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Executives

David Brain - President and CEO

Mark Peterson - VP and CFO

Greg Silvers - VP and COO

Analysts

Jordan Sadler - KeyBanc Capital Markets

Paul Adornato - BMO Capital Markets

Michael Bilerman - Citigroup

Anthony Paolone - JP Morgan

Rich Moore - RBC Capital Markets

Jon Braatz - Kansas City Capital

Greg Schweitzer - Citigroup

Entertainment Properties Trust (EPR) Q4 2008 Earnings Call February 24, 2009 11:00 AM ET

Operator

Good day, ladies and gentlemen, and welcome to the Q4 2008 Entertainment Properties Trust Earnings Conference Call. My name is Josh, and I will be your coordinator for today. (Operator Instructions).

I would now like to turn the presentation over to your host for today's call, President and CEO, David Brain. You may proceed, sir.

David Brain

Thank you, Josh. Thank you all for joining us this morning. This is David Brain. I will start with our usual preface, and that is, as we begin this morning, let me inform you this conference call may include forward-looking statements 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 conditions and results of operation may vary materially from those contemplated by such forward-looking statements. A discussion of the factors that could cause actual results to differ materially from those forward-looking statements is contained in the Company's SEC filings, including the Company's report on Form 10-K now for the year ending December 31, 2008.

With that said, let me thank you again for joining us. We always appreciate your tuning in. This is David Brain to provide you all the Company news. With me this morning as always are Greg Silvers, our COO.

Greg Silvers

Good morning.

David Brain

And Mark Peterson, our Chief Financial Officer.

Mark Peterson

Good morning.

David Brain

As we get underway this morning, let me remind you and direct you if you are not there, there's a simultaneous webcast available via link from our website at eprkc.com. If you can, go there now, catch the visual side of the presentation, as well as the audio.

There I am going to the first slide, and what I would like to share with you, what I think are the headlines for EPR. In most of our comments this morning, they are going to be more forward-looking rather than about the year past, but we are pleased to answer any of your questions as we go along about any of it.

But your headlines for EPR are, number one, entertainment properties raise substantial equity to fortify our liquidity position. Two, EPR's tenant base is demonstrating again its proven stability, even growth in adverse economic conditions. Third, moves to fortify our liquidity, along with slowing and scaling of our two major remaining development projects, lead us to revise guidance to levels roughly equivalent to 2007 performance at FFO of about $4.20 a share and cash dividends of around $3 a share. And fourth, given the foregoing guidance, EPR priced at a $4.25 FFO multiple and a cash dividend, cash dividend yield in excess of 17% represents a value at about a 40% discount to our peers.

I would like to elaborate on each of these headlines a little bit. The first headline we went through, EPR raised substantial equity to fortify our liquidity position. Entertainment Properties delevered during 2008, added over $300 million in equity and under $180 million in debt, close to a two-thirds, one-third mix. That took us to a total leverage point of less than 50%. We delevered again in the first quarter of 2009, adding $45 million in equity, about $45 million in equity fortifying our liquidity position. Diluted to shareholder results what we believe consistent with increasing shareholder returns in the long run.

In the fourth quarter of 2008, we felt we had and discussed with you $100 million liquidity cushion position for 2009. We began to have some concern in the fourth quarter about backstopping our potential paydown requirement in the refinance of the construction loan of our non-consolidated Toronto Life Square project, despite its impressive retail leasing ahead of plan at about 90% occupancy. Therefore, during the first quarter, we twice opened our direct share purchase plan, and we are pleased to find strong demand for our stock. We materially cut back orders, and now we have high confidence with a signed term sheet that the Toronto Life Square project refinance will be completed without a paydown, we have just fortified our liquidity position for '09 with these equity raises.

The second headline, EPR's tenant base demonstrating its proven ability to even growth in adverse economic conditions. We have often talked about and documented the prosperous nature of the cinema industry during difficult macroeconomic times. This is being proven again real-time. 2008 box office was flat despite film calendar reductions in the fourth quarter because Hollywood's essential advanced media buys were just literally crowded out by election advertising in the fall.

In 2009 box office is up almost 20%. Up almost 20%. I don't know how many other industries are saying that. Other key tenant industries are likewise showing great signs of strength.

In the wine industry, our tenant portfolio is reflecting an increase in sales with only one client reporting lower sales. In the ski industry, we opened the season with advanced season pass sales reported to you last time year-over-year increase we saw a lower November and early December, but then Christmas season, January and the Martin Luther King holiday were all up over last year. Greg has an up-to-date report. Season-to-date revenues I know are both ahead of the three and five-year trends, which is the real key. And in the charter public school areas, we reported early enrollment is up year-over-year for the current school year.

Now we do not have an update there, but I will ask you guys if you want to look out for some of the major accolades that are coming with regard to public schools. Particularly you might look for Bill Gates personal reflection about the effectiveness of charter schools in The Gates Foundation annual report just released.

Regarding our development projects reported to you earlier, Schlitterbahn in 2008 was up over '07, and regarding the Concord project, the 2008 East Coast slot report is now out. That report shows total wagering up just under 3%, and total house wins are up just under 4% with some of the best reports coming from the most comparable properties to our development project.

Our third headline is not weakness in our key tenant industries but rather moves to fortify our liquidity, along with slowing and scaling of our two major remaining development projects that lead us to revise guidance to levels roughly equivalent to 2007, FFO per share of about $4.20 and cash dividend around $3.00. Mark has the full guidance range for you in his part.

Our current equity raise of about $45 million, just under 2 million shares at an average price of about $23.50, was dilutive to shareholder metrics. Despite our ability to see this, we undertook it to fortify our liquidity position so highly valued by the market today, hopefully to increase shareholder returns.

We have some minor non-systematic vacancies at some of our multi-tenant ERCs. Greg will talk about that. They are also weighing a bit on shareholder results. But given the hugely tightened and dysfunctional financing market for development projects, our clients are scaling down the Schlitterbahn Kansas City waterpark project and the Concord Catskills New York Casino anchored project.

Bear in mind, these are not speculative to be leased projects. Both have their attraction anchors in place, as well as structural tax incentive advantages in place. Both have adequate financing available to proceed with a Phase I completion that satisfies critical mass requirements to be successful. The scaling and slowing, along with some renegotiation of construction period yields, lead us to lower guidance.

My fourth and last headline, given the foregoing EPR priced at about $4.25 FFO multiple and a cash dividend yield in excess of 17% represents a discount of something around 40% to our peers. I hope you find this math very compelling.

Despite a strengthened liquidity position, a demonstrated strong tenant-based performance, we are currently trading at a level that is a substantial discount to our peers. Our credit ratios of leverage and coverage leverage less than 50% and interest coverage greater than three times with a fixed charge coverage around $2.25 are generally comparable if not superior to those same peers. Debt maturities are also comparable to or lower than those same peers. Based on what we go through on this call, I hope you will agree that our tenant risk profile is lower than most of our peers.

Despite all of this, we are selling an evaluation of this at a substantial discount relative to our peers. This feels a lot like the unsupported difference in valuation we saw in the second half of 2000 when we also saw a large and rapid increase in our share price over the next several months.

One further thought before I turn it over to Mark and Greg about maybe for the more skeptical or cynical perspectives, I reflected to you and you will hear from others it is a couple of our large development projects that are driving a lot of the range and change in our guidance. These are not our projects. We do not wholly control them. We are lenders with ownership conversion features.

The Toronto Life Square refinancing seems well in hand with a signed term sheet, and Schlitterbahn's reconstruction is nearly and pretty reliably complete. The Concord Casino anchor project rescaling, although fairly complete, probably has the most moving pieces to get finally resolved and is the project we get the most questions about.

For that reason we went through the following analysis for you. Even if you completely deduct from our guidance all the returns in cash flow related to this project, which would be about $0.50 per share in earnings and $0.35 per share in cash, our current trading level would still be less than a five times FFO multiple and a corresponding cash dividend yield in excess of 15%.

The good news is this reflects a complete halt to the project which will also reduce our capital spending by about $90 million and preserve substantial liquidity for the Company that is so highly valued by the market. That is just a hypothetical though, but I just thought I would share it with you because we get so many questions about that project.

I will turn it over to Mark now. He has a lot of the details on the guidance, the financials, and Greg, about our portfolio, and I will be back to join you in a minute.

Mark Peterson

Thank you, David. Let me begin with a review of the significant items from our recently completed fourth quarter.

As you can see on the first slide, our net income available to common shareholders increased 29% compared to last year from $21.5 million to $27.8 million. Our FFO increased 23% compared to last year from $31.3 million to $38.4 million. On a diluted per share basis, FFO was $1.16 compared to $1.11 last year for an increase of 5%.

Looking at the details of our fourth-quarter performance, our total revenue increased 17% compared to the prior year to $77 million. Within the revenue category, rental revenue increased 4% to $51.4 million, an increase of $2.1 million versus last year. Percentage rents included in rental revenue decreased to $268,000 versus $512,000 in the prior year. This decrease primarily relates to one property and is offset by an increase in base rent at this location. The rent bump increased to the break point in calculating the percentage rents.

Tenant reimbursements decreased 19% or $1.1 million. This decrease is primarily due to the decrease in the Canadian dollar exchange rate and a decrease in operating expenses in the fourth quarter of 2008 versus the fourth quarter of 2007 at certain of our entertainment retail centers.

Other income increased $400,000 to $1 million. This increase is due to approximately $400,000 in gains recognized on settlement of foreign currency forward contracts during the fourth quarter of 2008. Mortgage and other financing income was $19.8 million for the quarter for an increase of $9.9 million versus last year. This increase is due to the higher outstanding balance of mortgage and other notes receivable during the quarter compared to the prior year, as well as financing income recognized related to our direct financing lease investment in charter schools.

On the expense side, our property operating expense decreased approximately $300,000 for the quarter. As with tenant reimbursements, this decrease is primarily due to the change in the Canadian dollar exchange rate, as well as a decrease in operating expenses for the fourth quarter of 2008 versus the prior year at certain of our entertainment retail centers. This variance is partially offset by an increase in bad debt expense versus the prior year of about $400,000.

Other expense was approximately $560,000 compared to $1.6 million last year. The decrease of $1.1 million is primarily due to approximately $850,000 in expense recognized upon settlement of foreign currency forward contracts during the fourth quarter of 2007. As discussed earlier, during the fourth quarter of 2008, a gain was recognized. Additionally expenses were down about $200,000 related to our family bowling center in Westminster, Colorado that has operated through a TRS subsidiary.

G&A expense increased $959,000 versus last year to approximately $4.8 million for the quarter. This increase is due primarily to increases in personnel-related expense, including share-based compensation. Additionally, G&A expense for the fourth quarter of 2008 includes about $590,000 in costs associated with terminated transactions versus about $200,000 in such costs included for the fourth quarter of 2007.

Interest expense increased $1.6 million or 9%. The increase in interest expense resulted from increases in debt associated with financing our additional real estate investments and mortgage notes receivable. This increase was partially offset by the impact of lower interest rates on our variable rate debt.

Equity and income from joint ventures decreased $767,000 versus last year to $219,000. This decrease is the result of our acquisition in April of 2008 of the remaining 50% interest in a joint venture that owned 12 public charter schools. Minority interest was $880,000 for the quarter and as in the prior year is due primarily to minority interest income related to our White Plains investment, which is excluded from reported FFO. Minority interest income for the current quarter was partially offset by the minority interest expense of $79,000 related to global wine partners, our minority partner in VinREIT.

Now turning to our full-year results in the next slide, our net income available to common shareholders increased 25% compared to the last year from $81.3 million to $101.7 million. Our FFO also increased 25% compared to last year from $113.7 million to $142.6 million. On a diluted per share basis, FFO was $4.57 compared to $4.18 last year for an increase of 9%. This impressive year-over-year growth in all key metrics was primarily driven by the increases in our real estate and mortgage loan portfolios.

Rather than go through each of the line item details that essentially track the growth in our operations and that will be detailed in our 10-K, I would like to limit my comments to the less obvious year-over-year variances.

Within the revenue category, percentage rents were approximately $1.7 million versus approximately $2.1 million in the prior year. As was the case for the quarter, this decrease is primarily driven and offset by base rent bumps and leases at certain properties.

On the expense side, other expense was $2.1 million compared to $4.2 million last year. The decrease of $2.1 million is due to $1.7 million less in expense recognized upon settlement of foreign currency forward contracts. Additionally expenses were down about $40,000 related to our family bowling center in Westminster, Colorado as operated through a TRS subsidiary as I mentioned earlier.

G&A expense increased $3.9 million versus last year to approximately $16.9 million for the year. This increase is due primarily to increases in personnel-related expense, including share-based compensation and increases in professional fees. Additional G&A expense for 2008 includes about $1.6 million in costs associated with terminated transactions, which is an increase of approximately $1.4 million versus the prior year.

Okay. Now turning to the ratios for the year, interest coverage was 3.3 times, fixed charge coverage was 2.4 times, and debt service coverage was 2.5 times. All of these ratios remain very healthy.

Now turning to the next slide, I want to give you an update on our recent capital markets activities, as well as update you on our liquidity position. In November we exercised our option to extend the maturity date of our $235 million revolving credit facility by one additional year to January 31, 2010, and all of the other terms remain the same. Importantly we now have no debt maturities in 2009.

Also, we are pleased to report that in November, VinREIT, our subsidiary that own vineyards and wineries, expanded its credit facility from $129.5 million to $160 million, and $67 million is currently un-drawn on that facility.

Turning to the next slide, for the year ended December 31, 2008, as David mentioned, we deleveraged our balance sheet from approximately 50% to approximately 48% on a booked basis, primarily by raising over $300 million in equity versus just under $170 million in debt. In addition, subsequent to the end of the year, as David mentioned, we continued deleveraging and further strengthened our liquidity position.

During January and February 2009, we issued 1.9 million common shares through our DSPP, the Direct Share Purchase Plan, and used the proceeds to reduce the balance outstanding on our revolver. These shares were sold at an average price of $23.57 per share, and total net proceeds after expenses were approximately $44.3 million. While the equity issuances in 2008 and early 2009 mitigate the growth in per share results, we believe lower leverage and increased liquidity is prudent during this current economic downturn.

At year-end we had total offsetting debt of approximately $1.3 billion, of which $1.1 billion was fixed rate long-term debt with a blended coupon of approximately 5.9%. We had $140 million outstanding on our unsecured revolving credit facility at year-end and had $50 million of unrestricted cash on hand.

Certainly, the focus in today's economic environment is on liquidity, and we continue to be in excellent shape in that regard. I would like to reiterate that with the exercise of the extension option on our revolver, we do not have any maturities in 2009. Additionally, excluding our revolver, our only 2010 or 2011 maturity on a consolidated basis that does not have an extension option is the note related to our Sullivan County, New York investment. Furthermore, the maturity of this note corresponds with the maturity of our expected mortgage investment and the anticipated completion of the casino resort complex.

It should also be noted that our operating cash flows have historically covered our dividends and recurring principal payments, and given the current dislocation in the Capital Markets, it is certainly our intention to continue this practice in 2009.

As you can see on the next slide, when we consider the $44 million of equity raised under our direct share purchase plan during the first quarter of 2009, we have a total of $254 million of liquidity available under our existing credit facilities and unrestricted cash. In addition to the equity raise, this total is comprised of $78 million in availability on our revolver, $50 million in unrestricted cash, $26 million of availability on our vineyard and winery debt facility, and $56 million of availability on our Sullivan County term loan. We consider our anticipated investment spending of $125 million for 2009, we find ourselves with a cushion of almost $130 million.

Now with respect to our revolver maturing in January 2010, we plan to pursue our new agreement in 2009 and have begun preliminary discussions in this regard. Certainly we are aware that many banks are increasing their liquidity by reducing or eliminating their capital commitments on various types of corporate credit facilities.

The good news for us is that we expect to have substantially less than the maximum amount drawn on the revolver at the time of the renewal, and our preliminary discussions with certain larger lenders in the current facility have been favorable. The disruption in the credit markets also means that a new facility will likely have higher pricing and other more restrictive terms. Although there can be no assurance regarding the ultimate outcome and timing of our revolver renewal efforts in the current environment, we think we have put ourselves in a position for success, but we have budgeted an increase in revolver borrowing costs for the latter half of 2009.

Now a project with both liquidity and accounting or earnings variability for 2009 is our second mortgage loan investment related to Toronto Life Square, a retail and entertainment project in Downtown Toronto that was completed in May 2008. Greg will provide further details about this asset during his remarks, but I will first provide some background information and explain the liquidity implications for 2009. I will then shift gears and discuss the earnings implication for this investment in 2009.

During the fourth quarter, we extended the maturity on our second mortgage loan from November 30, 2008 to March 2, 2009 in conjunction with the similar extension granted by the project's first mortgage construction lender. The sale of Toronto Life Square was scheduled to close during the fourth quarter, as David mentioned. However, the transaction was not completed, and the current owners are seeking to refinance the project.

On the March 2 extended due date, we anticipate that the balance of the first mortgage will be approximately $119 million Canadian, and the balance of our second mortgage will be approximately $129 million Canadian for a total of $248 million. Management has determined the fair market value of the project to be approximately $277 million Canadian taken into account an independent appraisal dated January 31, 2009, and thus, we feel very comfortable with our economic position in this project.

We are currently assisting the ownership group at Toronto Life Square and their efforts to refinance the current first mortgage, and the group has secured term sheets from two different banks. As currently contemplated, these facilities will provide approximately $100 million to $130 million Canadian, and therefore, we may increase our investment by zero to $20 million Canadian to complete the refinancing. However, there can be no assurance regarding the ultimate success and timing of this refinancing.

I will now describe an alternate scenario. Please note this is not our expected outcome. We want you to understand this scenario since we can not be assured that the existing first mortgage lender will cooperate with the current ownership. If the current first mortgage lender is not willing to allow additional time for the current owners to execute a refinancing, they could insist that a for sale process be initiated, which could result in either us becoming the owner of Toronto Life Square or our second mortgage note being settled in conjunction with the project's sale to a third party. If we become the owner, we would expect to obtain one of the new first mortgages I described earlier.

In either of the scenarios I just reviewed, refinance or for sale, we should be able to protect our current investment with nominal or no stress to our overall liquidity position. In the for sale scenario with a third party buyer, we would actually monetize our investment.

Now I would like to discuss some of the accounting issues both financial statement geography and income recognition. If the current ownership group is successful in refinancing the first mortgage, we anticipate restructuring our interest in the project such as the project's financial results would be consolidated into the company's financial results subsequent to the restructuring.

To be clear, this means that we would include the real estate asset and the third-party debt on our balance sheet and show the property's operations in the various line items of our income statement.

Our loan structure as required by the first mortgage lender has always provided for the accrual of interest income rather than receiving cash interest payments. This fact, along with uncertainty around the mechanism by which we will realize the value of our second mortgage investment, makes it very difficult to predict the accounting treatment for the interest income between January 1, 2009 and the date the project is restructured and refinanced or sold. GAAP may preclude us from reoccurring interest income during this period, despite the fact that our loan will continue to accrue interest at our stated rate of 15% for purpose of settling our position with the project's current owners.

To be clear, this just means that our FFO and our mortgage notes and related accrued interest balance sheet line item may not fully reflect the benefit of our actual economic position in the project at the time of the restructuring.

I appreciate that this is complicated, so I will summarize it for you. From a liquidity perspective, our most conservative refinancing scenario will result in an outflow of only 20 million Canadian, and a sale of the project to a third party could result in an inflow as large as 129 million Canadian.

The accounting and earnings implications, which have been included in our updated guidance, are that one, it is possible that no interest income will be accrued and recognized between January 1, 2009 and the effective date of the restructuring and refinancing, which has a non-cash and non-economic impact of about $0.10 a share in the first quarter of 2009. And second, subsequent to this effective date, we expect to consolidate the property's operations into the various line items of our income statement instead of simply recognizing interest income as we have historically done under our second mortgage note.

Now turning to the next slide, we are revising our 2009 guidance for FFO per share from $4.65 to $4.95 to $4.05 to $4.35 in confirming our 2009 investment estimated investment spending of approximately $125 million. The decrease in our expectation for FFO per share of about $0.60 is due to about $0.21 a share from the phasing of development projects, $0.18 a share from the recent issuance of equity, $0.14 a share related to specific tenant issues, and a $0.07 a share related to the estimated increase in costs for the new revolver.

Additionally, although our Board of Trustees will not officially declare the first quarter of 2009 dividend until their March meeting, we expect to continue paying a common dividend in cash at an FFO payout ratio consistent with past practice and based on the lower side of our FFO per share range.

Now let me turn it over to Greg for his comments on leasing and investing activities.

Greg Silvers

Thank you, Mark. As you will remember from our last call, we moved our capital expenditure forecast to approximately $500 million, and I am pleased to report to you that we completed approximately $493 million for the year. For the fourth quarter, our investment activity was relatively light with approximately $22 million being invested in ongoing projects.

Today, however, I want to begin our discussion regarding the operating performance of our theaters, our primary asset class. As we previously discussed, theaters continue to shine in these difficult economic times. After finishing relatively flat in 2008 as compared to 2007 record performance, the New Year has started out very strong. January 2009 opened very favorably, recording the first ever $1 billion January, and year-to-date we stand approximately 19% ahead of last year's number. While there are no guarantees for this continued strong performance, the proposed slate of movies for the spring and summer look very strong and should bode well for the strength of our primary asset class.

As we discussed in our last call, our public charter schools continue to meet or exceed our expectations for enrollment with an overall occupancy of approximately 86%. We continue to expect these investments to be very resistant to the economic difficulties being experienced in the broader economy.

With regard to our ski properties, we began the year very strong as reflected in our annual season pass sales, and through February 8, 2009, attendance is up 2.24% and revenues are up 1.73%. These are especially favorable numbers given the strong performance of the '07, '08 season, which already exceeded the five-year average. Again, this data reinforces our belief that the Metropolitan ski model is better positioned for a consumer that may no longer spend money for a resort destination but still wants to have a ski experience.

I would like to spend a minute on our Schlitterbahn waterpark development. As we discussed in our last conference call, it is our intention to execute this project in phases, and it is our intent to open the first phase the waterpark amusement in the summer of 2009.

In conjunction with this phased approach, we have also reexamined our financial commitment and collateral regarding the project. In conjunction with this review, we and the Schlitterbahn team have agreed to reduce our financial commitment to the project from the original $175 million to approximately $163 million. To close the funding gap necessarily to complete the waterpark, the Henry family, who are the founders of Schlitterbahn, will inject an additional $25 million to $30 million of equity into the project, which will include the purchase of approximately $10 million of Star bonds to ensure our ability to additional bonds when the markets reopen.

Additionally, to further enhance our collateral and cash flow position, we expect to take mortgages on the highly successful new Braunfels and South Padre waterparks owned and operated by Schlitterbahn. As a result, we are very excited about the combination of sponsorship equity infusion, additional collateral support and demonstrated cash flow to support our position, and we look forward to the opening of the Kansas Park this summer.

In our last call, we also discussed that we had a significant Canadian asset under purchase contract. As many of you suspected, that asset was our Toronto Life Square project that was recently completed. The agreed purchase price for the asset was $325 million. However, after completing this due diligence, the buyer's German bank financing evaporated, leaving the buyer unable to close the transaction. As a result, it is our expectation that upon completion of the refinancing of the construction loan that we will own all of the effective economic interest in the project. While we had elected to accept the sale transaction, we are still very happy with our continued involvement in such a premier asset.

In conjunction with the refinancing, we have a recently completed appraisal dated January 31, 2009, which indicates a value of approximately $277 million. And while this is a substantial reduction from the $325 million to $340 million appraisal associated with the sale transaction, it still represents considerable value above our investment.

Furthermore, the retail and office space is 87% leased with our retailers and restaurants performing well, and we continue to make good progress on the signage leasing, which represents a substantial portion of the revenues for the project. However, as purchase of such advertising space is short in duration and hard to predict, we have elected to take a conservative view in our forecast for this revenue.

Given the premiere location and trophy nature of Toronto Life Square, upon stabilization of the market, we may take this asset back to the market.

So while the majority of our assets are performing well, we are experiencing certain difficulties in our non-theater retail and restaurant assets. Of our approximately 1.5 million square feet of non-theater retail space, we have approximately 177,000 square feet of vacancy with the largest concentration at our White Plains City Center project where we had a Circuit City which is liquidating via bankruptcy and Filene's, a large scale retailer that has vacated its premises.

With regard to Filene's, we have brought suit for the breach of the lease, and our expectation is that we will recover a significant damage award pursuant to the terms of the lease. However, we have not factored any such recovery in our guidance.

With regard to the space vacated by Circuit City and Filene's, we are in active negotiations with other tenants for this space. However, you should know that the guidance Mark provided earlier reflects the space remaining vacant for the balance of 2009.

We have also experienced a bankruptcy in the Bennigan's restaurant chain with two restaurants returned to us as a result of their liquidation. Again, we are in active negotiations on these properties, but the guidance does not reflect a releasing for 2009.

So as you can see, we are taking a very conservative approach. As Mark's comments indicated, our 2009 guidance for investment spending remains at approximately $125 million.

With regard to occupancy, we continue to have 100% occupancy of our theater assets, and our non-theater retail occupancy is at 89%.

With that, I will turn it back over to David.

David Brain

Alright. Thank you, Greg. Thank you, Mark. I guess just as we open to questions, I will turn back to my four headlines for you that I highlighted to you before to recap. And that is, the company has taken strides to fortify its liquidity position. Our tenant base overall is very healthy. We have, as pointed out, spots of the economic stress that is going on we're not immune to completely, but by and large, we have a well-positioned tenant base. We're rescaling a couple of development projects or our clients are. We are not in charge of these. These were sitting at the table and negotiating, and we're trying to take a conservative view of their performance.

To the extent that they scale even further down, there may be revisions. But the good news is, if those revisions are down for earnings and cash flow, they also preserve liquidity and we invest less. So we tried to reflect those to the best of our ability as we know them today. And given the foregoing, we still are going to be at a 2007 level, not a 1997 level like the Dow, the 2007 level. We just missed having I think our seventh straight year of double-digit increase. So all-in-all it's kind of a rebuilding point to the '07 level, but I think in relative terms it is good, and we have been very conservative with the assumptions taken.

Overall, as Mark told you, the transaction costs, one of our G&A moves is really we terminated a lot of transactions, thinks we had in the hopper, and have taken the write-offs and taken our medicine for all of those things in '08 or where we are with our guidance for '09.

So all-in-all we are not immune to what is going on in the economy, but it has been a very good position, and we will now open it for your questions.

Question-and-Answer Session

Operator

(Operator Instructions). And our first question comes from the line of Jordan Sadler. Jordan you may proceed.

Jordan Sadler - KeyBanc Capital Markets

Good morning.

David Brain

Good morning, Jordan.

Jordan Sadler - KeyBanc Capital Markets

I wanted to just get a sense of what is included in guidance as related to a couple of different things. First, just on the percentage rents, what is baked in for the theaters given the performance year-to-date? I know two months does not a year make, but what are you guys baking in 20% year-over-year?

David Brain

I know two years does not make a year make, Jordan, but we are pretty encouraged by the market.

Mark Peterson

We basically would be budgeted at flat. We don't want to get carried away by one month's performance, but we thought it would be prudent too just budget it at flat. It's not a huge, really percentage of our income, frankly, but we thought it prudent just to budget it as flat versus this year.

Jordan Sadler - KeyBanc Capital Markets

Just to bracket it, if it were up 20% for the full-year, I know you are not promising anything clearly, but what would that do in terms of an impact to your percentage round number?

Mark Peterson

I don't have that handy.

David Brain

Try to spend $2 million to $3 million bucks.

Mark Peterson

It has been bracketed about 1.7 to 2.3 roughly.

David Brain

$500,000.

Jordan Sadler - KeyBanc Capital Markets

Well, your percentage rent would not necessarily be up just 20% if the box office were up 20%, right?

David Brain

It depends on the specific tenant. I can tell you there are not a lot of specific tenants just sitting at the brink. I meant with increases we expect out of digital and 3-D down the road, we expect that to be more meaningful. But there's not a lot of tenancy. So it's basically existing tenants that would move with the increase in box office. I don't think that would be huge, but I think it could be a few hundred thousand dollars.

Jordan Sadler - KeyBanc Capital Markets

Okay. And then on the other side of things, what's in there in terms of, I know you said $0.14 in terms of tenant issues, but what does that relate to specifically? Is that just Circuit City and Filene's and Bennigan's, or are you baking into traditional reserves?

Greg Silvers

Well, we are, Jordan. It's those things specifically, and we are just taking a conservative approach and building in some reserves for issues that we cannot foresee. But we think it prudent to consider.

Jordan Sadler - KeyBanc Capital Markets

Is there anybody else out there besides those three tenants that is non-current or on your watch list like within the restaurant and retail portfolio?

David Brain

Well, we have a bunch of what I would say small tenants and things like that that we are continuing to keep a watch on in our retail portfolio. I think on the retailer side, I don't think we have any large-scale retailers that we are following right now other than those we mentioned.

And as far as the restaurant group, we really don't have an exposure to one large restaurant group. They are really kind of very different groups of restaurant tours. So it is just kind of monitoring it as we go, but we don't have any restaurant tour or retailer right now on a watchlist beyond what we have showed you.

Jordan Sadler - KeyBanc Capital Markets

And then on the Concord development and/or Schlitterbahn, it did not sound like you guys have taken any reserves yet. Is that correct?

David Brain

Well, we have taken in our forecast delays to reductions for where we thought we might be otherwise if the economy had not gone into the situation it is in certainly.

Greg Silvers

I think with regard to Schlitterbahn, I think what we have done is effectively added two cash flowing properties that were very high performing properties to our collateral package and our cash flow protection. So, we are feeling very good how you think about how we've modified Schlitterbahn, we feel like we have got the complete circle around that and feel that project is positively there.

Jordan Sadler - KeyBanc Capital Markets

Were those first mortgages?

Greg Silvers

The only thing they have got a $5 million seasonal cash flow line that would be ahead of us.

David Brain

We feel like we have really increased, we down scaled the total investment, and we have increased our credit profile there, so we feel pretty good about it.

Jordan Sadler - KeyBanc Capital Markets

And is Concord going to fund the rest? Is that still dependent on the developer there, or what is the status?

David Brain

It certainly is dependent on the developer, and Concord probably has more moving pieces. I say one of the things about it is, it is constantly seemingly in a status of waiting to determine what is going on at the federal level because it is shovel ready. Because Chuck Schumer and guys have said they are going to try and help that project. People are waiting to try and get federal help. So it is yet to be determined in its finality.

So we are sitting waiting for that to try and determine where we are going to end up and what its timing is going to be, and we have substantial more scheduled investment. Maybe we don't make that, and we have a higher level of liquidity. I don't know the full answer, so we are waiting to determine on that one.

But the good news is all the competitive advantages, the tax advantages, are all in place. The primary tenants are all in place. This is not a speculative to be leased project. It is just waiting for it just had $300 million to $400 million of these tax exempt bonds available for that waiting to be sold to move the project forward.

Jordan Sadler - KeyBanc Capital Markets

Is all the equity there?

David Brain

All the equity is there.

Jordan Sadler - KeyBanc Capital Markets

No additional capital needs to be raised for you guys to fund? It is just at the developer's say so at this point?

David Brain

Well, I think they need to decide whether they are going to scale the project down to a level that does not need the bonds or whether they are going forward with the bonds. We are not in charge of that. The developer is in charge of that. So we are certainly, we are staying close to what we feel like it still is a very competitively advantage project.

As I mentioned to you, the East Coast slot report is showing gaming and wagering at comparable properties actually increasing in '08. So we feel good about the project. We feel good about its prospects. The land is assembled. The tax legislation is already passed and in place that gives it its competitive advantage. We just have to wait for the developer to finalize the schedule for this thing, and we cannot control that.

Jordan Sadler - KeyBanc Capital Markets

That makes sense. Thank you.

David Brain

Fine.

Operator

And our next question comes from the line of Paul Adornato. Paul, you may proceed.

Paul Adornato - BMO Capital Markets

David, you talked a little bit about dividend policy. Could you remind us how close you are to the statutory payout limit?

David Brain

Sure. For 2008 we were relatively close, but then we are taking down our guidance with regard to 2009. So Mark, we would be --

Mark Peterson

What is our number?

Greg Silvers

Well, we are fairly close to the dividend payout is generally fairly close to our taxable income. But like I said in our guidance, we expect the payout ratio to be similar to what it has been in the past and similar to taxable income effectively.

David Brain

Right, we moved it. That is what I gave you was my approximate levels of a $4.20 and $3.00 are Mark's ranges. Our payout ratio at the mid to low 70s would still put us, and we would probably correspondingly be within but close to the required, we would be to the point --

Mark Peterson

We would be fine with respect to.

David Brain

(Inaudible).

Mark Peterson

We have some cushion there.

Paul Adornato - BMO Capital Markets

Okay. And under what circumstances, do you think the board might decide to either cut the dividend or pay a portion in stock?

Mark Peterson

Well, I think we had liquidity issues I think. But, Paul, as we went through, we are managing the company. The company is sitting at what we think is a good liquidity cushion with. We fortified that liquidity cushion. We do not foresee that our expectation is to pay a cash dividend. But I think you would if you had to, but we don't foresee having to.

Paul Adornato - BMO Capital Markets

Okay. And with respect to some of the retail leasing challenges, given that you guys are relatively new to having non-theater retail tenants and certainly the level of re-leasing challenges that you do have, do you think that you have the resources on-board to handle those challenges? And maybe you could just comment a little bit on staffing in this environment.

Greg Silvers

That is something that we are outsourcing with third parties and third party leasing agents. And like I said earlier, on those spaces that we talked about, we have LOIs for those spaces on our desks right now. However, given the fact that we just went through a transaction that evaporated, we are taking the conservative approach and saying, we do not talk about anything until it crosses the finish line.

David Brain

There, our numbers as being dark.

Greg Silvers

Is dark. But to your point, though, we are using outside resources rather than staffing that up.

Mark Peterson

Even with the conservatism that we're talking about, the $0.60 reduction we are talking about a range, only $0.14 of it is tenant specific. I think that's an important thing to reiterate is that a lot of the change is due to stuff like equity issuance and the development issues that we talked about in terms of timing. But this reduction is not largely driven by tenant weakness. I think that's important to underline.

David Brain

So, but if some of those lease we would have some pickup there, but those are big items are the equity issuance and this dilutive effect that fortify our liquidity, and the other is rescaling the timing of some of these projects, and we are doing our best estimate. We have got a couple of them as Greg mentioned kind of we got the fence around them, and we know we have got them cornered. But the Concord a little less so, but we are attempting to give you our best estimate and staying on top of it closely.

Greg Silvers

And as I mentioned, we have already baked in a higher revolver cost for the latter half of the year.

David Brain

And we do not have to even do that as Mark indicated that revolver, but we are in anticipation we get that done early to continue to take risk away from the shareholder and at a higher cost. So we bake that in as well.

Paul Adornato - BMO Capital Markets

Okay. And finally, I guess this is not really a question but more of a request, and that is I think you have alluded to some of the complexity that analysts have and investors have when looking at the company, and I think it would be helpful to perhaps lay out in a little bit more detail some of the key points of the construction loans that you have and the mortgage loans and also the different property types that you now have exposure to in terms of your quarterly disclosures.

David Brain

Yes, as I see it, the 10-K has some of that in there in terms of how much assets in each area and so forth. As we said in the past, the income fairly tracks that because of the similar cap rates across our businesses. So I think it's more of a consideration on the quarterly as you mentioned, and we will give that some thought here for the first quarter.

Paul Adornato - BMO Capital Markets

Okay, great. Thank you.

David Brain

Thanks, Paul.

Operator

Our next question comes from the line of Michael Bilerman.

Michael Bilerman - Citigroup

[Greg Schweitzer] is on with me as well. I would echo Paul's comment I think given the amount of assets that are in loans, as well as outside your theater investments, and that is really what is causing some of the declines. Additional quarterly disclosure I think would help bridge the gap with expectations.

I wanted to get a little bit more clarity on Toronto Life Square and where if you were to convert into equity and you were able to get that $100 million to $130 million new mortgage loans, what would the effects be in terms of yield and returns for 2009?

David Brain

Well, I think we have got largely assumption baked into the numbers of that occurring. And --

Michael Bilerman - Citigroup

Well, I'm really trying to understand when right now your recurring interest at a 15% rate on $120 million Canadian. You convert that into equity. You are not going to get the cash flows off the asset, and you will have to pay interest expense on the new loan. I'm trying to understand how that matches up relative to what you have been accruing at 15%.

Mark Peterson

Here are some statistics. The first year annualized expectation for Toronto Life in an ownership scenario is about a NOI of about $17 million. So that's a cap rate, if you want to put it in that perspective on our basis, which would be about $250 million at about a 7 cap. Again, the thing is it's not fully leased up. Greg mentioned.

Greg Silvers

Signage conservative.

Mark Peterson

87% on retail and only 47% on signage, so that is one thing. The stabilized rate that is projected is more like $25 million, which is more like a 10 cap on our $250 million investment.

David Brain

So Michael, what we are struggling with is it is hard to predict how people are going to treat advertising in this kind of market.

Greg Silvers

Just remember, we have substantial billboard space on i.

David Brain

And so we are just trying to take a fairly conservative view on that and potentially have positive surprise as opposed to negative.

Michael Bilerman - Citigroup

And so you are thinking that your investment is the 120 that you have in accrued plus another 130 loan?

David Brain

The other way around. We have accrued 120 first loan. And to kind of put it in perspective versus the 15% we are accruing, we expect somewhere in the neighborhood first year after interest on that first mortgage somewhere in the neighborhood of $9 million, and we will have equity in it roughly of $130 million. That is about a 7% ROE versus the 15% ROE we were enjoying when we were accruing.

Michael Bilerman - Citigroup

With the lower billboard space.

Mark Peterson

This is the initial year, not fully stabilized to give you some sense. And that is what we have baked into our guidance subsequent to the restructuring is the lower NOI, the result from ownership versus what we were accruing previously.

Michael Bilerman - Citigroup

That is the major $0.21, the $0.21 is fully Toronto Life Square? It has nothing to do with

Mark Peterson

Not really versus our previous guidance, remember our previous guidance had the sale of Toronto Life Square. So it just had proceeds being reinvested in our line of credit, paying down our line of credit. What you have now that has slipped to potentially no interest income recognition for a quarter. So no income from any source in the first quarter given this accounting quirk and then lower NOI going forward.

The overall impact of that versus paying it down on the line in our previous guidance is actually fairly immaterial difference between the two. So the phasing really is not Toronto Life. It is more Concord, Schlitterbahn related than it is.

Greg Silvers

You have taken down Toronto Life given our prior guidance.

Mark Peterson

Because then we thought it was going to sell.

Greg Silvers

Yes.

Michael Bilerman - Citigroup

Well then on Schlitterbahn and Concord, how does that, it's not the current income that is changing, it is really changing your expectation of the income you are going to get?

Mark Peterson

No, well, in the initial guidance we gave, we had that funding very early in 2009, the whole year of 2009 practically. And now here we sit in February and that has not happened yet for some of the issues that David said. So we have obviously had to take a more conservative approach, and that has a fairly high octane FFO number associated with it, in excess of 14%. So, as you move that out, it reduces your FFO.

Michael Bilerman - Citigroup

This is for the balance on Concord you are saying? So you have $132 million in today, and your expectation was you have put in the other 92 early in the year and then the other 56 potentially if they were able to get some additional financing?

Mark Peterson

No, the $92 million was our remaining investment. The 56 the debt --

David Brain

Is part of that 92.

Mark Peterson

Part of that 92 is the 56 we would get in debt associated with it, it kind of comes with it. But 92 on the asset side is the impact to basically revenue or interest income that we otherwise would have had in the plan.

Michael Bilerman - Citigroup

But you're not going to I mean I guess in the guidance you are not spending the 92 either?

Mark Peterson

The 92 is in our $125 million guidance, but much, much later in the year than what it was previously. It is not the beginning of the year.

David Brain

So if we would take down our spending guidance that stalls out through the entire year. I mean that is a major part of our spending guidance.

Michael Bilerman - Citigroup

Of the 21, of the defined $0.21, it is 125 being later in the year than in the beginning of the year?

Mark Peterson

That is right. It is a very material part of our investment spending. The incremental investment is not a very material part, frankly, given how we modeled it in our guidance for 2009. So because we have modeled that much later in the year than previously, than our previous guidance range.

Michael Bilerman - Citigroup

Right. I guess what I'm trying to figure out is if you are currently at 464 annualized and I know there was a couple of things in the fourth quarter, if anything it probably brought it down less, right? Just as of the fourth quarter, you knock off $0.20 or $0.18 for the issuance, $0.14 for the tenant issues and $0.07 for the cost reductions would sort of take you to $4.25 to $4.55?

Mark Peterson

No, on a year-over-year basis, you have got to take Toronto Life does have a big impact. It does not have a big impact to our guidance change, but on a year-over-year basis, it does have a large impact. You are going from, to nothing in the first quarter is what we have modeled again because that accounting nuance, if we ended up owning it, you would have to stop your interest accrual, and that has the benefit of hindsight on that.

And secondly, the lower NOI, initial NOI, has given it in ramp-up stage, that is much lower than the 15% we were accruing in '08.

Michael Bilerman - Citigroup

And who is going to handle most of the management of the asset going forward?

Greg Silvers

We expect the same management that has been involved in the project from the inception to be the managers going forward.

Michael Bilerman - Citigroup

Will Penn Equity have anything left? Do you want to keep them involved in sort of an equity stake?

Greg Silvers

Remember, Penn Equity had very little equity stake. It was the pension funds that are there, and I think for a variety of reasons, the expectation is that they will have a deeply subordinate back-end participation piece. But Penn Equity as the manager was really just a developer in management, and they have the traditional kind of property management fees that they do on our other properties.

David Brain

And Greg, the interesting thing about this we had a sale for $325 million. Okay? We expect to get this for $250 million. We had a sale for $325 million. That fell through. In the worst of times, as Greg mentioned, an appraisal was done for 277, $27 million in excess of my value. And while it has an FFO impact year-over-year, like I said in my comments, we do like our economic position in this project.

Michael Bilerman - Citigroup

And where are the term sheets? What is the sort of rates on that debt?

David Brain

I don't know that we want to negotiate all of that, but I guess Mark --

Mark Peterson

I mean it is higher probably L plus 375, 400. We expect that potentially could be fixed financing. So it is still going to be, it still could be around 5%.

Michael Bilerman - Citigroup

Okay.

Mark Peterson

With those because the rates are so low. So it is still attractive.

David Brain

Michael, you appreciate we cannot negotiate all of that out in the open.

Michael Bilerman - Citigroup

Yep no, understood. It sounded like it was more firm than still being negotiated, but --

David Brain

Yes, I would say so, but we've got a couple of institutions. We have two institutions that were let's say trying to get to vie for the business, two different term sheets. But that gives you a perspective of what we are thinking.

Michael Bilerman - Citigroup

And then on the $0.14 of Penn issues, I guess is about $5.6 million annually. How much of that really relates to Circuit City, Filene's and Bennigan's? I guess is it all out as of January 1, and did it have any impact to the fourth quarter?

David Brain

Well, no, we took some bad debt provision because Circuit City declared in the fourth quarter. We took some, and Filene's we took some hit in the fourth quarter. That is why our bad debt expense in the fourth quarter was up $400,000 year-over-year. So we took some of that in the fourth quarter, and then we have been conservative in our guidance for next year by keeping it out of because those are pretty big tenants, not readily available to release. We just said let's take it out of our guidance completely for '09 both Circuit City and Filene's and some others.

Michael Bilerman - Citigroup

And the totality of this $5.6 million?

Mark Peterson

That is about right, yes, it's in the five's. That is right. That is what gives you that $0.14 impact that I mentioned roughly.

Michael Bilerman - Citigroup

And the majority of that it sounds like are those tenants rather than future losses?

Mark Peterson

Yes.

Michael Bilerman - Citigroup

Okay, Thank you.

Mark Peterson

Thank you.

Operator

And our next question comes from the line of Anthony Paolone. You may proceed.

Anthony Paolone - JP Morgan

Just to finish up first on Toronto Life Square, you said the stabilized expectation would be for $25 million, and the appraised fair value recently was $277 million. That comes out to a 9 cap. Am I looking at it right in terms of how they?

Mark Peterson

Yes, I think that is correct, Tony, in how they stressed it given, I mean this was done like I said January 31st. So if you looked back in August when the first one was done, it was 325 to 340 on the same income.

Greg Silvers

Keep in mind, my basis is not 277, it is 250ish.

Anthony Paolone - JP Morgan

Right. And the 25, of those was kind of like the stabilized number out in the future. The 17 I missed was that, was the 17 what is in place right now at 87% leased and about half on the signage, or is it something other than 17?

David Brain

Well, I think the 17 is I think where we feel like with discussions that are going on in a large way where we could end up, that does not reflect a fully lease up. And when we say it is stabilized, that reflects a proper vacancy factor. But I think it is a conservative view of where we hope we think year one will end up.

Greg Silvers

Right. That is first full year. What we know today is probably more like $15 million.

David Brain

Right, which you have right now, but --

Greg Silvers

Literally in hand.

David Brain

But you have some visibility to advertising season that make that number.

Greg Silvers

It's like you don't have any of your Christmas season booked on the billboards.

Anthony Paolone - JP Morgan

But the first full year would be '09, right?

Greg Silvers

But we're getting it midyear likely or not, it does not happen 1/1. so we get it kind of midyear or end of the first quarter, if you will. So we get, that $17 million, we get part of that. You can not necessarily pro rate it because that number grows over time. You can not necessarily pro rate it and say we get nine months of 17. It is probably slightly lower than that that we have budgeted because that's a ramp-up number in the first year.

Anthony Paolone - JP Morgan

Okay, I see. Switching over to Concord, can you give us the capital stack as it currently -- how much money is out as of today, EPR, Cappelli, the bank group, whatever might the case be?

Mark Peterson

Well, Tony, here again, this is the thing in active negotiation. I hate to do this all out in the open, but we have got 130, 132, and I mean all the land assembly has been done, the land purchase. That includes clearing, demolition, the footings are in. The steel is ordered. The exterior skin of the building and all the other environmental design and so forth.

And so the capital stack overall is they have, there is $75 million of capital that went in front of us. We are in now there would be more equity going along with us with the next phase, and the senior lending group has moved from around $700 million to around $400 million. That is reflective of the change in the scale of the project. Unless that $300 million of supposedly federal enhancement of the bonds to create the jobs and the tax income flow for the state of New York occurs. Then that is back.

So that capital stack would be come back, $300 million to $400 million on the senior lenders and $300 million to $400 million on the bond financing, and then we are in for $225 million, $75 million and about probably $150 million overall on the developer equity.

Anthony Paolone - JP Morgan

So of the $400 million from the bank group that is in place right now, they have not extended any of that as of yet?

Mark Peterson

That is correct.

Anthony Paolone - JP Morgan

And is that --?

Mark Peterson

That is including some of the 75 that has been extended.

Greg Silvers

There is $75 million in now.

Anthony Paolone - JP Morgan

Okay. So they have extended money thus far?

Greg Silvers

Yes, there is $75 million in.

Anthony Paolone - JP Morgan

And you referred to them as senior bank group. I was under the impression you guys were the most senior in the stack. Is that the case, or does anybody get --?

Greg Silvers

We are the most senior in the stack on the resort side, and they are the senior on the casino side. There's a parcel carved out for the casino where they have first position. We have first position on the other surrounding land.

David Brain

Now as we talked in the last time, Tony, we have certain rights onto the casino as kind of secondary collateral for us.

Anthony Paolone - JP Morgan

Okay. Do you have a claim on the gaming license?

David Brain

We have a pledge of the entity that owns the gaming license, yes.

Anthony Paolone - JP Morgan

Okay. And then on Schlitterbahn, can you give us a rough sketch of what the economics of what is to open say this year is expected to look like in terms of revenues and maybe EBITDA and kind of what is left to service the capital you have extended?

Mark Peterson

I can tell you what we have kind of forecast. And if you look at it from an EBITDA standpoint that the other two parts generate about I think about 17. The Kansas Park is expected to generate about 7. So you will have $24 million of EBITDA you will have, and realistically the only debt that you have to service is the, as I said, the $5 million kind of seasonal revolver and our $163 million.

David Brain

Yes, and what will open the $7 million generated, as Greg alluded to, and there will also be, that includes sales tax support because you got sales tax revenues to support the project. That will be the summer only water park execution with some kind of minor retail, incidental retail for the waterpark, and food and beverage for the waterpark. So our commitment is going down, and our collateral is increasing is effectively what we expect out of that.

Mark Peterson

And we also, as we said, we captured existing and demonstrated cash flow.

Anthony Paolone - JP Morgan

Okay. And then finally, I don't know if you would have this offhand, but if I were to look at your balance sheet here and you have got mortgage notes and related and then you have your investment and direct financing, which I guess is the charter schools, and then down below you have your accounts and notes receivable, can you give a sense as to what kind of, what FFO or rather income you expect on each of those buckets for '09?

Greg Silvers

Well, you can get to that. I don't have that handy. But the mortgage notes is detailed in our 10-K, so the rate is stated right there. It is pretty easy to get to a blended average. I don't have that handy, because it ranges from fairly high to LIBOR plus 350 on some others. So I don't certainly have that blended average, but I think you can get at that.

What was the other question? That's on the mortgage notes, and on the properties, I think we have stated are generally are cap rates, generally 9 to 10 initial cap rates on a lot of these deals whether it be theaters, charter school, wine and the ski, which is the mortgages.

David Brain

Mark, we talked about the yield on these asset elements is not terribly different than their proportions. They are ratable proportions, Tony. They as a percent of the total investments is relatively equivalent.

Greg Silvers

Given that the cap rates are similar going.

David Brain

Ratable percent of the revenue.

Anthony Paolone - JP Morgan

Alright.

David Brain

We have the exception is like at Toronto Life, which was carrying at 15 for awhile. That is changing, and you have the Concord investment that has a 14 kind of effective interest rate method, and the third one would be the charter schools that has an effective interest rate method I think around 12. So those are the exceptions, just the nature of them and the accounting rules associated with them that are a little different than the standard.

Anthony Paolone - JP Morgan

Okay, I think I will get the K. Thank you.

David Brain

Okay, great. Thanks, Tony

Operator

And our next question comes from the line of Rich Moore. Rich, you may proceed.

Rich Moore - RBC Capital Markets

Hi. Good morning, guys. I think I heard a couple of analysts back earlier in the call asking for a quarterly supplemental, but maybe that was my imagination. But if they were, I would echo that kind of thinking in these tough times.

On the theater side of things, I think last quarter you guys were saying that you were seeing some pretty good opportunities out there in terms of cap rates, and I realize that investing in your precious capital at this point is probably not what you have in mind.

But what are you seeing in terms of, or are you seeing any opportunities in terms of theaters out there for sale and what kind of cap rates you are thinking?

David Brain

Rich, yeah. We still are seeing, I think, very good opportunities. It is still an issue of what you want to do with your relative liquidity. And given just the tone and tenure of the market as we see, it just seems more prudent to fortify the balance sheet than to execute on some of those transactions.

But as always, as this turns, which I think everyone here believes it will at some point, we will position ourselves to take advantage of those.

Rich Moore - RBC Capital Markets

Are those still mid double-digit type numbers on the cap rates?

David Brain

I think it depends upon, I mean clearly what we talked about before was distressed sellers, not distressed assets.

Mark Peterson

And we have seen distressed assets maybe are scary, but those are not of interest to us. The distressed sellers maybe get into the lower mids, 12, 13

David Brain

And they don't trade based upon the value of the property. They trade based upon the value of the distressed.

Mark Peterson

Yeah, it's really the cash.

David Brain

Right.

Rich Moore - RBC Capital Markets

So I'm guessing more of those will start popping up, probably?

David Brain

Yes, I think, Rich, I'm going to say this. In terms of our portfolio, I think the patients, the non-forced seller, which certainly we would be taking care of the balance sheet if we were to move some assets. And given the strength of the industry that it is demonstrating, I think these can command much lower cap rates too. But we certainly are seeing the high cap rates for distressed sellers.

Rich Moore - RBC Capital Markets

Okay, I got you. Good, Thank you. And then looking at the income statement for a second, base rents kind of dipped from 3Q to 4Q. Did you talk about that, Mark? I cannot remember if you mentioned it.

Mark Peterson

Well, part of that's going to be Canadian exchange rates if you will.

Rich Moore - RBC Capital Markets

Was it? Okay.

Mark Peterson

You know, Q3 versus Q4. I mean, we know for FFO from Q3 to Q4 that had about a $0.03 impact. But it affects every line item down the page. We have 20% of our operations in Canada.

Rich Moore - RBC Capital Markets

Okay. Yeah, you had kind of mentioned it. I figure that might be the same thing. And then on the tenant reimbursements, the actual ratio of recoveries was a lot lower than we had seen it before, and maybe that is partly the bad debt expense, what else might be in there?

Mark Peterson

Well, that is pretty much the main reason is, the bad debt expense. For the quarter that was $400,000, as I recall, year-over-year, and quarter-over-quarter in terms of bad debt. For the year that number is more like $800,000 year-over-year. If you look at the year, I think that pretty much explains the change in that number if you look at it year-over-year.

Rich Moore - RBC Capital Markets

Okay. And then you are going to run some additional bad debt expense going forward I assume?

Mark Peterson

Well, we have budgeted this continued vacancy, if you will, on the certain cities of the world, we have budgeted that, yes.

Rich Moore - RBC Capital Markets

You have budgeted that. That is the part of it? Okay, great. Thank you very much, guys.

Mark Peterson

Sure, thank you Rich.

Operator

And our next question comes from the line of Jon Braatz. Jon, you may proceed.

Jon Braatz - Kansas City Capital

Good morning, David. One question, assuming your share of valuation improves a little bit, would you consider selling even more equity under your direct share repurchase plan, or are you satisfied with the liquidity and the position as it is now?

David Brain

Well, I think generally, we went into this on our last call saying we were satisfied with our '09 liquidity position. We did raise some more because we saw possibly a new requirement possibly raising its head, and we raised equity at equal to kind of the larger end of what we thought that could be, and so we are back to a position where we are feeling pretty good.

On the other hand, we are constantly watching this, so we feel like we are in good shape right now, Jon. So we are not at a need to make any further offering. But we do whatever we have to, to keep the balance sheet in good shape. You know that we had a much better price before than we were currently trading at.

So if you get into a good territory, we have to see about what the use of funds is potentially and how the marketplace is rewarding what level of balance sheet fortification. If they love it, maybe you do some more. I don't know, right now we don't feel like we need it for liquidity purposes.

Mark Peterson

All right, okay. Stay tuned then?

Jon Braatz - Kansas City Capital

Thanks, Dave.

David Brain

Thanks, Jon.

Operator

Our next question comes from the line of Michael Bilerman.

Greg Schweitzer - Citigroup

It is Greg here. Just going back to Schlitterbahn for a second, is there potential conversion of that loan to equity, or does this continue to accrue at 350 over LIBOR?

Mark Peterson

Well, I think you are going to see us change that position. We are in negotiations on where that ends with LIBOR floating down so low, we are going to change that, but it will not convert to equity. We are going to continue this as a mortgage and keep those mortgages in place in Texas.

Greg Schweitzer - Citigroup

And at what rate?

Mark Peterson

Well, we are negotiating that right now. They like the rate, we don't like the rate. It will be going up, let's put it that way.

David Brain

We expect it to be [budgeted] going up.

Greg Schweitzer - Citigroup

Okay, thank you.

Operator

And our next question comes from the line of Jordan Sadler. Jordan, you may proceed.

Jordan Sadler - KeyBanc Capital Markets

I am not sure if I caught this on the Concord, you said the anchor tenants were in place, and I was just curious who is signed up so far?

David Brain

I mean it is Empire Gaming, the casino anchor, casino operator anchor.

Jordan Sadler - KeyBanc Capital Markets

Is the resort included in the Phase I as it is currently being drawn up of initial hotel?

David Brain

The Phase I, well, it depends on the scale. Without all of the taxes and bonds, no, the hotel, it would be the gaming facility. There is the racing because there is the racetrack and so forth, and all of that is developed. The hotel really comes now is a module that comes with the bond availability.

So it is the casino in the back of the house and the racing facility and some support retail, but the major hospitality piece comes now in a module that will be with the bonding capacity.

Jordan Sadler - KeyBanc Capital Markets

And how much did you say was invested to-date in the whole project?

David Brain

About $200 million.

Jordan Sadler - KeyBanc Capital Markets

That is everybody altogether so?

Mark Peterson

Closer to $275 million when you count owner equity.

David Brain

$275 million with owner equity, I'm sorry.

Jordan Sadler - KeyBanc Capital Markets

So it is 75 from Cappelli, and 130 from you guys, and then 75 from the senior lenders?

David Brain

Right.

Jordan Sadler - KeyBanc Capital Markets

Got it. Thank you.

Operator

And our next question comes from the line of Anthony Paolone, Anthony you may proceed.

Anthony Paolone - JP Morgan

I just had one other. I think you all had a personal loan to Cappelli out that I think comes due. What happens with that and any options you have surrounding that?

David Brain

Well, we are being paid on it. We have been paid on it, Tony, and we are probably likely to extend that note as it stands now. We're going to see depending on all that's part of the negotiation of all what goes forward vis-à-vis this relationship.

Anthony Paolone - JP Morgan

Okay. Were there other assets securing that, or was it just personal guarantee or what happens there?

David Brain

There's two notes. One was secured by.

Greg Silvers

Interest in New Roc, that when we bought that --

David Brain

And it is personal guarantee.

Greg Silvers

And it is personal guarantee, and the other one is a personal guarantee, and the options on development projects in New Rochelle, in Yonkers, a substantial portfolio of development opportunities that are secured.

Anthony Paolone - JP Morgan

Okay. Do you anticipate anything happening with those? Are those projects that EPR would have interest in or would move forward with?

David Brain

Well, I think the original game plan going back Tony, to the Cappelli relationship after the success in New Rochelle and then White Plains was the pursuit of we talked about there were other projects in Westchester County that would be more reminiscent of those in Yonkers and so forth.

But really what happened was, if you just go back to Lynch, the Indian gaming that was going to be on the assembled land, then failed at the Bureau of Indian Affairs, the state government said you can step in at a 25% tax rate, if you will, execute on this.

So kind of all efforts went lower on those other projects and turned towards the gaming opportunity. And so and the legislation passed, and so that has been front and center of all the development attention of the enterprise because it is a large project, and it is a very lucrative project, so that is where that has happened.

So those other projects are still there, but they are more on the back-burner because of getting this one, and then also and you have the constriction in the market does not allow you to have that many things open and so all resources are being directed towards getting this Concord project to a completed stage.

Anthony Paolone - JP Morgan

Got it. Okay. Thank you.

David Brain

All right.

Operator

And at this time, we are showing no more questions available. Mr. Brain, you may proceed.

David Brain

All right, well. Again, I want to thank everybody for tuning in. I hope we have made points clear about we are fortifying the balance sheet. We are taking our medicine whether it is the transaction costs, we have written through, whether it is the scaling of these projects to the point. And overall, we are getting to a point that it is really we have a very strong core tenant base. We are getting these projects scaled to a point they are executable, and we are kind of rolling back to 2007 level performance we think. And even at that it's a pretty compelling valuation I think relative to the peers.

Those are the points today, and I appreciate you all spending your time with us. We are, of course, always glad to try and take questions as a follow-up to this. And as these things evolve, we will continue to communicate with you as soon as possible and look forward to doing that and progressing on all of these matters. And I hope your favorites won at the Oscars, I hope you enjoy Mardi Gras, and we look forward to talking to you again soon. And go out to the movies, it is a lot of fun.

Mark Peterson

We will talk to you later. Thank you.

David Brain

Thank you.

Operator

Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect. Have a great day.

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Source: Entertainment Properties Trust, Q4 2008 Earnings Call Transcript
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