the CNL Lifestyle ski and attraction properties along with steady growth of our top golf complexes and other facilities. Total investments in recreation properties increased over the prior year by $1.1 billion to $2.2 billion at year end 2017. Regarding our ski portfolio, through the Martin Luther King holiday, our tenets overall revenue performance is similar to last year. As a point of reference last year ski season was significantly above the three-year average for our tenant portfolio. So we're very pleased to see the continued strength in this geographically diverse portfolio. We will provide a further update on the ski season in our April earnings call. Our portfolio of recreation properties is now quite diverse across regions, property types and operators. Our attractions portfolio performed well in 2017 and seasonal reserves for all of our attraction properties have been fully funded as noted on last quarter's call. The company's TopGolf properties continued to enjoy strong consumer acceptance and operating performance. At the end of the fourth quarter we had four TopGolf properties under construction with 30 open in operating properties. Construction of the water park hotel at the Resorts World Catskills by the developers and owners of the Camelback Lodge & Aquatopia Waterpark, an existing recreational property owned by EPR, continues to rapidly progress completion and supported by the first half of 2019. Recreation spending totaled $55.1 million during the fourth quarter with investment spending on build-to-suit development of golf entertainment complexes, and attractions, and redevelopment of ski areas, as well as $10.8 million for the acquisition of a recreation facility. In summary, at the end of the fourth quarter the company had a approximately $2.2 billion invested in the recreation segment with five properties under development, 84 properties in service and 21 operators. During the fourth quarter investment spending in our education segment totaled $16.5 million. Public charter schools, early childhood education facilities and private schools were the drivers of investment spending through 2017. Strong after the relationships investments across the spectrum of education facilities and active builder suite programs support the development of a high quality portfolio of education facilities. In summary, at the end of the fourth quarter, the company had approximately $1.4 billion invested in Education segment, with six properties under development, from 145 properties in service and 60 operators. Property occupancy for all our properties remain strong at 98%. This reflects the termination of nine Children's Learning Adventure leases. In terms of capital recycling, during the fourth quarter we sold three public charter school properties pursuant to tenant purchase options for total proceeds of approximately 52.5 million and recognized a net gain on sale of real estate of 13.5 million. We also completed the sale of one early education facility for net proceeds of $0.7 million. We received a prepayments of $4 million on two mortgage notes receivable and recognized prepayment fees of $0.8 million. Dispositions and mortgage note payoffs totaled $197.6 billion for the year ended December 31, 2016. We increasing our range for expected disposition proceeds to a range of 350 million to 450 million from arrangement 125 million to 225 million. As was the case with our previous guidance dispositions consists of the sale of public charter schools pursuant to tenant purchase options, as well as the sales of public charter schools operated by Imagine Schools. In addition to increased guidance anticipates disposition on opportunistic basis in our Entertainment and/or Recreation segments to take advantage of the continued strength of the private market. As Greg mentioned, in light of the current market volatility, we are adjusting our investment spending guidance for 2018 to a range of $400 million to $700 million. We maintained a strong pipeline of compelling opportunities, but remain disciplined in our underwriting and pricing in order to create shareholder value with our investments. With that, I'll turn the call over to Mark for a discussion of the financials and I'll rejoin you for questions.

Thank you Jerry. I like to remind everyone on the call that our quarterly investor supplemental can be downloaded from the website. Now turning to the first slide, net income for the fourth quarter was $54.7 million or $0.74 per share, compared to $52.2 million or $0.82 per share in the prior year. FFO was $78 million, compared to $80.4 million in the prior year. Lastly, FFO as adjusted for the quarter increased to $95.9 million versus $80.7 million in the prior year, was a $1.29 per share for the quarter versus $1.26 per share in the prior year. As Greg and Gerry mentioned, the fourth quarter of 2017 was unfavorable impacted by the write-off of noncash straight line rent receivables from prior periods of $9 million, against rental revenue and fully reserving $6 million in accounts receivable, both related to CLA. These adjustments reduced FFO as adjusted by $15 million or $0.19 per share for the quarter. Note that for the nine months ended September 30, we had recorded total revenue of about $7.5 million related to CLA. So the $15 million of adjustments this quarter reversed that income, as well as another $7.5 million a straight line rent receivables from the prior year. Before I walk through the key variances I want to briefly discuss two adjustments to FFO to come to FFO as adjusted. First, as we previously announced we completed the redemption of all our six and five eighth Series F for deferred at par plus accrued dividends totaling approximate $126.5 million and recorded a charge of $4.5 million in the fourth quarter, representing original issuance and redemption costs. I'll discuss our new issuance of preferred shares later in my comments. Second, pursuant to tenet purchase options we completed the sale three public charter schools during the quarter for net proceeds of $52.5 million and recognized terminations fees including a gain on sale of $13.3 million. Now, let me walk through the key line item variances for the quarter versus the prior year. Our total revenue increased 13% compared to the prior year of $147.7 million. Within the revenue category, rent revenue increased by $11.8 million versus the prior year to $119.3 million. This increase resulted primarily from $24.9 million in rental revenue related to new investments including those assets purchased in the CNL transaction. This increase was partially offset by a $12.8 million decrease related to CLA, including the $9 million reversal of prior period noncash straight-line rent receivables I discussed previously. Percentage rents for the quarter included in rental revenue were $3.1 million versus $2 million in the prior year. The increase was due to percentage rents related to several recreation properties, two private schools and net favorable percentage rents for theaters. Other income decreased by $2.7 million for the quarter versus last year. It was due primarily to a $1.6 million fee earned in 2016 related to extending a purchase option for a public charter school tenant. And no insurance recovery again recognized in the current quarter versus $850,000 in the prior year. Note that insurance recovery gains are excluded from FFO as adjusted. Mortgage and other financing income was $23.7 million for the quarter, an increase of approximately $7.6 million versus the prior year. The increase was due to additional real estate lending activities in 2016 and 2017, including the funding of a $251 million mortgage note receivable with Och-Ziff Real Estate last quarter in connection with the CNL transaction. This was partially offset by mortgage note payoffs and transactions related to our direct financing lease of public charter schools with Imagine, including the sale of properties in the fourth quarter of 2016 and the restructuring of certain leases last quarter. Additionally, we recognized approximately $800,000 of prepayment fees during the quarter related to two mortgage notes receivable, of which $600,000 related to the prepayment of a $3.4 million public charter school mortgage note receivable that we had previously anticipated would occur in 2018. On the expense side, property operating expenses increased by $7 million versus the prior year. $6 million of this increase was due to bad debt expense related to CLA as I mentioned previously. The remaining increase related primarily to higher non-recoverable expenses at other properties. G&A expense decreased to $9.6 million for the quarter, compared to $10.2 million in the prior year, due to a decrease in annual incentive compensation, partially offset by increases in our other payroll and benefit costs and professional fees. Transaction costs decreased $135,000 from $3 million in the prior year due primarily to a decrease in costs expense associated with the C&L transaction. Now turning to our full year results in the next slide, our total revenue increased 17% versus the prior year to a record $576 million and FFO as adjusted per share was increased 4% versus the prior year to $502 million, also a new record for EPR. Turning to the next slide, I will review some of the company's key credit ratios. As you can see our coverage ratios continue to be strong with fixed charge coverage at 3.1 times, debt service coverage at 3.6 times and interest coverage at 3.6 times. Our net debt to adjusted EBITDA ratio was 5.39 times at quarter end. Note that adjusted EBITDA for CLA is zoro in this calculation. As Greg mentioned, we increased our monthly common dividend by over 6% in 2017 and our FFO as adjusted payout ratio was 79% for the quarter and 81% for the year. Our previously announced monthly common share dividend for 2018 is well covered and represents another strong annualized increase of almost 6%, our eight consecutive year with a significant increase. Now I'll turn to the next Slide for capital markets and liquidity update. At quarter-end, we had total outstanding debt of $3 billion. 91% of this debt is either fixed-rate debt or debt that has been fixed through interest rate swaps with a blended coupon of approximately 4.8%. We had $210 million outstanding at quarter end on our $1 billion line of credit. And we had $41.9 million of unrestricted cash on hand, which includes $33.8 million held for a 1031 exchange. Turning to the next slide. You can see our debt maturity profile as of year-end. Note that subsequent to year-end, we prepaid in full the $11.7 million mortgage note payable due in 2018 and earlier today, we completed the redemption of our 7.75% inaugural senior notes due in 2020. For the outstanding principal amount of $250 million plus a premium for the terms of the denture of $28.6 million. The $28.6 million will be expensed in the first quarter of 2018 and excluded from FFO as adjusted. And after these paydowns, we are pleased with the fact that in a rising interest rate environment, we have managed our debt maturity laddering such as we have no debt maturities until 2022 and manageable that maturities thereafter. Turning to the next slide, as previously announced, during the quarter we issued 150 million of series G preferred shares at a record low coupon for the company at 5.75%. This issuance represented a savings of 87.5 basis points versus 125 million of series F preferred shares were redeemed during the quarter. Additionally, during the quarter, we issued approximately 465,000 common shares under our direct share purchase plan for net proceeds of $30.3 million. The DSPP plan continues to be a very low-cost and effective way to raise common equity. As you can see, our balance sheet and liquidity position keeps getting stronger and process in great position for 2018. Turning to the next slide, as Greg mentioned, we are decreasing our guidance for 2018 FFO as adjusted per share to a range of $5.23 to $5.38 from a range of $5.33 and $5.48 primarily due to removing all earnings related to CLA. Until such time that the equity markets improve our cap rates and new investments rise, we are becoming more prudent with our capital. Accordingly, we are decreasing our guidance for investment spending to a range of $400 million to $700 million from a range of $700 million to $800 million and increasing our guidance for disposition proceeds to a range of $350 million to $450 million, from a range of $125 million to $225 million. The lower end of the guidance for investment spending and the midpoint for dispositions is consistent with the midpoint of our guidance for FFO as adjusted, which allows us the flexibility of not having to raise capital in 2018 to achieve our earnings plan, while reducing our leverage. Should we see an improvement in our cost of capital or should we see a raise in investment cap rates, we would expect to increase both our investment spending and capital raising activities accordingly. The only other change for 2018 guidance relates to lower expected prepayment fees related to public charter schools of $1 million given the mortgage note receivable repayment we received this quarter and we expected in 2018. As far as timing both expected prepayment fees and termination fees associated with public charter schools properties are not expected to occur until the back half of the year. Note also that while our 2018 guidance is unchanged for percentage rents and purchase of interest, these amounts are historically lower in the first half of the year than in the second half of the year and we expect to the same for 2018. Accordingly, although we generally will not provide quarterly earnings guidance, we thought it will be helpful to provide guidance for the first quarter of 2018 for FFO as adjusted per share guidance to a range of $1.22 to $1.26. Guidance for 2018 is detailed on Page 30 of the supplemental. Now with that I’ll turn it back over to Greg for his closing remarks.

Thank you, Mark. I want to reiterate that the fundamentals of our segments are strong and our opportunities within the segments are solid and growing. However, we are fundamentally capital allocators. And we take that responsibility seriously. Having been in this business for many years, we are also confident that asset prices will over time realign with capital cost and we will, again, become more acquisitive. We understand that our tenants as well as sellers of assets are looking at the rear view mirror with our expectations and we are pricing capital with the forward perspective. But we also have a very strong conviction that we are in the right assets, that we have the right team to identify those assets and that over time, those assets will produce the cash flow results that investors value. With that, I'll open it up for questions.

Thank you. [Operator Instructions] And our first question comes from the line of Anthony Paolone from JP Morgan.

Alright thanks and good afternoon. First question is just to make sure I understand that the midpoint of your guidance, is that suggest that at the midpoint, its zero net investment activity?

Yes that would be correct.

Okay. And then when you think about the midpoint on the prior guidance to the new midpoint, how much of that is credit related versus investments?

You can reconcile the number one down by $0.10 at the midpoint and that's about the number we had in for CLA, consider all CLA related. Couple of other things going on with the redemption and the redemption of bonds, which reduced our interest cost of course, that was about $0.06 about a $0.01 difference in termination fees. And then, obviously, having lower spending and higher dispositions was the remaining impact, but if you kind of got through it all, really the main impact is the CLA reduction.

Okay. And then my second question is set on CLA. Can you just step back and maybe give us a sense as to how many stores do you own that are operating versus under construction versus it looks like maybe some landslides, like what's the starting point here?

Yes I think we have 21 stores that are operating, we have two under some stage of construction that we stopped then we have two land parcels.

Okay so 20, 25. And what’s the total basis in all of this?

About, I think we discussed about $255 million.

Of properties and we have some land parcels to go.

Okay. And then to just understand, throughout the course of 2017, did you get any cash or was it just all accrual through 2017 in terms of…

Yes we did receive some cash and that kind of went to pay property taxes. So kind of consider that as I watched as far as that goes. Like I said, the $15 million, the charge we took this quarter, $7.5 million was kind of the income we recognized this year, the 16 regular rents, $1.5 million being straight-line and then other $7.5 million of the $15 million was really prior year straight-line rent. That's it breaks down. $15 million in total $7.5 million related to the prior, and $7.5 million to where we had recognized. And like I said while we did get some cash that was really an offset to property taxes.

So it would be – what was the expected yield on all 25 sites like how much cash and why would that have been?

I think the expectation would have been that it would have been about a $20 million contributor. We, as Mark said, we had kind of geared it back down to above an expectation of about $7.5 million with that growing because our stores were actually performing, and so, but Tony, when the bankruptcy came, we felt it and candidly, in discussion with investors that this was creating an overhang on kind of what numbers we had in there. So we made the decision in consultation with our accountants that it was time to write that off and then clear it from the decks for 2018, so it really becomes upside opportunity.

Okay sure, then there is zero in the guidance and there is zero cash right now coming in.

That’s correct.

And then just separately last question. Can you give us a quick run through the major segments and credit conditions like, whether it's EBITDA coverage at the theaters or ski just overall credit.

I would say overall, like our Entertainment segment is above – we're right at – we picture a [ph] 1/6 cover, which is consistent with what it's been for within that range that we talk about. So our Recreation, probably as Jerry mentioned, our ski portfolio was kind of higher. And so it was kind of closer to a 2.0 and our education was right in our 1.5 that we talk about. So overall, the entire company was at right in that 1.7 range.

Okay. Great. Thank you.

Thank you, Tony.

And our next question comes from Mike O'Carroll from RBC Capital Markets. Your line is now open.

Yes. Thanks. So with regards to CLA, how should we think about the situation today? The tenant is in bankruptcy now. So you're 25 stores, including land parcels, are kind of locked up in the bankruptcy process and you were not able to get the stores that you originally and terminate the lease signed in October?

That's correct. Again, that we are and they are working with several capital sources to recap the company. We are also exploring other alternatives with other operators. So we are – we’re trying to expedite the solution of this. We’re kind of pushing the bankruptcy court to the extent that we can. Like I said, we feel that we have good stores, performing stores and I think by the interest that we've had, from various parties, we think there is a solution that will get this resolved in 2018. And that these have an opportunity to become productive in 2018 and contribute. We just felt that, rather than – have been talking about it and what's in there and what's the risk out there that it was more prudent and conservative to remove it all and that it will be hopefully, an upside to our performance.

Now will the tenant in bankruptcy have to elect if they're going to affirm or cancel the leases? And when is that?

That's correct. Our first schedule hearing is scheduled in March. Again, so there will be an opportunity for us to present the case that they need to begin making payments on that. So again, what we don't know is kind of how quickly that will move. If they decide they want to start and make payments or if they want to give us our properties back. It's an ongoing discussion, Michael.

And are the existing properties right now profitable?

Again, for us, yes. Now that I’m not saying that’s for all of the CLAs properties.

Okay. And then the interest that you received in the ones that you elected to terminate that's kind of locked up. How many different operators have elected to look at those schools and where have the – I guess, that you can't say right now, but if you can say, where were the rental rates kind of coming out?

Yes. Again, I don't think it's a good idea for us to negotiate on our call and it could be multiple operators. Generally, what I would tell you is we would look at these in kind of regional groups. There is generally operators that want to operate these in different segments, and again, trying to give numbers, while we're actively negotiating with several is probably not in our best interest.

Okay, great. Fair enough. Thanks.

Thank you, Michael.

Our next question comes from the line of Nick Joseph from Citi. Your line is now open.

Thanks. Greg, you mentioned the capital allocators. What are the lessons kind of learned that I can take forward from CLA in terms of tenant underwriting or investments going forward?

Sure. I think it's a fair question, Nick. And we made some mistakes and we need to own that. I think for us, like I said, we look at kind of our exposure to this tenant and not appreciating the level of credit decisions they were making away from us. And I think we've already made changes in our underwriting to be more detailed on where there are other tenants – other capital commitments are and what kind of exposure that we have to each tenant in this space. These spaces are different than our theater spaces where there is a lot of homogeneous nature to the property relative between operators. It's not that, that in the early ed. space. And I can assure you we have looked at it and we've already made changes to address what we saw where issues.

Thanks. And you mentioned a lag on the pricing. If you look back historically, how long does it typically take cap rates to adjust to a movement in interest rates?

My guess is, it’s going to be somewhere in the neighborhood of six to nine months. Again, it takes a little while – again, we all benefited that it went the other direction. And they will – and sellers and tenants will not give that up easily. Yet they will their businesses as long as their businesses are doing well, they will want to grow in their business. And I think, historically, if you go back even when interest rates were higher and we’ve seen these dips and raises, that it’s generally a six to nine month period.

Thanks. And just finally, we’ve seen a lot of M&A in terms – but studio and media companies are proposed M&A. How does that impact do you think premium video on demand and production of content going forward?

I think there is a couple of things that are – I think, premium video demand we were just at a conference where that was and it's interesting. They were pretty much saying that – Disney pretty much said, I hope this issue is dead now, because it's no longer being discussed. Now that doesn't mean that other people are keeping it on, but it really – it hasn't reared its head. The content aspect is true. I think what – we're very excited about is what we saw, Jerry mentioned Black Panther, and how the idea, I truly do believe and this was kind of the concept of that conference that we were at the dawn of a new age where we're introducing new directors, new writers and we're not just simply doing product for one genre of people, but we're broadening that and we are seeing whether that's a female audience for Wonder Woman, a diverse audience for Black Panther. And as we start to open ourselves to more a greater diversity of film product, I think, we will see a greater embraced by the public of that product. So we’re very excited about kind of the creativity that we are seeing come to the market.

Thanks.

Thank you, Nick.

Our next question comes from the line of Craig Mailman from KeyBanc Capital. Your line is now open.

Hey, guys. Not to beat the dead horse here on CLA, but a couple of questions, I guess, number one, are those assets mashed released?

They are. They've cross defaulted. There's some that are part of mashed release some that are cross defaulted.

So how many could they reject versus the cross defaulted versus mashed released?

Again, I think this – I think they would have a difficulty. Again, we’re not getting into their bankruptcy strategy. I would tell you that we don't believe that they've an ongoing business model without our assets given the productivity of our assets.

Okay. And then just I know we talked about this on the last quarter call when you guys gave guidance, but I guess, given the troubles that you know they're in, the fact that they weren't paying cash rent for much of 2017. Kind of what was the thought process of putting anything in guidance for these guys versus just being very, very conservative in just blanking them?

It’s a fair question Craig. I think, again, when you look at ours and the idea of the productivity of our stores and what they were, what we felt was a conservative number relative to that and talking with them and their assurances that they were making progress toward a kind of a recap of some of the issues that they were looking at. But we met with capital providers that were affiliated with what they were looking to do. So we were in dialogue with them. We felt like the process was just taking so long that we needed to take action. And so, we filed, as we talked about termination notices on nine of our properties in an effort to accelerate that process. That created a reaction, which again, from them to protect their interest, they took our assets into bankruptcy. We still believe that was the right thing to do to get this process moving. At this time, we felt like that those numbers, they would and should be able to pay those numbers. And we felt like we had confidence that they would get paid. After the filing of a bankruptcy, meeting with our accountants, we felt then at that point, it kind of changes the trajectory of where you are at – when you are actively trying to take your properties back. And so, we felt like we need to take this approach and make these accounting decisions.

Yes, I think just to add to that, I think we believe then and we believe now restructuring is the most logical outcome. But like Greg said, they filed bankruptcy and the delay – just another quarter of delay, those two things combined let us to the conclusion that we needed to reserve this. And then hopefully, there's upside going forward in the near term.

And then Mark, maybe reconcile from me, I know you said potential reduction, most of its from CLA, but was all of the acquisition activity you guys have were predominantly all of that just development that wasn't going to hit at all in 2018. I just don't know how you go from $750 million to the midpoint of $400 million and bump up dispositions as much you didn't have no impact on guidance?

Remember, I’ve got it up from refinancing from the bond redemption, which is about $0.06 –$0.10 negative from CLA, $0.06 positive from the redemption. And then that less acquisitions, more dispositions and other updates was really a $0.05 negative to the plan. So there is an offset.

And there is still, again, as you know, we came into this year with $200 million of in-process development, that's not necessarily contributing in 2017. So those – well, those may be a positive, I mean, in 2018, those will be positive for 2019, they are not like acquisitions for us that immediately contribute.

Okay. And then on the dividend, I mean, did you guys have room not to raise the dividend. I'm just curious that decision, you talked about being capital allocators, the cheapest source of capital, the stock has moved tremendously, you guys need to put capital out of the door for growth. The kind of decision to raise it here, was it you had to because that's where tax on the income was going? Or is it you guys wanted to keep the message out there to your income oriented investors that you were going to continue to reward them, just kind of curious if you can reconcile that.

Well, the payout ratio, which is really ultimately what we based is still at the midpoint, 81%. That’s exactly…

So I mean, we kind of maintain that 80%, 81%. So it was kind of right there.

So its significant excess cash flow and dividend will cover. So we think it was the right move.

Right. But do you have room not to raise the dividend, that's what I'm getting at – just sort of why didn’t you keep a payout ratio can be somewhat arbitrary versus your capital needs and being able to reinvest that capital?

Again, I think it was a combination. We probably had a little room, but not tremendous.

And then just last one. The increase in dispositions, how much of that – is that all opportunistic? Or you want to recycle capital to harvest gains? Or is that have more charter schools in there?

No, it's primarily the charter schools that we knew and the other side of that is kind of the opportunistic through recycle capital. We think we've got opportunities that are better opportunities for us, rather than raising equity at these levels.

And just what’s the conviction there? You're talking about cap rates going higher, the six to nine month lag, you guys are clearly bringing product down into a more difficult environment, but what's your pricing expectations here are you willing to be forward thinking and maybe take upward move in cap rate as you sell the stuff? Or are you going to kind of hope friendly, I think it is worth and maybe that’s limit the amount you actually get done?

Again, I would tell you that we are – we wouldn't be kind of forecasting these kind of moves if we were in active discussions with people. So we have a good idea. I think – we think that we can achieve sales at or near we think these assets are worth. We’re not – this is not in any shape perform a higher sale. There, we have assets for which there is desire for, and so we – these discussions, like I said are ongoing. So these are – there's in the sense – they're specular because they haven't closed, but they're not specular because they're not known.

Great. Thank you.

[Operator Instructions] And our next question comes from Rob Stevenson from Janney. Your line is now open.

Good afternoon, guys. Thanks. The Topgolf that you said we are currently under construction, is that the end of the batch of that Topgolf that you guys have under agreement with them?

Yes, that would be the end of the agreement and in fact, there's one or two of those that are beyond our agreement that we had started discussions with them and kind of reached the end of our agreement and we agreed to do two more beyond that. So just because we had helped them kind of help them in identifying sites and things of that, where we – kind of value added to the equation.

Okay. And are there any kind of instead of outside of your top 10 that you guys have been doing more with on the sort of quarterly investments that you could see wind up being a top 10 tenant over the next couple of years?

I don't think anybody that right now we're kind of looking at. We're probably doing more diversity than anything. I think in our recreation concepts, we're seeing a greater number of operators. So I don't think there's one explosive kind of – I think we're looking at, let's do – five concept of $20 million each to get to 100 as opposed to 10 with one person at $10 million.

Okay. And then any other tenants other than CLA not current on their payments now of note?

No, nothing of materiality at all.

Okay. And then anybody of any size moving on to your watch list, in terms of people that you worried about last year or so?

No. I mean, again, what we said is the ski season revenues are relatively flat or recreation that just they kept – they’re fully funded for their seasonal reserves. So we feel like we're in good shape. Our large theaters tenants are, like I said, this year, we think will be a strong year. So we're feeling pretty good where we're at from a credit perspective against the backdrop of this conversation about CLA.

Okay. Thanks, guys. I appreciate it.

And our next question comes from the line of John Massocca from Ladenburg Thalmann. Your line is now open.

Good evening, everyone. So just kind of quick question here. Is there any cost of carry for the CLA assets made into your guidance, and if CLA did vacate the assets kind of what would that be?

Again, there is not right now baked into that guidance. So that could be – that you get into an absolute catastrophic, there could be some additional money associated with taxes and things of that nature. Again, that's – we think from the bankruptcy court will protect us on that and got in some degree of assurance on that or we will be able to get our properties back and get them into the hands of other people.

Okay. And then you guys kind of talk about how in the midpoint in your new guidance, it's going to be a offset all acquisitions – dispositions, and what kind of recreation are you getting from a capital recycling perspective on your opportunistic dispositions?

I mean, I think, it's a fair standpoint that we would be looking for that on an initial cash yield, probably 100 basis points clear and on a GAAP yield, it could be better.

Okay. And then has review on leverage – your target leverage kind of change it all given the situation at CLA, given the kind of volatility in the equity market. Is there any thought process to maybe lowering the range of leverage you want to run the company at or you're just comfortable kind of getting back towards maybe the bottom end of your prior range and just staying there?

I’ll let Mark jump on this. But I think as part of this – its part of our plan. We're actually lowering leverage because between if you look at dispositions and then you look at free cash flow that will result in actually as kind of lowering leverage, but Mark?

No. I think that's right. We historically kind of operated low 5s and at this point, we kind of enter the year 5.3, 5.4 and leverage us with CLA at zero by the way. The next year, as Greg said, if you take $400 million of dispositions, $400 million of investment spending, but then put the cash flow on top of it, it's a delevering year at those target numbers. So no broad changes. We think our range is good. We think where we end of the year is still good with CLA at zero. I think next year, we're going to continue the low leverage high credit metrics that we've always had.

But there is no like kind of – if this is maybe get it down into the mid-4s just kind of.

Not at this time. We don't see that.

Okay. That’s it for me. Thank you very much.

And I'm showing no further questions. I would now like to turn the call back to Greg Silvers for any further remarks.

Thank you, operator. Again, thanks everyone for your time and attention. We look forward to talking to you throughout the year and on our first quarter earnings call later this year. So thanks a lot. Bye-bye.

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