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Entertainment Properties Trust (NYSE:EPR)

Q1 2010 Earnings Call

May 3, 2010 5:00 pm ET

Executives

David Brain – Chief Executive Officer

Gregory Silver – Chief Operating Officer

Mark Peterson – Chief Financial Officer

Analysts

Jordan Sadler - Keybanc Capital Markets

Greg Schweitzer - Citigroup

Anthony Paolone - JPMorgan

Paul Adornato - BMO Capital Markets

Andrew Dizio – Janney Montgomery Scott

Rich Moore - RBC Capital Markets

Jonathan Braatz - Kansas City Capital

Operator

Good day ladies and gentlemen and welcome to the Q1 2010 Entertainment Properties Trust earnings conference call. My name is Katrina and I’ll be your operator for today. At this time all participants are in listen only mode. Later we will conduct a question and answer session. (Operator instructions) I would now like to turn the conference over to your host for today, David Brain, Chief Executive Officer.

David Brain

Good afternoon and thanks all for joining us. This is David Brain. I’ll start with our usual preface and that is that I need to inform you this conference call may include forward-looking statements defined by the Private Securities and Litigation Reform Act of 1995 and are 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. A discussion of 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 for the year ending December 31, 2009.

With me to provide all of the company news is Greg Silver, our Chief Operating Officer and Mark Peterson, our Chief Financial Officer.

I will remind you again that there is always a simultaneous webcast at our website at eprkc.com. There you will see a visual dimension, a presentation, again if you can pick that up it will be helpful.

I will start the call with our first quarter 2010 headlines for Entertainment Properties Trust. First, earnings and business operations are in line with expectations and guidance despite some complexities in appearance and reporting. Second, portfolio tenant fundamentals continued to outperform general economic and retail data. Third, portfolio acquisitions outlined in our recent stock offering were completed and significant opportunities remain. Fourth, the Toronto, Canada Dundas Square acquisition was completed as planned as discussed in our prior calls.

Now I will elaborate on these headlines a bit. Greg will then review the portfolio and recent transactions in detail, Mark will go over financial results, and of course we will take your questions following all of that.

I want to start going back to our first year performance for the quarter as in the first headline. It is almost like an odd coincidence so I want to clarify for those of you that might be looking at our press release that the additions and take-aways translate FFO to its as adjusted form are equal. The bulk of them are equal to the same $0.78 per share. Both the plusses and minuses are largely the result of the same event; the purchase of the equity interest of the 10 Dundas Square Project in Toronto; a project in which we previously just held a mezzanine loan position.

Our resulting payout ratio for the quarter at 83% is a touch higher than our usual position in the mid-70’s, but one in which we are comfortable at this time as we have significantly lowered leverage and look forward to the annual effect of some acquisitions and the realization of further growth.

Now before leaving the earnings topic, I want to make one additional important point and that is that our White Plains, New York investment, which is a theatre anchored retail center; further it is the only one in our portfolio that can be described as dominated by soft goods and fashion retail and it is dragging down our credit statistics, our reported FFO with non-cash charges, and looks to continue to do so until we can get to a point of eliminating it from our financial statements.

We have spoken about this project often. I will summarize to say that this was a highly leveraged project when we bought controlling interest and it has incurred two major vacancies; Circuit City and Filenes Basement. It has rendered it uneconomical beyond the non-recourse loan value in our opinion.

We are not supporting the project with any further cash expense or investment, but we are still carrying its leverage and book losses in our reported financial results and likely to do so until the mortgage loan matures in the fourth quarter. You should know that without it in our results, our FFO would be increased by $0.04 to $0.82 per share. Our leverage ratios would fall by about 300 basis points and our debt service coverage would be improved by about 0.2 times. Now taken as a whole, I want to express that our reported results for the quarter are consistent with our plans, expectations and guidance.

Now the second headline for today dealt with the stellar performance of our investment portfolio, particularly as compared with the economy and retail generally. Our primary investment industry, the first-run expedition industry, continues to provide a great show. Year-to-date box office is up 7% over last year, which remember was up 10% over 2008 for the full year, but that’s become so repetitious that it’s begun to feel like old news.

In new news, we can now report to you that our ski properties are reflecting very strong results through the end of March to nearly the end of the 2009-2010 season, with admissions and revenues both up about 7%. Another great portfolio performance.

My last comment on portfolio performance leads me to also the third headline, where it said portfolio acquisition outlined in a recent stock offering were completed, and significant opportunities remain.

Thus becomes my final comment about portfolio performance is that enrollment utilization of our recently acquired charter public schools is 86%, very consistent with the level with which we have talked about all of our other charter public school investments.

Our recently acquired public schools are five schools for investment of approximately $44 million, and this Q1 purchase was the second installment of the two investment transactions we outlined in our November ‘09 common stock offering. The good news is that we got this transaction closed. Even better news is that we have visibility of additional opportunities in several of our established investment categories that make us comfortable and confident in our guidance of about $125 million of additional acquisitions for the balance of the year.

My last headline also concerns the completion of a transaction in the first quarter. And that is the Toronto Dundas Square acquisition which was completed as planned and discussed in our prior calls. We talked a lot about this asset, and I won’t go into a lot of detail here but I just want to be clear that this has been a well-performing asset. We’ve been unable to recognize its performance in our financials due to an unfortunate series of really unexplainable decisions by the property’s original equity owner that led it into receivership. And we are pleased to now have it as a consolidated part of our portfolio having bid our loan.

With those comments, I’ll turn it over to Greg and then further to Mark, and I’ll be back with you for Q&A.

Gregory Silver

Thank you David. In the first quarter of 2010, we continued to execute our plan of acquiring high quality properties in our two primary asset classes - theatres and public charter schools. Furthermore, our existing portfolio continued to demonstrate its resilience in today’s economic environment. I will discuss overall performance later, but first, I would like to discuss the major acquisitions for the quarter.

On January 21, we completed an additional investment of approximately $48 million with Imagine Schools. This transaction involved five schools with a cost of approximately $44 million, located in Florida, Indiana, and Ohio, as well as a commitment to provide approximately $4 million of expansion capital for two schools. The investment was structured as an addition to our existing master lease, which is tripled-net in design and pass a substantially all of the obligations for the expense and operation of the property to our tenant.

On March 4, we completed our acquisition of the Toronto Dundas Square project by paying off the existing first position construction financing. The property is a 13-level entertainment retail center, anchored by a 24 screen AMC Theatre that is located in downtown Toronto. It contains approximately 330,000 square feet of leasable square footage, as well as 25,000 square feet of static and digital signage. As we discussed in previous calls, we, along with the construction lender, placed this property into receivership and the developer was unable to execute a refinancing of the property. Given the nature of a receivership, it was very difficult to execute a cohesive plan for the long term success of the project. As leasing, property management and signage management were all handled with temporary service providers that were focused on marshaling assets rather than positioning the asset to achieve its best financial results. Upon acquiring the asset, we have selected three different groups to manage these functions, each of which bring a wealth of experience to the property.

Specifically with regard to signage which constitutes a major component of future NOI growth, we have retained Clear Channel of Canada to manage our signage assets on the Square. By affiliating with such a large advertising platform, we believe that we can leverage our assets as a component of a larger advertising campaign which should drive utilization as well as rate.

In addition, subsequent to the end of the quarter, we advanced approximately $15 million to pay off the mortgage financing on our Cantera property which is held in an unconsolidated joint venture. We’re currently working with our German partners to identify a substitute financing strategy for the property.

I would now like to discuss the portfolio and its performance for the quarter. The box office continued to demonstrate its strength through the first quarter with overall performance of 7% year over year. Box office receipts continue to be strengthened by the introduction of additional 3D products, which is also accelerating the digital conversion in many theatres. As we’ve discussed before, we are very pleased with an acceleration of this conversion, as it brings us closer to the widespread rollout of alternative content which could significantly drive top-line revenues at our theatres and enhance our changes for percentage rent.

As David said, we now have preliminary numbers for the 2010 ski season, and the results reinforce our message of the strength of the metropolitan daily ski model. Through March, year to date ski revenue is up approximately 7% and skier visits are up approximately 8%.

As we discussed in our year end call, our overall charter school portfolio stands at 86% utilization. That is the actual enrolment compared to the authorized enrollment capacity. The introduction of the four new schools did not change the overall utilization rate, which speaks to the high level of enrollment at these schools, despite being less seasoned.

We continue to closely monitor our winery and vineyard assets. However, general industry metrics indicate some marginal improvement in the industry. Subsequent to the end of the quarter, we along with Farm Credit placed the EOS Winery and Vineyards into receivership. We chose this course along with Farm Credit, as together we believe that for purposes of maximizing the value of the assets, either to sell or release, it is important to maintain the physical assets, the inventory, and the brand together.

In our last call, we discussed that we had initiated legal proceedings against Louis Capelli, along with various entities controlled by him, relating to various payment obligations and our obligations under the Concord project. We filed this action in Missouri State Court, and it has been subsequently removed to federal district court in Missouri. Mr. Capelli and various entities controlled by him filed a complaint in Westchester County, New York against the company and certain of our subsidiaries, for declaratory and monetary damages relating to the Concord project, as well as the White Plains City Center. The company intends to vigorously pursue its claims against Mr. Capelli and his related entities, and to vigorously defend the claims asserted by Mr. Capelli and his related entities, for which we believe we have meritorious defenses.

As Mark will discuss with you later, during the quarter, an entity controlled by Louis Capelli, our partner in the New Roc Entertainment Retail Center, who through an affiliate is also the property manager, made an unauthorized loan to itself. As a result, as the general partner of the partnership, we exercised our rights to terminate the management agreement and seize all bank accounts related to the project. We have subsequently installed CB Richard Ellis as the day to day manager of the property.

As we discussed in our last call, our 2010 capital plan calls for additional investment spending of approximately $100 million, with the majority of that number targeted for the latter half of the year. I’m very pleased to report to you that we are looking at a number of significant opportunities that could materially accelerate this time frame. These opportunities exist for both theatre and public charter school acquisitions. However, as with previously anticipated transactions, we do not discuss specifics until we have a definitive transaction, or we are otherwise compelled to disclose it legally.

At this time, we are slightly increasing our current 2010 capital plan to provide for investment spending of 2010 of approximately $300 million, of which $175 million has already been completed. With regard to occupancy, consistent with the previous 12 years, we remain 100% occupied on our theatre assets, and our remaining retail portfolio stands at 91.5% occupied. With that, I’ll turn it over to Mark.

Mark Peterson

Thank you Greg. Hopefully everyone listening to the call is aware of our quarterly investor supplemental which can be downloaded from our website.

Before we get into details of the various line items, I think it’s first important to help you understand three offsetting items that impacted our results for the first quarter. I want to go through these with you up front, so you can more clearly understand our operating results.

It’s illustrated by the first slide. During the first quarter, we recorded two items associated with the March 4 acquisition of Toronto Dundas Square. I want to first discuss the gain on acquisition at $8.4 million, or $0.19 per share. Recall that in the third quarter of 2009, we recorded approximately $35 million U.S. in loan loss reserves related to our mortgage now receivable on this project. The net carrying value at the time of acquisition was approximately $96 million Canadian, or $93 million in U.S. dollars.

In conjunction with our acquisition of this project, at the conclusion of the receivership process, we paid off a first mortgage which totaled approximately $122 million Canadian, or $119 million in U.S. dollars. We obtained a third party appraisal at the time of the acquisition which valued the project at $229 million Canadian, or $223 million in U.S. dollars. Accordingly, net of working capital acquired a gain and acquisition of $8.4 million U.S. was recorded at closing.

In addition, we expensed $7.5 million in U.S. dollars or $0.17 per share and transaction costs during the quarter, primarily related to transfer taxes and other costs associated with this acquisition. We had previously provided guidance for these costs of up to $8 million. [At access] acquisition we obtained a new $100 million Canadian first mortgage from a group of banks. I will discuss this new loan in more detail later.

Additionally during the quarter we recognized $700,000 in loan loss provisions or $0.02 per share related to an unauthorized loan to a minority joint venture partner in the New York Entertainment Retail Center, who was also the project’s manager. As Greg mentioned, we have replaced the manager and have seized the bank accounts for this project.

Accordingly, FFO for the first quarter was $33.8 million or $0.78 per share. If you subtract the $8.4 million gain in acquisition and add back the combined charges of $8.2 million, our FFO per share as adjusted was also $0.78 for the first quarter.

I will now walk through the quarter’s results and explain the remaining key variances from the prior year.

As you can see on the next slide, for the quarter, our net income available to common shareholders increased compared to last year from $17.8 million to $22.5 million, an increase of 26%. Our FFO also increased compared to last year from $29 million to $33.8 million, an increase of 17%. Our per-share results reflect the impact of more shares outstanding as a result of the company’s deleveraging versus a year ago. FFO per share was $0.78 compared to $0.84 last year for a decrease of $0.06.

Now, looking at the details of our first quarter performance, our total revenue increased 13% compared to the prior year, to $75.5 million. Within the revenue category, rental revenue increased 13% to $57 million, an increase of $6.6 million versus last year, and related primarily to our 15-theater acquisition completed in December 2009 as well as our acquisition of Toronto Dundas Square during this quarter. Percentage rents included in rent-to-revenue were 729,000 versus 438,000 in the prior year. This increase reflects the increase in box office at certain of our megaplex theatre locations.

Mortgage and other financing income was $12.6 million for the quarter up $2.1 million from last year. This increase is due to our January 2010 acquisition of five public charter schools as well as increased real estate lending activities during 2009. Other income was $0.2 million for the quarter, down $0.9 million from last year. The decrease is due to a $0.4 million decrease in revenues from a family bowling center in Westminster, Colorado, previously operated through a wholly-owned taxable REIT subsidiary.

The bowling center was converted to a third-party lease in February 2010. Additionally, other income decreased due to a $0.5 million gain recognized upon settlement of foreign currency forward contracts for the prior year quarter versus slight loss recognized in the current quarter that is reflected in other expense.

On the expense side, our property operating expense increased approximately $1.7 million for the quarter versus last year due to our acquisition of Toronto Dundas Square as well as an increase in property operating expenses at our retail centers in Ontario, Canada.

G&A expense increased approximately $1.1 million versus last year to approximately $5.1 million for the quarter. This increase is due primarily to an increase in payroll and benefit-related expenses as well as professional fees. I will also point out that the first quarter G&A expense includes $573,000 of Section 79 employee life insurance premium expense, versus $148,000 in the prior year. This first quarter expense was anticipated in our annual guidance and does not repeat itself over the remainder of the year.

Turning to the next slide, I would now like to turn our discussion to some of the company’s key ratios. Please note that our expanded supplemental summarizes these key ratios on Page 14. We continue to report healthy levels of interest coverage at 3.2 times, fixed charge coverage at 2.3 times, and debt service coverage at 2.4 times. Our supplemental includes the calculation of AFFO, or adjusted funds from operations, and AFFO per share on Page 10.

Given the gain in charges for this quarter as well as other [inaudible] in the calculation, we believe that AFFO per share provides an important measurement of our operating performance. You will see that our AFFO per share for the quarter was also $0.78. With our cash common dividend of $0.65 per share, we had an AFFO payout ratio of 83%, which continues to be a top-notch metric compared to other REITs.

Next I’d like to point out our debt to adjusted EBITDA ratio, which was a healthy 5.7 times for the quarter. Adjusted EBITDA calculation is defined as the trailing 12 month EBITDA adjusted for the gain in acquisition, non-cash charges and transaction costs. And debt is the balance at March 31. Please note that acquiring Toronto Dundas Square in March with the new $100 million Canadian first mortgage negatively impacts this calculation since we count all the debt and only one month of the adjusted EBITDA.

Our debt to total assets un-depreciated was 42% at March 31. I will come back to these two key metrics shortly. The next slide details the impact of White Plains on certain financial measures. As David mentioned, we are not currently financially supporting White Plains. However, this project continues to have a negative impact on our reported results. FFO for White Plains for the first quarter was a loss of $1.6 million or $0.04 per share. The property has been written down to essentially the nonrecourse loan balance. The reported leverage on this project is 100% in our financial statements.

Turning to the next slide, excluding the impact of White Plains, FFO per share as adjusted would have been $0.82. Debt to adjusted EBITDA would have been 5.3 times, and debt to total assets un-depreciated would have been 39%.

Now let me turn to a discussion of our capital markets activities for 2010 as well as our liquidity position. As I mentioned earlier and during our year-end earnings call, in conjunction with our acquisition of Toronto Dundas Square, we closed on a credit facility with a group of banks to provide $100 million Canadian first mortgage financing. The interest rate is 6% at today’s rates, and the term is two years with an extension option of one year, subject to lender’s approval. We consolidated the financial results of this property subsequent to the acquisition date.

Turning to the next slide, at quarter end, we had total outstanding debt of $1.3 billion of which approximately $1 billion was fixed rate, long-term debt, with a blended coupon of approximately 5.9%. We had $107 million outstanding on our revolving credit facility at quarter end, leaving approximately $108 million of availability. Our unrestricted cash on hand was $21 million. Our debt to total assets un-depreciated was 42%, as I previously mentioned.

Subsequent to quarter end, as Greg mentioned, we funded a debt maturity of $15 million related to an unconsolidated joint venture, Atlantic EPR1. As we have previously stated, our only consolidated debt maturity in 2010 and 2011, without a contractual extension option, is the $56 million secured by our Concord investment. The $114 million note on the White Plains project matures in October of 2010, is nonrecourse to EPR, and has a stated extension option for 2 to 4 years. As we have discussed previously, we are not currently supporting this project financially and thus do not view this debt as a hard maturity. All of our debt maturity beyond 2011 are manageable. And thus we believe we are well-positioned for future growth.

With that, I will turn it over to David for his closing remarks.

David Brain

Thank you, Mark. Thanks, Greg.

My closing comments are just to reiterate I think the summary points we made that the quarter was in line with our expectations including the reported results and really the completion of the transactions as described in our last offering as well as the consolidation of the Ten Dundas property that we talked about many times as that being the end result of this process we’re in. So with that, we’ll conclude it. And in line, I think as Mark indicated, we’re in good shape on the progress and we have an outlook at some transaction opportunities.

We’ll open it up to your questions now.

Question-and-Answer Session

Operator

(Operator Instructions) Our first question will come from Jordan Sadler - Keybanc Capital Markets.

Jordan Sadler – Keybanc Capital Markets

Mark, could you – I may have missed this because I hopped off for a second, but did you discuss guidance – I know previously it was $311 to $326 after the acquisition charges? Do you have an update for us or does that still stand?

Mark Peterson

I think we’re still comfortable with that guidance. As David said, the quarter was in line with our expectations.

David Brain

Right. At this time we’re not really revising guidance. We said that the quarter is in line and we’re staying the course with the guidance previously offered, Jordan.

Jordan Sadler – Keybanc Capital Markets

Okay. But for the – it sounds like the expectations may have nudged up another $25 million, is that fair?

Mark Peterson

That’s fair. But Jordan, we’re trying to determine when, you know the kind of the velocity of when that will come, and if that’s later or earlier, how that will impact us.

Jordan Sadler - Keybanc Capital Markets

And so we don’t really change those… we have those kind of definitive?

Mark Peterson

We like to have a little more definition to it before we revise guidance so…

Jordan Sadler - Keybanc Capital Markets

Sure, that’s fair. Is it also accurate in terms of characterization? Previously you thought that would take out later in the year, the investment activity, and now it sounds like you’ve got a bit more flurry of activity?

Mark Peterson

That’s fair to say Jordan, yeah. That we think that we’re accelerating the velocity of that.

David Brain

All the same, that’s one of the reasons we have a range and we’re not really prepared to adjust the range yet.

Mark Peterson

When we confirm guidance, we’re talking about axioms. Of course, we had the gain of acquisition that technically is part of FFO but we’re really talking about ex the unusual items in terms of being right out of our expectations.

Jordan Sadler - Keybanc Capital Markets

Okay. And in terms of the activity Greg, maybe can you frame it up? I know you said theatres and charter schools mostly, but what are you seeing on the pricing front? What’s going on in your world? Is it getting more competitive? Are cap rates coming down, or is it still pretty attractive?

Gregory Silver

I think Jordan, it’s still really attractive. We said we did that rate of transaction. That was probably a high watermark, so I think you can see cap rates, you know if you say that’s we said earlier that we think in the ten to eleven range, we’re comfortable operating in. We feel that there’s opportunities out there in that range.

Jordan Sadler - Keybanc Capital Markets

Okay, that’s helpful. And then just one last before I jump back in the queue. Can you give us the current yield on Dundas Square, the occupancy and then just as you’re getting in there, any sort of near term opportunities?

Mark Peterson

Well I think we’ve said the yield on our current investment is about 7%, that our occupancy is about 90%, 91%. I think what I tried to lay out for you is in the signage opportunity. If you recall the way that property, the way it was being operated, it was being operated as a standalone property with a standalone group marketing the signage. And so therefore, you couldn’t be part of an entire…

If someone wanted to advertise at the airport, and downtown, and somewhere else, they’d have to make three different phone calls. And so we felt that it would be important to get with a larger group that could bring this asset into them as part of the platform, and release it as all part of a campaign and we’re very excited about those opportunities and I think we’ll see some improvements in those assets.

Operator

And our next question will come from the line of Greg Schweitzer – Citigroup.

Greg Schweitzer - Citigroup

Just following up on Jordan’s questions on the acquisitions. The $125 of potential additional acquisitions, is that all locally within the U.S.?

Mark Peterson

Yes.

Greg Schweitzer - Citigroup

Okay. And then regarding the charter schools, could you talk a little bit more about the yield? We have seen competition increase in that space. Just sort of what yield you are seeing and then what should be comfortable with?

Mark Peterson

I mean, I think it’s going to migrate around that 10% yield. That’s kind of what we kind of set the margin there. Now it plays a little different with the way the direct financing lease says, but I think it’s more a function of you know, you want to get a yield that’s commiserate with what the property can tolerate and be successful with and we think that’s around an appropriate yield for this space.

Greg Schweitzer - Citigroup

Okay, and then any information you can give us on the [inaudible] leasing.

David Brain

Well, like I said, we’ve said before, we continue to evaluate where we’re going to go with that, and I think as we get more… Technically, the AMC’s obligation to tell us whether or not they’re going to exercise their options, doesn’t come until the summer, so we don’t have a formal… What we told you before, is we thought three of those four would be just rolled into their options. That one would have an opportunity to resize, and we continue to work through that, and determine kind of what the right sizing of that is.

Greg Schweitzer - Citigroup

Okay, and then I just have one more for Mark. With respect to guidance, the increase in operating expenses in G&A. I know there was that small one-time insurance expense in G&A. But is this a run rate that we can expect going forward to that same guidance?

Mark Peterson

For G&A, I would take out that $4,000 or so variance. $500,000 and that’s pretty representative of a G&A run rate. We don’t give G&A guidance by quarter of course, but that is more representative I think, yes.

Greg Schweitzer - Citigroup

And the operating expenses?

Mark Peterson

Operating expenses were impacted to some degree this quarter at White Plains, which kind of a non-cash item. But they were higher that we’d expect on a run rate basis by probably a $1 million. And second of all, of course the acquisition of Toronto Dundas Square certainly affects the operating expenses going forward. And it also, in the quarter, we had a partial quarter for 10 Dundas, so that will of course annualize as we go.

Greg Schweitzer - Citigroup

What was the one at White Plains?

Mark Peterson

White Plans recorded some bad debts during the quarter related to some receivables outstanding that shouldn’t repeat itself frankly, that happened in the quarter.

Greg Schweitzer - Citigroup

Any specific on that?

Mark Peterson

It’s a Capelli entity.

Operator

And our next question will come from Anthony Paolone - JPMorgan.

Anthony Paolone - JPMorgan

Question on the G&A, I know it’s been hit on before, but were there any legal fees related to Capelli in the quarter hitting that number as well?

Mark Peterson

No, very little. We did have some, but it was probably around $50,000 or something. So it was not a significant event in the first quarter.

Anthony Paolone - JPMorgan

And you expect that to be steady for the rest of the year?

Mark Peterson

No, we budgeted, I think we talked about in our annual budget, something like $1 million for the year for those legal expenses. So we expect that could increase as we go forward, but we have that contemplated in our guidance.

Anthony Paolone - JPMorgan

Okay. And from a practical point of view, what’s the status of Concord? Is there anything going on at the site? Any update on the potential to issue industrial revenue bonds, or anything else going on there we should be aware of?

Mark Peterson

I mean, physically, I don’t think there’s anything going on at the site. As far as discussing the improvements, as you can imagine, since we’re embroiled in litigation, we’re not getting monthly updates from Capelli on the matter. So I think where we’re at is that we’re not seeing significant progress.

Anthony Paolone - JPMorgan

Okay. And then just one last question, on City Centre, is that in default right now, and if so, what do you think the likelihood… or I guess regardless, what do you think the likelihood that the banks working with you on that is?

Mark Peterson

You know what, it’s technically not in default. It’s in default of its loan to us, but it’s not in default under the underlying property loan and first mortgage. I just hate to comment on what a lender might do. I don’t know. Again, since that’s a note that we’re suing on to one of the Capelli related entities, I don’t know that we want to talk about how you would potentially settle that out anyway.

Operator

Your next question comes from Paul Adornato - BMO Capital Markets.

Paul Adornato - BMO Capital Markets

You talked about the speeding of digital conversion at some of the theatres, and the possibility that it might feed the recognition of percentage rent. I was wondering if you could just quantify that a little bit. How much more growth in receipts do you need before you’ll hit some of those percentage rent hurdles?

Mark Peterson

Well, I think what we’ve said Paul is it’s really theatre by theatre. I think we could cross over with as little as another 10% year growth, and others are much further off depending upon where the percentage rent rate. But I think the overall aspect that we’re very excited about, especially with the 3D component, you’re already seeing a $3 upcharge that falls right to the revenue line. And as we talked about, when you move to our alternative content where you’re talking about maybe sporting events or music events, where the ticket prices moving from an average ticket of $7-$10 to an average ticket of $15-$20, that’s a meaningful movement that can seriously drive top-line revenue substantially.

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Paul Adornato - BMO Capital Markets

What are the prospects of those additional events utilizing the theaters in the immediate term?

Mark Peterson

We are seeing it now in the sense that we had an entire group of our theaters that were simulcasting a UFC event; one of the mixed martial arts. I don’t know what the correct term is for that. We are doing that. We’ve seen concerts. We’ve seen it used for business events. I think the issue is, as we have consistently talked about, that the platform has to be big enough and you have to have a sufficient number of sites where someone will contract for those rights to simultaneously broadcast it. Therefore one of the issues was that the penetration level wasn’t high enough.

Now with the acceptance of the importance of 3-D and how that is driving the movie business, you are seeing more digital conversion, which broadens that platform and allows you greater penetration.

Paul Adornato - BMO Capital Markets

Okay. So in terms of the critical mass, at the [inaudible] level, they are contracting with individual exhibitors. Is that the way it works?

Mark Peterson

Either that or on a large group like the three large guys have their group through NCM where they may be handling the contractual part of the alternative content.

Operator

Your next question comes from Andrew Dizio – Janney Montgomery Scott.

Andrew Dizio – Janney Montgomery Scott

When you talk about your potential investments for the rest of the year, would that be in terms of sale/lease packs or would that be more in terms of community capital towards the construction of new charter schools or theaters?

Mark Peterson

It’s really going to be investments of in-place properties, so largely in theaters.

Mark Peterson

So lease backs, Andrew.

Andrew Dizio – Janney Montgomery Scott

When you talk about your utilization rate for the charter schools, is that for the ‘09-‘10 school year? Do you have any visibility on the ’10 – ’11 year?

Mark Peterson

It is really for the ’09-’10 school year. There is really no visibility yet. That will come in the fall. Next quarter, we will begin to have some visibility on that.

Andrew Dizio – Janney Montgomery Scott

When you look at your additional land interest that you have on the [Splitter Bond] property in the Kansas City area, are you seeing any interest in acquisitions or additional development on that land?

Mark Peterson

Yes, we are seeing several, at least in preliminary stages. The official groundbreaking for the casino that is going adjacent or across from the speedway was last week. So that project is going in at least initially without a large hospitality component. So there is a lot of other kind of factors that are occurring out there that seem to be driving interest in the area. Nothing at the level that we are ready to discuss.

Andrew Dizio – Janney Montgomery Scott

Okay, great. Actually I do have one final question. When you look forward, again your additional investments and everything coming online, in Florida do you have any interests in becoming an unsecured debt issuer or do you think that you will stick with secure financing?

Mark Peterson

Well that is a question that really we’ve been interested in exploring. So we have some interest in it. Given the market and giving the strength of that window that has stayed open through the turmoil of credit markets at a much greater sense than did a lot of our funding, I think it is in our interest to look at that. If we have an interest in it, we will continue to examine that possibility.

Operator

Your next question comes from Rich Moore – RBC Capital Markets

Rich Moore – RBC Capital Markets

Just for modeling purposes, when do you close Dundas again in the fourth quarter?

Mark Peterson

March 4.

Rich Moore – RBC Capital Markets

March 4, okay. You had said that you are trying eventually to find a joint-venture partner, possibly sell it, that kind of thing. It seemed that maybe a joint-venture partner was getting closer last quarter. Is there any update on your thoughts there?

Mark Peterson

Rich, I don’t think our thoughts have changed. I think really what we wanted to do was stabilize the property and get some groups in there. I mean if we need to, I think we are still interested in exploring those ideas. You know it’s March… We are talking less than 45 days really. So we were just trying to get a flat form and a stabilization that we can grow from and at least have discussions with.

Rich Moore – RBC Capital Markets

Okay, so no real update on a partner at this point.

Mark Peterson

No real update or no real change on the strategy. We have stabilized it with some of the new parties involved in the operations and buildings. Some of that ought to take place a little bit before we pick a partner.

Rich Moore – RBC Capital Markets

On the theater side of things, as you are looking at theaters, originally or a short while back I think the strategy was to find landlords that had theaters that maybe needed capital or that kind of thing. Now it seems like theaters are a gold mine. I’m wondering where you are seeing potential theater acquisitions and what form might they take?

Mark Peterson

I still think the portfolio deals of opportunities. We feel very good about those that we are still having access to those. I think what it means, Rich, is that it is important to be the leader of a certain class so that if somebody… I mean it is easy to find us when you are looking for theaters. Generally, if for whatever reason, somebody may be looking to dispose it or whatever, maybe they are looking for what they think are greater opportunities somewhere else; those opportunities find their way to us. So I think we still feel very good about it.

Rich Moore – RBC Capital Markets

You are seeing a pickup I take it in theater possibilities, is that true?

Mark Peterson

That’s true.

Rich Moore – RBC Capital Markets

The same thing on the charter school side of things, I remember you had said I think Dave that you thought there would be 400 to 500 schools built a year. That gives you pretty good pickings for finding new opportunities. Is that accelerating as well?

Dave Brain

I don’t really have any statistics on 400 to 500. We know that’s been the run rate. My guess is that given the political climate it probably is going to pick up, but yes we are usually looking at things that have been open 2 to 3 years Rich, so it is still picking out of that pool that have established enrollments. It is a large opportunity set. The momentum is positive in the industry I will tell you.

Rich Moore – RBC Capital Markets

Then the last thing on charter schools again, that 86% is that for what is actually there or does that include what you could bill the school out to?

Mark Peterson

No that’s the quote. When we say… We realized that we were talking about occupancy and the reality is the utilization factor. All of our schools are occupied.

David Brain

So they are 100% occupied in terms of being used.

Mark Peterson

But it is how much is current enrollment with regards as compared to its regulated capacity. So if we have a school that has 400 kids in it currently, but it has 500 available slots, then that is 80% utilization. We are at 86% utilization.

Rich Moore – RBC Capital Markets

Okay. I did have one more thing. The wineries that you had, I didn’t quite get what you were getting at. What happened exactly in the wineries in the quarter?

Mark Peterson

In EOS, we had a winery and a vineyard property that we placed along ourselves with Farm Credit. The inventory lender had put it into receivership. We thought we did that and we did that together with them because the thought process was, Rich, that being able to sell or re-lease this property with not only the physical assets that we have, but also the inventory and brand that they may control will give us both a greater maximization of value.

Dave Brain

This is the property with the dispute among the operator that we executed the sale/lease back with another party who is executor and acquisitioned to buy the operating interest, but it’s unclear. There is a dispute going on between the two and the receiver is in place to make sure that the brand isn’t diminished as a result of that dispute.

Operator

Your next question is from Jordan Sadler – Keybanc Capital Market

Jordan Sadler – Keybanc Capital Market

I just need some clarification on the $0.7 million charge during the quarter related to a Capelli loan and debt? Would that also relate to that $1 million bad debt expense in White Plains or is that separate?

Mark Peterson

No that is really separate. The million dollars is more related to tenants, which that he has a hand in at White Plains. The $700,000 really happened at New Rochelle, another project with Capelli. That was basically that they made an unauthorized loan to our partner in that venture and we then went and seized the bank accounts and changed the manager, but we thought that we really needed to reserve that $700,000. It’s a reserve that we put in place for an unauthorized loan. We are not sure that we will ever get paid back.

Jordan Sadler – Keybanc Capital Market

Okay, he is a principal partner?

Mark Peterson

He controls that partner that made the unauthorized loan.

Jordan Sadler – Keybanc Capital Market

Okay and that received the proceeds.

Mark Peterson

Yes.

Jordan Sadler – Keybanc Capital Market

As far as percentage rents go, I know they were up. Can you just explain, and you may have done this before so I apologize, but in terms of incremental investment, is there some sort of allowance, return on capital granted, to the investor or the tenant that maybe adjusts sort of the percentage rent level higher? Or do you just receive the benefit of higher rents on the back of their investment?

Mark Peterson

We receive the benefits on the back of their investment, but remember we were talking about the digital. That is generally being financed with the savings that the distributing companies are saving by moving from celluloid print and delivery to digital print and delivery.

David Brain

You make the point overtly they are making an additional investment in the property, even though it may be economically subsidized by the studios. But no, we’re not adjusting our percentage rent rates as a result of this improvement of the property.

Jordan Sadler – Keybanc Capital Market

It’s just inherently increasing the value of your properties.

David Brain

Correct.

Jordan Sadler – Keybanc Capital Market

So what do we think is the potential here for percentage rent this year versus last year rent? I know there was a substantial increase in the 1Q number over the 1Q ’09. Mark, do you have any sense?

Mark Peterson

Last year was about $1.5 million. We try not to over project percentage rents because it is not assured. I think we’re projecting upwards of $300,000 to $400,000 improvement this year over last, so this year something like $1.7 million, $1.8 million.

Jordan Sadler – Keybanc Capital Market

And you’re at $700,000 so far.

Mark Peterson

Yes, it doesn’t all come in pro rata. It’s based on lease maturities.

Jordan Sadler – Keybanc Capital Market

Who owns the gaming license at the Concord?

David Brain

The development entity does.

Jordan Sadler – Keybanc Capital Market

Gaming is illegal in the State of New York, so is the property owned by the developer and how do they have the license?

Mark Peterson

The point is that if I can go a little bit with where I think you’re going, the entitlement for the 25% gaming tax runs to the land. The actual site. The physical gaming license is in Capelli’s name, but if someone else would have gave me license could benefit that 25% gaming tax by doing it on that property.

Jordan Sadler – Keybanc Capital Market

Is there a tribe associated with the land?

Mark Peterson

It’s a New York state legislature granted.. It’s not associated with Indian gaming. That’s the way most people know that lower tax rate in New York, but this is the only, this is not associated with Indian gaming.

Jordan Sadler – Keybanc Capital Market

Is it a unique property in the State of New York?

Mark Peterson

Yes it is. It has site-specific legislation and the specific legislation is the only license granted and it does have to do with just this site for purposes of it being an empire district and a variety of other things and so it was unique legislation and a unique license.

Operator

Your next question comes from Jonathan Braatz - Kansas City Capital.

Jonathan Braatz - Kansas City Capital

Returning back to [inaudible] how many of your theaters have moved to 3D and digital and how many are really engaged in offering alternative content at this time?

David Brain

99% of our theaters have 3D capability. We’re already there. Our chain is pretty much there completely. The issue is mainly, is the platform big enough with other theaters, not necessarily just ours. We know across the board that there are events at our properties whether they be music or the sporting events that we talked about or live events. I would say right now of our 90 theaters, 25 – 30 are involved in those currently.

Jonathan Braatz - Kansas City Capital

Ultimately they could all be involved in that.

David Brain

That’s our hope, yes.

Jonathan Braatz - Kansas City Capital

Secondly, any advance pre-season activity regarding the Schlitterbahn parks that you can tell us?

Mark Peterson

I don’t have that information with me. I can see if I can run that down and get back to you.

Jonathan Braatz - Kansas City Capital

I assume they do sell pre-season --

David Brain

They do.

Mark Peterson

The only reports I can give you on the advance secrets of the weekend seasons are already open in Galveston and South Padre and for the Schlitterbahn parks are those are running ahead of last year pretty substantially but I don’t have the figure at hand to give you. It’s a small, small number relative to the season coming up.

Operator

That concludes the Q&A portion. I will now turn the call back to David Brain for closing remarks.

David Brain

Again, thank everyone for joining us and we always look forward to talking to you. If you need anything supplementary be in touch with us and we’ll talk to you next quarter. Thank you.

Operator

Ladies and gentlemen, that concludes today’s conference. Thank you for your participation. You may now disconnect. Have a great day.

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