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Entertainment Properties Trust (NYSE:EPR)

Q3 2010 Earnings Call Transcript

November 2, 2010 4:30 pm ET

Executives

David Brain – President and CEO

Greg Silvers – VP and COO

Mark Peterson – VP and CFO

Analysts

Anthony Paolone – JPMorgan

Jordan Sadler – KeyBanc Capital Markets

Michael Bilerman – Citi

Greg Schweitzer – Citi

Gabe Poggi – FBR

Andrew DiZio – Janney Montgomery Scott

Rich Moore – RBC Capital Markets

Craig Mailman – KeyBanc Capital Markets

Operator

Good day, ladies and gentlemen, and welcome to the third quarter 2010 Entertainment Properties Trust earnings conference call. My name is Francine and I’m 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 presentation over to your host for today’s call, Mr. David Brain, President and Chief Executive Officer. You may proceed.

David Brain

Thank you, Francine. Good afternoon to all of you. Thank you for joining us. This is David Brain. I’ll start with the usual preface, and that is to inform you that this conference call may include forward-looking statements defined by the Private Securities Litigation Reform Act of 1995, identified by such words as will be, intend, continue, believe, may, expect, hope, anticipate, or other comparable terms.

The company’s actual financial condition and results of operations may vary materially from those contemplated by such forward-looking statements. A discussion of the factors that could cause 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 12/31/09.

All right. Let me start by saying we appreciate your vote of confidence and taking time with us today. The headlines for the third quarter for 2010 for Entertainment Properties are as follows. As usual, we have the webcast through eprkc.com. You can go there now for the slides. Headlines are, first, number one, we had a quieter but very solid quarter for tenant fundamentals; two, no major capital formation activity during the quarter, but good progress on our cost of capital. Three, good 2011 growth prospects that support guidance of $300 million in acquisitions; and four, 2011 FFO diluted share increase of 4% to 5% is expected.

All right. This afternoon, as usual, I’ll comment a bit on these items, and then Greg, who is with us this afternoon –

Greg Silvers

Hello.

David Brain

And Mark –

Mark Peterson

Hello.

David Brain

Will add some detail of these items as well as some other things, and we will follow that all by taking your questions.

Now, going to our first headline, a quieter but very solid quarter for tenant fundamentals. We did have significant and positive news regarding tenant fundamentals for the quarter, during the quarter, and I’d like to share that with you.

First, our primary index of our largest area of invest represented about 70% of our investment portfolio, the first around exhibition cinema industry accelerated its retail market-leading performance during the quarter. And during the quarter, box office receipts were up over the same period of ’09 by 5%, a great performance for the industry of the vast majority of our investments.

Second, both in terms of sequence this afternoon and EPR portfolio provenance is news regarding our tuition-free public charter school properties. Enrollment counts for the 2010-11 school year were just taken and published, and the student counts in our schools were up by 8%.

And third, this – the third quarter marks the end of the summer operating season for our water park investments, and we can report to you that revenues for our operator Schlitterbahn were right on top of last year despite not only a tough economy but major storm-related weather problems and a depressed travel and hospitality profile for the Gulf Coast as a result of BP oil spill. With that said, flat results were viewed as good news.

In sum, the seasonal aspects of our portfolio, all reported good news this quarter. And when combined with the steady, positive performance of our theater investments and the great performance of our ski portfolio have increased revenues of 8% that we reported to you on our last call. We are encouraged by the broad based positive fundamentals throughout our client base.

Our second headline today also reflects the quieter nature of the quarter and that we undertook no new capital formation activity. Unlike last quarter when the company began what I describe to you as a seismic change and our movement from being a secured to an unsecured debt issuer. There were no new financings or equity issuances in the quarter just ended, but we did see progress in our cost of capital, as our common stock traded up and our bond yield tightened.

Our investment grade rated day view unsecured bond that was sold with the 7.75% coupon in the second quarter has traded into a yield of about 7%. This coupled with a more robust stock price, translates to a lower average cost of capital, and is very supportive for the continued growth of the company. This is important, given the large and growing opportunities that we see.

Now, speaking of opportunity sets in view, with this report to you, we are providing guidance for acquisitions in 2011 in our third headline. We are able this time to provide guidance of $300 million in acquisitions throughout next year. We have formulated this estimate based on visibility of specific transactions.

As we’ve discussed with many new pass, we do not like to provide a large transaction target or estimate without visibility-specific deals. We don’t want to be motivated just to hit a volume number for its own safe. This level of growth is consistent with the company’s level of historic transactional volume, very achievable and very manageable, we believe.

Our fourth and last headline this afternoon deals with our earnings guidance for 2011. It is that an increase in FFO per diluted share of 4% to 5% is expected next calendar year. This estimate is, as usual, a result of a number of assumptions and estimates of portfolio performance, transaction parameters, timing of events, market conditions, and financing terms.

We are confident and comfortable, however, with this growth estimate despite the headwinds of a continued difficult and at best, slow growth economy overall. Although I must caution that no final determinant has been made by our Board, we can also provide guidance to you that a dividend increase of at least comparable magnitude can also be expected.

Now with that, I will turn it over to Greg. Mark is going to follow him. And I’ll join you all as we go into taking your questions. Greg?

Greg Silvers

Thank you, David. The third quarter saw less investment activity as compared to previous quarters with just $10 million of spending during the quarter, consisting mainly of our $7.6 million funding of expansions to existing public charter schools. However, we continue to make progress toward additional transactions, and we are on track to meet the capital budget that we laid out for you in last quarter’s call.

With that said, I’ll give you an update on the performance of our various asset classes. The theater industry continues to outperform last year’s record box office with year-to-date growth at approximately 3%. The industry continues to outperform other retail categories and demonstrated stability and resiliency during this economic downturn.

With regard to our public charter schools, we are pleased to report that the preliminary enrollment numbers are in for the 2010-2011 school year, and our overall enrollment has increased 8% over last year. As we described earlier, we also expanded four schools, increasing capacity by 5% overall. As a result of the increase in enrollment coupled with the increased capacity, overall utilization improved to 89% from 86% last year.

These numbers reflect our continued belief in the success and sustainability of the public charter school model. Schlitterbahn has completed its summer season, and although we experienced significant loss days due to weather in the Texas facilities, overall revenues for the summer were less than 1% off last year’s numbers.

As we’ve previously discussed, we intend to make additional investment in the water parks of approximately $8 million to $10 million prior to the opening of next season to facilitate future growth. The projected return on this additional investment will be commensurate with our target yield rather than the current yield, and we anticipate that it should move as closer to the point that we can realize on our percentage rents.

Our overall portfolio occupancy stands at a very strong 98%, with our retail occupancy, excluding theaters, remaining at 90%. As we’ve discussed previously, we continue to look at ways to recycle capital to drive FFO growth and shareholder returns. To that end, we have decided to explore selling our Toronto Dundas asset. As we’ve discussed, this is an asset that we believe should trade at a cap rate that is significantly below cap rate with currently acquiring assets.

Furthermore, we’ve indicated that it was our intention to explore a possible disposition of summer, all of these assets at such time as we have stabilized the performance. As the asset approached stabilization, we believe that it’s worth exploring these options. If we do like to sell the asset, this event may affect our FFO performance for 2011, depending upon if and when we sell it and the time period it takes to redeploy the proceeds. We will keep you updated on the progress of this endeavor along with the expected results if the transaction should occur.

Our wine portfolio continues to experience stress, and although it appears that things are improving, it is not improving at the pace we would like to see. To that end, we took additional reserves in the quarter to account for this stress and anticipate that we could see future reductions in rent as we seek to stabilize our portfolio.

Furthermore, it’s our expectation that during the fourth quarter, we will repossess our EOS asset that was being operated under a receivership. However, as all receivables were previously written off, we expect minimal impact on our results going forward. As we indicated in our last call, we continue to look for ways to trim our volatility in this asset class by stabilizing the performance of the asset and exiting when the market permits.

Notwithstanding our wine performance, our overall portfolio continues to perform at or exceed our expectations and we remain very positive about our opportunities to accretively grow our asset classes. We have a very robust pipeline of potential investments and have set a target of $300 million for investment spending for 2011. We are in active discussions on several theater opportunities as well as opportunities in public charter schools, an area in which we continue to make progress through diversifying our operator base while solidifying our position as the preferred real estate capital source for the industry.

With that, I’ll turn it over to Mark.

Mark Peterson

Thank you, Greg. I’d like to remind everyone on the call that our quarterly investor supplemental can be downloaded from our website. While the second quarter was a busy one in terms of accessing both the public debt and equity markets to support significant transaction volume and further enhance our balance sheet, the third quarter was more about harvesting some of the early fruits of those efforts.

As you can see on the bottom of the first slide, our FFO per share for the third quarter increased by $0.01 to $0.87, excluding charges. This operating performance was achieved with much lower leverage versus a year ago. I will touch on that more later in my comments.

Now let me walk through the quarter’s results and explain the key variances from the prior year. For the quarter, our net income available to common shareholders increased compared to last year from a loss of $66.8 million to income of $27.5 million. Our FFO also increased to $40.7 million compared to a loss last year of $71.2 million. FFO per share was $0.87 compared to a loss of $2.01 last year.

Now looking at the details of our second quarter performance, our total revenue increased 24% compared to the prior year to $81 million. Within the revenue category, rental revenue increased 24% to $61 million, an increase of $11.8 million versus last year and resulted primarily from acquisitions completed in 2009 and 2010 and base rent increases on existing properties, partially offset by a decline in rental revenue from our vineyard and winery tenants.

Percentage rents included in rental revenue were $788,000 versus $591,000 in the prior year. For the nine months ended September 30, percentage rents were $1.8 million, up 42% versus the prior year. Of the $525,000 increase year-to-date, $300,000 was from tenants at Toronto Dundas Square, which was acquired in the first quarter of this year, and the remaining increase relates primarily to theater tenants due to the strong box office performance.

Tenant reimbursements increased by $2.4 million versus the prior year due primarily to our acquisition of Toronto Dundas Square and increases at our other Canadian entertainment retail centers.

Mortgage and other financing income was $13.3 million for the quarter, up $1.7 million from last year. This increase is due to our January 2010 acquisition of five public charter schools for approximately $44 million as well as other smaller real estate lending activities. The public charter school expansions completed in the third quarter did not close until September 30 and thus had no impact on operating results for the quarter.

On the expense side, our property operating expense increased approximately $4.2 million for the quarter versus last year due to our acquisition of Toronto Dundas Square, increased expenses at our four other Canadian entertainment retail centers as well as an increase in bad debt expense associated with our vineyard and winery tenants.

G&A expense increased $0.6 million versus last year to approximately $4.1 million for the quarter. This increase was due primarily to an increase in payroll and benefit-related expenses as well as increases in insurance expense and franchise taxes. Loss from discontinued operations relates to the operations prior to disposition of a small parcel of land and building in California that were sold during the third quarter.

In addition to this parcel, the year-to-date amount relates to the operations at the White Plains Entertainment retail center and a vineyard and winery property prior to the dispositions in the second quarter. The gain on sale of real estate for the third quarter of approximately $200,000 related to the parcel sale during the quarter.

Turning to 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 and improving levels of interest coverage at 3.5 times, fixed charge coverage at 2.5 times, and debt service coverage at 2.7 times. Our AFFO or adjusted funds from operations per share for the quarter was $0.83. With our cash common dividend of $0.65 per share, we had an AFFO payout ratio of 78%, which continued to be conservative metric compared to other REITs.

Our debt-to-EBITDA ratio was a healthy 4.5 times for the quarter. EBITDA in this calculation is defined as quarterly EBITDA annualized and debt is the balance of September 30. Our debt-to-gross assets was 37% at September 30, a 500-basis point reduction versus a year ago. This ratio is toward the lower end of our previously stated target range of 35% to 45% for this important metric and provides us great flexibility as we ramp up the year and move into 2011.

Let’s turn to the next slide and I will provide you a capital markets and liquidity update. 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 $150 million outstanding under our revolving credit facility at quarter-end, leaving approximately $170 million of availability. And our unrestricted cash on hand was $15 million. Our debt-to-gross assets was 37%, as I previously mentioned.

As we turn to the next slide, 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 at around $100 million per year through 2018.

Turning to the next slide, we are confirming our 2010 investment spending guidance of $350 million. We are also confirming our 2010 guidance for FFO as adjusted per share of $3.30 to $3.40, or $2.96 to $3.06 when you include the charge of $0.34 per share for costs associated with loan refinancing in the second quarter.

Turning to the next slide, we are also providing guidance for 2011 investment spending of approximately $300 million and FFO per share of $3.40 to $3.60. This guidance reflects acquisitions being financed consistent with our targeted capital structure of approximately 40% debt and on an unsecured basis.

While we generally do not provide guidance on specific line items, we think it is helpful to share our forecast for G&A expense. We expect this line item to be slightly under $20 million for 2011. Also our G&A is typically about $600,000 higher in the first quarter than the full year number divided by four, primarily due to certain employee benefit expenses that are recognized in Q1.

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

David Brain

All right. Thank you, Mark, Greg. Let’s go to questions. I just want to reinforce what I hope is the clear message of the great position of the company. We are very well set with an overall strong tenant base with ascending fundamentals, a very strong balance sheet with low leverage, no near-term maturities, and great credit metrics. We are excited about our position and the prospect it holds for growth and increased shareholder returns.

With that summary, I guess we will – Francine, if you’re there, we will turn it over to questions. Open it up.

Question-and-Answer Session

Operator

Thank you. (Operator instructions) We have a question from the line of Anthony Paolone from JPMorgan.

Anthony Paolone – JPMorgan

Thanks and good afternoon.

David Brain

Hi, Tony.

Anthony Paolone – JPMorgan

Hi. In terms of the deal pipeline, can you give us a sense as to just the size, some cap rates, and maybe what you see as competition for these deals?

Greg Silvers

Yes, Tony. It’s Greg. I think we have some that are larger deals that are more portfolio deals, call them in the $100 million range that we’re looking at a couple – at least a couple of those. And we’re also, as we talked about earlier, we’re working again with existing operators on markets to develop some build-to-suit and some standing portfolio. As far as cap rate, I think there is a little downward pressure. We’re still seeing things comfortably with outstanding inventory in the 9 to 10 cap range and 10 to 10.5 range in the kind of build-to-suit category.

Anthony Paolone – JPMorgan

And what would be your appetite for build-to-suits, like how would you build out underwriting those?

Greg Silvers

It’s similar to how we’ve underwritten them always, Tony. We work with the operator and develop what we think is the appropriate size of the theater based upon what we believe would be the attendance to drive to a coverage number that we think is supported by the rent. You drive rent based upon on the productivity of the theater. So we start building our models based upon what we think the total revenues will be and see if the numbers were to drive at a rent coverage that we think is acceptable.

David Brain

Yes. Just to add to that, Tony, as you know, maybe not everybody does, we’re not the prime – we don’t go out and do site selections. We usually follow our tenant base, our customer base, and we work with them to make sure we’re based on demographics. We expect certain level of tenants. That then flows into financials to a coverage ratio, gives us a budget that can be spent on the theater, and all that is really how it’s determined. That’s how we underwrite.

Anthony Paolone – JPMorgan

Okay. What’s the competition right now because we hear a lot about – for quality deal, there’s just quite a bit of bidding and a great deal of cap rate compressions. I’m just wondering who you guys (inaudible) compete against.

Greg Silvers

Yes. And it really depends on the product. A lot of it is – we will get calls that I don’t think are being broadly shot, Tony, but if something has more broadly shot, it may be something that we’re not successful in just because it appears that – if it’s a one-off transaction as opposed to a – we're financing the platform and they are not only wanting to do this deal but grow their chain, we’re much more effective in those. And we access those not through the broker market, which is kind of the traditional where you see a lot of competition. We access those through our relationships in the exhibition market.

David Brain

Yes. And competition is generally somewhat reversely correlated as size of deals. The portfolios grew larger. We have fewer and it goes more to a negotiated transaction and single property.

Anthony Paolone – JPMorgan

Okay. And then just another question would be with respect to the vineyards. Can you maybe put some numbers around coverage there at this point? Is it essential that’s in a tough spot? Just give us a little more color on exactly what the problems are there.

David Brain

Well, I think, Tony, without identifying a specific tenant and calling them out here, I think what we can tell you is that the stress is broad-based. And I think we are seeing it with all of our tenants. As far as specific numbers, as I said, we are talking about potential rent concessions, but we haven’t identified those deals aren’t finalized. We did take $1 million reserve in the quarter. And Mark, you may put some color on that.

Mark Peterson

Yes. We had a receivable outstanding from one of our tenants that we did take a reserve on this quarter for $1 million. Other than that, we’re paid up with respect to that – with respect to the quarter.

David Brain

Tony, what I’d add to that is it’s still a matter channel competition, and probably again the stress is higher to the smaller guys. So essentially in that regard is maybe in little better shape than average coverage than with most cases, but we’re taking these rent concessions would be something of a one over less. That’s where we are.

Anthony Paolone – JPMorgan

Okay. And then just, Mark, the guidance range for the – implicitly for the fourth quarter is $0.10. Did you just leave it out there? Is there reason on why it’s so wide, just –?

Mark Peterson

Frankly, that was just a matter of just confirming where we – the same guidance we had given at the end of the third quarter. There is no specific reason for keeping it at $0.10 other than it was unchanged. So we didn’t update it.

Anthony Paolone – JPMorgan

Okay. Thank you.

David Brain

Thanks, Tony.

Operator

Our next question comes from the line of Jordan Sadler from KeyBanc Capital Markets.

Jordan Sadler – KeyBanc Capital Markets

Thanks, guys. Just wanted to clarify some of the guidance. On this chart that you took, does that impact FFO, the $1 million by the $0.02?

Mark Peterson

It did, yes.

Jordan Sadler – KeyBanc Capital Markets

Okay. And what line item did that show up in, Mark?

Mark Peterson

It’s bad debt expense. It was in our property operating expenses.

Jordan Sadler – KeyBanc Capital Markets

So that goes away. So you would call this a clean $0.89. Is it fair for the quarter?

Mark Peterson

Yes. I guess you’d have to conclude if the $1 million is going to be repeated or not to conclude that, but yes. I mean, the $1 million was a receivable reserve we took for one time for the quarter. And absent that, it would have been about $0.89, correct.

Jordan Sadler – KeyBanc Capital Markets

What were your total reserves year-to-date, including the $1 million?

Mark Peterson

The total reserves?

Jordan Sadler – KeyBanc Capital Markets

Bad debt expense?

Mark Peterson

I don’t know that. Hold on a second. We have booked bad debt expense to date of $4.7 million across all lines of business. A lot of that is related to our line business frankly.

Jordan Sadler – KeyBanc Capital Markets

Okay. And is it fair to say you are assuming there is going to be some additional sort of reserves or losses related to that line portfolio? Are you leaving in some cushion for that?

David Brain

Really there is some cushion for that, yes.

Jordan Sadler – KeyBanc Capital Markets

Okay. Because at the $0.89, I’m annualizing just on the 3Q number, which was like a pretty clean quarter, meaning there weren’t a lot of moving parts from a financing or investing perspective. You are annualizing to $3.56 before you invest anything incrementally?

David Brain

Yes. I would just warn you, there are couple things. One is, this is a stronger quarter for percentage rent realization, which we only book as we actually incur it. Secondly, we do have, as Mark indicated, there is some insurance and some benefit and – the charge in first quarter that are little larger than – the first quarter is always lower. So it’s on a straight annualization. And then lastly, both of the issues that Greg spoke of, timing of events where we may have a sale and maybe a redeployment, I mean, we try to mix all those things in, Jordan, to come up with kind of a more of a range for you. I agree with you, it’s – if you annualize, this is different. But I don’t know if annualization is a really good answer to come with an accurate –

Jordan Sadler – KeyBanc Capital Markets

No, no, no, that makes a lot of sense. That’s helps. And I guess the guidance – does the guidance include transaction costs, just to be clear, the $300 million? I assume there will be some costs associated with that that will need to be expensed?

Greg Silvers

Actually, for triple net acquisitions, we won’t have transaction cost expense. It’s only when you acquire an asset like an entertainment retail center or something. That’s when you have a transaction cost expense. So uniquely in the triple net space, you don’t have to expense those.

David Brain

So our expectation is likely we are not going to have a lot of that, gives us more of an operating kind of business definition, and hopefully we’ll have it more in the triple net category.

Greg Silvers

Yes. For example, in the second quarter, we had it on the acquisition of Toronto Dundas Square because it was an operating asset, an entertainment retail center. But if we do a theater portfolio or something, that’s not the case.

Jordan Sadler – KeyBanc Capital Markets

Okay. And I guess lastly, cap rate on the Toronto Dundas Square acquisition, two questions there. One, you said approaching stabilization. I’m curious where you are on a current yield basis and then cap rate expectation on a sale, where's the market at?

David Brain

I think – let's go to the latter first, because as the expectation on a sale, I think, is – I think we’re looking somewhere in and around 6 to 6.5 cap is our sort of stated kind of number that’s out there for that asset. I think – Mark, do you have the numbers on what it’s –?

Mark Peterson

It’s trading somewhere – a little higher than the low 6s in terms of where our –

David Brain

Where our run rate is for the poor performance.

Mark Peterson

That’s right.

David Brain

During the opportunity for us really is that asset is yielding us something in the 7 zip code. We can not only maybe make a bit of a profit, but to redeploy those funds at a higher return rate is an attractive thing for us.

Jordan Sadler – KeyBanc Capital Markets

Sure. Now it makes sense. Thank you.

David Brain

Thank you.

Operator

Our next question comes from the line of Greg Schweitzer from Citi.

Michael Bilerman – Citi

Yes. Good afternoon. It’s Michael Bilerman. I’m here with Greg. I’m – just sticking with the guidance for a second, and it sounded like clearly there are maybe some other things that was boosting up FFO, offsetting the impairment or the reserve that you took on the line. But that still sort of get to you at least on an annualized basis probably north of 350 with acquisitions, and I’m sure on your model. Let’s say, if you just had a mid-quarter – mid-year for the $300 million, that’s got to be $0.04, $0.05, maybe even $0.06 accretive depending on where things shake out and where costs are. So I’m just curious how – I mean, what sort of things would even remotely take you to $3.40 to $3.60.

Mark Peterson

The G&A – for example, if you annualize G&A here in the third quarter, you’d get – the quarterly number was like $4.1 million. While we set our guidance that I gave in my remarks was just under $5 million. That’s roughly a $900,000 difference per quarter. If you annualize that, that’s a $3.6 million difference. That’s about $0.08 per share impact if you annualize this quarter’s G&A as opposed to the guidance I gave for G&A. So that’s one big offset right there. David mentioned the percentage rents. If you annualize – this is our biggest quarter for percentage rents. It was around $800,000, as I mentioned. Times four would be $3.2 million. We expect percentage rents closer to $2 million for the year.

Greg Silvers

Overall, the expectation is for next year, 2011, would be a very solid year for box office as the percentage rents may be equally good. But we’re just trying to plan on something little less. The timing issues, we’ve looked at for both the acquisitions you speak of, Michael. You’re right. Depending on when they come, but we’re trying to take a reasonably conservative view on that as well as possibly the timing, although strategically and long-term, we will be in a good position with the redeployment of Toronto Dundas investment. It may work out timing such as it weighs down the 2011 results or shorten the 2012. So we’re trying to consider all those things and be reasonably conservative because it just often turns out that that’s the case. So you’re right. Annualize and just layer on the acquisitions, it’s a good step-up and it’s in the upper lever of the range we’re targeting, but we are trying to give a range that could include all of these other issues.

Michael Bilerman – Citi

But for Toronto Dundas specifically, I guess you’re just – you would sell it and then pay down the line. So how much dilution do you have at least in the interim?

David Brain

As Mark talked about, we are earning north of 6 now and on our line is slightly north of a 3. So you have 300 points of dilution there, and guys candidly – there is issues with – we're taking money out from revenue Canada where they’re going to hold half the proceeds of any sale for a minimum of two months. Revenue Canada is a little bit for an item. As we repatriate that money, we know we’re going to have some delay. So we’re trying to plan on that. That’s not as clean and as easy a redeployment. We hopefully will do this as with redeploying those funds, which we’re planning on some delays that we’ve seen and know of that are going to occur.

Mark Peterson

Certainly, the timing of redeployment is difficult to predict. The longer you are setting on that, as Greg mentioned, saving money off your line, interest on your line, certainly doesn’t offset the income you would have gotten for the short run on Dundas Square. So it’s all about their redeployment timing, and that’s why it’s a little bit difficult to pinpoint.

Michael Bilerman – Citi

Right. But I’m just trying to figure out – I know it’s difficult, but how have you netted into your guidance for that, just so I’m getting clear sense of – as things –?

David Brain

I think it’s just fair to say I don’t think we’re going to componentize it, Michael, at this time. I mean, we could talk to you about it at some point, but we’re not prepared really to give a componentization. I think it’s just is what we try to address is all those factors. As I said in my comments, I mean, we’ve got the portfolio performance transaction parameters timing, market conditions, financing terms, we try and go through all that.

Michael Bilerman – Citi

Yes, yes. What is the current balance that you have invested in Dundas?

David Brain

I think our book basis is something like 225, roughly $225 million.

Michael Bilerman – Citi

And your current – you're telling your earning today on a run rate basis, low 7s or high 6s? You’ve got the abacus out there?

David Brain

Yes, we do. We’re all hitting the abacus.

Mark Peterson

It’s in there –

Greg Silvers

Yes. Take a 6.5 and add half roughly, and that’s what we are – in fact, we have a nice increase embedded in our guidance frankly for Dundas Square. We are happy with the performance and it’s improving. And we think we’re – it's going well there.

Michael Bilerman – Citi

Any update on Concord?

Greg Silvers

No. I mean, we are active with regard to talking about that. We really have nothing new to report. And right now, it’s still carrying a zero impact for us on the P&L. Well, it seems to be zero, okay? Some maintenance cost – $1 million maintenance cost, but no, we have some active discussions going on.

Michael Bilerman – Citi

But that’s – I guess from a guidance perspective, that’s free money that can come back and be reinvested.

David Brain

No doubt.

Greg Silvers

That is exactly right. We view that as probably something we don’t have visibility of yet, but at the same time, at some point, we’re going to reactive those monies and it will be a contribution to the results.

David Brain

Yes. And we’ve baked in basically the carrying costs in the meantime. So there is actually a double impact of getting rid of the carrying costs and having the money deployed in earning in return.

Michael Bilerman – Citi

Right. Do you have $1 million a quarter or $1 million for the year in kind of cost on that?

David Brain

Actually I think it’s $1.2 million for the year.

Mark Peterson

Property taxes.

David Brain

Property taxes.

Michael Bilerman – Citi

And then you have zero positive, and while you have the dilution from Dundas Square, you have zero accretion from the potential modernization of that piece.

David Brain

That is correct.

Mark Peterson

That’s correct.

Michael Bilerman – Citi

And Greg has a question as well.

David Brain

Okay.

Greg Schweitzer – Citi

Hi, guys. Just two quick ones. In terms of investment spending next year, do you plan on maintaining that focus on any theater than schools or could you see yourself being opportunistic with any other industry or existing industry that you had experienced already?

Greg Silvers

Well, I think primarily still we see the main of it, still be in the theater and school area. I think we are not close to the idea of – and we said from time to time we’re seeing different things with regard to the ski industry, which is another industry that’s performed very well for us. Greg mentioned we’re doing a little bit of improvement in the water parks area. We don’t view any major investment in that area beyond that though at this time. And we don’t have anything to guide to deal with regard to any new areas of investment, we’ll try and give you visibility of that. So, yes. In answer to your question, yes, it is in those two main areas.

Greg Schweitzer – Citi

And what will be split on the $300 million?

Greg Silvers

Well, I could tell you, Greg, that the issue is our pipeline is much deeper than the number that we are driving towards. So it really will be kind of availability and can we reach the terms. So that’s what hard to say. Right now I would say that, as we sit here, if you say that’s $600 million, I’d say there is 50% of each in that opportunity set and then we’ll just see how we take those to fruition.

Greg Schweitzer – Citi

Okay. Is there a level that you would feel comfortable maintaining the school exposure to eventually?

Greg Silvers

Well, I think we said repeatedly, we don’t really run the company on an asset allocation model, and I still stay with that. We don’t target that level. We’re really more focused on the real estate values and the property level performance. And given good transaction opportunities, we’re willing to let that in those – let those into the portfolio and deal with them the resulting amounts from there.

Greg Schweitzer – Citi

Okay, great. Thanks very much.

Operator

Our next question comes from the line of Gabe Poggi from FBR.

Gabe Poggi – FBR

Hey, good afternoon, guys.

David Brain

Hi, Gabe.

Gabe Poggi – FBR

A couple quick kind of a maintenance question or a progress questions on a few assets. Can you give – if you’ve said it already, I apologize. But will you update on Lisa progress at New Rock, any signage progress at Toronto, and then regarding Schlitterbahn, the Shields broken ground. How do you view progress there? Thanks.

Greg Silvers

I guess I’d go in the order. At New Rock, we continue to actively be talking to people about that, but nothing to announce and the negotiations were bound my confidentiality, did not announce, but we are talking to several people there. As far as the signage, I think the number is stronger than last year. It’s, I think – I'm doing this off of memory, but I think it’s at least $0.5 million better on our signing. So we continue to make very good progress on that. As far as Schlitterbahn, again, what we’ve said was with the Shields project that we weren’t going to put additional money in on that project. So it’s really dependent upon our tenant to find a third party to finance that. And right now, they have not successfully found that.

David Brain

Shields has not broken ground yet. And my guess is they are not going to like 2012 opening as a result of that. They – Shields discussed some issues with regard to the Utah developments. And so that is still kind of in queue, but we don’t have ground broken out.

Gabe Poggi – FBR

Okay. That’s helpful. Thank you, guys. Good quarter.

David Brain

Sure.

Operator

Our next question comes from the line of Andrew DiZio from Janney Montgomery Scott.

Andrew DiZio – Janney Montgomery Scott

Hey, guys, good evening.

David Brain

Hi, Andrew.

Andrew DiZio – Janney Montgomery Scott

Most of my questions have been answered. I really just have one. And again on Schlitterbahn, you talked about revenue being flat overall, and understand you have both of their properties as collateral. But can you talk about KC versus Texas, if that was flat in both areas or one was the strength [ph]?

Greg Silvers

No. KC was – we have three properties; two in Texas and one in – Kansas City property was up substantially over last year. Texas, the major project – major New Braunfels operation was down about 10% mainly as a result of weather that was caused by some flooding and we had about 14 to 18 missed weather days. And apart that there was – it closed in entirety for continuous two-week period because of a storm-related flood. I mean, it was a major, major incidence in the Texas mothership, which is the largest of the three parks in New Braunfels. So that was where it was down. Kansas City was up big. South Padre was just about flat. Yes.

Andrew DiZio – Janney Montgomery Scott

All right. Thanks a lot, guys.

David Brain

Thanks, Andy.

Operator

And we have a question from the line of Rich Moore from RBC Capital Markets.

Rich Moore – RBC Capital Markets

Yes. Hi, good afternoon, guys.

David Brain

Hi, Rich.

Rich Moore – RBC Capital Markets

On the G&A for 2011, what was the reason for the increase again to $20 million? I got the $600,000 for the first quarter extra, but what was the general reason for the higher quarters running next year?

Mark Peterson

Yes. Basically, part of it is payroll expense and part of it, frankly, is stock amortization of shares. We take a lot of our – the company takes a lot of its shares – lot of its compensation in shares. And if you think about that share is amortized over a period of time, the piece you’re removing is kind of the older piece, and the piece you’re putting on is the newer piece. And so, stock amortization is a piece of it. We also expect larger payroll next year as we have some people. And then basically with the growth of the company, franchise, taxes, insurance and some of the smaller items add up to somewhere in the neighborhood – if you add it all together, somewhere in the neighborhood of $1.7 million.

Rich Moore – RBC Capital Markets

Okay. Okay, good. Thank you. Thank you, Mark. And then, so for the fourth quarter, what do you think G&A does in fourth quarter? Is any of this hidden in fourth quarter or do we see the number we had in the third quarter kind of moving into the third quarter or does that get higher too?

Mark Peterson

Yes. No, I think the fourth quarter will be pretty much in line, maybe slightly higher than the third quarter. We didn’t have much professional fee expense in the third quarter because it’s kind of a light quarter. We may have some more of that. So I’d say it would be slightly higher, but not dramatically in the fourth quarter.

Rich Moore – RBC Capital Markets

Okay. And then –

Mark Peterson

That’s why – excuse me. That’s why I take for the year, this year, around $18 million in G&A, and then next year, move into just under $20 million.

Rich Moore – RBC Capital Markets

Okay, I got you. And then same thing on the equity and earnings unconsolidated JV line, that was higher in the quarter. Anything special in there?

Mark Peterson

Remember, we invested in the Atlantic property in that JV. We loaned – put additional investment –

David Brain

Yes. We basically – we have the ability to pay off the first mortgage and get a preferred return for that, and we did that. And we did that partial quarter –

Mark Peterson

Yes, we had a partial quarter last quarter.

David Brain

So that just shows the full quarter impact of it and then annualize this quarter.

Rich Moore – RBC Capital Markets

Okay. Okay. I got you. Good. Thank you. And then maintenance CapEx also was higher in the quarter?

Mark Peterson

Yes. We moved our corporate headquarters this quarter. And so we had some of our tenant improvements. As part of that move, we’ve moved just really down a street in downtown Kansas City, but at new office space, and there were additional TIs and so forth that were sort of a one-time because we don’t move very often here.

David Brain

First time in 10 years.

Rich Moore – RBC Capital Markets

Okay. Sounds good. Good. I got you. And then you guys, I know, had been looking at a ski resort or two as possibly closing this year. Are you still thinking in terms of adding some ski resorts this year or early next year?

David Brain

Well, Rich, we have some things under negotiation. We don’t really have anything to announce. I don’t think –

Greg Silvers

I don’t think we were at it right now. That will be where the investment will be. We are going to come in to a point where we don’t want to close anything because we’re going to go into the season. So we’re going to wait till the season to close anything there very shortly.

Rich Moore – RBC Capital Markets

Okay. Yes, I got you. Okay. And then, on a charter school, when you do an expansion, what exactly is happening there? Are you adding grades –?

Greg Silvers

Either that or you have enrollment that is demand – you are either – you add capacity physically and were new buildings or were expanding buildings, but we’re physically growing the number of students to where you can’t support among the existing facilities. So it’s a real positive sign.

David Brain

Sometimes we have a situation where we have a cafeteria and a gymnasium and an assembly area, all on a shared space. The enrollment gets up to the point that they can afford to when we can add that gymnasium portion to the building so that they have separate and specialized spaces for the different uses.

Rich Moore – RBC Capital Markets

Okay. All right. I understand. And then when you think about the level of utilization, can that go to a 100% or is that – some of that reserved for future grades?

Greg Silvers

I mean, as the school matures, it clearly can go to 100%. I mean, that’s not necessarily we don’t – we don’t require it to be that. As we talked about at the level that we are at, we’re very comfortable with the coverage this gives [ph], but we do expect it to move up into the 90s over time as it matures.

Rich Moore – RBC Capital Markets

Okay. Because I always thought, Greg, that there was room to add, like we have first through fourth and you can –

Greg Silvers

And you are correct. I’m sorry. You are correct, except that at a certain time, after three, four, five, six years, you have all the grade then. And you are at maturity.

Rich Moore – RBC Capital Markets

So then you can get to 100%.

Greg Silvers

Yes.

Rich Moore – RBC Capital Markets

I guess what I was trying to figure out, is the 89% fairly full for what you have at the moment? I mean, could you actually go over that percent at the moment?

Greg Silvers

No. I mean, I think we are – we continue to make progress. We have some that have not reached their maturities. So that’s the opportunity for the growth that’s in there. We have schools that are not fully mature with all of their enrollment. So we think those will naturally move up as we continue. But as you’ve seen over the last couple of years, what we continue to see is, as these schools and the enrollment increases, the demand is there so that we do these expansions. So, over the last two years, Rich, we’ve done expansion, I think, at about eight schools overall, four last year, four this year. So we continue to both rolling our enrollment and grow our capacity.

Rich Moore – RBC Capital Markets

Okay. Good. Got you. And then on the theater side of things, do you – does it make sense to track the degree of digitalization on a quarterly basis? I mean, is it growing back fast? I mean, as I do demand –

Greg Silvers

It is growing that fast. And I mean, we kind of track it both kind of from an industry and from our owned facilities. So it’s – but it is clearly the capital has flowed into that. And with really the realization of what 3D brings to the table, everyone is rapidly converting.

Rich Moore – RBC Capital Markets

Okay. So you guys were at around 40%. I think gradually you’re higher than that now?

Greg Silvers

Yes, we would be approaching probably mid-60s to 70%.

Rich Moore – RBC Capital Markets

Oh, really. Okay. Wow, fantastic. Okay. Good. Thank you. And then do you have an update on China and what you’re thinking there?

David Brain

Well, we got – we have, our first year, only two months of operation, Rich. So we don’t really have much to report. Actually the two months are a little bit frustrated because the whole of the shopping center is not open yet. It’s behind schedule. So we’re dealing little bit one arm tied behind our back, but it’s a low enough investment that I don’t have any more to report about that theater for theater investment right now. Hopefully by the time we get to next quarter, we’ll give you more to that.

Rich Moore – RBC Capital Markets

Okay. Very good. Thanks, Dave. And then I think that’s it. Thank you, guys, very much.

Greg Silvers

Thanks, Rich.

Operator

(Operator instructions) There is a follow-up question from the line of Jordan Sadler from KeyBanc Capital Markets.

Craig Mailman – KeyBanc Capital Markets

Hi, it’s Craig Mailman here with Jordan. Just a couple quick follow-ups. Mark, is there anything in the guidance sort of a place holder on the timing expectation for Dundas? It sounds like from the time that you sell it to the time that you actually collect the cash, there is going to be three months or so window on a portion of it?

Mark Peterson

I think, as David mentioned, this is one of many factors we’ve considered in the budget. There is scenario where it has basically zero impact because of the time. There is an area where it has a negative impact. There is a scenario where it has a very positive impact within the year. Certainly over the long haul, it’s a positive impact. So there are lots of considerations there. But frankly, you could remove Toronto Dundas, look at our guidance with $300 million of acquisitions kind of pro rata with the other things we’ve given you in terms of G&A and get there that way. So it’s just a matter of, do we use that capital or another source of capital depending if it sells or not and then what scenario do you pick for that in terms of the redeployment and the timing of it. I think – so at a midpoint, there is sort of not much impact frankly in terms of Toronto Dundas for the current year. If you get to deploy it quicker though, there could be a tremendously good impact.

Craig Mailman – KeyBanc Capital Markets

Where would you guys say you are in the process though? Do you actually have – are you at the LOI stage yet or is it still real early?

Greg Silvers

The project went to the market, went in the last two weeks. So we’re still in the very early stages.

Craig Mailman – KeyBanc Capital Markets

Okay. And then, are there any capital assumptions in the guidance? Is there a plan that’s Dundas doesn’t get down or gets some place to term out the balance of the line potentially?

Greg Silvers

Yes. We have assumed sort of a 60/40 capital structure; 60% equity, 40% debt on an unsecured basis in terms of what we’ve modeled for the $300 million.

Craig Mailman – KeyBanc Capital Markets

Okay. So, a little more aggressive than in the past, you guys have done all equity to finance deals.

Greg Silvers

Yes. We feel like, as Mark indicated, that the leverage level is down now below kind of the midpoint of our targeted range. So it certainly I think we’ve got the green light on to use some debt again, and we’re using the assumptions though generally. As Mark indicated, our guidance is 60/40 with a 40% debt fixed in there with the cost of capital that I referenced. We’d get down to what we think is 7 on the debt and the equity is trading well and you can kind of calculate the cost of equity based on our markets.

Craig Mailman – KeyBanc Capital Markets

Okay, but – sorry. But there is no specific plans to clean down the offsetting balance in the line, maybe do another on secured deal. You guys are still at that flow until your proceeds –

David Brain

We don’t have specific plans for that. We would just look at the convenience and the strategic positioning based on our pipeline and the opportunity to do that with a specific transaction. But right now, no, that’s not included in the guidance.

Craig Mailman – KeyBanc Capital Markets

Okay. Then, David, did I miss this? Did you say what percentage rents might be in 4Q?

Mark Peterson

Well, we expect it to be about $2 million for the year. The fourth quarter is a very low percentage rent quarter. I think last year it was around $200,000. So I think we’re somewhere in the neighborhood of $1.7 million or $1.8 million to date. So $200,000 to $300,000 is what we’d expect in the fourth quarter.

David Brain

Craig, I mean, the way you open theaters, generally we have historically opened a lot of theaters with our customers in Q3. So you have them available for the holiday season. We don’t usually open a lot of theaters in Q4. So we don’t have a lot of – we don’t end our lease years in Q4 and therefore realize our calculation percentage rents because that’s when we do that, at the end of the lease years.

Craig Mailman – KeyBanc Capital Markets

Okay. And then just one last quick one. Do you guys have any insight into the AMC IPO? Do you still think to contract?

Greg Silvers

I mean, that level of information, they don’t share with us. And we’re kind of at the same mercy – I mean, it would just be pure speculation for us.

David Brain

Yes. I don’t think we have any insight to share with you there. It really would just be speculative. I think I know that has a priority for them, yet at the same time, it seems to be sitting on the shelf right now.

Craig Mailman – KeyBanc Capital Markets

All right. Great. Thanks, guys.

David Brain

Okay.

Operator

And we have no further questions. And that concludes the Q&A portion of the presentation. I’d now turn the call back over to Mr. David Brain.

David Brain

Well, thank you all that tuned in today and for your time and attention. As I say, I’ll take the Election Day vote of confidence you had to spend time with us. And we look forward to talking to you soon. And of course, feel free to call the company if you’d like to discuss anything in detail, we’re always happy to do that. Thank you very much.

Greg Silvers

Thank you.

Operator

Ladies and gentlemen, thank you for your participation in today’s conference. This concludes the presentation. You may now disconnect and have a great day.

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