Jul 25, 2013
Executives
David Brain – President and CEO Greg Silvers – EVP and COO Mark Peterson – SVP, CFO and Treasurer
Analysts
Craig Melman – KeyBanc Capital Markets Tony Paolone – JPMorgan Daniel Altscher – FBR Emmanuel Korchman – Citi Michael Bilerman – Citi Rich Moore – RBC Capital Markets Dan Domlin – Lautenberg Philman Josh Patinkin- BMO Capital Markets
Operator
Good day ladies and gentlemen and welcome to the Q2 2013 Entertainment Properties Trust earnings conference call. My name is Ian [ph], I’ll be your operator for today.
At this time, all participants are in listen-only mode. We will conduct question-and-answer session towards the end of the conference.
If at any time during the call you require assistance, please press star and zero and an operator will be happy to assist you. As a reminder, this call is being recorded for replay purposes.
Now, I would like to turn the call over to Mr. David Brain, President and CEO.
Please go ahead, sir.
David Brain
All right, thank you Ian. Good afternoon and thanks everybody for joining us.
This is David Brain, I’ll start with the usual preface. As we begin this afternoon, I need to inform you this conference call may include forward-looking statements defined in the Private Securities Litigation Reform Act of ‘95, identified by such words as will be, intend, continue, believe, may, hope, expect, anticipate or other comparable terms.
Company’s actual financial conditions, results of operations may vary materially from those contemplated by such forward-looking statements and discussion of these 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, 2012. All right.
Again, I’ll say good afternoon. Thanks for joining us.
This is earnings call for the second quarter of 2013. As the operator has said, this is David Brain, the company’s CEO.
With me to go through the news of the quarter as usual is Greg Silvers, our company’s chief operating officer.
Greg Silvers
Good afternoon.
David Brain
And Mark Peterson, our chief financial officer.
Mark Peterson
Good afternoon.
David Brain
I’ll remind everybody there are slides available via our website at eprkc.com. I’ll start with, as usual, with the headlines.
Headlines for the second quarter of 2013 are, first, quarter ahead of plan with favorable portfolio and tenant performance. Second, key tenant industries remain solid.
Third, favorable debt refinancings are completed and add deposited outlook. Fourth, investment spending remains on track largely composed to build-to-suit projects.
And fifth, guidance has increased based on multiple positive elements. All right.
It’s good to join you this afternoon in completion of our second quarter. It was really a good business as usual quarter, the display of strengths of EPR Properties portfolio and our market position.
Our first headline this afternoon, the quarter ahead of plan with favorable portfolio and tenant performance is probably a pretty good summary snapshot of the State of Affairs at EPR Properties right now, things are going very well in all respects and you’ll hear this throughout the call, I believe. Mark will have all the financial report details, but broadly the quarter is very much on plan with several elements falling our way that allow us to report results just ahead of consensus.
The performance of the quarter along with the positive outlook for the balance of the year in several respects permits us to raise earnings guidance for the full year more on this in a moment. Now we’ve been presenting the case of portfolio quality for some time, and our second headline this afternoon, key tenant industries remain solid, relates to and reinforces exactly this point.
Despite some concerns about a letdown after a record box office year last year, 2013 is measuring up to be every bit is equal. Although lagging coming in to the early part of the summer season, box office is caught.
And it’s just about even with last year’s record performance. To go along with this, our ski property finish their season with a very solid year back to a comfortable level of rent coverage and our waterparks appear to be on track for a solid performance following a record year there as well.
Greg has more details on the portfolio performance, but in just a moment that the broad message is clear. Our portfolio is high quality and consistently demonstrates great results.
Third headline this afternoon, favorable debt refinancings are completed and add deposited outlook takes us to another aspect of favorable performance during the quarter and just after the quarter end. EPR Properties continued its migration and conversion from secured debt to rated unsecured debt during the quarter with the new $275 million 10-year bond issue.
This was achieved at 5.25% coupon. And just like our last bond offering reflects a reduction or improvement in spread over comparable base rates.
A particular notice that in conjunction with this offering, Moody’s investor services upgraded EPR Properties Baa2 and notch above our previous rating. Further, since the end of the quarter, we’ve been able to finalize a renewal and significant extension of both our revolving credit facility and bank-termed up facility with lower rates and more favorable terms.
Here again, Mark will have more details and answer particular questions. But the key takeaway is that EPR Properties cost of capital continues to decline and bolster the outlook for improved shareholder results.
Our fourth headline this afternoon, investment spending remains on track largely composed to build-to-suit projects, supports not only the positive results of the quarter but also a robust outlook for the company. One of the fundamental strengths of EPR Properties are build-to-suit business, which is multiple properties with repeat customers and niche categories that we understand in depth is proving to be a great asset particularly in this time of cap rate compression.
Currently as typical, we have a number of build-to-suit projects going that will afford us investment yields and duration of investments substantially superior to properties bought in the secondary market to a bid process. We’ve been able to maintain our investment returns in the upper single digits with strong portfolio performance and a reduced cost of capital, those things I mentioned before.
And this together set the table for improved shareholder returns. Lastly, I want to turn to our final headline guidance increase based on multiple positive elements.
This is a result, as I said, of the advantageous components just reviewed strong portfolio performance, growth and investments without declining returns and a decline in cost of capital. I’m pleased to report you we are modestly moving up our full 2013 FFO as adjusted per share guidance for the year by a penny and a half on the midpoint to between $3, maybe $3 to $3.93.
Well, that’s it for the headlines. Now I’ll turn it over to Greg for his property as a salesman.
Mark will have the financial report.
Greg Silvers
Thank you, David. In the second quarter of 2013, our asset performance remain strong, and we continue to make progress toward meeting our full year capital spending guidance with approximately 84 million spent in the second quarter bringing our total spent for the first half of the year to approximately $123 million.
Our spending in the quarter included investments in each of our primary asset segments. On today’s call, I’d like to spend a few minutes talking about the performance of each segment as well as detailing our second quarter investments.
In the entertainment segment, as we discussed in our last call, the first quarter of 2012 was a challenging comparable for the exhibition industry due to 2012’s release calendar. However, we also anticipated that the summer season would correct the slow start with a projected strong performance from several titles.
I’m happy to report that the summer film slate has delivered with 2013 performance to date matching the record-breaking revenues of 2012. Given that most respondents believe that this year’s holiday season is stronger than last, the industry is positioned to once again set a new record for box office revenues.
Additionally, as we have discussed, we continue to see very positive impacts from newly introduced enhanced amenity theaters. Per capita food and beverage spending, which is historically been approximately $3 to $3.25 is more than doubling with expanded food and beverage offerings.
While some of this additional revenue is being used to offset the loss of revenue from a reduction and set count to allow for the expanded sitting amenities, it still is an impressive trim. For the quarter, investment spending in our entertainment segment was approximately 20 million related to six built-to-suit theaters in one family entertainment center.
For the year, in addition to the six theaters under construction, we have two theaters that have completed construction and we maintain a solid pipeline of potential opportunities both build-to-suit and standing inventory. In our recreation segment, tenant performance at our top gulf investments continues to exceed our expectation with the actual revenues exceeding under written numbers by approximately 20%.
Our waterpark continues to benefit from a warm summer, especially in Texas with 2013’s performance running slightly behind 2012’s record performance mainly due to two factors, the first being the school year in Texas has shifted one week later compared to last year, and two, we have had some additional rainy days. During the quarter, our investments spent in the recreation segment was 17.4 million related to three new build-to-suit top gulf facilities as well as additional spending on improvements at our existing daily ski properties and our waterpark investments.
With regard to our education segment, we continue to execute on our stated strategy of going the asset class while increasing operator in geographic diversity. As we are in the traditional summer months, performance stats are not as meaningful.
However, there are some continuing trends that speak to the underlying strength of the category. In June, the National Alliance for Public Charter Schools announces that the National Waiting list for Public Charter Schools now approaches one million students.
These kids are not enrolled but rather just looking for the opportunity to get into a public charter school, and we see this demand continuing the growth. With our continually growing expertise in the category, we see increasing opportunities in the education sector both in public and private pay and believe that EPR could take a leadership position much like we enjoy in our entertainment segment in financing and delivering quality real state solutions that tap in to this growing demand.
For the quarter, we deployed $45.4 million related to the build-to-suit construction of 13 public charter schools and one early childhood education center. Our investment pipeline remains robust and we continue to have strong confidence in our ability to meet or exceed our stated target of 125 million for this segment.
During the quarter, we also completed a swap of three St. Louis schools previous operated by a match in the last two charters for three operational schools in Ohio.
We’re pleased to report we’ve already secured a sub-lease for one of the two Indiana schools operated by a match and whose charter was not renewed. As we previously stated, a margin has remained current in all the rent obligations and we do not anticipate any disruption of their payment.
Furthermore, a match continues to work through the academic challenges that resulted in the loss of certain charters. However, as we previously mentioned, the underlying demand for public charter school option remains in these communities, and we are confident that we will continue to identify solutions for the remaining non-operational schools.
With regard to the Sullivan County property investment, the New York legislature successfully passed the bill to introduce full casino style gaming into the state if approved on a statewide referendum in November. As proposed, gaming would be limited to certain areas in the state including the Catskills and would be excluded from New York City and the surrounding counties for a term of seven years.
Our proposed tenant in part of gaming is very interested in pursuing a full gaming option if the voters approve this referendum, which may result in the project being delayed until the results are known. However, we remain confident that our property continues to offer a first-to-market opportunity that is valued both by the New York State and our gaming partner.
Our overall occupancy rate remains strong at 98%. We also remain confident about our 2013 spending guidance at 300 million to 350 million and the continued growth of our pipeline beyond our committed or approved transactions.
In addition to the approximately 123 million of spending to date, we have an additional 125 million of spending over the balance of the year related to projects already in process and approximately 70 million of additional spending related to projects that have been approved but have not closed. As many of you may have seen in our recent bond transaction, we disclose that we’ve entered into an LOI for an 11 property theater deal valued at approximately 115 million.
As this transaction comes with existing debt, it requires several approvals and we continue to work through those issues and the timing related to obtaining those approvals. Our stated guidance both capital spending and earnings, however, does not include this transaction.
We are hopeful that we can complete this transaction and substantially increase our 2013 investment spending. However, the timing, if always used, are successfully resolved, would result in little impact from 2013 earnings perspective.
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 supplement can be downloaded from our website.
So now turning to the first slide, FFO for the quarter was $40.2 million or $0.85 per share compared to $43.1 million or $0.92 per share in the prior year. FFO’s adjusted per share was $0.98 versus $0.92 in the prior year, an increase of approximately 7%.
For the first six months of the year, FFO’s adjusted per share increased approximately 8% to $1.92 from a $1.78 in the prior year. The main difference for the quarter between FFO and FF was adjusted and relates to $5.9 million or $0.13 per share in cost associated with loan refinancing as we paid off approximately $144 million of secured debt related to our four entertainment retail centers in Canada as well as our entertainment retail center in New Rochelle, New York.
I will further discus our significant debt refinancing activity in the quarter a bit later in my comments on our capital market activities. Now let me walk through the rest of the quarter’s results and explain the key variances from the prior year.
Our total revenue increase 7% compared to the prior year to 83.6 million. Within the revenue category, rental revenue increased by $2.5 million first the prior year to $60.8 million and resulted primarily from new investments.
Percentages rents for the quarter included in rental revenue were approximately 600,000 versus 100,000 in the prior year. Mortgage and other financing income was $18.2 million for the quarter, up approximately $3 million from last year.
This increase is primarily due to additional real estate lending activities. On the expense side of property operating expense increased by 300,000 versus the prior year due to higher property operating expenses at our multitenant properties.
G&A expense increased by 230,000 versus last year to 6.1 million for the quarter due primarily to higher payroll related expenses and professional fees as we continue to support our growth. Our net interest expense for the quarter increased by $1.5 million to $20 million.
This increase resulted primarily from an increase in our outstanding borrowings during the quarter. Equity and income from joint venture increased by approximately 200,000 to 466,000 for the quarter.
This increase was primarily due to an increase in income from our joint venture projects located in China. Now turning to next slide, I’d like to review some of the company’s key credit ratios.
As you can see, our coverage ratio has remained strong with interest coverage at 3.6 times. Fix charge coverage at 2.8 times and debt service coverage at 3.0 times.
As discussed previously, we began paying a monthly common share cash dividend in May of this year. During the second quarter, we declared total monthly common dividends of $0.79 and our FFO has adjusted payout ratio for the quarter was 81%.
Our debt to adjusted EBITDA ratio was 5.1 times for the second quarter annualized and our debt gross assets ratio was 43% at June 30th. As you can tell by this metrics or balance sheet, it continues to be in great shape.
From the next slide, I’ll provide a capital market and liquidity update. At quarter end, we have total outstanding debt of 1.5 billion, all but about 50 million of this debt is either fix rate debt or debt that has been fixed through interest rate swaps with a blended coupon of approximately 5.5%.
We had 24 million outstanding quarter end on our line of credit and we had 20 million of cash on hand. We are in excellent shape with respected debt maturities.
As of June 30th, we have no scheduled blown maturities in 2013 or 2014. And which should be a very manageable amount of such maturities in each year thereafter.
Turning to the next slide, we continue to reduce our cost of capital in level of secured debt. We issued 274 million of 10-year senior unsecured notes at 5.25% during the quarter.
This issuance represented our third 10-year unsecured notes offering. And in comparing it to our second field completed last August, we’re pleased to reduce the spread in this transaction by over 100 basis points.
As I referenced earlier, this part of the proceeds from this issuance repay for mortgage debt totaling approximately $144 million that had a weighted average rate of about 6.4%. The issuance of senior unsecured notes and payoff of the secured mortgage notes during the quarter allowed us to lower our secured debt levels from 16% to 11% of real estate assets.
As David mentioned, in conjunction with this bond issuance, Moody’s upgraded both our corporate and senior unsecured notes ratings from Baa3 to Baa2. Recognizing the continued improvement in our financial and operating metrics as well as the quality of our asset base.
Turning to the next slide, we also pleased to announce that subsequent to quarter end in July, we amended and receded both our line of credit and our term loan facility. The amendment of the line of credit including increasing the size of our line from $400 million to $440 increasing the accordion feature from $100 million to $160 million extending the maturity date from October 2015 to July 2017 with an additional one year extension available at our operation and reducing the interest rate and facility pricing.
At our current credit ratings, interest on the line of credit is at LIBOR plus 140 basis points, a reduction of 20 basis points from the previous agreement and the facility fee was reduced by five basis points. The amendments of the term loan including increasing the size of the facility from $255 million to $265 million increasing the accordion features so that the maximum amount available under the facility goes from $350 million to $400 million extending the maturity date from January 2017 to January 2018 and reducing the interest rate all but the lowest rating agencies ratings categories.
At our current credit ratings, interest on the term loan is at LIBOR plus 160 basis points, a reduction of 15 basis points from the previous agreement. In summary, it was a very successful quarter in terms of raising new debt and lowering across the capital while at the same time extending duration and increasing our financial flexibility.
As we move forward in a rising interest rate environment, we think we are well-positioned with over 95% of our debt fix rates and low debt maturities over the next several years. Furthermore, we believe that our leading market positions unique niche categories will allow us to continue to invest with higher relative yields whereas more commoditized real estate types and will provide a significant cushion against any future spread compression that may come with rising interest rates.
Turning to the next slide, we are increasing our guidance for FFO as adjusted per share as David mentioned from 3.79 to 3.94 to 3.83 to 3.93. And as Greg mentioned previously, we are maintaining our 2013 investment spending guidance of $300 million to $350 million.
Now I’ll turn it over to David for his closing remarks.
David Brain
Thank you, Mark. Thank you, Greg.
As we go to your questions, I just want to reiterate a point I brought up at the first headline. I said, I think you heard throughout the call, things are going well in many respects.
Portfolio performance is positive. Investment opportunities are strong.
Capital cost is declining and notably it’s been locked in for long durations. And the balance sheet is really in excellent shape.
So it’s a very good position we find ourselves and I’m glad to report to you. With that, we’ll go to questions and, Ian, are you there?
Operator
Yes. (Operator instructions) And that question comes from the Craig Melman and he’s from KeyBanc.
Please go ahead, Craig.
Craig Melman – KeyBanc Capital Markets
Good afternoon, guys. Just curious on the investment spending and guidance.
It sounds like even if you get above – near or above the high-end of the 300 to 350 at this point, maybe closer to your transaction that guidance probably at the high-end not going to much higher? Is that sort of a fair way to look at it?
David Brain
In earnings guidance, Craig?
Craig Melman – KeyBanc Capital Markets
Yes, just given the timing and the ramp in spending on products you do get signed. Is this kind of adjusted guidance range a pretty good sense at this point in a year for the balance?
Greg Silvers
I mean, Craig, it’s Greg. I think as far as it’s the best knowledge we have right now.
So we’re giving you the great visibility if we have. Clearly, the more build-to-suits that we do will not impact that earnings because they don’t – if we get one of the closings like that big theater deal that comes quicker, then yes, it could impact that.
But being in the second half, the more meaningful impact of any investment is going to be in 2014 now.
David Brain
Craig, there’s no doubt that the math is just such as you get towards the end of the year it impacts this year less, but if you think of a rolling 12 months forward basis, these things are very important to increase the outlook as we continue to look out through not only the balance of ‘13 but the ‘14.
Craig Melman – KeyBanc Capital Markets
All right. Well, I guess, I was just getting at – is there anything in the tail [ph] that could get guidance kind of moving higher here for the balance of the year.
Do we have enough time basically?
Mark Peterson
First, the top-end of guidance, it’s not – it’s possible because we have other standing inventory that we look at. We also have a component of percentage rents on the back half of the year and the jury are still out on some of that but we try not to over-budget that.
Greg Silvers
But we still think that things are going well for us. We’ll probably be towards the top-end of that guidance range and that’s why we have that’s out there, yes.
Craig Melman – KeyBanc Capital Markets
Okay, that’s helpful. Then I guess this is for Mark, just as you look at sort of your sources in the instance here for the balance of the year.
What kind of drive pattern do you think you have before you would need to get to more equity in the stack?
Mark Peterson
Yes, I think the good news is we have a lot of flexibility. We have $24 million on our line, of course, on the line of $440 million lines.
We got plenty of availability there. We’re a little under 43% levered on a debt-to-gross asset basis at the end of June 42.6%.
And if you were to finance that with all debt, we’d be slightly over 35% at the end of the year. We start our range from 35% to 45%.
We set the time. We can get – go outside of that range for a temporary period.
So we could do at all debt. But our plan includes a slug of equity via either direct share of purchase plan opportunistically or otherwise, but we do have equity in the plan, but we don’t have to issue equity, so we’re in a good position.
Craig Melman – KeyBanc Capital Markets
Okay. Then, just lastly, on the balance sheet, the 199 land for development, that’s – is that all Concord?
Mark Peterson
No, it’s about 194.5 or 195 Concord and then there’s another land that’s not related to Concord that’s in that number.
Craig Melman – KeyBanc Capital Markets
Okay, I’m just curious because it sounds like Empire could or sounds like they’re going away until they see what happens with the referendum here on gambling. I mean, at what point do you guys say the project is going to take too long to monetize, maybe someone is going to pay more for that land because they want that future project to go forward.
What point did you monetize the land?
David Brain
The one we get it off? I mean, I think, Craig, it’s just – that’s – I think right now, the outlook is this is the best route to pursue, but I think if somebody came forward with an offer, we said repeatedly we’re open to that.
Craig Melman – KeyBanc Capital Markets
Great. Thank you.
David Brain
Thank you.
Operator
Thank you. We have another question for you.
This one is from the line of Tony Paolone at JPMorgan. Please go ahead, Tony.
Tony Paolone – JPMorgan
Thanks, good afternoon. When I look across these triple-net lease suite, a lot of these guys seem to be just on fire in terms of the deal flow that they’re transacting in.
And you guys have been pretty consistent and are you believing a bit more modest than in prior years. Can you maybe talk through just how you bridge that difference?
Is it just purely the others playing at a different point in the credit spectrum or just what you think is bridging that gap or is it that you are seeing tons of deal for owner just not comfortable with pricing?
Greg Silvers
I think it’s the latter, Tony. I think as we’ve talked about – I mean, we’ve got – with this other deal, we’ve got deal flow that takes us up well over 400 million and we’ve got far more and to look at and we continue to look at what we’ve grown comfortable with is telling people what we have very well underhand and know we can absolutely deliver and we do not want to disappoint on that.
So there’s a lot of deals that are floating out there. Some of it are quality issue.
We’re not happy with the quality so we pass on it. As we’ve talked about on theater deals, there’s a lot – there is more pricing expectation on standing inventory and those deals are getting bid down.
But we’re looking at continuing to grow 8% to 10% off our asset base and do that with quality assets that are going to deliver 15, 20 years of lease life and of the quality that we think are enhancing to the portfolio rather than detracting.
David Brain
Broadly, Tony, I just say philosophically, we probably have a bias towards doing less of what we know a lot about and that’s just the DNA of the company than guys who reach out and try and do more of things they know less about and bid at lower prices. If we could do twice the volume but half the – half the investment spreads we probably would do – we would not do that.
We would do half the volume, twice the investment spreads. So it’s philosophically an approach that we have a better screen with the same financial result of those throughout and we would do things we know more about and we feel better about.
Tony Paolone – JPMorgan
And that’s helpful. And do you think there they’re just in terms of – like it just seems like some of the volume that they’re seeing is so high.
Do you think that that with this level of activity is occurring because it’s happening at the very high investment grade credit 15-year or whether it’s a drug store or whatever the case maybe and they just don’t – if it just that different product type and credit profile or do you guys like seeing huge volumes too?
David Brain
Well, I think there are probably – maybe there’s a lot going on there. But Tony, you tell me, I mean, it seems like there’s kind of an arm’s raise and sometimes pricing is not that important anymore or investment especially initial investment yields.
I mean, people are willing to cap rate compression is on and people are going for volume within that cap rate compression. We generally don’t play that.
We don’t play that way.
Tony Paolone – JPMorgan
Okay. On the theater deal that you guys have tied up.
Can you talk about just yield and/or maybe the economics because it sounds like you’ve got to assume some debt and don’t know what rate that would be at and so forth?
Greg Silvers
Yes, I don’t think we – I think we’re – it’s in the range that we talked around at 9% going in yield. And so, we’re – like I said, this is another deal that didn’t get shop.
It was brought to us as one of our operating partners. We haven’t disclosed the debt.
I don’t know that we can do that. I’ve given you the stuff that are on our side.
So I think we’re very comfortable. It’s an imaginable theater operator.
It’s got well over 10 years left on the lease so – on a master lease asset of 11 asset. So we are – it’s a group of assets that we like.
They are consistent with the quality of what we own.
Tony Paolone – JPMorgan
Okay. And Greg, on the years of box office, what was that number that sounded flat the way you described it, I don’t know if you gave an actual number.
Greg Silvers
I would tell you, it’s actually – going in previously last week, we’re slightly ahead – this last weekend, we’re slightly down a little over 1% because of the last weekend was Batman on a comparable basis. We should go back this weekend to flat or slightly ahead of 2012 space.
David Brain
It’s roughly even at this point.
Mark Peterson
For the record year, we still consider that with the strong outlook for holiday, a good place to be.
Greg Silvers
Yes, I think I would tell you that the marketplace is still same 2% to 3% up over for the year. We came out of first quarter about 11% down.
But we talked about that was really kind of Hunger Games-oriented – kind of when that came out at a line with kind of what was traditionally be in December fair product. But it continues to be very strong and robust with some really good August titles and as we talked about we move into the – to the holiday season where we now have Hunger Games in the holiday season, another Marvel movie with Thor, and we know another Harlette [ph] movie coming as well, so quite a lot of exciting titles.
Tony Paolone – JPMorgan
Got it. And then last one just on the imagine swap.
Can you just maybe walk through that again, I didn’t catch all of it and just what’s the last – just the update on where that is?
Greg Silvers
Sure. We’ve got – we talked about having four – about four assets remaining under that group.
We swapped out to three new schools. And we swapped three St.
Louis assets for three Ohio assets. On the last quarter there was made mention of the fact that at Indiana there were two schools for which their charter – it was announced their charter would not be renewed.
And we have talked about those were the two schools that were on our watch list. One of those schools we’ve already sub leased on and the other one we have it.
So we currently have three non-operational schools there we’re looking for. So the overall number from with the different issues that have gone on, we already started with nine.
We had whittled that down closer to two and then with the Indiana one adding another one back, we’re at three.
David Brain
They’re all paying rent.
Greg Silvers
They’re all paying rent though.
Tony Paolone – JPMorgan
Right. I’m sorry, not to be confused here, but you had four assets that hadn’t – that were in St.
Louis that still needed to be addressed. You swapped three so that leaves you with one.
Greg Silvers
One. That is correct.
Tony Paolone – JPMorgan
And then you had two more in Indiana that lost their charter.
Greg Silvers
Right.
Tony Paolone – JPMorgan
And one in those is sub leased?
Greg Silvers
That is correct. And then we had one asset in Atlanta that was sub leased and that sub leased did not get renewed, so that gives us the three that we have.
Tony Paolone – JPMorgan
Okay, got it. Thank you.
Greg Silvers
Thank you, Tony.
Operator
Thank you. I have another question for you.
This question is from the line of Daniel Altscher at FBR. Please go ahead, Daniel.
Daniel Altscher – FBR
Hey, thanks. Good afternoon, everyone.
David Brain
Hello, Daniel.
Daniel Altscher – FBR
A question for you about TopGolf, I think Greggie mentioned that results there are exceeding your expectations. Did you mean revenue or attendant at the actual facilities or did you mean your actual results from the TopGolf?
Greg Silvers
We’re talking about both results. And what I saw was we underwrote the asset at that level and the revenue results are exceeding those by over 20%.
So they’re performing very well.
David Brain
And they’re generating percentage rents beyond our expectation. So they’re generating for us as well as for our customer, our client great results.
Daniel Altscher – FBR
Got it, okay, great. Maybe also just dispositions on winery, it doesn’t look like there is anything else in the quarter.
Is that right? And if so what’s left and how much longer do you think that’s going to take?
Mark Peterson
Yes, at June 30th [inaudible] $30 million was the number. We sold one, a small one subsequent at the end of the year for $1.5 million roughly with no gain or loss.
So we think we’ll be down to roughly around $11 million by the end of the year and we got a couple others that are in process.
Greg Silvers
Under contract, in process.
Mark Peterson
Yes.
David Brain
And Dan, it’s because of the diminimus level as we mentioned in our last call, we’re not reporting on it specifically anymore on our proactive basis.
Daniel Altscher – FBR
Yes, got it. And then just one more if I may, with the new monthly policy in place what do you think, has there been any reaction positive, negative from shareholders or do you think it’s doing what you are looking to accomplish there or anything, any feedback you can give us about the new monthly dividend policy?
Greg Silvers
I can tell you Dan, we were out maybe with institutional investors and got real positive feedback from them and the fact that they thought that adding a retail component would be very positive and they felt that the move to that would be viewed very positive from the retail community. It’s hard to get direct feedback from retail other than anecdotally getting a shareholder letter or something like that.
But we have gotten feedback with maybe our institutional investors that they see it positively.
Daniel Altscher – FBR
Great. Thanks so much.
Operator
Thank you for your question. We have another question for you.
This one is from Emmanuel Korchman at Citi. Please go ahead.
Emmanuel Korchman – Citi
Hey, good afternoon, guys. As we look at your remaining acquisition guidance, could you possibly help us divide that between standing inventory and more build-to-suit type of stuff that won’t be income producing for a few more months?
Greg Silvers
I’d say right now on the entertainment side, excluding the big theatre deal that probably 30% of that is standing, 70% of that is build-to-suit of the education space, most of that I get 80%, 85% of that will be build-to-suit. And on our recreation side, probably half of that will be standing and half of it would be incremental mainly our TopGolf facilities that we’re building.
Emmanuel Korchman – Citi
And is that the same case for the 125-70 split that you show in the disclosure or is that just generally speaking about the rest of that mix or both?
Greg Silvers
Yes.
Mark Peterson
Yes, the 125 is the completion of build-to-suit process definitely of that [inaudible] and the 70 is deals we’ve approved.
Greg Silvers
We’ve approved but have not closed.
Mark Peterson
That is a combination of standing in other words.
Greg Silvers
Yes.
Emmanuel Korchman – Citi
And then Mark just what brings the top-end of your guidance down by a penny from last time?
Mark Peterson
What we try to do is narrow the range from 15 to 10, raise the guidance at the midpoint by a penny and a half, so just the narrowing of the range, but a raise at the midpoint. We have the ability potentially for some things that happen to exceed that, but that’s our best estimate at this time as far as the range.
Michael Bilerman – Citi
Hi, David, it’s Michael Bilerman speaking. I just want to come back to Concord for a moment and as much as I would love someone to come knocking on my home door and offer me a big check for my home, unless I go hire a broker and try to market it and try to sell it, likelihood is I’m probably not going to maximize value.
So I’m just curious at this point, it’s $195 million, it’s over 5% of your balance sheet, why not pursue a dual-track process at this point, prepare it for sale and hire a broker and try to see what you get in that way you’ll be in a position to make a decision rather than just sitting and waiting and letting this capital earn nothing for shareholders?
David Brain
Well because I can’t under my agreement, my option agreement with Empire.
Michael Bilerman – Citi
At what point does that option agreement end?
David Brain
Well it ends at the end of this month and we’ve extended on a monthly basis. And we expect we’ll have another extension here shortly and we’ll disclose all the terms of that.
And it was kind of on a very short-to-short short month-to-month extension series coming into the deliberation of the legislation which just got passed in June in the end of the legislative session in New York. So there wasn’t an ability because we didn’t know what the terrain would look like to look like what it was worth extending beyond a few and integrate the resource [ph].
We’re extending in July and those negotiations are going on now and there will be probably an extension as Greg indicated up to the end of the election in November. So it will probably go on at least till then.
Michael Bilerman – Citi
And so at that point you will reevaluate again in November whether to sit on the capital?
David Brain
Yes, we always do, yes.
Michael Bilerman – Citi
Okay, thank you.
Operator
Thank you very much. I may have more questions for you.
This one is from Rich Moore, RBC Capital Markets. Please go ahead, Rich.
Rich Moore – RBC Capital Markets
Yes, hi guys. Good afternoon.
On the three charter schools that you were talking about that had lost their charters now that you have left, it seems that it’s getting kind of late in the year for anything that happened for the 2013-’14 school years is that right? And if that is, then what happens?
Greg Silvers
Yes. Well I think it’s very similar.
I think what will occur Rich, is remember two of those three just happened recently. One decided not to take their sub lease and the other one just elected not to seek renewal of their charter.
So we had the number of nine drilled down to eight. One of those schools, I think the other St.
Louis school we are underway in looking at a swap asset with Imagine. I think we’ll have sub leased candidates, but my guess is it will be for the ‘14th school year, not this year.
But we’ve demonstrated last year when we had nine schools that they can carry those schools and pay rent, not necessity payments. And in fact that number is lower than it was last year.
Rich Moore – RBC Capital Markets
Okay. And those were with Imagine as well, those two?
Greg Silvers
Yes.
Rich Moore – RBC Capital Markets
Those two, yes, okay. All right great, I got you.
Then back on the acquisition side of the world, I mean there has been a lot of going on with the whole Triple Net space and I’m curious from your point of view, is the interest rate increase that we’ve seen [ph] recently causing any broader cap rate changes that you’re seeing and is it causing any change in the players who you’re bidding against I guess or who you’re seeing in the marketplace looking at these various assets?
Greg Silvers
I would say a little bit in the sense of yes, we are spread players, so when we’re bidding deals we’re conscious of what our cost on both our debt and our equity is and what we think is an adequate risk adjusted spread for that. To the second part of your question, yes, I mean whether it’s the private non-trade – our public non-traded REITs, there just seems to be a lot more people chasing not as many deals.
I mean I’m saying there is more volume, but I think it’s changing in their hands. There’s not a lot of new product being introduced.
That’s why we’re still very successfully catching these build-to-suits where we’re seeing little or no competition really from those traditional competitors.
Rich Moore – RBC Capital Markets
Okay. And then the net grade [ph], it sounded like the cap rates are still flat with where they were or maybe even coming down some?
Greg Silvers
Yes. I think our tenants clearly want them to migrate down, but we’re still in the low nines or so, so still very, very soundly in the range that we’ve talked about.
Rich Moore – RBC Capital Markets
Okay. And then Mark, I’m curious, why – and you might have mentioned this, but my phone died in the middle, why did you pay off the mortgages?
What was the impetus behind paying off those with the bond?
Mark Peterson
Well, first of all they’re at 6.4% was the average rate and we refinanced those with 5.25% rate. And when we did our debt deal, the bond deal rates, we did that 2.17 Treasury and about three days later, it went to 2.60.
So you think about what you’re saving. And then the projections, if you look at bank’s projections, have that interest rate rising even further.
Blocking in at lower rates made sense from a rate perspective and in an economic perspective. It also made sense from reducing our secured debt.
And that was part of the impetus from the Moody’s upgrade. And frankly we had hoped for an S&P upgrade as well which we continued to work on.
So there’s kind of a dual track there. Economically it made sense and secondly we’re encumbering our balance sheet to improve our financial metrics for [inaudible] purposes.
Rich Moore – RBC Capital Markets
Okay, good, got you. And then the last thing on the early childhood centers that you guys certainly introduced to us last time, what I guess is going on there?
Greg Silvers
We’re continuing to build deals in our pipeline. I think we’ve got one as we talked about, we’ve’ got one underway.
We’ve got several, Rich, in our pipeline. We think as we talked about that it can be somewhere between a $35 million and $50 million annual component of our educational platform.
We continue to believe that but we wanted to introduce that before they’re actually sum in our deal flow. But we see those working their way through and hopefully you’ll see more of that introduced as we move through the year.
Rich Moore – RBC Capital Markets
Okay, very good. Thanks, guys.
Mark Peterson
Thanks, Rich.
Operator
Thank you very much for your question. We have another question for you.
This one is from Dan Domlin at Lautenberg Philman [ph]. Please go ahead.
Dan Domlin – Lautenberg Philman
Thank you. Just real quick, I think you mentioned that I was off the call at the onset, but did you give the exact rent coverage of the Ski portfolio and where that is on a trailing 12?
Greg Silvers
No, we didn’t, but we can. It’s on trailing 12, its 1-7 which is right the historical average.
It did dip. Do you remember two years ago when we had a very difficult winter, but it’s returned back to its natural average.
Dan Domlin – Lautenberg Philman
Okay. And then on the Imagine portfolio, can you give any rent coverage as there as well?
Greg Silvers
Well we’ve talked about there are two levels of rain coverage that we’ve talked about and on a property level, we’ve said that it’s closer to a 1-8 or 1-9 on a property level. But the more interesting factor is where they at corporately because we know they’re carrying some of these properties.
We think that’s closer to a 1-2, 1-2-5 where we’ve talked about historically. We think they’re generating after carrying these properties that are not operational approximately $10 million of free cash flow beyond the rent application.
So we are fairly comfortable that this is – it’s not a situation where we’re going to see any stoppage in rent payment. Remember we have a $16 million letter credit and they do have free cash flow beyond servicing the properties.
And as they take some of those properties and either sell them, sub lease them, do something with them and move them up their balance sheet that that will only improve overtime.
Dan Domlin – Lautenberg Philman
Okay, thank you.
David Brain
Thank you, Dan.
Operator
Thank you, Dan. And we may have another question.
This one is from Josh Patinkin at BMO Capital Markets. Please go ahead.
Josh Patinkin– BMO Capital Markets
Hi, good afternoon. Going back to the Imagine corporate coverage, does that include maintenance CapEx in that number?
David Brain
Yes.
Josh Patinkin– BMO Capital Markets
Okay, thank you. And I’m thinking about the Empire State Building and your ownership of the John Hancock Group Observatory?
Have you guys looked at the observatory there and thought about investing?
Greg Silvers
Well I mean we saw the numbers, but I don’t think they are considering breaking that out as a separate investment opportunity and selling off that as the way that they’ve listed that. I mean remember we financed Triple Net Investments, that’s what we do.
We would have to have a tenant that was willing to operate that and would see the value, and would bring the credit support necessary for it to work for us. But it’s a space that if it becomes available, we will look at it if it needs our underwriting.
Josh Patinkin– BMO Capital Markets
Okay. And how is the John Hancock Observatory performing since you bought it?
Greg Silvers
It’s performing exactly as we underwrote it. It’s everything that seems to be very strong.
What we hope as we move forward with some of the new improvements and they’re putting additional investment, our tenant is committed to spending more and more of their money to further enhance and freshen the product that it will only get better.
Josh Patinkin– BMO Capital Markets
Very good. Thank you.
Greg Silvers
Thank you.
Operator
Thank you very much. There’re no further questions in the queue.
So at this stage, I’d like to turn the call back over to David for closing remarks.
David Brain
Okay, at this point, we just usually thank everybody for joining us and we always appreciate your inquiries outside of the call. I’m glad to respond.
And we will look forward to seeing you next quarter. Thank you once again.
Greg Silvers
Thank you.
Mark Peterson
Thank you.
Operator
Thank you for participating in today’s conference. Ladies and gentlemen this concludes the presentation and you may now disconnect.
Good day.