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Executives

David Brain – CEO

Greg Silver – COO

Mark Peterson – CFO

Analysts

Anthony Paolone – JPMorgan

Michael Bilerman – Citi

Greg Schweitzer – Citi

Jordan Sadler – Keybanc Capital Markets

Andrew Dizio – Janney Montgomery Scott

Rich Moore – RBC Capital Markets

Greg (ph) – Keybanc Capital Markets

Entertainment Properties Trust (EPR) Q2 2010 Earnings Conference Call July 29, 2010 5:00 PM ET

Operator

Good day ladies and gentlemen. Welcome to the Entertainment Properties Trust earnings conference call. My name is Keith and I’ll be your operator for today. At this time all participants are in a listen-only mode. Later we will conduct a question-and-answer session. (Operator Instructions) As a reminder this conference is being recorded for replay purposes.

I would now like to turn the conference over to your host for today, Mr. David Brain, President and CEO. Please proceed sir.

David Brain

Good afternoon to all, thank you for being with us. This is David Brain. I’ll start with the usual preface and as we begin this afternoon I need to inform you that this conference call may include forward-looking statements defined by the Private Securities and Litigation Reform Act of 1995 identified by such words as will be, intend, continue, believe, hope, may, expect, 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 contained in the company’s SEC filings including the company’s report on Form 10-K for the year ending December 31, 2009.

With that said, let me say again, thank you for joining us. We understand this is a busy time for all and we appreciate your investment of time and interest.

With me to provide you all the company news and updates are Greg Silver, our COO and Mark Peterson, our Chief Financial Officer.

As we get underway, I will remind you again we have a simultaneous webcast via our website at eprkc.com. We do have some slides there so if you can you want to pick that up as well.

I’ll start, our first slide is as usual my headlines and for the second quarter of 2010 for EPR they are as follows; Number one, we undertook and achieved what for us is a seismic change in capital structure, from secured to unsecured rated debt. Now notable points of this are, we debuted as an investment grade issuer; we accomplished a material refinancing of a third of our credit facilities or outstandings; we eliminated all maturities for the next two years; and we offset nearly all the cost of moving to unsecured long-term bond debt by resetting our short term credit costs.

Now my second major headline for the quarter is that we also added substantially to our holdings with another theater portfolio acquisition and with this also continued our trend of de-leveraging.

Third, our portfolio during the quarter continued to outperform the economy in theaters.

Now I’ll elaborate on these headlines a bit, then Greg he will also add detail to our portfolio and transaction of the quarter and of course Mark will detail all the financial reporting and that’s all, I’ll join you all for questions.

Let me start going back to the headlines with our first and largest news item and that is our move to shift our credit market access from a secured asset back basis to an unsecured company credit basis.

EPR has historically accessed the secured debt market primarily the CMBS market for a long dated debt financing but as a result of amassing both a superlative long and short term performance track record, a position of significantly reduced leverage and seeing clear indications of unreliability of a secured debt market, EPR undertook over the last several quarter culminating in this most recent quarter a reorientation.

EPR pursued the extensive planning, presentations and negotiation with the credit service rating agencies and others to become a rated credit and access the unsecured corporate debt market.

Developing this optionality and the inherent flexibility that comes with unsecured debt is for the company a very good thing. It enhances our ability to capitalize investment opportunities and to grow earnings.

Now several specific elements of our moved unsecured rated debt are notable. We received an investment grade rating of BAA3 or BBB- from a majority of the rating agencies on our debut offering of $250 million of 10-year bonds made during the quarter.

Achievement of an initial investment grade rating is quite an endorsement of our business platform, fundamentals, and strategies. It proves once again that upon close scrutiny our portfolio stands up and stands out.

The scale of refinancing achieved during the quarter was massive for us. Our $250 million bond issue proceeds used to repay secured credit elements and the renegotiation conversion of our revolving credit facility from a secured to unsecured basis represents a third of our total credit outstandings. As a result of our restructuring we are now positioned with $1.7 billion or over 50% of our total assets unsecured.

The conversion and restructuring of all these credit arrangements leaves us in the great position of having no debt maturities for the next two years. This takes us through the vast majority of the (inaudible) wall of real estate credit maturities that has often been referenced as a trouble spot on the horizon.

By combining the increased cost of unsecured debt particularly for debut offer with the renewal and extension of our shorter term revolving credit facility on substantially better terms, we created an offset such that no material revision to FFO guidance is necessary.

Our current guidance with the transactions completed in the second quarter is $3.30 to $3.40 of FFO as adjusted per diluted share for the year.

Now my second major news headline for the quarter was that the completion of our investment in another portfolio of high quality theaters leased to a leading national operator. Greg has the details on this transaction but it’s important to note that the transaction was funded entirely with equity and another major step was taken along our path or de-leveraging.

EPR is now 500 basis points lower leverage on a gross asset basis than we were a year ago, currently we are around at 38%. This is right in line with our new policy guidance of maintaining leverage between 35% and 45%.

The last of my major headlines deals with portfolio performance. Our major property investment portfolio overall we continue to outperform the economy in general and peers in terms of tenant fundamentals.

Box office revenue, the primary barometer health of two thirds of our portfolio continues its positive trend and is up more than 4% over the prior year, year to date.

The other current noteworthy data point is that our ski properties about another 10% of our investments wrapped up their operating year recording a 6% increase in revenues and importantly more than a 20% increase in cash flow coverage of their obligation to us moving it over two times.

All these dynamics combine to make us optimistic about our prospects.

With that I’ll turn it over to Greg for the portfolio and transaction color.

Greg Silver

Thank you, David. As David discussed, the second quarter was very busy and productive for EPR. During the quarter, we made significant capital investments, settled our litigation with Mr. Cappelli, transformed our capital structure to take advantage of the unsecured debt market, all while continuing to make improvements in the portfolio.

Either Mark or I will discuss each of these points in detail but I will begin with our significant capital investments for the quarter. As you will recall we established a capital budget for 2010 of $300 million and I’m happy to report to you that we’ve accomplished that goal with our recent 12 theater acquisition we completed in June. The theaters were acquired from a third party for approximately $124 million or a 10.82 cap rate and are subject to triple net cross the faulted leases with Cinemark USA.

The theaters are located in four states and have a total of 192 streams and while I cannot give specific rent coverages for these theaters, I can’t tell you that the coverage on these theaters exceeds our overall theater portfolio rent coverage.

During the quarter we also invested approximately $15 million to pay off the existing first mortgage of our joint venture Atlantic EPR 1 for which we own a 23% interest. This joint venture owns the Cantera 30 in suburban Chicago.

Per the partnership agreement we will earn a 15% return on this additional capital contribution until such time as our partner contributes its proportionate share or 77% of the debt repayment.

The current lease payment of the tenant results in an overall return to EPR of approximately 14% on our investment.

As I stated earlier, with these investments we have now exceeded our stated goal of $300 million of capital spending for 2010. However, given that we saw the significant portion of the year remaining we are revising the plan upward to $350 million.

As previously announced on June 18th we entered into various settlement agreements with Louis Cappelli and entities controlled by him whereby we released and settled all claims relating to existing litigation between the parties. As we have stated if we could accomplish the goals of the litigation without the necessary expense then we would be open to settling the matter and we believe that we have accomplished these goals.

As part of the settlement, EPR received a deed in lieu on the property in Sullivan County, New York for which we had a first position mortgage. We exchanged our interest in the White Plains City Center project for Mr. Cappelli’s interest in the New Roc City project.

We now own 100% of the New Roc City Project, which is anchored by an 18 screen regal theater and it’s 80% occupied. We granted Mr. Cappelli a two-year option to reacquire the Sullivan County property for a purchase price of $143 million plus accrued interest from the settlement date.

We committed to the union labor life insurance company to be a participant in the construction loan for casino development to be built on land controlled by Mr. Cappelli subject to certain conditions including a requirement that a major gaming company contribute not less than $100 million of equity to the project. This commitment expires on December 31, 2010 and EPR was granted the right to receive 50% of distributions received up to $15 billion from the Cappelli entity that would be the partner in the casino development.

I go over these details to reiterate the point that we could have continued the litigation, however, we were able to accomplish our goals of getting in control of the Sullivan County Investment gaining 100% of the New Roc project, shedding the negatively performing White Plains City Center project and eliminating the debt associated with it as well, and facilitating the development of the casino project in Sullivan County without additional expense both in terms of dollars and attention of litigation.

With regard to performance, the theater industry continues to outperform general retail categories and while it is not exhibiting the torrid pace of last year’s 10% growth with the seven nearly complete, we are still 4% ahead of last year’s record box office.

During the quarter we also had announced regarding our first lease renewals in theater portfolio. As we discussed in our last conference call, we told you that our expectation was that three of the four theaters would be renewed pursuant to their contractual terms and at the fourth theater located in Dallas Texas would not be renewed.

As you read, this is exactly what happened. We are pleased that these renewals occurred as we predicted. Furthermore, I received several calls inquiring as to the effects of these renewals on our relationship with AMC. We have had, continue to have and will have a very strong relationship with AMC and we continue to look at projects with them on a regular basis.

Turning to the fourth location, Dallas, the theater needed to be repositioned in the market to reflect its current consumption patterns and I am happy to report to you that we have entered into a letter of intent to reposition the asset to 14 to 16 screen theater from its current 24 screen size. As part of this reconfiguration, we will gain approximately 30,000 square feet of available retail space as well as five to seven acres in the parking field for pad site development for which we have begun to identify interest from prospective tenants.

With regard to our public charter schools as we are in the middle of summer break, I do not have any further information to give you at this time regarding 2010, 2011 enrolment as these numbers should be available for our next quarterly call.

With regard to our metropolitan daily ski investments, I am happy to report to you that the 2009, 2010 ski season was very successful for our operator with overall skier business up 8% and total revenues up 6%. These outstanding metrics when combined with additional expense control results in an overall coverage improving from 1.8 to 2.2. Furthermore including the additional payment requirement of the original $25 million development note that we moved to current pay in conjunction with extending the note for two years will result in overall payment coverage of approximately 1.7 times. With the removal of White Plains City Center and additional leasing gains at our Toronto Dundas project, our overall retail occupancy improved to 90%. The Toronto dentist project has improved its occupancy to 95% with the leasing of 23,000 square feet of additional space.

With the introduction of Clear Channel as a signage manager, we continue to make progress on increasing the signage revenue for the back half of 2010 and also for 2011.

As we previously discussed, our wine portfolio is our only asset class that continues to lag the performance of our other properties. While there are indicators that the consumer is returning to our price segment, we did execute a transaction whereby we completed the sale of our Havens property at a price of $6.5 million. While we are not pleased about recording a loss on the sale, we were able to recover approximately 87% of our basis which combined with our carrying cost as a property and our redeployment opportunities made at the right time to exit the property.

With regard to occupancy, our overall occupancy stands at 98% with theaters being 100% occupied and our non-theater retail assets at 90%. As we discussed earlier, we are increasing our full year capital guidance to $350 million. As you might expect, we are doing this because we continue to see acquisition opportunities that are attractive to us. The majority of these opportunities continue to be in theaters and public charter schools, we are very pleased with the performance of both of these asset classes and want to continue growing.

As we previously indicated, we are looking to increasing our operator diversity specifically in our public charter school space. As we detailed before, much like our theater investments, which began with AMC, we began our public charter school investment with a large well capitalized and established operator Imagine schools.

With this solid foundation, as we did in theaters, we now look to expand and diversify the operator base as we become the preferred capital source for the industry.

With that, I will 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 the details of the various line items, I think it’s first important to help you understand the terms that impacted our results for the second quarter and six months ended June 30. I will go through these with you upfront so you can more clearly understand our operating results.

As illustrated by the first slide, during the second quarter we recorded $15.6 million or $0.35 per share in cost associated with loan refinancing as we paid off $272 million of secured debt. I will further discuss our significant debt refinancing activity in the quarter a bit later in my comments on our capital markets activities. Accordingly FFO for the second quarter was $21.7 or $0.48 per share. We add the $15.6 million of costs associated with loan refinancing and $0.1 million in transaction cost, our FFO per share as adjusted was $0.83 for the second quarter. Our year-to-date FFO was $1.26 per share. If we subtract the $8.5 million gain on acquisition recognized in the first quarter related to our acquisition of Toronto Dundas Square and add back the combined charges of $23.9 million, our FFO per share as adjusted was $1.61 for the six months ended June 30.

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 decreased compared to last year from $20.2 million to $8 million. Our FFO also decreased compared to last year from $30.1 million to $21.7 million. FFO per share was $0.48 compared to $0.86 last year for a decrease of $0.38.

Now looking at the details of our second quarter performance. Our total revenue increased 22% compared to the prior year to $77.6 million. Within the revenue category, rental revenue increased 20% to $58 million, an increase of $9.8 million versus last year and resulted primarily from acquisitions completed in 2009 and 2010 and base rate increases on existing properties partially offset by a decline in rental revenue from our vineyard and winery tenants.

Percentage of rents included in rental revenue, we are $247,000 versus $191,000 in the prior year. Tenant reimbursements increased by $2.9 million versus the prior year due primarily to our acquisition of Toronto Dundas Square in Q1 and increases in our Canadian Entertainment retail centers. Mortgage and other financing income was $13 million for the quarter, up $1.8 million from last year. This decrease is due to our January 2010 acquisition of five public charter schools as well other smaller real estate lending activities.

Other income was $0.1 million for the quarter, down $0.7 million from last year. The decrease is due primarily to a decrease in revenues from our family bowling center, Westminster, Colorado, previously operated through a wholly-owned taxable REIT subsidiary. The bowling center was converted to a third-party lease in February of 2010.

This line item also contains the net impact of the settlement with Louis Cappelli that Greg outlined in his earlier comments. Our 10-Q will have an extensive discussion of the various components of the settlement and their individual contributions to our net gain of $400,000. I will take a moment here to emphasize that the accounting rules require us to consider the fair value of the consideration received along with both the book value and the fair value of the consideration that was surrendered in calculating our net gain on the settlement transaction. In determining estimated fair values, the management utilized current appraisals to both Concord resort and New Roc. The Concord resort line was recorded as estimated fair value of $180 million and the net carrying value of the mortgage note receivable of $132.2 million was extinguished. We also recorded a $27.8 million non-controlling interest credit in the equity section of our balance sheet to reflect the value of Cappelli’s repurchase option as well as $9.2 million capital lease obligation for a portion of the resort property that is under ground lease.

Thus in effect, the net carrying value of the Concord resort land subsequent to the settlement is a $143 million, which is the option amount for which Cappelli can purchase the property. Another nuance worth pointing out is that $7.4 million had to written off in conjunction with the disposition and the corresponding deconsolidation of our interest in the White Plains project. This amount related primarily to the debit balance we carried for the non-controlling interest in this project.

Other smaller elements of the settlement entry included the fair value of interest received in New Roc and the Concord casino that increased the gain and amounts paid or accrued at closing and the net carrying value of notes receivables for given that reduced the gain. Again, I encourage you to consult our 10-Q for further details on the settlement accounting.

On the expense side, our property operating expense increased approximately $4.3 million for the quarter versus last year due to our acquisition of Toronto Dundas Square as well as increases in bad debt expense associated with our vineyard and winery tenants and property operating expenses at our four other Canadian entertainment retail centers. Other expense decreased $0.7 million for the quarter and is due to less expense recognized related to the previously described bowling center as well as less expenses at certain of our vineyard and winery properties that are being operated through a wholly owned taxable REIT subsidiary.

G&A expense increased $0.4 million versus last year to approximately $4.6 million for the quarter. This increase is due primarily to an increase in payroll and benefit-related expenses as well as professional fees. Loss from discontinued operations relates to operations at the White Plains entertainment retail center and the vineyard and winery property prior to their disposition. The loss on sale of real estate of approximately $900,000 for the quarter relates to the sale of the vineyard and winery property.

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 supplemental summarizes these key ratios on Page 16. We continue to report strong levels of interest coverage at 3.2 times, fixed charge coverage at 2.4 times, and debt service coverage at 2.5 times. Our AFFO, or adjusted funds from operations per share for the quarter was $0.85. With our cash common dividend of $0.65 per share, we had an AFFO payout ratio of 76%, which continues to be a top-notch metric compared to other REITs.

Our debt to adjusted EBITDA ratio was a healthy 4.7 times for the quarter. Adjusted EBITDA and this calculation is defined as quarterly EBITDA annualized and adjusted for the gain on acquisition and charges and debt is the balance at June 30. Our debt to gross assets ratio was 38% at June 30.

Let’s turn to the next slide and I will discuss our capital markets activities during Q2 as well as our liquidity position. We had a very business and productive quarter in the capital markets. In May we raised a $140 million of net proceeds by selling 3.6 million shares of common stock at $41 per share. At the end of June, we closed on both our new unsecured line of credit and $250 million unsecured notes. The new $320 million unsecured line of credit replaces our previous $215 million secured facility. The new facility of the pricing grid based on the current ratings of our senior unsecured obligation. At closing the pricing was LIBOR plus 300 basis points, which represents a 50 basis point improvement in spread compared to our former secured credit facility. The new facility also does not have a LIBOR floor. This will create a savings in today’s interest rate environment of approximately 165 basis points as compared to our former secured facility. Thus to sum it, we went from secured to unsecured, increased our capacity by over $100 million and reduced our current interest rate by 215 basis points.

Turning to the next slide, as David discussed, we also executed something new for EPR in Q2, an unsecured note offering. For the first time in the company’s history, we obtained corporate and senior unsecured credit ratings. Our $250 million 10-year notes were signed investment grade ratings by two of three major rating agencies. The bonds had a 7.75% coupon and were sold at a slight discount to par. All this unsecured debt is more costly than the secured debt it replaced, we feel that over the long-term the cost of our secured versus unsecured debt should converge as the company becomes a more seasoned issuer. Furthermore, the long-term benefits of being an unsecured issuer should translate to a low overall cost of capital.

Turning to the next slide, as I mentioned earlier in my comments, we also retired $272 million of secured debt during the quarter. These retirements significantly improved our already strong debt maturity ladder and increased our unencumbered asset pool to $1.7 billion, which leaves us with a ratio of unencumbered assets to unsecured debt of over four times. In conjunction with the debt retirements, we also recognized $15.6 million of expenses as I mentioned earlier, $6 million of which was non-cash.

Turning to the next slide, at quarter end, we had total outstanding debt of $1.2 billion of which approximately $1 billion was fixed rate, long-term debt, with a blended coupon of approximately 6.4%. We had $154 million outstanding on our revolving credit facility at quarter end, leaving approximately $106 million of availability and our unrestricted cash on hand was $20 million. Our debt to gross assets was 38%, as I previously mentioned, a 500 basis point reduction versus a year ago and in line with our new target for this important metric of 35% to 45%.

As we turn to the next slide, I will outline our debt maturity profile. We have no debt maturities in 2010 or 2011 and only $65 million in 2012. Excluding our line of credit when we get to 2013, we level off it around $100 million per year. Now the slide you are looking at stops in 2015 but the $100 million per year benchmark is true through 2018. We believe this is a very manageable and well laddered maturity schedule. The capital markets transactions and theater investments that we made during the quarter continued our trend of deleveraging the company and growing FFO. The new unsecured platform will further enhance our access to the capital markets and make us more flexible and efficient as we finance future real estate investments.

Turning to the next slide, the company is increasing its 2010 investment spending guidance from $300 million to $350 million. The company is also tightening its 2010 guidance for FFO as adjusted per share to 330 to 340 from the previous guidance of 330 to 345. This guidance reflects the company’s lower leverage as a result of the equity offering and settlement with Cappelli in the second quarter as well as recent debt transactions in the expected investment spending for 2010 of $350 million. The guidance for FFO per share is $295 to $305, which includes the charge of $0.35 per share for cost associated with loan refinancing in Q2 that I just discussed.

Now I will turn it back over to David for his closing remarks.

David Brain

Thank you, Mark. Thank you, Greg. As both of those gentlemen referenced, it was a busy and action packed quarter and hopefully you have noted in all the comments, it was a very transformational quarter for the company as well. So with all this said, I think at this time rather than comment further we will just go to your questions and see if there are anything we can address in particular.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question is from the line of Anthony Paolone with JPMorgan.

Anthony Paolone – JPMorgan

Just on the land, when I look at your balance sheet, I think the land went up $180 million sequentially and the new markets, sounds like there are a lot of different adjustments there. Can you just walk through very basically like how it got to $180 million from the $133 million?

Greg Silver

You are talking about the Concord land?

Anthony Paolone – JPMorgan

I assume that’s the only way that made that (inaudible) increase.

Greg Silver

Yes, right. So the $180 million, we had an independent appraisal done at the time of the transaction, that was the fair value. However, effectively with the credit we have in non-controlling interest for the option value Cappelli has and the capital lease obligation reported effectively we have it on the books for $143 million, which is the option price that Cappelli can purchase the property. So when the fair value was higher, we effectively booked it at the option value of $143 million on a net basis, $143 million net as far as that asset is concerned when you cut through it all.

Anthony Paolone – JPMorgan

Okay, on the appraisal, can you give us just a sense of the executive summary on how the appraisers got to the $180 million like what went into that, I can’t imagine there is a lot of comps for (inaudible) and just how they approach that?

Greg Silver

There is not a lot of comps and they are basically using the highest and best use of the property and so it’s basically on developed basis and it’s with and without a casino, that’s correct. We look at the number without the casino, so actually a lower number of the two. But they are looking at the different uses of the property and discounting it back at heavy discounts rates and with a fairly conservative timeline in terms of development. So that’s basically how they come to the value.

Anthony Paolone – JPMorgan

Asset work, if you wanted to sell it, what happens the option that Cappelli has?

Greg Silver

He has the right of first refusal during the two year period, that if we wanted to sell it, he can match that bid and take it but if he does not, his option expires with regard to that property that we would sell.

Anthony Paolone – JPMorgan

Okay. And then with the your commitment to fund the casino if something’s put together by the end of the year, what do you peg as the probability of that happens?

Greg Silver

I think he has been trying to put this together for years and what we have said and when we talked about his willingness to be a participant if we could get a casino going but we were unwilling to have that set out there forever. As far as its probability, candidly I don’t know. I mean he is trying desperately to put this together but we needed a timeframe to where we knew that we can take control of our own destiny and we wouldn’t have something out there and we could begin to just shop and market out property for its various users.

Anthony Paolone – JPMorgan

Okay. And then, Mark, can you give us maybe some run rates for some line items for the balance of the year, like G&A, property operating expenses and some of those items? Because I think, for instance, in G&A, like last quarter you had mentioned that you in guidance I think for the full year there was maybe $1 million of legal fees throughout the year. But since that’s all said, I would imagine that comes out for the second half. And just some of those things, because it seems they’ve move around a little bit.

Mark Peterson

As far as G&A, you’re right. We had about $250,000 a quarter in there for G&A, they can expect a run rate from Q2 to drop by that amount anyway for the legal expenses. So I think you’re right on with respect to G&A. And then the other question was –

Anthony Paolone – JPMorgan

Property operating –

Mark Peterson

Property operating expenses, let me think about that. We have a slight increase, we have a increase projected in Q3 and Q4, for property operating expenses, and that would be for –

David Brain

Our maintenance of the Concord.

Mark Peterson

Yes, we had some Concord carrying costs that we have projected. Of course, on the flipside, overall we lose the Life Plains asset as well. So a slight increase in property operating expenses over the remainder of the year, but not significant from what we have in have in the second quarter.

Anthony Paolone – JPMorgan

Okay, thanks.

Mark Peterson

Sure.

Operator

Your next question is from the line of Greg Schweitzer with Citi. Please proceed.

Michael Bilerman – Citi

It’s actually Michael Bilerman with Greg Schweitzer. Just sticking with Concord for a second. So, I guess, if that project is through and you think probably you’re able to get it, your forward commitment limits it up $30 million or is there other capital?

David Brain

No, that’s it. And our commitment is not to Cappelli, it’s a (inaudible). You look how to participate in their as well.

Michael Bilerman – Citi

In the mortgage loan. And, I guess, stepping back and obviously settling with Cappelli and stopping cross lawsuits and just settling this is a positive, especially considering you wrote everything down and you weren’t receiving any cash. You now have got 5% to 6% of your asset base tied up in and what really is not income producing. I guess, would you try to sell this commitment before December 31 and just get out of it or we have to wait to last of December 31, till you monetize this land?

Mark Peterson

I think we have – we have the latitude to begin to sell this – the asset. I’m not going to sell really the commitment. I don’t think that’s a saleable item. At least, we don’t see it as that way, but we can – we can work the land, we have the latitude as Greg pointed out before to control our own destiny and that’s what we wanted. So – but we’re not waiting anymore on the casino project.

If it goes, that’s great. It’ll be good for the – it’ll be a positive for the land value development as just we talked about is the higher value with the casino in place of the land appraisal, but we’re not waiting for that, we’re moving forward to do develop or deploy this asset as we can find opportunity to do so.

David Brain

And Michael, I think we looked at it, and you guys on a holistic approach, if you think about it, we’d have gone through the litigation and had been successful on all of these points. And even if we’re taking the next point in this – had taken Mr. Cappelli and the insolvency, I mean we wouldn’t have done any better than getting our property back there, getting our property back in New Rock, shedding White Plains, and potentially getting an interesting in any sort of go-forward that you might have in that development. So we looked at it as getting ourselves in this position and then having that incentive to see if the casino can happen and drive additional realization opportunities for us on our land.

Michael Bilerman – Citi

I guess, as to how long are you going to wait for that realization, knowing that you got $140 million of –

Greg Silver

Michael, let’s be clear. If you’ve got somebody that wants to buy it, you tell him the call is right now.

Michael Bilerman – Citi

Well, I’m saying, are you marketing? I mean, if you’re going to sell it, you put together a package, you enlist a broker, and you cut your losses, and you go forward, you take that money, you invest in theaters, you invest in charter schools, and you start earning the return that will eventually beat the cash flow – the dividend growth or you’ve made decision, “Look, I want to be in the casino business and I want to own the ground at (inaudible), I want to participate.” So I’m just trying to figure out where your mindset is.

Greg Silver

We’re not waiting to occur.

David Brain

You said, how long we’re going to wait. We’re not waiting.

Michael Bilerman – Citi

Okay, I think Greg had a couple. Yes, okay, go ahead, Greg.

Greg Schweitzer – Citi

Guys, just, if you can provide a bit more detail on Dundas Square, and what has Clear Channel been able to do on the signage leasing, how much NOIs is coming up now and your expectations?

Greg Silver

I think, on terms, you just want the signage aspect or do you want the property lease as well, Greg?

Greg Schweitzer – Citi

Both.

Greg Silver

Okay. On the property leasing, what we talked about is, during the quarter, we leased up – that were signed leases for 23,000 additional square feet which and we think there’s some real quality tenants and since that we expanded our Google space and a lease to them, we – a new lease with Ryerson with the Toronto Film Commission for use of the seventh floor. So some really – probably we think there are some great tenants.

With regard to signage, sequentially we’re making great progress. We really got control, they control of this at the end of the first quarter. And second quarter results compared to first quarter results are significantly better. They continue to book signage contracts for 2010 and 2011, so we’re feeling very good about the progress that they’re making and they’re jumping in and getting us in front of people to use to asset and actually closing on those transactions. So I would say that we’re very happy. From a percentage basis, I would say it’s probably up 20% from first quarter, like a (inaudible).

Greg Schweitzer – Citi

Is that just the signage or –?

Greg Silver

That’s just the signage.

Greg Schweitzer – Citi

So – and Pro forma with the increase in signage and it could go expansion and rise and what is that NOI?

Greg Silver

The NOI, because that some of these leases – their spilled out periods for the tenants and everything, I think the pro forma is probably going to be more into 2011, but we think it’s talking about and that fall into the bottom line of $1 million plus.

Greg Schweitzer – Citi

From the 15.

Mark Peterson

In addition.

Greg Silver

In addition and it’s incremental.

Greg Schweitzer – Citi

Okay. And then, you still have two more spaces left.

Greg Silver

We do.

Greg Schweitzer – Citi

I am correct?

Greg Silver

That’s correct.

Greg Schweitzer – Citi

Thanks very much.

Greg Silver

Thank you.

Operator

(Operator Instructions). Your next question is from the line of Jordan Sadler with Keybanc Capital Markets. Please proceed.

Jordan Sadler – Keybanc Capital Markets

Thanks, good afternoon.

David Brain

Hi Jordan.

Jordan Sadler – Keybanc Capital Markets

I just wanted to clarify on the guidance a little bit. I know lower leverage is a cause of sort of the tweak on the top end there as well as the financing. But can you maybe just talk a little bit about the expectations from additional acquisitions the return timing expectations on the incremental piece?

Greg Silver

I think currently, Jordan, we’re looking at that as part of the latter part of the year, and so not measurably contributing to this year.

David Brain

I think, yes, as Greg’s indicating the general lift of any further acquisitions during the year, I think we’d come towards 2011. The point of leverage where we are now as we talked about is 38% on a gross asset basis. We don’t really expect to delever a lot more given our range of 35% to 45%, we’re already in the kind of lower portion of that. So given the low cost of our kind of short-term line of credit, we might use for some incremental transactions, we think the lift could be pretty good, but it’s probably will come in 2011 fundamentally.

Jordan Sadler – Keybanc Capital Markets

And just to be clear, in terms of leverage, where we’re – so to the extent that you were to see significant incremental investment opportunity, where do you want to sort of target leverage just to maintain or maybe want to continue to ratchet it up on the investment grade spectrum, but what sort of the target?

David Brain

I think the target we talked about now is 35% to 45% on a gross asset basis and we are at 38% in – on that measure, on that basis right now.

Jordan Sadler – Keybanc Capital Markets

That is debt-to-EBITDA of 4 times or –?

David Brain

Debt-to-EBITDA this quarter was 4.7 times. Actually, it’ll come – probably come down a little bit. But 4.7 times was let’s just say was their number of the quarter and we feel comfortable, that’s a solid number. I think under 5 times is a solid metric.

Jordan Sadler – Keybanc Capital Markets

Okay. And when you guys have sort of laid out acquisitions, typically, you’ve had your eye on something or maybe something under contract and you’re indicating charter schools and diversifying there. It seems to make sense. So, one, do you expect – should we continue to expect 10 % type returns on charter schools, and two, is the case that you kind of have something under contractor or your eye on it?

David Brain

I think your cap rates are accurate and I think it’s – we may not have something under contract but we’re constantly have our eye on stuff toward then – and we’re constantly talking with people and as you know we kind of don’t try to go out on a limb that we have don’t have confidence that we can’t hit. So, it just needs to work its way through the process.

Jordan Sadler – Keybanc Capital Markets

You still continuing to see theater deals out there?

David Brain

Yes.

Jordan Sadler – Keybanc Capital Markets

What sort of the pipe look like there?

David Brain

No. I mean there’s still people they were talking to with, portfolios, there still deals as we said earlier in the year, we do think that we’re going to get back into the build the suit for some of our theater operators and we’re looking at sites with those groups now. But theater builds a suit generally only start in the fall and in the spring, because they want to open into the holiday season or the summer season. So, we continue to work with those groups as well and even if we started some of those, there wouldn’t be a lot of money going out on those in 2010.

Jordan Sadler – Keybanc Capital Markets

Okay. Lastly, I didn’t much about these, but your largest tenant filed for an IPO. There’s some interesting color in the S1, but I am just curious about your take in terms of what that might do to your relationship with them going forward meaning, you think they would look on a greater proportion of their real estate going forward? Given they’re likely coming lower cost of capital or vice versa?

David Brain

I don’t think so. That’s not necessarily their stated intent. We continued to talk to them. I mean they’ve been a public debt, in the public debt market for years and so now, I think this is the public equity markets. I think they’re owned by – I know they’re owned by several large private equity firms that are looking for an exit. So, I think as I said before we have and will continue to do business with them and we don’t really see any major changes from that.

Jordan Sadler – Keybanc Capital Markets

Okay. One specific thing they mentioned and I don’t if you’re a party to this. But one of their sort of, I guess, objectives is continue to achieve operating efficiencies including lowering occupancy cost in many of their facilities through negotiations with rental agreements and landlords and they talked about sort of strictly enforcing co-tendency provisions, auditing cam, things of that nature. Have you guys been subject to any of that?

They said they’ve seen some savings and do you feel like that there’s any risk associated with that?

David Brain

I’ve think they’ve talked to everybody. I think – all I can say is we just had renewals and as w said they would, they renewed three out of four percent to their contractual terms. Ours are generally triple net, Jordan, so we don’t have the exposure that you’re talking about with con-tendency or with cam audits and things of that nature. We just don’t have that exposure that they have in other places. So, our dealings have been pretty straight forward with them and haven’t really been exposed to that.

Operator

Your next question is from the line of Andrew Dizio with Janney Montgomery Scott. Please proceed.

Andrew Dizio – Janney Montgomery Scott

You talked about repaying the Cantera loan and EPR1, we have seen that property being marketed for sale a few months back. Is it still for sale or was that more in lieu of having to work out the loan?

David Brain

It’s on the German joint – our venture partners at German fund that sells out individual shares to German investors and as we got down to the period of time for the loan to be refinanced, they wanted to go out and establish value and so they marketed that to see the price that they could garner if they went through sale on that. they elected not to sell it and but they have to get there – have to go back to their individual investors to step up and fund this proportionate share and/or we have to locate and look at getting new debt for the property.

Andrew Dizio – Janney Montgomery Scott

Okay, thanks. And then secondly, saw you out of the disclosures on that very small China investment you have. Can you give us any update just on how that’s working?

David Brain

Well, it’s really been open with only about one month and so we don’t really have a lot of data to give you that’s really less (inaudible) of anything. But it’s open, we’re happy with it and but no, there’s not a lot of information to give you.

Operator

Your next question is from the line of Rich Moore with RBC Capital Markets. Please proceed.

Rich Moore – RBC Capital Markets

Hello, guys. Good afternoon. On the theater front, who are the sellers these days of theaters? I mean has that changed overtime and do you still see a pipeline, I guess of theater type sellers out there?

David Brain

Yes. I mean there are various private groups that have like the Cinemark transaction that we closed recently as a third party, kind of a private real estate organizations that was looking to raise cash for reasons other were in their portfolio. So, there’s still those that are out there. We think very good opportunities, Rich, that we continue to talk to people about.

As I said previously, we better opportunities as well with our build a suit opportunities, with our theater tenants, we’re out visiting sites with them on a regular basis now. So, we’re seeing opportunities on both those fronts.

Rich Moore – RBC Capital Markets

Okay. So, is there Dave the notion of distressed sellers out there of theaters you think at this point or can they get that to refinance it, (inaudible)?

David Brain

I think, Rich, we’ve come to, frown on the word distressed sellers because nobody wants to be characterized as a distressed sellers. There are still sellers out there who are opportunistically looking to raise capital.

Greg Silver

Yes.

David Brain

And so we are talking to people who fit that definition and we still think there are pockets of those out there that can and will provide us opportunities.

Greg Silver

It’s consistent with what I talked about for the background of us moving to go to the unsecured death mark (ph). It’s the secured Denmark (ph), it’s just so challenge the – and so there are people who have maturities maybe in theater ownership or otherwise and they still are looking for points of liquidity. So, there’s still are those opportunities we’re in discussions about.

Rich Moore – RBC Capital Markets

Okay. Thanks, good. And then staying on theaters for a second is the whole 3D movement is that as exciting as you thought it was going to be. I mean obviously it’s still really in the whole 3D thing, but do you think you’ll be hitting percentage rent thresholds quicker and is that a ball thing kind of the way you’ve seen it?

Greg Silver

I think it’s still is a very much a positive trend and will be a contribution to us moving towards more percentage rent realization. However, there have been some – there was a rush to the 3D. We’ve talked to a number of parties about the fact that there were films this year that were kind of cheapened the 3D effect by going back and programming some 3D effects on movies that were already shot in 2D. So, but overall, I still think it’s a very positive part of a landscape and the consumer is still paying a premium and appears to be comfortable in doing so. A sizeable premium to enjoy a 3D presentation.

Rich Moore – RBC Capital Markets

Okay. Good, thanks. Turning to charter schools for a second, obviously, the opportunity is gigantic out there in charter schools.

Greg Silver

Yes.

Rich Moore – RBC Capital Markets

I mean how do you feel about charter schools at this point. I think do you think that it’s going to go grow as quickly as you thought it might for you guys?

David Brain

Yes. Right now, we’re still very strong on our outlook for charter schools to grosen (ph) the category, the political environment supportive of that growth is still very strong and that is the category that we’ve targeted for a significant investment over the near term and we hope to talk to you about some specific transaction opportunities in the very near future, but we really don’t have anything today.

Rich Moore – RBC Capital Markets

Okay. Is there competition coming into that or are you guys kind of by yourselves out there?

David Brain

We talked about the fact that we did see one other, Inland (ph) in a charter school transaction. But, no, it’s still a fairly thin competitive set, so there are others that are out there but I think we’re still in the leadership position.

Rich Moore – RBC Capital Markets

Okay. Good, thanks. And then on the Dallas theater, is that – are you planning to turn that into like a center kind of atmosphere or are these going to be various pads that you’re going to sell?

David Brain

They’ll be various pads that we sell or ground lease, kind of restaurant type pad size, there will be a center.

Rich Moore – RBC Capital Markets

Okay. Good, thanks. And then last thing, I realized you can’t necessarily make the decision on the call, but what do you guys think about the dividend and the potential for a dividend increase?

David Brain

Well, Rich, we don’t really – as you say we’re not in the position to make a call or give any guidance on that. but as we alluded to in earlier comments, probably the incremental investment opportunities for us we think as we are now gotten to the lever each point, we’re comfortable with maybe greater contributor to our capacity for a dividend increase than the last couple acquisitions we’ve made.

So, I think this is something we’re going to continue to watch. We have been fairly static and flat in our dividend and we’d like to increase that. So, we will be looking at that issue closely as we move towards the first quarter of 2011 as we traditionally look in the first quarter to reset our dividend.

Operator

(Operator Instructions). We have a follow-up question from the line of Gregory Schweitzer. Please proceed.

Michael Bilerman – Citigroup

It’s Michael Bilerman (ph). We have to this call, your presentation in 3D next time, right?

David Brain

Michael, we will. I think that will really contribute to the slides.

Michael Bilerman – Citigroup

Okay. It will make them that much more enticing. The 3 million loan that’s the one the Sapphire, the wine loan, that’s past due?

David Brain

Yes. Yes.

Michael Bilerman – Citigroup

Is there any resolution there?

David Brain

No, actually. Well, Sapphire, as we talked about on our last call, the EOS (ph) winery was taken into receivership and they’re gaining control of the asset – have we bought suit against the note maker of that note and are pursuing that litigation.

Greg Silver

We have that loan fully reserved and we’re no booking any current interest income on it as well.

David Brain

Right.

Michael Bilerman – Citigroup

And then what else on the EOS (ph) reconciliation, the $1.3 million of the non-cash portion of the mortgage and other financing income. But what balance that does represent and does that burn off at all?

David Brain

What balances the?

Michael Bilerman – Citigroup

What debt balance or what loan balance that does represent?

David Brain

$15.6 million.

Greg Silver

No, the $1.3 million.

Michael Bilerman – Citi

The 1.257 non-cash portion of mortgage and other financing income.

David Brain

Okay.

Greg Silver

That’s the charter school primarily accrual that we accrue at a 12, but it’s past paying a 10. So, there’s some –

David Brain

It’s like straight line rent, except it’s in accordance with the effective interest method. But is the equivalent of the straight-line rent that reverses overtime.

Michael Bilerman – Citigroup

And right, there’s no other loans that you’re accruing gap, but only getting cash other than that?

David Brain

That’s not a loan remember. It is an owned property and leases that as to be characterized on the effective interest method –

Greg Silver

That’s a capital rule.

David Brain

Or accounting rules because it’s a capital –

Michael Bilerman – Citigroup

Right. And just lastly just thinking about sequentially knowing the Cappelli closed; I guess it was late towards the end of quarter. What are the income statement effects of New Rock and White Plains and the transactions that you did?

David Brain

Well, let’s handle White Plains first. We were booking about a $500,000 decrease in FFO per quarter. It was kind of the run rate of White Plains, so that will be removed –

Greg Silver

That goes.

David Brain

And help the back six months. With Respect to New Rock, because of the status of the project, we were booking most of that income. We have a preferred return there and we were booking in the preferred return. Now, as that thing further leases up, it’s about at the 75% –

Greg Silver

80%.

David Brain

80% lease level, as that lease is up that income will become all ours, but will not have an incremental income statement effect over the last six months.

Michael Bilerman – Citigroup

And does (ph) move geography wise on the statement from those transactions?

David Brain

Geography wise, White Plains from the second quarter keep in mind is down in discontinued operations. So, you really do kind of have clean run rate with respect to the quarter just because the quarter are being re-class. As far as geography, again, New Rock has no impact. White Plains certainly affect the balance sheet and we’ll remove the debt, remove the asset in nearly equal amount.

Greg Silver

It goes away –

David Brain

Goes away.

Greg Silver

But that includes a round and –

David Brain

New Roc had just removed.

Greg Silver

And New Rock doesn’t really move around.

David Brain

No.

Greg Silver

We just have upside now and we have 100% of the upside. We’ve been pretty much accounting for all the returns because we were in a (inaudible) position that potentially swept all the returns up to this point that any incremental leasing is ours.

Michael Bilerman – Citigroup

Okay. And then just lastly in China, I know it’s small but what other sort of capital commitments do you have for that venture and sort of more broadly how you’re thinking about expanding internationally?

Greg Silver

It’s an important point. I want to be clear, try be clear before. We do not have any commitments. We don’t have – there is no callable commitment in China. We do have relationships where we’re looking at investment opportunities, so there aren’t any commitments. Our expectation is we’re looking at really half a dozen projects now and I think our investment sizes are going to be small relative to those. Again, on the $3 to 5 million ranges on a per location basis, but we don’t have any commitments at this time, and we’ve not entered in any further specific site commitments.

Michael Bilerman – Citigroup

The $1.7 million that’s between two different sites?

David Brain

No.

Greg Silver

The $1.7 million now is a single site.

Michael Bilerman – Citi

Is a single site and then –

Greg Silver

Single site.

Michael Bilerman – Citigroup

And then that’s your equities, is there any debt on the project at all?

Greg Silver

No.

David Brain

No.

Michael Bilerman – Citigroup

And this is what a free standing theater, what?

Greg Silver

No, it’s a lease home improvement (ph). In a vertical mall.

David Brain

Mall.

Michael Bilerman – Citigroup

And who are your partners?

David Brain

Shanghai Film Group, we’ve talked about as our primary partner and then further we’ve taken a site specific partner, which is the Ningbo (ph) – I can’t remember exactly what the –

Greg Silver

Economic development.

David Brain

Yes, it’s kind of the Ningbo (ph), which is –

Greg Silver

It’s the local city government.

David Brain

It’s the local city government.

Michael Bilerman – Citigroup

Okay.

David Brain

Just not unusual in these arrangements.

Michael Bilerman – Citigroup

You’ve have another six or seven that you’re targeting but nothing that you’ve committed to?

David Brain

That’s correct.

Operator

(Operator Instructions). We have a follow-up from the line of Jordan Sadler with Keybanc Capital Markets. Please proceed.

Jordan Sadler – Keybanc Capital Markets

Hi. It’s Greg (inaudible) with Jordan. Mark, just a quick follow-up on the AMC expirations and the renewals and then a lot of the tab, just trying to get to the potential net impact on rental revenues from that assuming the ROI comes in kind of how much would you lose with the contractions theaters?

Mark Peterson

Well, I mean three of the four renewed, so we’re talking about the one.

Greg – Keybanc Capital Markets

Right.

Mark Peterson

So, if you – I would say that until we get the 30,000 square feet lease up and we get some of the pad sites sold, that it’s about 700 to 800,000 for the year.

David Brain

Yes.

Mark Peterson

And we get that other place leased up.

David Brain

For the impact this year, we’re going to lose what a month of rent.

Mark Peterson

Yes.

David Brain

Which is about $200,000 in December.

Mark Peterson

Yes.

David Brain

Because November is when the lease expires and we will not take time to lease it.

Mark Peterson

Right.

David Brain

There will be a little bit interim time where that will be okay.

Mark Peterson

We’ll take it – well, we could get to about 90 days or so before we –

David Brain

Right, so.

Mark Peterson

Petitioned over.

David Brain

That’s the impact for this year anyway and then should run back up.

Mark Peterson

Back up.

Greg – Keybanc Capital Markets

Okay. So, about 800,000 (inaudible), 70, right?

Mark Peterson

For an annual basis.

Greg – Keybanc Capital Markets

For an annual basis, right. But only 200,000 in 4Q.

Mark Peterson

Yes.

Greg – Keybanc Capital Markets

It’s going to come down. Great.

Operator

There are no other questions at this time. I’d like to turn the call back over to Mr. David Brain.

David Brain

All right. Thank you. thank you all for joining us again, we always do as I say appreciate your tuning in and taking the time and we’re as I usually say very receptive to entertaining questions also, if you’d like to call the company further. But thank you again and we’ll see you next quarter.

Operator

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

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