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EPR Properties (NYSE:EPR)
Q2 2018 Earnings Conference Call
Jul. 31, 2018, 8:30 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good day, ladies and gentlemen, and welcome to the Q2 2018 EPR Properties Earnings Conference Call. At this time, all participants are in a listen-only mode. Later we will conduct a question-and-answer session and instructions will follow at that time. (Operator Instructions) As a reminder, this conference call is being recorded.

I would now like to turn the conference over to Mr. Craig Evans, General Counsel. Sir, you may begin.

Craig Evans -- Senior Vice President, General Counsel and Secretary

Hello, everyone. This is Craig Evans, General Counsel for EPR Properties. I'm filling in for Brian Moriarty who is out this week. Thank you for joining us today for our second quarter 2018 earnings call. I'll start the call by informing you that this call may include forward-looking statements as defined in the Private Securities Litigation Act of 1995, identified by such words as intend, continue, believe, may, expect, hope, anticipate or other comparable terms.

The company's actual financial condition and results of operations may vary from those contemplated by such forward-looking statements. Discussion of those factors that could cause results to differ materially from these forward-looking statements are contained in the company's SEC filings, including the company's reports on Form 10-K and 10-Q.

Now I'll turn it over to company President and CEO, Greg Silvers.

Greg Silvers -- President and Chief Executive Officer

Thank you, Craig, and good morning. Welcome to our second quarter 2018 earnings call. Before we get started, I'll remind everyone that slides are available to follow along via our website at www.eprkc.com.

With me on the call today is the company's CFO, Mark Peterson, who will review the company's financial summary.

Mark Peterson -- Executive Vice President, Chief Financial Officer and Treasurer

Good morning.

Greg Silvers -- President and Chief Executive Officer

As always, I'll start with our quarterly headlines; then discuss the business in greater detail. So let's get started. The first headline, record quarterly revenue, and earnings. We are pleased to continue the refrain of highlighting record setting results. As compared to the same quarter of previous year, our top line revenue grew by 37% and FFO as adjusted per share grew by 45%. This ongoing strong performance is supported by our differentiated portfolio of high quality assets and the underlying strength of each of our investment segments.

Our second headline, successfully executing our capital recycling strategy. One of our fundamental principles is prudent and disciplined capital management. As such, in February, during our 2017 year-end call, we communicated our capital plan for 2018, which mitigated the need to raise any additional equity capital given our stock price at the time. We have substantially delivered on our recycling strategy, and with our recent stock price recovery, we are now positioned to tap either source as we begin to turn to a more favorable growth posture.

Third headline, recent results reflect strong tenant performance. The box office has established a strong pace for the year, our ski properties delivered a solid year, and the strong performance of our attractions was rewarded with a credit upgrade following the announcement of Six Flags assuming five of our leases. We are pleased with their near-term strength, but more importantly, as we spoke into -- about previously, we take a long-term view with these properties, and they continue to demonstrate the consumers' preference for experiential assets.

Fourth headline, increasing earnings guidance. We are happy to announce that we are increasing our earnings guidance. While the significant increase is driven primarily by the contribution from additional prepayment fees, it's important to note that our core business remains very healthy. Mark will have more detail on this topic.

Now I'll discuss the business in more detail. At the end of the second quarter, our investments were $6.7 billion with 396 properties in service that were 99% occupied. During the quarter, investment spending was $129.9 million, bringing us to a total of $238.5 million year-to-date. Our proceeds from dispositions were $236.9 million, bringing us to a total of $247 million year-to-date. Additionally, our company level rent coverage was at 1.77, well in line with the approximate 1.7 average we've seen over the past three consecutive years, and highlighting the consistency of our operators' businesses.

Now I'll provide an update on our three specific segments. At quarter-end, our entertainment portfolio included approximately $3 billion of total investments with one property under development, 169 properties in service, and 23 operators. Our occupancy was 99%, and our rent coverage was 1.67 times. Investment spending in our entertainment segment totaled $23.8 million, consisting primarily of build-to-suit development and redevelopment of megaplex theaters, entertainment retail centers, and family entertainment centers.

Disposition proceeds in our entertainment segment totaled $13.6 million, which was primarily comprised of $9.4 million in proceeds from a partial prepayment of $8 million on principal on a mortgage note investment secured by the 360 Chicago Observation Deck at the John Hancock Tower in Chicago, Illinois.

Turning to industry updates, North American box office revenues were up over 8% versus prior year through this last weekend. The second quarter box office outperformance was impressive with almost 20% growth on a -- over the prior year, and was driven by highly successful titles such as Avengers: Infinity War, Incredibles 2, Jurassic World, and Deadpool 2. While we are pleased with this summer's outstanding performance, it's not our expectation that this torrid pace will continue for the balance of the year, and we continue to expect to end the year up closer to 2% to 4%.

At quarter-end, our recreation portfolio included over $2.1 billion of total investments with five properties under development, 80 properties in service, and 21 operators. Our occupancy was 100%, and our rent coverage was approximately 2.05 times. Investment spending in our recreation segment totaled approximately $88.6 million during the second quarter, which included $27 million on the Kartrite Waterpark Hotel in the Catskills, and $36.4 million on the springs resort and spa with the balance being primarily build-to-suit development of golf entertainment complexes and attractions. The springs resort and spa is a 79-room, independent boutique resort featuring 23 natural hot spring tubs, terraced along the banks of the San Juan River in downtown Pagosa Springs, Colorado. Situated in the Colorado Rocky Mountains, the property is fed by a mother spring that is the deepest thermal hot spring in the world. The springs have been attracting thousands of visitors for over 100 years and offer a unique and appealing recreational anchor to this lodging asset.

Our success with the Camelback Lodge in the Pocono Mountains of Pennsylvania, which includes skiing and waterpark recreational anchors, has led us to pursue additional recreational-based lodging assets such as the springs resort and spa. We are also eager to welcome another waterpark-anchored lodging asset to our portfolio in 2019 when the Kartrite opens in the New York Catskill Mountains, adjacent to the new Resorts World Casino.

As discussed on our last call, we received a paydown of approximately $221 million from affiliates of Och-Ziff Real Estate in conjunction with their sales of seven properties to Boyne Resorts on May 7, 2018. This paydown reduced the carrying value of the note by approximately $175 million, resulting in the recognition of a $45.9 million of prepayment fees and yielding an unlevered IRR on our investment of over 29% with an implied cap rate of 6.8%.

Additionally, Vail Resorts announced in June that they have entered into agreements with Oz to buy four of Oz's six remaining ski properties. These transactions will require them to pay off the remaining $74.6 million of carrying value of our note, and we anticipate recognizing an additional $15 million of prepayment fees for total net proceeds of approximately $90 million, assuming the payoff occurs in the fourth quarter.

Turning to industry updates, the operators in our ski portfolio have delivered solid results this season with visits and revenue through April up approximately 7% and 8% respectively versus the trailing three-year average. To be clear, despite the outstanding performance of their underlying assets, we have removed the Oz mortgage assets from our performance statistics due to the recent and expected loan payoffs. Our attraction assets were in the heart of their productive season, and we will provide a detailed update on the season during our next earnings call, which will allow us to report results for the vast majority of the summer season.

We are pleased to expand our relationship with Six Flags Entertainment Corporation with their May 22nd acquisition of the leasehold interest in five of our -- of the parks that were previously operated by Premier Parks, LLC. These parks were added to our portfolio in 2017 when we closed on our transaction with CNL Lifestyle Properties. Six Flags had already purchased the operations of one other park from Premier. So we will now have a total of six assets leased to the world's largest regional theme park company.

The transaction brings us both additional customer diversity and a deeper relationship with an active and well capitalized attractions operator. We look forward to growing this strategic relationship over the coming years as we further establish our position as the leading REIT owner of experiential real estate.

At quarter-end, our education portfolio included over $1.4 billion of total investments with six properties under development, 146 properties in service, and 58 operators. Our occupancy was 98% and our rent coverage was 1.47 times. Investment spending in our education segment totaled $17.4 million, primarily consisting of build-to-suit development and redevelopment of public charter schools, early childhood education centers, and private schools.

Subsequent to quarter-end, we have sold five charter school properties for total net proceeds of approximately $55 million. Four of these five properties were leased to Imagine Schools, and produced net proceeds of approximately $43.4 million. The transaction had a cash cap rate of approximately 9%, and a GAAP cap rate of approximately 10% due to the additional non-cash direct financing income from these leases.

In July 2018, we entered into an agreement with CLA related to 21 open schools, which replaces the prior leases with a one-month lease expiring on August 31st, 2018. We may agree to extend this lease in our sole discretion, if we believe CLA is making adequate progress toward a satisfactory restructuring. CLA made all of the $4.2 million of scheduled rent payments under the prior agreement, covering the period of March to July 2018.

The new lease requires a rent payment of $1 million and we have only included one month of payments under this new lease in the midpoint of our earnings guidance. If the new lease is not extended, CLA will be required to expeditiously vacate the remaining properties, in which case, we intend to lease some or all of the 21 schools to other operators. CLA also agreed to relinquish control of four of the company's properties that were still under development, as the company no longer intends to develop these properties for CLA.

As Mark will detail in his comments, we took a charge during the quarter, which essentially wrote off the cost of improvement specific to the development of CLA's prototype. We anticipate listing these properties in the near future. CLA continues to negotiate with third-parties regarding a restructuring that would permit CLA to continue operation of the properties. We are also actively pursuing other alternatives for these properties, including replacement tenants and operators.

Moving to our investment spending guidance, we are tightening our range to $450 million to $650 million from our previous range of $400 million to $700 million. We are also increasing our disposition guidance to $450 million to $500 million from the previous range of $350 million to $450 million. The increase is primarily due to our expectation that Oz will pay off their loan by the end of the year. Including the aforementioned July transactions, our year-to-date disposition proceeds are slightly in excess of $300 million.

With that, I will turn it over to Mark for a discussion of the financials and then rejoin you at the conclusion.

Mark Peterson -- Executive Vice President, Chief Financial Officer and Treasurer

Thank you, Greg. I'd like to remind everyone on the call that our quarterly investor supplemental can be downloaded from our website. Now, turning to the first slide, net income for the second quarter was $85.5 million or $1.15 per share, compared to $74.6 million or $1.02 per share in the prior year. FFO was $139 million compared to $85 million in the prior year.

Lastly, FFO as adjusted for the quarter increased to $141.8 million versus $94.9 million in the prior year, and was $1.87 per share versus $1.29 per share in the prior year, an increase of 45%. I would like to point out upfront that these results include the $45.9 million prepayment fee that Greg mentioned related to the $175.4 million partial prepayment on the OZRE mortgage note during the quarter.

Also, before I walk through the key variances, I want to discuss two items from the quarter that were excluded from FFO as adjusted. Due to the recent agreement entered into with CLA, we determined that it's unlikely that we will continue the development of four CLA early education properties. Upon making this determination, we obtained appraisals of each of these properties and reduced the carrying value of the assets to $9.8 million by taking an impairment charge of $16.5 million. This charge is primarily related to the cost of improvements specific to the development of the CLA properties.

Additionally, during the quarter, we settled our ongoing litigation with the Cappelli Group for $2 million. While we have always believed we have very strong defenses against the plaintiff's claims, the legal cost to continue the litigation through a trial would have in all likelihood exceeded the settlement cost. We are pleased to put this distraction behind us.

Now let me walk through the key line item variances for the quarter versus the prior year. Our total revenue increased 37% compared to the prior year to $202.9 million. Within the revenue category, rental revenue increased by $13.6 million versus the prior year to $137 million. This increase resulted primarily from rental revenue related to new investments. Note that we recognized $2.5 million in revenue related to Children's Learning Adventure during the quarter, as they made all the required payments under the prior agreement we discussed on our last call. This represented a decrease of $240,000 versus the prior year.

Please also note that this quarter we began reporting tenant reimbursements within rental revenue due to the fact that the dollar amount is relatively small, and also in preparation for the adoption of the new lease accounting standard on January 1st, 2019, where these will be combined. Tenant reimbursements were $3.8 million for the quarter versus $3.9 million in the prior year. Additionally, percentage rents for the quarter included in rental revenue were up slightly at $1.7 million versus prior year at $1.6 million.

Mortgage and other financing income was $65.2 million for the quarter, an increase of approximately $42.1 million versus the prior year. The increase resulted primarily from the $45.9 million in prepayment fees related to the OZRE paydown I discussed previously.

In addition, as Greg mentioned, during the quarter, we received $9.4 million in proceeds from a partial repayment of a mortgage loan investment we have in the observation deck of the John Hancock Tower in Chicago, which included a $1.4 million prepayment fee. These increases were partially offset primarily by Endeavor Schools' exercise of the right to convert their $143 million mortgage note into a master lease arrangement during the first quarter of 2018.

On the expense side, our property operating expense increased by $1.3 million versus the prior year due to approximately $550,000 in real estate taxes paid on behalf of CLA, as well as higher operating expenses at our multi-tenant properties. G&A expense increased to $13 million for the quarter compared to $10.7 million in the prior year, due primarily to increases in our payroll and benefit costs as well as professional fees.

There were no prepayment or termination fees related to our education properties in the second quarter versus $3.9 million in the prior year. However, subsequent to quarter-end, we did sell one public charter school pursuant to a tenant purchase option for total net proceeds of $11.9 million, and as a result, we will recognize a termination fee of $1.9 million in FFO as adjusted for the third quarter. Also subsequent to quarter-end, as Greg mentioned, we completed the sale of four public charter schools leased to Imagine for net proceeds of $43.4 million, and will recognize a gain on sale of $5.5 million in the third quarter that will be excluded from FFO and FFO as adjusted.

Turning to the next slide, for the six months ended June 30th, our total revenue was up 29%, and our FFO as adjusted per share was up 26% to $3.12, including the OZRE prepayment penalty. I want to also note if we remove all prepayment and termination fees from both year-to-date numbers, our FFO as adjusted per share growth was 5%.

Turning to the next slide, I'll review some of the company's key credit ratios. As you can see, our coverage ratios continue to be strong and improving with fixed charge coverage at 3.2 times, debt service coverage at 3.7 times, interest coverage at 3.7 times, and at quarter-end, our net debt to adjusted EBITDA ratio was 5.6 times. Note that each of these ratios exclude all prepayment and termination fees. Our net debt to gross assets was slightly under 44% on a book basis, and 37% on a market basis.

Now let's turn to the next slide for a capital markets and liquidity update. At quarter-end, we had total outstanding debt of $3 billion, of which $2.9 billion is either fixed-rate debt or debt that has been fixed through interest rate swaps with a blended coupon of approximately 4.6%. We had $30 million drawn at quarter-end on our $1 billion line of credit, and $3 million of unrestricted cash on hand.

As previously announced, in April, we issued $400 million of 10-year senior unsecured notes at a coupon of 4.95%, the proceeds of which were used to reduce our line of credit. We now have a weighted average debt maturity of over seven years and no debt maturities until 2022, which is a great position to be in given the potential of rising interest rates.

Subsequent to quarter-end, we settled two expiring foreign currency agreements with a combined notional amount of $200 million and received a cash payment of $30.8 million in connection with this settlement. This significant gain will be recorded in accumulated other comprehensive income and reclassified into earnings upon the sale of liquidation of our properties in Canada. These derivatives serve as a net investment hedge against the value of our Canadian properties and will replace with two new cross-currency swaps with a total notional value of C$200 million through June of 2023.

Turning to the next slide, we are pleased to announce that we are increasing our guidance for 2018 FFO as adjusted per share to a range of $5.97 to $6.07 from a range of $5.75 to $5.90. As Greg mentioned, we are narrowing our guidance for investment spending to a range of $450 million to $650 million from a range of $400 million to $700 million, and increasing our disposition proceeds to a range of $450 million to $500 million from a range of $350 million to $450 million.

Note that our plan laid out at the beginning of the year to primarily use disposition proceeds to fund new investments has been working very well such that our guidance does not anticipate the need to raise any new capital over the remainder of the year. Guidance for 2018 is detailed on page 30 of our supplemental.

Turning to the next slide, I thought it might be helpful to again provide a roadmap from the previous midpoint of FFO as adjusted per share guidance to the current midpoint. As you can see, the increase in guidance is primarily due to a net increase in prepayment and termination fees coupled with a slight increase in our base of expectations.

Starting with the previous midpoint of $5.82, we add the net impact of additional prepayment and termination fees of $0.19 per share, primarily related to the approximately $15 million we expect to receive when OZRE pays off its remaining loan balance with us, as Greg discussed. We then add a net $0.01 per share related to additional percentage rents in the August CLA payment, partially offset by higher G&A expense. These changes move the midpoint of our guidance up by $0.20 to $6.02.

Please note as far as timing that the remaining OZRE prepayment fees of approximately $15 million are anticipated to occur in the fourth quarter, as are all the prepayment and termination fees associated with public charter school dispositions totaling approximately $13.5 million with the exception of the sale of one school, which has already closed in the third quarter that had a termination of $1.9 million -- termination fee of $1.9 million, as I mentioned earlier.

Now, with that, I'll turn it back over to Greg for his closing remarks.

Greg Silvers -- President and Chief Executive Officer

Thank you, Mark. As we discussed this morning, we executed on multiple fronts this quarter, including our capital recycling plan, the further reduction of our Imagine locations, and the overall performance of our portfolio. Notwithstanding these strong results, we were disappointed that Children's Learning Adventure did not complete their restructuring by the July 31st date. They have assured us that progress is being made, however, any restructuring requires the cooperation of many landlords and creditors.

To that end, we announced today a one-month agreement to allow CLA some additional time. However, it required they release the development parcels and any extension of such agreement will require demonstrated progress as well as continued payment of our agreed-upon rent. Furthermore, we continue to work with other groups to allow optionality for EPR, and I can assure you that we are working on a resolution.

Furthermore, we are encouraged by the recovery of our share price. And given the underlying performance of our operating partners, we believe their success will translate to attractive opportunities in the future to invest capital and grow our business.

Now let's open it up for questions. Brian?

Questions and Answers:

Operator

Thank you. (Operator Instructions) And our first question comes from the line of Nick Joseph from Citi. Sir, your line is now open.

Nick Joseph -- Citigroup -- Analyst

Thanks. Appreciate the color on the box office growth. Do you view the struggles of MoviePass as a meaningful risk to the theater industry? We've seen some estimates that MoviePass accounts for about 5% of all US box office receipts.

Greg Silvers -- President and Chief Executive Officer

Well, again, what I can rely upon is our discussions and the announcements from the theater operators. They haven't seen it yet, and as we've discussed before, Nick, almost all of the operators are now introducing their own kind of proprietary kind of plans. Both Cinemark and AMC have announced plans. So, to date, they've not kind of indicated that they're suffering as a result of that and the box office to date hasn't demonstrated it.

Nick Joseph -- Citigroup -- Analyst

Thanks. And then just on CLA, what do you think the costs should be to release the CLA assets to new tenants if there is no resolution, because it sounds like there is specific improvements to the properties based off the impairment that you took?

Greg Silvers -- President and Chief Executive Officer

Yeah. I think it's -- we're -- it's going to depend upon who the operator is. So we haven't -- I mean, I think one of the things that is important that, when you look at these costs, a lot of those -- whether they range from architectural and other type fees that are very dependent upon that, but one of the things I wanted to hit on, Nick, that we didn't discuss as part of this agreement is, we did gain the ability to share store level financials with potential new operators to demonstrate the performance of our stores. So we think, with this latest agreement, we've meaningfully improved our position to market those properties so that somebody can see that they can operate in their current environment.

Nick Joseph -- Citigroup -- Analyst

And then maybe just finally, for the CLA lease extended through August, is there something in August that should result in a resolution or could this continue to be a month-to-month lease as long as the rent is current?

Greg Silvers -- President and Chief Executive Officer

Well, again, it's a great point. What we've said is that we're not comfortable with extending that beyond a longer period. We want to continue to put pressure and see meaningful progress. And at each one of these intervals, we get to determine if we think that progress is sufficiently being made that either encourages us to continue or allows us to stop the process at that time.

Nick Joseph -- Citigroup -- Analyst

Thanks.

Greg Silvers -- President and Chief Executive Officer

Thank you, Nick.

Operator

And our next question comes from the line of Craig Mailman from KeyBanc Capital Markets. Sir, you may go ahead.

Craig Mailman -- KeyBanc Capital Markets -- Analyst

Hey, good morning, guys. Good morning, guys.

Greg Silvers -- President and Chief Executive Officer

Good morning, Craig.

Craig Mailman -- KeyBanc Capital Markets -- Analyst

Just to follow up on your commentary about your improved cost of capital and kind of the optimism that it gives you on the investment spending front, I guess, could you just maybe give us a sense of your ability now to kind of trend toward the high end? I know previously you said you kind of have to trend toward the high end of disposition. Is that not the case anymore and we could see you guys surpass the midpoint or are you going to kind of still take a more cautious kind of view here?

Greg Silvers -- President and Chief Executive Officer

I think it's a little of both, Craig. I think, again, we've just kind of regained our footing on this price. So it takes a little while to ramp up, turning the spigot on more investments, but I will tell you the posture of which we're approaching investments has changed, and we think that we can issue equity if we find the right opportunities to grow our business. The underlying businesses are doing well. So we think that's in -- conducive of creating opportunities, but we are -- this -- our prices kind of just recently recovered in the last 60 days. So we are -- you can feel it in this company and with our people that the opportunity is -- of a more offensive posture is starting to blossom.

Craig Mailman -- KeyBanc Capital Markets -- Analyst

That's helpful. Then, as we just look at guidance surrounding this, I mean, were there any meaningful changes to kind of what your spread expectations were?

Greg Silvers -- President and Chief Executive Officer

Not now, but we think clearly it's potentially going forward, if we deploy additional capital, but there wasn't -- I mean, our dispositions are coming in, in line with our expectations.

Mark Peterson -- Executive Vice President, Chief Financial Officer and Treasurer

Yeah. Remember, we're not raising capital to do our investments. We're -- dispositions are funding our investments. So that really hasn't changed spreads.

Craig Mailman -- KeyBanc Capital Markets -- Analyst

That's helpful. And then just on CLA, you guys have the extra month cushion now, timing perspective. What's the pipeline of prospective tenants if CLA -- if you guys were to not renew at the end of August for another month? Kind of how much of that could be backfilled by year-end or any timeline you guys see and how much of it is kind of maybe less demand at this point?

Greg Silvers -- President and Chief Executive Officer

Yeah. I mean, like I said, I think -- and we've had these discussions. It really depends upon if someone is wanting to take over an existing position and maintain the existing enrollment, or they want to rebrand it and start anew. So we've got multiple discussions, somewhere between four and eight discussions going on with multiple operators. So there are a variety of options. It's just finding the best solution that we feel is the least disruptive both in terms of cash flows and for the affected families.

Craig Mailman -- KeyBanc Capital Markets -- Analyst

Okay. And then just on the development, I'm sorry if I missed this, are you guys -- the two that were in process that you kind of halted, are you guys looking for backfill tenants there, or are you just looking to kind of sell the dream to another developer?

Greg Silvers -- President and Chief Executive Officer

We're going to check all of those. I mean, we just got those back, as you can see, in the last couple of weeks. So we're going to explore all of those alternatives whether that's a sale, working with a different operator as far as to develop something. It's just that this agreement has come together more recently, and we're going to explore all of those options, Craig.

Craig Mailman -- KeyBanc Capital Markets -- Analyst

And do you feel like there is a good opportunity to kind of recoup some of the writedown that you guys took this quarter?

Greg Silvers -- President and Chief Executive Officer

Again, it's an opportunity, but right now it's so early without knowing what others would exactly want to do with it. We felt this was more an opportunity for us to utilize these to increase the pressure on CLA to understand that we were very serious about our position and make it -- them making progress. We will -- we've had a history of putting our properties into productive use. So we'll start looking at that, and whether that's with an early ed operator, whether that's with a -- if these are good sites, they could be -- in our entertainment or -- we are going to exhaust all opportunities to get the best recovery that we can.

Craig Mailman -- KeyBanc Capital Markets -- Analyst

And then just last one. What kind of specialized kind of design or improvements are they putting in to carry that kind of costs? It seems kind of high for an early ed facility.

Greg Silvers -- President and Chief Executive Officer

Again, like I said, you're going across four properties. There is various things from playground equipment, different things that carry the gamut of their design in terms of -- even from the geotech, and how you put the pad and can someone use that exact pad. So there is just a lot across four properties.

Craig Mailman -- KeyBanc Capital Markets -- Analyst

Great. Thanks, guys.

Operator

Our next question comes from the line of Collin Mings from Raymond James. Your line is now open.

Collin Mings -- Raymond James -- Analyst

Hey, good morning, guys.

Greg Silvers -- President and Chief Executive Officer

Good morning, Collin.

Collin Mings -- Raymond James -- Analyst

Just on the investment front, can you just expand on the prepared remarks regarding the Colorado acquisition in June and how that came about? And then just more broadly touch on how you see the pipeline of acquisitions versus development opportunities as you look to ramp back up some investment spending?

Greg Silvers -- President and Chief Executive Officer

Sure. I think, Collin, again given our presence in what I would call the recreational hospitality, with what we've done at Camelback and what we've announced with the Kartrite, we've been approached by people who see that recreational hospitality as an opportunity and we were -- we've been looking at this deal probably for four to six months, trying to understand the recreational element and the durability of the underlying recreational activity, and how that's supportive with the lodging. That deal came together. We feel that we're well positioned in that, we've got a substantial quality partner in the property, it is a triple-net lease, so it's more in our fashion than in hospitality. So it worked for us with structure. It's got a long-standing history of operating excellence. So we feel it fits naturally within our recreational portfolio.

As far as -- again, it's one of those things that acquisitions would be meaningful to the year's performance, but a lot of our business this year has been kind of build-to-suit and we continue to look at those opportunities. Those are the kind of the ones that we kind of slowed down with our capital. So those will be the ones that we kind of turn back to immediately, but we will always continue to look for quality acquisition opportunities within that we can add to our portfolio. We just haven't been kind of beating that drum as much. I think you'll start to see a slow rumble with that drum. Hopefully by the end of the year we'll be pounding that pretty hard.

Collin Mings -- Raymond James -- Analyst

Okay. That's helpful. And then just turning to the theater redevelopment project, just maybe can you touch on how rising construction costs are impacting your underwriting and just maybe how that impacts the threshold for a conversion, especially at some of the more productive theaters that I know in the past that you kind of indicated? May not make sense to convert, but just how does rising construction costs kind of fit into all that?

Greg Silvers -- President and Chief Executive Officer

You're dead on in the sense that it becomes an -- it becomes a kind of return on invested capital. So it's really in conjunction with our operators. We sit down and kind of look at and it also goes to a point that we've discussed, I know Collin, whether you are a first-mover, second-mover, third or fourth in the market. And we have a detailed analysis on what we think each one of those positions contributes, and the ROIC with respect to that. But there is no doubt that rising construction cost, and candidly, the availability of labor is impacting the ability to deliver on those. To date, it seems to still be very much working and our operators are still moving and enjoying the benefits of the amenitization, but it has kind of dampened, especially as you get to those kind of fourth-mover in a market, with the increased costs, the ROICs are getting more, instead of what were 30 to mid-20s, they are into closer to the mid-teens, which starts to have a different discussion profile with the operator. On the really, really high productive theaters, it still is an issue of relative productivity. It's not -- it hasn't to date been an issue of cost. It's the productivity issue and can you recoup the overall kind of attendance metric in that format.

Collin Mings -- Raymond James -- Analyst

Great. Appreciate the color. I'll turn it over.

Greg Silvers -- President and Chief Executive Officer

Thank you. Thanks.

Operator

Our next question comes from the line of Ki Bin Kim from SunTrust.

Ki Bin Kim -- SunTrust Robinson Humphrey -- Analyst

Hi, good morning, guys.

Greg Silvers -- President and Chief Executive Officer

Hi, Ki Bin.

Ki Bin Kim -- SunTrust Robinson Humphrey -- Analyst

So I don't want to belabor the point too much, but on CLA, you guys took an impairment charge on -- of $16.5 million and wrote it down to about $9.8 million. I mean, just percentage wise, that's a pretty big impairment charge. So does that make you think twice about making a build-out very specialized with -- tenant or is that just basically the name of the game and you have to do it? And what does that imply about the existing properties, the 21 assets, and what the recovery rate could be on those assets?

Greg Silvers -- President and Chief Executive Officer

Again, I think, Ki Bin, it has more to do with -- remember, we stopped construction of these projects in January of 2017. So as we sit now, it's less so much about the specialization of some of these and more about what are the costs to -- for those projects that have been kind of mothballed and the recovery on that mothballed product. I don't think that we're saying that these are such highly specialized buildings that no one else could use them. I think that we made a decision back, now 18 months ago, that we did not want to move forward on those. They got tied up in this process. But like I said, I don't think it's an issue of here are specific things that are very, very unique to them as much as that there is product that's been exposed to the elements for 18 months. When you start to look at kind of what the recovery of that and the usability of that, it starts to get impact, and candidly, we wanted to take a very conservative approach to this.

Mark Peterson -- Executive Vice President, Chief Financial Officer and Treasurer

Yes. It becomes more likely than not you're not going to finish development. As Greg said, you're basically writing them down the land value and then you have optionality whether you want to have someone else could come in and continue development or you could sell those properties as land.

Ki Bin Kim -- SunTrust Robinson Humphrey -- Analyst

Yeah. I know that's a good point. And can you remind us what is the carrying value of the 21 assets that you have with CLA --

Greg Silvers -- President and Chief Executive Officer

Yeah. That's about --

Ki Bin Kim -- SunTrust Robinson Humphrey -- Analyst

-- and what you think -- I know --

Greg Silvers -- President and Chief Executive Officer

Sorry, I'll let you finish.

Ki Bin Kim -- SunTrust Robinson Humphrey -- Analyst

And I know there is a wide range of outcomes that are possible, but if you had to -- I guess what's a base case recovery ratio for the 21 assets you think at this point?

Greg Silvers -- President and Chief Executive Officer

Yeah. I would say that the number, as we've talked about, is about $250 million, and what we said was the original rent was around $20 million, and we thought a base case was somewhere in the 60% to 70% of that number.

Ki Bin Kim -- SunTrust Robinson Humphrey -- Analyst

Okay. Thanks. And just last question, the customer rent coverage data you show in the slide deck, I think the -- if I look at the footnotes, it's a little bit older with I think the trailing 12 months from 2017. Do you have any updated stats on the rent coverage for the three verticals?

Greg Silvers -- President and Chief Executive Officer

It's really -- it becomes -- it really gets a little bit crazy because of schools. I think if you look on for most of ours and some of the seasonal stuff, if you look at our entertainment, that's like one quarter behind. So you're like seeing a trailing 12 with one quarter behind, but the seasonal, if we -- it would be distorted if you're right in the middle of the season, and you don't have -- it would distort it from its productivity. So we try to kind of annualize that to reflect the seasonality of it .

Ki Bin Kim -- SunTrust Robinson Humphrey -- Analyst

Okay. Thanks.

Greg Silvers -- President and Chief Executive Officer

Thank you.

Operator

And our next question comes from the line of Michael Carroll from RBC Capital Markets. Your line is now open.

Michael Carroll -- RBC Capital Markets -- Analyst

Yeah, thanks. Just a few quick ones on CLA. How is the performance of those assets right now? I know there is 14 that have been stabilized, and seven that was kind of in the ramp-up. Have the ramp-up ones kind of moved closer to the stabilization or have these properties or stores been impacted by the headlines out there?

Greg Silvers -- President and Chief Executive Officer

I would tell you that we haven't seen that much of an impact like the -- I think it's far more in the mindset of our investors than it is in the families that are there. We haven't seen them impacted by that and the coverage hasn't materially changed. So we're pleased with that standpoint in the sense that the operational effectiveness of these properties continues. So we are enthused by that. So we continue to see that as the positive and the underpinnings of why something should get worked out on these properties.

Michael Carroll -- RBC Capital Markets -- Analyst

And then of the seven, ones that were still in the ramp-up phases, are they still on track to be stabilized when you previously expected them or have that slowed down?

Greg Silvers -- President and Chief Executive Officer

No, I mean, I think they're still tracking in the fashion that we had anticipated. So nothing's changed from our underlying thesis.

Michael Carroll -- RBC Capital Markets -- Analyst

Okay. In the press release too, it said that if agreement doesn't get worked out by the end of August that CLA would vacate those properties. Now, if that does occur, do you expect an orderly transition or would you have to go to the courts to get those assets back?

Greg Silvers -- President and Chief Executive Officer

Well, again, that's something we would hope for an orderly process. We can't predict kind of even if you have -- if you have a contractual right, you may have to go and force that. So I mean, hopefully it would be in an orderly fashion. That's the way -- the reason we drafted the agreement that way.

Michael Carroll -- RBC Capital Markets -- Analyst

Okay. And then just last question on acquisitions. I know you said that you're getting a little bit more comfortable deploying capital. I mean, how long is there a delay versus the improvement in your cost of capital versus when you can actually start completing more investments? I mean, have you remained on track to complete those types of deals? I mean, it's just like flipping a switch or does it take a little bit longer to do that?

Greg Silvers -- President and Chief Executive Officer

Well, on the build-to-suit side, as you can imagine, it takes a little bit longer because of the fact, we've talked about that theaters and entertainment, they want to open and specific, and if we've kind of delayed certain projects, they may not readily line back up. Acquisitions is a little more opportunistic and we just need to get ourself reinserted in some of those discussions. And as I said, we're beginning to feel more positive about that and we'll see kind of where that takes us.

Michael Carroll -- RBC Capital Markets -- Analyst

Okay, great. Thank you.

Greg Silvers -- President and Chief Executive Officer

Thank you.

Operator

And our next question comes from the line of David Hargreaves from Stifel. Your line is now open.

David Hargreaves -- Stifel Financial -- Analyst

Hi, thank you. With respect to the development in the Catskills, I was curious if you had any thoughts on the early performance of the casino that's opened, and how dependent your project is on kind of the success of the casino, and what the level of commitment you're seeing from your partners there in the Catskills.

Greg Silvers -- President and Chief Executive Officer

Again -- sorry, David. Again, we just had the official kind of grand opening there in May. I think the numbers have trended up positively. However, we do think it's -- the Kartrite is a different product. It's a much more family oriented kind of product, in which its target market is slightly different. We would think those as kind of complementary, but not necessarily competing. And so while we're always happy for the project, the casino to do well, to create awareness, and to create kind of an opportunity to showcase the overall region, it's not something that the waterpark operator is dependent upon, and in fact, they're going to start their own independent marketing campaign for that property, separate and apart from the casino.

David Hargreaves -- Stifel Financial -- Analyst

That's due to open by April?

Greg Silvers -- President and Chief Executive Officer

Yeah. March-April time frame. Yes.

David Hargreaves -- Stifel Financial -- Analyst

And there's been -- you guys haven't scaled back the development size at all, right, for the most part --

Greg Silvers -- President and Chief Executive Officer

No.

David Hargreaves -- Stifel Financial -- Analyst

Pretty much as planned. Great.

Greg Silvers -- President and Chief Executive Officer

Yeah. No, that's still as previously discussed.

David Hargreaves -- Stifel Financial -- Analyst

Saw it this past week. Very impressive. Thank you.

Greg Silvers -- President and Chief Executive Officer

Thank you. Thank you. It's a beautiful project. We think it will be well received by the Greater New York area. It is a beautiful -- if anyone gets the opportunity, it truly is an outstanding, and the Camelback operators actually have proven their ability to deliver a quality customer experience.

David Hargreaves -- Stifel Financial -- Analyst

Thanks very much.

Operator

And our next question comes from the line of John Massocca from Ladenburg Thalmann. Your line is now open.

John Massocca -- Ladenburg Thalmann -- Analyst

So going back to guidance quickly, what is flowing through that $0.19 adjustment in guidance from the prepayments? Is there anything kind of offsetting the kind of top line $17 million in additional prepayment fees from entertainment, rec offset by the $500,000 less in lease term fees you're expecting?

Mark Peterson -- Executive Vice President, Chief Financial Officer and Treasurer

So what we've got there, if you look at that reconciliation, you got additional prepayment penalties from OZRE. So you got -- we had said $45 million; it turned out to be $45.9 million, so you got an extra $900,000 there. There is $15 million we expect from the Vail purchase that they'll pay us. So that totals $15.9 million. Then you've got the John Hancock payment. So those -- that adds up to $17.3 million. And if you divide that by the number of shares, that's where the $0.23 comes from. We offset that by lower termination fees. They're going down by about $500,000 at the midpoint. And then, of course, there is the impact of incremental dilution from the convertibles, and that's how you get to the $0.19.

John Massocca -- Ladenburg Thalmann -- Analyst

So what's the negative impact from the convertible -- that was the $0.02 or $0.01? I can't remember.

Mark Peterson -- Executive Vice President, Chief Financial Officer and Treasurer

It's $0.01 for the incremental amount that we're changing guidance by. And as income goes up, when -- once you're into dilution, as your income goes up, you have an impact from the convertibles, and so it's an additional $0.01.

John Massocca -- Ladenburg Thalmann -- Analyst

So from the $0.23 of the positive, you're losing $0.01 from the convertibles, probably, what, $0.005 from the --

Mark Peterson -- Executive Vice President, Chief Financial Officer and Treasurer

Education.

John Massocca -- Ladenburg Thalmann -- Analyst

Education, and then what's kind of the rest --

Mark Peterson -- Executive Vice President, Chief Financial Officer and Treasurer

And there is -- oh, sorry, and then the $0.02 is the lost income from the fact that we didn't -- hadn't anticipated that $75 million additional paydown.

John Massocca -- Ladenburg Thalmann -- Analyst

Okay. That makes sense. And then it was fairly small, but what was the early education center you sold in the quarter, the one in Wallingford, Connecticut?

Mark Peterson -- Executive Vice President, Chief Financial Officer and Treasurer

Yeah, it was the -- $1.4 million, it was KLA Wallingford.

Greg Silvers -- President and Chief Executive Officer

Yeah. Again, it was just a project that we felt like when we -- the operator wanted to get out and we made a decision that we didn't want to be involved without them. So we sold the property as well.

John Massocca -- Ladenburg Thalmann -- Analyst

Okay. That was the CLA development that you sold?

Greg Silvers -- President and Chief Executive Officer

No, no, no, no.

Mark Peterson -- Executive Vice President, Chief Financial Officer and Treasurer

KLA.

Greg Silvers -- President and Chief Executive Officer

KLA.

John Massocca -- Ladenburg Thalmann -- Analyst

Sorry, no. KLA.

Greg Silvers -- President and Chief Executive Officer

Yeah. I'm sorry. No, no.

John Massocca -- Ladenburg Thalmann -- Analyst

CLA, KLA, it's (inaudible).

Greg Silvers -- President and Chief Executive Officer

Sorry for that reaction, but no, it was not --

John Massocca -- Ladenburg Thalmann -- Analyst

No, no. I understand. And then I know it's mid-season, but do you have any update on how kind of Schlitterbahn properties are performing, specifically the Texas ones? I would assume Kansas is probably struggling a little bit given the closed rides, but are you still confident that the Texas Parks can cover the mortgage net payments?

Greg Silvers -- President and Chief Executive Officer

Again, I think with -- nothing's changed on our belief. I -- hopefully the very hot weather that Texas is experiencing is helping us in that sense, but you are correct, there is no doubt that Kansas is struggling, but it never was a major contributor. And so our thesis of Texas supporting that remains intact.

John Massocca -- Ladenburg Thalmann -- Analyst

Okay. That's it from me. Thank you very much.

Greg Silvers -- President and Chief Executive Officer

Thanks.

Operator

(Operator Instructions) And our next question comes from the line of Nick Joseph from Citi. Your line is now open.

Michael Bilerman -- Citigroup -- Analyst

Hey, it's Michael Bilerman here with Nick. Greg, just in terms of expanding your sub-segments, you had the slides in there, which sort of listed out a variety of different expansion possibilities across entertainment and recreation. It's funny because the natural hot springs and spa wasn't one of the options. So I assume there is a lot of --

Greg Silvers -- President and Chief Executive Officer

No, I do think recreational lodging was part of it.

Michael Bilerman -- Citigroup -- Analyst

Right. Yeah. You didn't say spa. So there is a lot of other things on here; spa was one of them, but I guess now you talked about this whole feeling more comfortable with where your stock is at from a cost of capital perspective. How do you think about deploying capital either to existing segments that you have versus using that capital to embark on further new sub-segments? And if you were to look at those pages, what sort of ranks really high on the list of what you'd like versus stuff that's low on your list?

Greg Silvers -- President and Chief Executive Officer

I would say, Michael, that if we get more offensive for the balance of the year, it's probably going to be in existing segments and existing product. Again, I think that's where we'll -- that will be easiest for us to turn the spigot back on. And so my guess is, you won't see a lot of introduction of any sort of new sub-segments for the balance of the year. We would have a -- we'll have probably an opportunity to have a more meaningful shareholder discussion about those opportunities as the year develops and we go into next year. So for the remaining part of the year, I would look for more of our traditional product.

Michael Bilerman -- Citigroup -- Analyst

Okay. Thank you.

Greg Silvers -- President and Chief Executive Officer

Thank you.

Operator

And I'm currently showing no further questions. I would now like to turn the call back to Greg Silvers, President and CEO, for any closing remarks.

Greg Silvers -- President and Chief Executive Officer

Well, I just want to thank everyone for joining us this morning. Hopefully, everybody has enjoyed the change for us to start this early as opposed to the end of the day, and we look forward to talking to you next quarter. Thanks guys.

Mark Peterson -- Executive Vice President, Chief Financial Officer and Treasurer

Thank you.

Greg Silvers -- President and Chief Executive Officer

Bye-bye.

Operator

Ladies and gentlemen, thank you for your participation in today's conference. This concludes today's program, and you may all disconnect. Everyone, have a great day.

Duration: 54 minutes

Call participants:

Craig Evans -- Senior Vice President, General Counsel and Secretary

Greg Silvers -- President and Chief Executive Officer

Mark Peterson -- Executive Vice President, Chief Financial Officer and Treasurer

Nick Joseph -- Citigroup -- Analyst

Craig Mailman -- KeyBanc Capital Markets -- Analyst

Collin Mings -- Raymond James -- Analyst

Ki Bin Kim -- SunTrust Robinson Humphrey -- Analyst

Michael Carroll -- RBC Capital Markets -- Analyst

David Hargreaves -- Stifel Financial -- Analyst

John Massocca -- Ladenburg Thalmann -- Analyst

Michael Bilerman -- Citigroup -- Analyst

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