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EPR Properties  (NYSE:EPR)
Q3 2018 Earnings Conference Call
Oct. 30, 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 EPR Properties Third Quarter 2018 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 introduce your host for today's conference, Brian Moriarty, Vice President of Corporate Communications. Sir, you may begin.

Brian Moriarty -- Vice President of Corporate Communications

Okay. Thanks Ashley and thanks to everyone for joining us today for third quarter 2018 earnings call. I'll start the call today 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 will be, intend, continue, believe, may, expect, hope, anticipate or other comparable terms. The company's actual financial condition and results of operations may vary materially from those contemplated by such forward-looking statements. Discussion of these factors that could cause results to differ materially from these forward-looking statements are contained in the company's SEC filings including the company reports on Form 10-K and 10-Q.

Now I will turn the call over to company President and CEO Greg Silvers.

Gregory Silvers -- President and Chief Executive Officer

Thank you Brian and good morning everyone. Welcome to our third quarter 2018 earnings call. As always, I'd like to 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, Treasurer and Chief Financial Officer

Good morning.

Gregory Silvers -- President and Chief Executive Officer

First, I'll get started with our quarterly headlines, then discuss the business in greater detail. First, strong quarter boosted by prepayment fees. As compared to the same quarter previous year, our top line revenue grew by 17% and FFO as adjusted per share grew by 25%. The results were driven by strong business fundamentals and from the payment in full on the Och-Ziff real estate mortgage note. This note as structured allowed us to recognize an additional prepayment fee of $20 million in the third quarter. Two, tenant segments demonstrate strength. Box office revenues are up significantly versus the previous year and our diversified portfolio of property types and operators within our education and attraction investments illustrated solid performance. The consumer continues to demonstrate their preference for experiences and our portfolio on tenants are well positioned to benefit from that preference. Number three, capital recycling plan execution. We are pleased with the successful execution of our capital recycling plan that we initiated at the start of the year. We continue to expect this plan along with free cash flow will fully fund our investment spending for the year without the need to issue additional equity. Furthermore, these transactions have proven the inherent value of experiential assets and demonstrated their liquidity in the marketplace. Four, balance sheet strength. With strong financial coverage ratios, 99% unsecured debt and no debt maturities until 2022, we have the balance sheet strength and financial flexibility to continue our success into 2019. And finally five, increasing earnings guidance. Our positive results today along with our outlook for the year allow us to again increase our earnings guidance for the year. Our healthy pipeline of opportunities along with our unique expertise in experiential assets positions us well to continue to deliver strong results.

Now I'll discuss the business in greater detail. At the end of the third quarter, our investments were $6.7 billion with 391 properties and service that were 99% occupied. During the quarter, investment spending was $116.5 million bringing us to a total of $355 million year- to-date. Our proceeds from dispositions were $152 million, bringing us to a total of over $399 million year-to-date. Additionally, our company level rent coverage was at 1.87 times, nicely above the approximately 1.7 times average we've seen over the past three years and highlights the strength and consistency of our operators' businesses.

Now I'll provide an update on our three 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 (Technical Difficulty) 1.86 times. Investment spending in our entertainment segment total $10.7 million consisting primarily of build-to-suit development and redevelopment of megaplex theaters, entertainment retail centers and family entertainment centers.

Turning to industry updates, North American box office revenues were up over 11% versus prior year through last weekend. The third quarter box-office was up 8% over the prior year, which was even better than we anticipated coming off of second quarter that was up over 20%. The third quarter out-performance was driven by highly successful titles such as Mission Impossible, Crazy Rich Asians and we are optimistic that the full year box-office will exceed our previous estimate. We continue to assert the content matters and 2018 is a prime example of Hollywood producing desirable content and consumers responding with their wallets. At quarter-end, our recreation portfolio included over $2.1 billion of total investments with five properties under development, 75 properties in service and 17 operators. Our occupancy was 100% and our rent coverage was approximately 2.07 times. Investment spending and our recreation segment totaled approximately $73.8 million during the third quarter, which included $45 million on the Kartrite Water Park Hotel in the Catskills with the balance being primarily build-to-suit development of golf entertainment complexes and attractions.

During the quarter, we received approximately $95 million in proceeds from Och-Ziff, representing payment in full on the remaining mortgage note receivable of $75 million and prepayment fees of approximately $20 million. Our investment without Ziff produced approximately $66 million of additional cash payments over and above the original $250 million of principal. This translates into an unlevered IRR in excess of 30% and an implied cap rate of approximately 6.7%. We are of course thrilled with these returns and our overall success in recycling capital this year.

Turning to industry updates, the operators in our attractions portfolio have delivered solid results this season with visits and revenue through August, up approximately 1% and 3% respectively versus the prior year. At quarter-end our education portfolio included over $1.4 billion of total investments with three properties under development, 146 properties and service and 60 operators. Our occupancy was 98% and our rent coverage was 1.49 times. Investment spending in our education segment totaled approximately $32 million, primarily consisting of $9.3 million of Early Childhood Education acquisitions with the balance being primarily build-to-suit development and redevelopment of public charter schools and Early Childhood Education centers. As discussed in our last call, in July we sold five charter school properties for a total net proceeds of approximately $55.4 million. Four of these five properties were leased to Imagine Schools under a direct financing lease and produced net proceeds of approximately $43.4 million, which produced a $5.5 million GAAP basis gain and a $12 million gain versus our original cost. This 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.

As we also discussed during our last call, in July we entered into an agreement with CLA related to 21 open schools which replaced the prior leases with a one month lease for the month of August for rent of $1 million. Since progress has been made toward CLA's ultimate restructuring, we have extended the lease through the end of October. CLA made rent payments of $1 million per month in August, September and October. We have not included any additional payments under this new lease in the midpoint of our earnings guidance. If the new lease is not extended or if CLA does not meet its obligations under the lease, 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 identified operators. We anticipate a resolution to the CLA issue by our year-end earnings call.

Moving to our investment spending guidance, we are tightening our range to $500 million to $600 million from our previous range of $450 million to $650 million. We are also confirming our disposition guidance range of $450 million to $500 million. As previously stated, our year-to-date disposition proceeds are approximately $400 million.

With that I'll turn it over to Mark for a discussion of the financials.

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

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 third quarter was $85.8 million or $1.15 per share compared to $57 million or $0.77 per share in the prior year. FFO was $116.5 million compared to $90.5 million in the prior year. FFO as adjusted for the quarter increased to $119.6 million versus $93.3 million in the prior year and was a $1.58 per share versus $1.26 per share in the prior year, an increase of over 25%. I'd like to point out that the results for this quarter include the $20 million in prepayment fees or $0.26 per diluted share related to the $75 million pay-off of the Och-Ziff mortgage note that Greg mentioned. We also had one adjustment to FFO to come to FFO as adjusted that I would like to discuss. As I mentioned on the prior call in July, we sold one public charter school pursuant to a tenant purchase option for total proceeds of $12 million and as a result we recognized a termination fee of $1.9 million in FFO as adjusted versus $1 million of such fees in the prior year.

Now let me walk through the key line item variances for the quarter versus the prior year. Our total revenue increased 17% compared to the prior year to $176.4 million. Within the revenue category, rental revenue increased by $14.3 million versus the prior year to $140.9 million. This increase resulted primarily from rental revenue related to new investments as well as the Endeavor Schools' exercise of the right to convert their $143 million mortgage note into a master lease arrangement during the first quarter of 2018. Note that we recognized $3 million in rental revenue related to Children's Learning Adventure during the quarter related to the required payments under the monthly lease agreement. This represents an increase of $1 million versus the prior year. Tenant reimbursements included in rental revenue were $3.7 million for both the current quarter and the prior year. Additionally, percentage rents for the quarter also included in rental revenue increased to $2.7 million versus $2.2 million in the prior year. The increase of $0.5 million is due primarily to the strong theater box-office performance as well as additional percentage rents related to private schools.

Mortgage and other financing income was $35.1 million for the quarter, an increase of approximately $10.8 million versus the prior year. The increase resulted primarily from the $20 million in prepayment fees related to the Och-Ziff payoff I discussed earlier. This increase was partially offset primarily by the impact of Endeavor Schools' lease conversion as I mentioned earlier and the sale of four Imagine Schools in July that were classified as investment in direct financing leases.

On the expense side, our property operating expense increased by approximately $600,000 versus the prior year due to higher property operating expenses at our multi-tenant properties. G&A expense decreased to $11.4 million for the quarter compared to $12.1 million in the prior year, primarily due to a decrease in our professional fees, in part due to the settlement during the second quarter of our litigation with the Cappelli Group. During the quarter, we completed the sale of four public charter schools leased to Imagine for net proceeds of $43.4 million and recognized a gain on sale of investment and direct financing leases of $5.5 million during the quarter that has been excluded from FFO and FFO as adjusted. Our carrying value on these property at the time of sale was $37.9 million and our original acquisition cost was $31.6 million. Our gain over our initial investment in these schools was nearly $12 million.

Turning to the next slide, for the nine months end of September 30th, our total revenue was up 25% and our FFO as adjusted per share was up 26% to $4.70 including $65.9 million or $0.86 per diluted share in prepayment fees received from Och-Ziff. I also want to note that if you remove all prepayment and termination fees from both year-to-date numbers, our FFO as adjusted per share growth was approximately 5%.

Turning to the next slide, I will 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 3.3 times, debt service coverage at 3.8 times, interest coverage at 3.8 times and at quarter-end, our debt to adjusted EBITDA ratio was down to 5.3 times. Note that each of these ratios exclude all prepayment and termination fees. Our net debt to gross assets was slightly under 42% on a book basis and 35% on a market basis.

Now I'll turn the next slide for 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 the blended coupon of approximately 4.6%. We had no balance at quarter-end on our $1 billion line of credit and $74.2 million of unrestricted cash on hand. We are pleased to have a weighted average debt maturity of approximately seven years and no debt maturities until 2022, which is a great position to be in given the potential of rising interest rates. During the quarter, we settled two expiring foreign currency agreements with a combined notional amount of $200 million and received the cash payment $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 or liquidation of our properties in Canada. These derivatives were replaced with two new cross currency swaps of the same amount that will continue to hedge our net investment in our Canadian assets 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 $6.03 to $6.09 from a range of $5.97 to $6.07. We are also narrowing our guidance for investment spending to a range of $500 million to $600 million from a range of $450 million to $650 million and confirming our disposition proceeds range of $450 million to $500 million. Note that our plan laid out at the beginning of the year to primarily use disposition proceeds and free cash flow to fund new investments has been working very well such that our guidance does not anticipate (Technical Difficulty) any new capital over the remainder of 2018 and we expect to finish the year with all or substantially all of our $1 billion line of credit available. This should put us in great shape from a liquidity perspective as we enter 2019. Guidance for 2018 is detailed on page 30 of our supplemental.

Turning to next slide, I thought it would be helpful to again provide a road map from the previous midpoint of FFO as adjusted per share guidance to the current midpoint. Starting with the previous midpoint of $6.02, the increase in prepayment fees from Och-Ziff of $0.06 is offset by lower expected termination fees related to our education properties of the same amount. Within that, $0.03 per share related to the additional CLA rent payments received for September and October that were not in our previous guidance and had a penny for additional expected percentage rents. These changes moved the midpoint of our guidance up by $0.04 to $6.06 per diluted share. The lower termination fees and education properties due partially to the timing of when tenants planned to exercise their purchase options as well as tenants that have decided not to exercise such options both of which are difficult to predict within a narrow time bound.

Finally, as is the most common practice among our peer group, we will be introducing 2019 guidance on our February 2019 call rather than on this call. This practice provides us better visibility as to our anticipated results for the coming year and as a result, we believe it provides better quality earnings guidance for our investors. I do however want to make a few points about the new lease accounting standard that will be effective on January 1, 2019. First, we have never capitalized internal leasing costs or any costs associated with lease renewals or modifications. So the change to expense such costs going forward for the new standard will have no effect on our net income or FFO results. Second, we do expect to book a right of use asset and corresponding lease liability for certain operating ground leases and other arrangements for which we are the lessee, which we estimate to be less than 4% of total assets at the date of adoption based on current information. Also because substantially all cases the ground lease costs are passed on to our tenants, we will begin recording such amounts as both rental revenue and property operating expense going forward. In addition, certain other costs paid directly by our tenants such as property taxes, a, require a similar gross up of revenue and expense in future income statements, again with no expected net impact. We will update you on these other impacts of a new standard in our year-end call.

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

Gregory Silvers -- President and Chief Executive Officer

Thank you Mark. While we're pleased with our third quarter execution, we know there remains work to be done to achieve our objectives for the year and we're committed to those objectives. In conclusion, our tenant industries are demonstrating their durability and strength. We have substantially executed on our capital recycling plan with outstanding results and we have positioned our balance sheet for future growth. We believe we are well positioned.

With that let me open it up for questions. Ashley?

Questions and Answers:

Operator

Thank you. (Operator Instructions) And our first question comes from the line of Craig Mailman with KeyBanc Capital Markets. Your line is now open.

Craig Mailman -- KeyBanc Capital Markets -- Analyst

Hey good morning guys. Just Mark if you can clarify, so guidance has $0.03 of additional upside just from CLA, correct?

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

Correct.

Craig Mailman -- KeyBanc Capital Markets -- Analyst

Okay. And you guys are saying in the press release that you guys can (inaudible) pretty quickly, I mean do you have LLIs (ph) on any of the 21 assets right now that would slate in pretty quick or could you just give us an update on progress?

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

Sure. What we've said is we actually -- if you remember as part of our August agreement we got the right to share the performance information with other operators. We put six to eight different operators under MDA have been part of that process and we're narrowing that down. So we think we have good options with regard to the other operators. However the current operator has got a restructuring alternative as well and we're trying to let go to other path that maximizes not only our value but also is least disruptive to the properties. So we feel that we have solid alternatives for us to replace that. We have operators that are willing to take all of our 21 properties. So we feel like we're in a position. We're just now into that execution phase and whether or not we have to take those back or whether or not we're able to just transition those.

Craig Mailman -- KeyBanc Capital Markets -- Analyst

Okay. I mean as you guys are going to this process, is there a core business still intact like are they, is enrollment still good, expenses kind of -- can they still run the business that they come out of this process with either lower rent lord or from landlords or I mean can you talk about that at all?

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

Sure. I can talk to you about ours. So I don't want to comment on the others, but our properties have been and have performed very solidly as you can see in the overall kind of coverage metrics that we talk about. They have performed and in fact some of them are continuing to improve. So we feel very good about our properties and the underwriting that we did on their performance. So I think those properties are well positioned to be successful. As I said it's probably improper for me to comment on properties that are owned by others.

Craig Mailman -- KeyBanc Capital Markets -- Analyst

That's fair. And then just on Och-Ziff. The extra $5 million that -- what kind of happened there from the $15 million guidance you gave to the $20 million you received. Is it just, was it all contractual timing or?

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

Yeah. I mean there's a bit of timing because earlier they prepay higher the penalty, so that's it and then we're probably a little bit conservative in that estimate as well.

Craig Mailman -- KeyBanc Capital Markets -- Analyst

Okay. And then just last one from me. As I look at your loan maturities next year, can you remind us what the $176 million one is that expires in May and kind of what the expectation is there for repayment and opportunities to roll that forward?

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

Sure, that's the Schlitterbahn note. So again we'll take a look at that, I mean we historically have had history of rolling that. I can't tell you right now kind of where we will be exactly on that, but what I can tell you of their performance is that they fully funded all their reserves, so we are fully funded up. So we will probably be talking with them in the near future about kind of what they want to do.

Craig Mailman -- KeyBanc Capital Markets -- Analyst

Okay. And I know it's a 7% and 10%, what's the blended on the full balance?

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

It probably blends to a below 8%.

Craig Mailman -- KeyBanc Capital Markets -- Analyst

Okay, great. Thanks guys.

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

Thank you.

Operator

Thank you. And our next question comes from the line of Nick Joseph of Citi. Your line is now open.

Nicholas Joseph -- Citi -- Analyst

Thanks. Just want to follow-up on C&L with extension ending tomorrow, is the plan to extend them again month to month or could there be a resolution or at least a decision on the resolution over the next few days?

Gregory Silvers -- President and Chief Executive Officer

Again I think Nick what we're doing is every one of those are kind of a little bit of a negotiation there, a part of the bigger picture, some of the operators that we're looking at are wanting to look at stores other than our own. So they're trying to get a view beyond just the 21 that we have. So there's some negotiation going on to expand that and we will see how that works out, but again right now we're in active discussions with them.

Nicholas Joseph -- Citi -- Analyst

Thanks. And how do you think about what's the right rent level as for those 21 assets, if you look right now marked around $250 million to $1 million, you're looking at about 4.8% current yield, what you think market rent is for those and if they were to be retented, will there be downtime for rent any CapEx required?

Gregory Silvers -- President and Chief Executive Officer

It really is, again if you look at that historically that product type is kind of low to mid-7s type cap rate. Whether or not that we don't think there will be CapEx whether there's downtime will really be dependent upon the transition and if we transition these as operating properties to new operators versus real estate to new operators and where there's a ramp-up period and those are part of kind of the ongoing negotiations, Nick.

Nicholas Joseph -- Citi -- Analyst

Thanks. And just find me understand changing the guidance issuance to 4Q, but just thinking ahead, are there any expected prepayment or termination fees that we should be thinking about for 2019?

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

There's nothing like an Och-Ziff. We should be back more to our kind of school track. There's no large transactions like we had structured with Och-Ziff in there.

Nicholas Joseph -- Citi -- Analyst

Just a more share excluding Och-Ziff?

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

Yeah. Right.

Nicholas Joseph -- Citi -- Analyst

Thank you.

Operator

Thank you. And our next question comes from the line of Collin Mings with Raymond James. Your line is now open.

Collin Mings -- Raymond James -- Analyst

Hey, good morning everybody.

Gregory Silvers -- President and Chief Executive Officer

Morning Coll.

Collin Mings -- Raymond James -- Analyst

To start, just recognizing not providing formal guidance that can you just me talk a little bit more about the deal pipeline you're building just especially given your improved cost of capital, that's something you touched on a little bit on the last call and then maybe just within your different categories, where are you seeing the most opportunities either in terms of build-to-suit or acquisitions?

Gregory Silvers -- President and Chief Executive Officer

I think what we would say is Collin that we would take 2019 would be kind of a return to our kind of a normal what we have established over the last couple of years excluding the large C&L transaction. So I think what we would think is it's kind of a return to the norm. As far as kind of where the opportunities I would say right now they're probably in our entertainment and recreation, there's probably more as we continue to talk about the power of the experiential assets. We're seeing a lot of focus there and a lot of tenants tapping into those markets. So education being more of the steady, but the growth being in those two areas.

Collin Mings -- Raymond James -- Analyst

Okay. And then maybe just along those lines, you've touched on some areas that future growth within kind of the targeted categories of areas that maybe historically haven't trafficked and any sort of update or thoughts there, any particular sub-categories if you will that you're focused in on right now?

Gregory Silvers -- President and Chief Executive Officer

I think what we'll do and again it's within the larger framework of what we call that those experiential groupings of recreation entertainment, but I think we'll probably we will deal with that. I mean you know you've seen some things that we've done here recently with the recreational lodging. We're seeing a lot of opportunities in that. So again but that's probably best for our fourth quarter call when we're ready to roll-out formal guidance.

Collin Mings -- Raymond James -- Analyst

Fair enough. Just going back to the prepared remarks, just the downward pressure on termination fees on the education properties. You noted some of that was maybe driven by tenant election not to pursue some purchase options. Just anything specific driving that or any additional color you can provide on that move in guidance?

Gregory Silvers -- President and Chief Executive Officer

I mean I think for anything as we've said before a lot of these people are trying to exercise early and I think with some of the rate movements, there's been some reconsideration for people because that just increases their prepayment penalty if they're going out earlier. So that is what our understanding is. People are a little more sensitive there.

Collin Mings -- Raymond James -- Analyst

Okay. That's helpful. I'll turn it over. Thanks guys.

Operator

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

Michael Carroll -- RBC Capital Markets -- Analyst

Yeah. Thanks. I guess actually on Collin's question on your investment pipeline, Greg, can you talk a little bit about where are you seeing the most activity in terms of your three segments. It seems like you kind of shied away from the entertainment investments here near-term, is that because those are mostly build-to-suit type deals and those are building and they're going to come more in 2019?

Gregory Silvers -- President and Chief Executive Officer

Yeah. I think what is true, it's a fair statement as I said, I think that 2019 will be more focused a little bit in the entertainment and recreation areas, but remember we started off 2018 slow and we're worried about our cost of capital and where we would deploy. So that pushes projects whether they would be redevelopment or new development out. So we think that that will get back on a more traditional trajectory in those and feel like especially after coming-off of a really strong year and the performance of redeveloped theaters to the high amenities that they continue to perform outstandingly. So I think we'll see more focus or a return to a focus on that in '19 given our better cost of capital and our willingness of our operators to take advantage of that.

Michael Carroll -- RBC Capital Markets -- Analyst

Okay. Can you talk a little bit about the education platform. Is there anything on the legislation side that's coming down over the next few months and then also why do you think that investment activity in that space is going to be a little bit slower as you move into 2019?

Gregory Silvers -- President and Chief Executive Officer

I'm not aware of any sort of legislative activity and what I mean by slower I meant on a relative basis compared to the other two. It is more of a steady flow business where the others got more momentum with a focused on experiential. So I don't mean to say that that's where that business is not still progressing. It's just that there's quite a bit of momentum right now in the experiential side.

Michael Carroll -- RBC Capital Markets -- Analyst

Okay. Then with regard to CLA, can you talk a little bit about I know it might be difficult but how there negotiations are going with the third-party capital providers? It seems like they've been in talks with potential capital fighters for the past few quarters now. Is that a likely scenario or is it more likely that you're going to have to release these facilities to a different operator?

Gregory Silvers -- President and Chief Executive Officer

Again, Michael, it's a very fair question. I just don't think we should be talking about their transaction on our call. We're trying to advance the ball. We get evidence of progress by talking to people who are involved on the other side, but at each stage I can assure you we are making progress on our solution that we control and that at each one of these months we're extracting something that is useful for us to drive our solution forward, but to talk about their side of the transaction, probably I shouldn't be doing that on our call.

Michael Carroll -- RBC Capital Markets -- Analyst

Understood. And then how long are you willing to continue to do these month-to-month extension? If I guess it's seen as you're able to -- these things can really see facility to a different operator on a seamless basis, that's when you'll stop those month-to-month transactions?

Gregory Silvers -- President and Chief Executive Officer

That's a great I think indicator of what we're trying to do the seamlessness nature of that, but what we said was we think we're going to have this resolved by our year-end call.

Michael Carroll -- RBC Capital Markets -- Analyst

Okay great. Thanks Greg.

Gregory Silvers -- President and Chief Executive Officer

Thank you.

Operator

Thank you (Operator Instructions) And our next question comes from the line of Ki Bin Kim with SunTrust. Your line is now open. Ki Bin Kim, if your line is on mute, please un-mute it.

Alexis Ratliff -- SunTrust Robinson Humphrey -- Analyst

Sorry about that. This is Alexis filling in for Ki Bin this morning. Two quick questions. First one regarding CLA and $3 million of rent recognized this quarter. Does that include the $1 million of October rent or is that going to flow through your fourth quarter income statement?

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

The October app will flow through the fourth quarter, but both amounts are in our guidance for the year. Yeah. We're booking it on a as received basis.

Alexis Ratliff -- SunTrust Robinson Humphrey -- Analyst

Okay. Makes sense. And then in terms of rent coverage, you had quite a big jump in the entertainment segment from last quarter. Is that mostly percentage rates or are there something else that drove that?

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

Well, what percentage rate wouldn't drive coverage. It's actually underlying performance. I think it's like we've said it's been a very good box-office year so far year-to-date. Also what we've seen across the board is increases per cap spending in the concessions. So overall, generally it feeds itself in that when you have a better box-office year you have higher concession spending which I think what we would tell you was we talk about a 1.6 (ph) to 1.8 (ph) is the bandwidth of our coverage and I think by the end of the year we'll probably be right around that bandwidth. So I think this is really just kind of taking off what was a less than stellar second quarter out of the trailing 12 and and having a better one in this year.

Alexis Ratliff -- SunTrust Robinson Humphrey -- Analyst

Okay. Thank you

Operator

Thank you and our next question comes from the line of John Massocca with Ladenburg Thalmann. Your line is now open.

Gregory Silvers -- President and Chief Executive Officer

Good morning John.

John Massocca -- Ladenburg Thalmann -- Analyst

So kind of looking at maybe the near-term investment spending, you're about $145 million out from the low-end of 2018 guidance. If you look at kind of page 20 that's up and in your own build-to-suit spending and the mortgage build-to-suit spending estimates that's about a little under $60 million. Is the delta there going to be your acquisitions that you potentially see out there in the market to close or is that kind of maybe spur of the moment build-to-suit spending historically get from like entertainment tenants?

Gregory Silvers -- President and Chief Executive Officer

It will be both but it won't be spur of the moment kind of, there are no kind of spur of the moment, it could be build-to-suits that start, but likewise it's pretty straightforward that there would be more acquisition than traditional in that fourth quarter to be comfortable with our numbers.

John Massocca -- Ladenburg Thalmann -- Analyst

Understood. And then kind of going back to the guidance a little bit, was there any loss kind of interest income in the current guidance versus the prior guidance given that maybe earlier prepayment then was originally expected and where's that flowing through that just netted out against the prepayment income?

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

No it's not netted out. It will be reflected in lower mortgage financing income but we had the school timing and across the rest of portfolio in terms of what went into service, there was kind of an offset there. So it didn't make its way to the overall guidance reconciliation. That was a decrease in interest income by them exercising earlier than we had anticipated but that was offset by other timing.

John Massocca -- Ladenburg Thalmann -- Analyst

Okay. So basically the fact that education had more interest income than expected can offset, right?

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

Yeah.

John Massocca -- Ladenburg Thalmann -- Analyst

And then maybe kind of lastly, can you provide some color on the Early Education properties you acquired in the quarter. What are those, are those maybe more high finished assets or CLA or are those kind of smaller lower costs?

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

I would say they are smaller lower cost boxes, more traditional early adds and then CLA.

John Massocca -- Ladenburg Thalmann -- Analyst

And is that kind of the way, maybe Early Education investments will be on a go forward basis that's more of a focus versus some of the bigger-box players out there even beyond CLA?

Gregory Silvers -- President and Chief Executive Officer

I think that's fair.

John Massocca -- Ladenburg Thalmann -- Analyst

Okay. That's it for me. Thank you guys very much.

Gregory Silvers -- President and Chief Executive Officer

Thank you.

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

Thank you.

Operator

Thank you. And our next question comes from the line of Tony Paolone with JPMorgan. Your line is now open.

Anthony Paolone -- JP Morgan Chase & Co -- Analyst

All right, thanks. Good morning.

Gregory Silvers -- President and Chief Executive Officer

Good morning.

Anthony Paolone -- JP Morgan Chase & Co -- Analyst

Just a question on the Catskills deal, I'm looking at page 20, what piece of the $371 million of recreation build-to-suits is the Catskills going to be, if you could remind us on that.

Gregory Silvers -- President and Chief Executive Officer

It will be a little over $200 million all in.

Anthony Paolone -- JP Morgan Chase & Co -- Analyst

Okay. And can you just talk about just what the expected the timing of that is to be wrapped up in the (inaudible).

Gregory Silvers -- President and Chief Executive Officer

Yeah. Again all of those things, it should be the spring of 2019, so that's kind of the expectation. As far as the yield, I think we'll put that into our guidance as we go forward Tony without speaking on one particular asset.

Anthony Paolone -- JP Morgan Chase & Co -- Analyst

Okay. I am just curious if anything just changed or the outlook for that, casinos have opened or the casino opened I think on the slower side, but I don't know if that's because your projects are not up kind of up and running there or just where everything stands for that whole region right now?

Gregory Silvers -- President and Chief Executive Officer

Yeah. I mean again I think if you talk to the operators, I don't feel they think there's a connection to the casino. I know while the casino has performed, somewhat less than the operator had anticipated, but I think our operator feels that that's a more family oriented product and really see that tapping into the upper, the northern half of, kind of Manhattan in New York for their destination, but I think if people get a chance to go out and look it's a beautiful project and I think it will be a real asset for us and for people looking for recreation and entertainment in and around New York.

Anthony Paolone -- JP Morgan Chase & Co -- Analyst

Okay, great. And then just on the top of, that was one of your bigger spends in the quarter, is that still under the original program where you were getting some out sized yields or at this point are on top of yields more market?

Gregory Silvers -- President and Chief Executive Officer

They are probably, we are outside of our deal. So these are a little more market, but they were sites that we had done work on as far as determining what would be in our final group. So I think we're doing well with those. We're probably in the low to mid-8s on these but against our overall portfolio we felt these were really strong locations that would perform, so we've gone ahead and added those to our portfolio.

Anthony Paolone -- JP Morgan Chase & Co -- Analyst

Okay. Got it. That's all I have. Thanks.

Gregory Silvers -- President and Chief Executive Officer

Thanks Tony.

Operator

Thank you. And I'm not showing any further questions at this time. I would now like to turn the call back over to management for any closing remarks.

Gregory Silvers -- President and Chief Executive Officer

Well again, I really and we really appreciate your time and attention and we look forward to talking to you in February and everyone have a very safe and happy Halloween.

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

Thank you.

Gregory Silvers -- President and Chief Executive Officer

Thank you. Bye-bye.

Operator

Ladies and gentlemen, thank you for participating in today's conference. This does conclude today's program and you may all disconnect. Everyone have a wonderful day.

Duration: 42 minutes

Call participants:

Brian Moriarty -- Vice President of Corporate Communications

Gregory Silvers -- President and Chief Executive Officer

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

Craig Mailman -- KeyBanc Capital Markets -- Analyst

Nicholas Joseph -- Citi -- Analyst

Collin Mings -- Raymond James -- Analyst

Michael Carroll -- RBC Capital Markets -- Analyst

Alexis Ratliff -- SunTrust Robinson Humphrey -- Analyst

John Massocca -- Ladenburg Thalmann -- Analyst

Anthony Paolone -- JP Morgan Chase & Co -- Analyst

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