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Executives

David Brain - President and CEO

Mark Peterson - CFO

Greg Silvers - COO

Analysts

Ambika Goel - Citi

Presentation

[Call Starts Abruptly]

Entertainment Properties Trust (EPR) Q2 2008 Earnings Call July 30, 2008 11:00 AM ET

Operator

Represent. I would now like to turn the presentation over to your host for today's call, Mr. David Brain, President and Chief Executive Officer of Entertainment Properties Trust. Please proceed sir.

David Brain

Thank you, Nora, good morning. Thanks for being with us, this is David Brain, let me start with our usual précis and that is, as we begin, let me inform you his conference call may include forward-looking statements defined by the Private Securities Litigation Reform Act of 95, 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 actual results to differ materially from those forward-looking statements is contained in the company's SEC filings, including the company's report on Form 10-K for the year ending December 31, 2007.

With that said, I'll say again, thank you for joining us. We always appreciate your investment of time and interest. I want to start by thanking and congratulating all the associates of EPR on another quarter, halfway through the year and already we've surpassed our once upwardly revised investment target for the year of very high quality properties.

As stated in our press release last night, we are on track and raising the lower end of earnings guidance for the year of FFO per diluted share to $4.55 to $4.62. I want to highlight some of the elements of our progress year-to-date and to elaborate and supplements all this on the this call morning are Greg Silvers, our Chief Operating Officer,

Greg Silvers

Good morning.

David Brain

And Mark Peterson, our Chief Financial Officer.

Mark Peterson

Good morning.

David Brain

And since we are ahead of our capital spending target already, I want to talk a bit about the outlook for the last half of year. But before we get fully underway with that, I want to remind to all that once again there is simultaneous webcast available via a link from our website at www.eprkc.com. If you can I advise you to there now, there are some informative slides and some pictures of properties, I think you will enjoy it.

Before I jump into company's news, I want to draw your attention to the box office performance year -to-date. Over the years we've often been asked about the first run exhibition industry performance and economic downturns. And I have often shared data as we did on our last call, about its reliable, positive performance even in economic headwinds.

Well summer of '08 is proving the point once again. Summer box office is up more than 5% over last year and attendance gains count for more than half of that increase. Year-to-date box office is up about 1.5% to 2%. Things are good in theatre land. I will throw in a word of caution though. The Presidential Election and Summer Olympics have historically proven to draw off attendance a little bit, so we are looking for a bit of flat tended performance for Q3.

Back on the company news front, we have as I said earlier, already exceeded once upwardly revised '08 investment total of $300 million. We made about $275 million of acquisitions in Q2, with major transactions involving Charter public schools and vineyards.

These transactions bring our total investments in those areas to about $160 million and $200 million respectively, becoming true enterprises for the business. Those transactions and a funding of $90 million maturity of a 10-year note, that was our original long term CMBS debt from 1998, were met - those obligations were met through a sale of about $200 million of both common and convertible preferred equity and some minor draws on our line of credit.

Our investment transaction year-to-date have gone well, according to plan. We are pleased with the results, our balance sheet position and our comfortable raising the lower end of earnings guidance, as I said.

So what about the second half of the year? Well, the guidance we have for you is guarded due to the very choppy and volatile nature and condition of the markets overall. Specifically, we are raising investment guidance to $350 million for the year. But I will also tell you that we have good visibility of several transactions that could lead us to CapEx spending in the second half of '08, very comparable to the first half of the year.

We also have an asset sale pending, quite unusual for us but on an attractive terms that would result in over $100 million in net proceeds for the company. Due to the uncertain and choppy nature of the market though, we are not at this time, giving guidance that contemplate the results of these transactions. But we are only raising the lower end of product guidance range of FFO per diluted share to 455. So the range is 455 to 462 for the year as a whole.

With that overall, let me turn over to Mark, lot of financial news to go through for the quarter and I will talk you in a few minutes. Mark?

Mark Peterson

Thank you, David. Let me begin with the review of the significant items from a recently completed second quarter. As you can see on the first slide, our net income available to common shareholders increased 14%, compared to last year from $20.9 million to $23.9 million.

Our FFO increased 26% compared to last year from $26.7 million to $33.5 million. On a diluted per share basis, FFO was a $1.09, compared to $0.99 last year for an increase of 10%. As noted in the press release, the results for the second quarter of 2007 included a gain on sales of [real estate] of $3.2 million, as well as an offsetting charge of $2.1 million as a result of the redemption of all our Series A preferred shares.

Now turning to the next slide, for the six months ended June 30th, 2008, our net income available to common shareholders increased 16% compared to last year from $39 million to $45.4 million. Our FFO increased 23% compared to last year from $52.9 million to $65.3 million.

On a diluted per share basis, FFO was $2.20 compared to $1.90 last year or an increase of 12%. Now looking at the details of our second quarter performance, our total revenue increased 19% compared to the prior year to $68.8 million. Within the revenue category, rental revenue increased 9% to $49.9 million, an increase of $4.3 million versus last year.

Percentage rents included in rental revenue decreased from approximately $500,000 in the prior year to approximately $300,000. This decrease is primarily due to increases in base rent at two theatres which in turn increase breakpoint using calculating percentage rent.

Thus the percentage rent declined was essentially offset base rent increases. And at reimbursements, increased 21% or $0.9 million. This increase is primarily due to both the acquisition in May 2007 of a two-thirds interest in an entertainment center in White Plains, New York, which has been consolidated into our financial statement, and increases at our four Canadian entertainment retail centers.

Mortgage and other financing income was $13.1 million for the quarter, for an increase of $6 million versus last year. This increase is due to the higher outstanding balance of mortgage and other notes receivables during the quarter compared to the prior year, as well as financing income recognized related to our direct financing lease.

As noted in our press release, upon completing the Charter school sale leaseback transaction in the second quarter, which Greg will describe further in his comments. We determine that the underline master lease for these schools should be accounted for as a direct financing lease rather as operating lease for financial reporting purposes.

The effect of this change is that rather than recording rental income with a yield including straight line rent of approximately 14%, as originally anticipated, we are recording financing income with a yield under the effect of interest method of approximately 12%.

While this change has no cash or economic impact to reduce our reported FFO per share for the second quarter by a penny, this is expected to reduce our reported FFO per share for 2008 by approximately $0.06.

It should also be noted, that during the second quarter, the partnership which owns Toronto Life Square exercised its options to extend by six months to 25% principal payment and the accrued interest that was due on May 31st and extended that to November 30th. As of June 30th, 2008, this mortgage note receivable had a carrying value of $114.1 million and that's in US dollars.

Now on the expense side, our property operating expense increased approximately $825,000 for the quarter, as with tenant reimbursements, this increase is primarily due both to White Plains acquisition and increases at our four Canadian entertainment retail centers.

Other expenses was approximately $600,000 compared to $900,000 last year. The decrease of $300,000 is due to $200,000 less an expense recognized upon settlement of foreign currency forward contract, and about $100,000 less in expense related to our TRS operations at our family bowling center at Westminster, Colorado.

G&A expense increased $1.1 million versus last year to approximately $3.9 million for the quarter. This increase is due primarily to increases in personnel related expense including share-based compensation as well as increases in professional fees and franchise [equity].

Additional G&A expense for the second quarter of 2008 includes about $400,000 in cost associated with terminated transaction. Interest expense increased $1.8 million or 12%. Approximately $0.7 million of this increase resulted from the $120 million of debt assumed in our White Plains acquisition in May of last year. The remaining increase in interest expense resulted from increases in debt associated with financing our additional real estate investment and notes receivable.

Minority interest was $478,000 for the quarter and is due primarily to our minority interest income of $537,000 related to our White Plains investment.

As I have discussed previously, this accounting nuance related to White Plains does not impact our reported FFO. This minority interest income was partially offset by minority interest expense of $59,000 accrued during the quarter related to Global Wine Partners, our minority partner in VinREIT.

Moving on, discontinued operations in the second quarter related to a parcel of land in Powder Springs, Georgia sold in June of 2008 for $1.1 million. A gain of $119,000 was recognized as a result of this sale.

Now looking at the ratios for year-to-date through June, our interest coverage was 3.2 times, our fixed charge coverage was 2.3 times, and our debt service coverage was 2.4 times. All of these ratios remained very healthy. I would now like to provide you an update on our capital market's activities.

Turning to the next slide, as we have previously discussed on April 2nd, 2008, we completed two concurrent registered public offering of a little over 2.4 million common shares, and about 3.5 million, 9% Series E convertible preferred shares. Total proceeds from these offerings were approximately $195 million.

Subsequent to the end of the quarter, as David mentioned, in July, we drew on our unsecured revolving credit facility to pay off the mortgage note which had an outstanding principal balance of approximately $90 million. This was our mortgage now with the infamous hyper amortization feature that was scheduled to kick in if the note was not paid off on the anticipated prepayment date.

The note was secured by eight theatre properties which was simultaneously added to the borrowing base of our unsecured credit facility. Turning to the next slide, also subsequent to the end of the quarter, we are pleased to report that we have received commitment to expand our Winery and Vineyard debt facility from $65 million to $117 million.

These long commitments expire on September 20th, 2008 and are subject to certain documentation requirement. To date, we have only drawn approximately $30 million on the original facility. So the increase facility will provide us with substantial debt capacity or liquidity during the third quarter and fourth quarters. We are also evaluating various options that will allow us to grow the size of our Winery and Vineyard debt facility even further.

At June 30th, our total outstanding debt was approximately $1.2 billion, of which $1.1 billion was fixed rate long term debt with a blending coupon of approximately 6%. We had $85 million outstanding under our unsecured credit facility at quarter end, which carried a spread of 150 basis points over LIBOR. [When we] pro forma our availability under the unsecured credit facility for the payoff of $90 million mortgage note that I mentioned, and the availability under the Winery and Vineyard credit facility for the increase I just described. We have total available borrowing capacity in excess of $150 million.

At June 30th, our overall leverage on a book basis was about 48%. Our overall leverage on a market basis was a conservative 39%. Finally, turning to the next slide, based on committed project, we are increasing our 2008 estimated investment spending from $300 million to approximately $350 million. We are also increasing our previously announced 2008 guidance or FFO per share from the previous range of 452 to 462 to a new range of 455 to 462.

This increased guidance reflects our strong year-to-date operating results and higher investment spending expectations offset by the previously discussed unfavorable $0.06 impact of the change in the accounting in our Charter school investments.

Now with that, I'll turn it over to Greg for his comments on leasing and investing activity.

Greg Silvers

Thank you, Mark. In contrast to the first quarter where I indicated that investments spending was light. I am happy to report you that the second quarter supplied significant capital investment. For the quarter, we completed investments of approximately $276 million, taking us to year-to-date total of approximately $307 million.

As you will recall, our last earnings call, we revised our capital plan [upward] to $300 million of acquisition for 2008, however, as we have already exceeded this number, we will again be revising our capital plan upwards.

I will speak later to our revised capital plan, but first I would like to highlight the accomplishments of the second quarter. In April, we acquired our partner's 50% interest in the Public Charter school venture for approximately $39.5 million.

In June, we acquired for approximately $82.3 million, an additional 11 Public Charter school and funded expansion of two schools, which were previously acquired. Our school properties are located in nine states in the districts of Columbia, and all 23 of our schools are governed by a long term triple net mass lease.

At the end of the quarter, our total investment in Public Charter schools totaled approximately $161 million. In June, we also completed the acquisition of certain Vineyard and Winery assets in a transaction valued at approximately $116.5 million.

The investment included four wineries and over 900 acres of land with 565 acres of vineyards. The properties were simultaneously leased to eight estates, fine wines and include such prestigious brands as Geyser Peak, Gary Farrell, [XyZin], Atlas Peak and Buena Vista Carneros.

During the quarter, we continue to fund our development projects including the [Silron] development $6.3 million. The Diamond Ridge theatre, approximately $4.4 million, and our Suffolk Retail Center, approximately $1.3 million.

During the quarter, we also commenced the construction of our winery facility in Sonoma County, California. Additionally, we acquired two land parcels that were previously ground leased at our Canadian centers for approximately $8 million.

Regarding the operating performance of our properties, while there is very little to report on Public Charter schools and its key assets during this part of the year, I would like to discuss a few of the metrics of the schools recently acquired.

The overall enrollment for the 2007, 2008 school year for the 11 schools was 4,302 students, and it's with the total capacity of 6,636 students, which resulted in overall occupancy of approximately 65%.

As we have indicated previously, we generally acquired these assets at these levels and expect the occupancy rate to continue to grow as a property season. Given the delay between the production of fruit and the ultimate sale of a bottle of wine, it is difficult to have meaningful data on 2008 production.

However, I can give you some general numbers regarding revenues on two of our largest winery and vineyard investment. For Cosentino wineries, revenues year-over-year increased 39% and EOS wineries, revenues year-over-year increased 21%.

As I promised earlier, I would like to spend a second on our capital expenditure plan for the balance of the year. Our current commitments will take our capital plan to approximately $350 million for the balance of the year. However, as David indicated we are reviewing several additional transactions that could result in a significant upward adjustment to this plan.

We continue to see high quality opportunities across all of our asset types, and we are currently evaluating these transactions along with the various capital alternatives to fund these acquisition including recycling of capital.

While we have not traditionally been a seller of properties, we are considering the disposition of certain assets and currently have at least one significant asset under purchase agreement. As this transaction is current in due diligence, I cannot give specific details or assurances that any such sell is eminent. However, we are exploring all possibilities to maximize shareholder value, and we will update you further as we achieve greater clarity on these projects.

A quick update on occupancy in our other assets, we continue to have 100% occupancy of our theatre assets and 95% occupancy of our non-theatre retail asset.

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

David Brain

Thank you Greg and thank you Mark. Good report, couple of highlights as we go to questions. Mark spoke of the double-digit metric increases, great coverage ratios. As Greg alluded to, we have a good visibility of pipeline of transaction opportunities and combined that with what Mark talked about the dry powder we are sitting on and the potential asset sales we have. We feel like we are in a good position for the balance of the year as well. So with that, I will open it up to questions. And operator, if you are there (inaudible).

Question-and-Answer-session

Operator

(Operator Instructions). Your first question comes from the line of [Michael Billerman] of Citi. Please proceed sir.

Ambika Goel - Citi

Hi, this is Ambika Goel with Michael. Can you give some color on the asset sales? What triggered, you deciding to sell the assets, were you approached by a buyer? And if you look at the current valuation of where your stock is trading at an implied cap rate basis of about 7.3% by my estimates, is that, what you would say is in line with what you are expecting for the theatres that's on the market?

Mark Peterson

I think we were approached by a buyer and without giving too much details, we do think that's the numbers that we could achieve our in line or better than the cap rates that you are talking about.

David Brain

I think that's right. We are pleased with the valuation, is quite stronger than the market gives us credit for, and the thought is, the redeployment of that continues to be accretive to our shareholder because we have opportunities to reemploy the capital. And all of our transactions are those that have come to us are pretty unsolicited ambiguous stuff.

Ambika Goel - Citi

Okay, great. And then on the vineyards, can you give some color on the investment. I know that the party that you bought the vineyard from this past quarter, they just bought the whole brand and vineyards from [Constellation] pricing $200 million. So just how you kind of piece together that, that acquisition prices that they paid relative to the price that you paid for the vineyards and the wine-making facilities. And also if there is any potential for more acquisitions with the same partners like you bought the vineyards from?

Greg Silvers

Great, couple of things. The way that we are able to breakout, I think what you say the brand value versus hard asset value is clearly the appraisal method is the easiest way for us to do that because we are acquiring land assets. And so we have our advisors and third party advisors who give us kind of input on that. So if you break it down just to give you some color on that.

Of the, call it, $116.5 million roughly $63 million of that was land and vineyard improvements being wine (inaudible) with approximately $53 million of that being winery buildings and the nature. As far as additional transactions with that Group right now, we are not talking it about doing anything right now. But they continued I think they feel very aggressive in the space, and we think they are a good partner who is willing to put, as you said, significant equity in the deal for us to look at. And that's a combination that we are excited about.

David Brain

Well the partnership that bought that, really it's a combination of prior management that ran them under the random under the [BMO] organization, its Deutsche and company that was the leading

Greg Silvers

The sponsor, marketer of the

David Brain

Yellow tail that really made a success out of that. And then a private equity fund out of Los Angeles, and really the private equity group has great designs to continue to build their market position in the space. So I think there is the potential for greater [transaction] Ambika. And I think we are all anxious to work together with each other further.

Ambika Goel - Citi

Okay, great. And then on the upsizing of the credit facility or the secured facilities for the wineries. Right now, the capital environment is pretty distress and I was possibly just surprised to hear that it was upsized. I guess what do you think allowed the lenders to get comfortable with upsizing that [turmoil]?

Mark Peterson

In part these are firm credit guys and so they looking through the land and their cost to capital, they are not as impacted by this credit crunch. So it's partly the nature of the guys we are talking to and frankly they are land lenders and they are like the real estate. And so the spreads are capable.

David Brian

I think if you think about it Ambika these are truly kind of [Ag] the lengths of their commodity lenders and the commodity markets right now are quite strong.

Greg Silvers

So I think these guys are still very interested and putting out. These are lenders who are loaning likewise on corn on almonds and wine and appreciating values as Mark said in the land space, in the Napa and wine spaces, very attractive to it.

David Brian

I was [saying] on CNBC on Friday Ambika, overall the Ag lenders are in much better shape being the Ag product is very strong. This is the crisis that otherwise in the market is not really extended to them right now. So it's a very strong space for us.

Greg Silvers

I mean I think it’s a credit to our group here who've identified kind of the right lenders to pursue for this kind of product type.

Ambika Goel

Okay, great. And then I think about a year ago you had mentioned that there was a portfolio of theatres that was on the block, it was previously owned by Liberty One, I forgot the name of the company, but did that portfolio ever sell, and if it did, what was the cap rate of that transaction.

Greg Silvers

That portfolio from One Liberty was sold to a fund in Chicago. About I think 18 months ago or so for 757 cap.

Ambika Goel

And then they were then again marketing that deal, the buyer?

Greg Silvers

Correct,

Ambika Goel

That end up selling.

Greg Silvers

It is not sold. We have had discussion with them, but as you guys know we have discipline in what we think we should pay for those types of assets, and to date we have not been able to successfully bring them to that point.

David Brian

Yeah

Ambika Goel

And then on the property that is on the market right now, that you were potentially selling, does that have financing in place?

Greg Silvers

It does currently, yes. But it's pre-payable, and so it's

David Brian

Something that can be dealt with.

Greg Silvers

If something can be dealt with by these new owners or to keep it or change it.

Ambika Goel

Okay, great, thank you.

Operator

Your next question comes from the line of Anthony Paolone of JPMorgan. Please proceed.

Unidentified Analyst

Hi it's (inaudible) for Tony, I just have couple of questions on Schlitterbahn. Can you provide an update on the construction financing and the [star barn] for Schlitterbahn.

Greg Silvers

Sure, during the quarter, the venture that's kind of responsible for that has secured a term sheet for construction lending. So that's one of thing that we are working through that now. So that's one of the successful triggers that was out there on the star barn. So I think the star barn issuance is still not happened due to that. They are working through that term sheet. I think it's just a matter of getting through and getting the acceptable term sheet and then proceeding forward with that but it was good news that in this difficult market, a construction loan term sheet has been delivered.

Unidentified Analyst

What about expectations for timing and when do you think that….

Greg Silvers

I think we are still, as we've said earlier, I think we still think it's the fall and I said anything that kind of changes that perception at this point.

Unidentified Analyst

Okay, excellent. And then another question is the $140 million funded to date on Schlitterbahn, is this inclusive of the accruals or is it just cash brought on.

Greg Silvers

It's cash drawn now.

David Brian

Yeah, that's cash drawn now. There is a little bit of accrued interest but we could pay the subsequent lost. But it's $114.2 million is the drawn down amount.

Unidentified Analyst

And what is the accrual to date?

David Brian

The accrual as of June 30th is about well under - a little over 500,000

Unidentified Analyst

Okay, alright and thank you very much.

David Brian

Sure.

Operator

Sir, you have no questions at this time.

David Brian

Okay. Well with that, then we will thank everybody for joining us and look forward to next quarter report, and in the mean time of course we are always available, if somebody like to call the company directly. We are always happy to try and talk to you and address your question. So, thank you and we will see you next quarter and for movies. Thank you.

Greg Silvers

Thanks.

Mark Peterson

Thank you.

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Source: Entertainment Properties Trust Q2 2008 Earnings Call
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