EPR Properties (EPR) Q3 2023 Earnings Call Transcript

EPR Properties (EPR -0.32%)
Q3 2023 Earnings Call
Oct 26, 2023, 8:30 a.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Good day, and thank you for standing by. Welcome to the third quarter 2023 EPR Properties earnings conference call. [Operator instructions] Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Brian Moriarty, vice president, corporate communications.

Please go ahead.

Brian Moriarty -- Vice President, Corporate Communications

OK. Thank you, Victor. Thanks for joining us today for our third quarter 2023 earnings call and webcast. Participants on today's call are Greg Silvers, chairman and CEO; and Greg Zimmerman, executive vice president and CIO; and Mark Peterson, executive vice president and CFO.

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 will be, intend, continue, believe, may, expect, hope, anticipate, or other comparable terms. The company's actual financial condition and the results of the operations may continue -- may vary materially from those contemplated by such forward-looking statements. The 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's reports on Form 10-K and 10-Q. Additionally, this call will contain references to certain non-GAAP measures, which we believe are useful in evaluating the company's performance.

A reconciliation of these measures to the most directly comparable GAAP measures are included in today's earnings release and supplemental information furnished to the SEC under Form 8-K. If you wish to follow along, today's earnings release, supplemental, and earnings call presentation are all available on the investor center page of the company's website, www.eprkc.com. Now, I'll turn the call over to Greg Silvers.

Greg Silvers -- Chairman and Chief Executive Officer

Thank you, Brian. Good morning, everyone, and thank you for joining us on today's third quarter 2023 earnings call and webcast. I'm happy to report another strong quarter, highlighted by top-line revenue growth of approximately 17% and FFO as adjusted per share growth of approximately 27% versus the same quarter prior year. These results were driven by continued strong results in our experiential properties, along with significant deferral collections.

With these results as a backdrop, we are pleased to announce that we are increasing our 2023 earnings guidance. A few matters on tenant health. As we previously announced, during the quarter, we significantly enhanced our theater portfolio as we entered into a comprehensive restructuring agreement with Regal, anchored by a new master lease. Additionally, Southern Theaters, our fourth largest theater tenant was acquired by Santikos Entertainment, who paid the full remaining deferred rent owed by Southern Theaters.

While the actors' strike is still ongoing, resolution of the writers' strike was an important milestone as theatrical exhibition continues its strong recovery. As of last weekend, year-to-date box office has already surpassed 2022 total box office revenues. As we emphasized previously, compelling content translates into theater attendance. Most recently, the Barbenheimer event highlighted the power of theatrical exhibition as it brought in cohorts from diverse age and gender demographics.

Additionally, it brought back many who hadn't been to the theater in years. With the Taylor Swift Eras Tour movie, we're seeing the true power of theatrical experience combined with highly engaging content. This is an excellent example of alternative content brought to life in a theatrical environment. Many in the industry are seeing the success of this movie as an indicator of opportunities for other genres and performers to bring their content to this entertainment platform.

Our non-theater portfolio continues to demonstrate strength, and our coverage remained strong with many tenants seeing increases in both attendance and revenue. While the macro environment remains challenging for REITs broadly, consumers continue to value experiences, and their spending on these activities remains resilient. Accordingly, we are confident in our plan and our ability to identify and capitalize on compelling opportunities. With a committed development and redevelopment pipeline of approximately $235 million to be funded over the next two years with $173 million of cash on hand and no borrowings on our $1 billion unsecured revolving credit facility, we are well-positioned to continue our growth without having to issue equity.

Our current value proposition is strong with a solid balance sheet, a well-covered dividend, and significant near-term catalysts with a recovering box office and the potential to realize meaningful percentage rent. Additionally, we are the only diversified REIT focusing on the highly resilient experiential economy. We specialize in experiential real estate and, as such, have developed unique industry knowledge in the segments we target approach. This allows us to develop long-term relationships and provides the ability to be selective in the spaces in which we invest.

As we continue to execute our plan, we anticipate an improvement in our cost of capital which should allow us to achieve increased levels of growth. Now, I'll turn it over to Greg Zimmerman for more details on the quarter.

Greg Zimmerman -- Executive Vice President, Chief Investment Officer

Thanks, Greg. At the end of the quarter, our total investments were approximately $6.7 billion with 359 properties in service and 99% leased. Beginning this quarter, we will exclude properties we intend to sell from our leasing occupancy statistics. During the quarter, our investment spending was $36.8 million, bringing our total investment spending for the nine months ending on September 30 to $135.5 million.

100% of the spending was in our experiential portfolio and included continued funding for experiential build-to-suit development projects and redevelopment projects commenced in 2022 and 2023. Our experiential portfolio comprises 288 properties with 51 operators and accounts for 92% of our total investments or approximately $6.2 billion and at the end of the quarter was 99% occupied. Our education portfolio comprises 71 properties with eight operators and at the end of the quarter, was 100% occupied. Turning to coverage.

The most recent data provided is based on a June trailing 12-month period. Overall portfolio coverage for the trailing 12 months continues to be strong at two times. Coverage for the non-theater portion of our portfolio is 2.6 times. Coverage for the theaters is 1.4 times with box office for the 12 months ending June 30 at $8.1 billion.

By way of comparison, if the restructured Regal deal, which I'll describe in more detail in a moment, had been in place for the trailing 12 months ending June 30, theater coverage would be 1.5 times, and overall coverage would be 2.1 times. Beginning next quarter, to provide a more accurate view of coverage, we will report theater coverage as if the restructured Regal deal was in place for the full trailing 12 months. Finally, with trailing 12-month box office gross through September 30 at $8.8 billion, we anticipate theater coverage is returning to our pre-pandemic range. Now I'll update you on the operating status of our tenants.

As previously reported, we entered into a comprehensive restructuring agreement with Regal, anchored by a new master lease for 41 of the 57 properties previously operated by Regal. The new master lease became effective August 1. The four former Regal locations now managed by Cinemark and one managed by Phoenix are all open, ramping up, and regaining market share. Performance is in line with our expectations.

As we reported in August, on July 17, Santikos Theaters LLC, acquired VSS Southern Theaters through an asset purchase agreement. With 10 theaters, Southern was our fourth-largest theater holding. Santikos is owned by the San Antonio Area Foundation, one of the nation's premier community foundations. The combined Santikos entity operates 27 highly amenitized theaters in eight Southeastern states, making it the eighth-largest theater circuit in North America.

In connection with the transaction, Southern paid in full its remaining deferred rent of $11.6 million, which was recognized as rental revenue in the third quarter. In the quarter, we took an impairment of $20.9 million related to a potential restructuring with a small regional theater chain. We are working on to finalize the agreement, and we'll provide more detail on a future call. The third quarter was a continuation of box office recovery despite the headwinds of the writers' and actors' strikes.

The writer strike was settled in September and approved by the writers guild in early October. The Screen Actors Guild remains on strike, and we don't have any insight into the timing of resolution. Box office for the first three quarters of 2023 was $7 billion, a 26% increase over the same time period in 2022. Led by $955 million in combined box office gross during the quarter from Barbie and Oppenheimer, Q3 total box office was $2.6 billion, a 38% increase over Q3 2022.

Six films grossed over $100 million and 13 grossed over $60 million, demonstrating the broad-based return of exhibition with contributions from both blockbusters and smaller films. Q4 is off to a solid start, led by Taylor Swift: The Eras Tour, which grows $93 million on its opening weekend, the second-highest October opening ever and the highest grossing concert film opening ever, and has grossed $132 million through October 23. Through October 23, 21 titles have grossed over $100 million in 2023 and year-to-date box office gross stands at $7.44 billion, which exceeds the box office gross for all of 2022. Because of the continued strong performance, we believe domestic box office for 2023 will come in slightly above $9 billion, which is in line with the projections we shared in discussing our Regal resolution and would be a 24% increase over 2022 domestic box office gross.

We are optimistic about the remainder of the year with Killers of the Flower Moon, which opened last weekend and grossed $23 million; Renaissance, a film by Beyonce; Hunger Games: The Ballad of Songbird & Snakes; The Marvels; Napoleon; and Aquaman and the Lost Kingdom. Importantly, our high-quality theater portfolio continues to outperform the industry. Turning now to an update on our other major customer groups. We continue to see good results and ongoing consumer demand across all segments of our drive to value-oriented destinations.

Across the board, operators are managing increased operating expenses, which is negatively impacting EBITDARM for some. While attendance remained strong, in some properties, we are seeing an anticipated pullback from peak post-pandemic attendance. Our Eat & Play assets continued their strong performance with portfolio revenue and EBITDARM up over Q3 2022. At its own expense, Topgolf renovated five of our assets in 2023, replacing the outfield turf in lighting, repainting, and upgrading signage.

Our attractions portfolio saw attendance gains. EBITDARM was pressured by increasing insurance and wage costs, but we still have comfortable rent coverage. Construction of the indoor water park at the Bavarian Inn in Frankenmuth, Michigan, is about 25% complete and on schedule for a summer 2024 opening. Attendance at City Museum in St.

Louis is up 11% year over year, driving increased revenue and EBITDARM. Our Titanic museums also demonstrated strong attendance, revenue, and EBITDARM growth year over year. Across our fitness offerings, we're seeing continued year-over-year growth in membership revenue as the post-pandemic emphasis on fitness continues. We are also seeing improvements in EBITDARM and EBITDARM margin.

Construction is underway for both the expansion of the Springs Resort in Pagosa Springs, which will open in early 2025; and the redevelopment of our Murrieta, California conference center into a new natural hot springs resort, which is scheduled to open in early 2024. Construction on improvements to both Gravity Haus Steamboat Springs and Aspen locations is also well underway. Vail reported season pass sales are up 7%, and Alyeska joins the Ikon Pass program for the coming season. We continued to be pleased with the strong performance of the Nordic Spa at Alyeska.

Room renovations continue at Alyeska, including the addition of a glacier lounge and new suites. Our Margaritaville Hotel Nashville, proximate to all of Nashville's famous downtown destinations, continues its upward trajectory in revenue, EBITDARM, and occupancy. At both the Beachcomber and Bellwether resorts in St. Pete Beach, we continue to see increases in occupancy, operating revenue, and EBITDARM, while ADR and RevPAR are normalizing from post-pandemic highs.

Revenue and EBITDARM increased year over year in Q3 for our overall RV park portfolio. The conversion of the former Cajun Palms to Camp Margaritaville Breaux Bridge is complete, and we are starting to see improved results. Construction on improvements at Jellystone Kosy Rest in suburban Pittsburgh is underway to be complete by Memorial Day, and we have completed 80% of the redevelopment at Jellystone Warrens in the Wisconsin Dells. Our education portfolio continues to perform well with year-over-year increases through June 30 across the portfolio, up 12% in revenue and 6% in EBITDARM.

Attendance is holding steady at very high levels and increased across the entire portfolio for June 2023 trailing 12 months. Turning to capital recycling. As we reported in August, during the quarter, we sold two more KinderCare locations for which the lease was terminated for a combined net proceeds of $13.9 million and a gain of approximately $1.5 million. Both will be operated at schools.

We have now sold three of the five and have a signed purchase agreement for the fourth. Again, as we reported in July, in the third quarter, we sold a former Cinemex theater in Hialeah, Florida, for a non-theater use for net proceeds of $9 million and a gain of around $750,000. We were not able to publicly market any of the 11 surrender Regal theaters we plan to sell until mid-July. I'm pleased to report that in the third quarter, we sold the first of the 11 for net proceeds of $3.7 million and a gain of about $300,000.

As of today, we have either executed letters of intent or signed purchase and sale agreements for six of the remaining 10 former Regal theaters. As has been our experience over the past two-plus years, the potential future uses are varied and dependent on the location of the real estate. Year to date, we have generated approximately $35 million in net proceeds from dispositions. Subject to satisfaction of customary closing conditions, we anticipate closing additional dispositions in Q4 and are thus revising our 2023 guidance for dispositions from a range of $31 million to $41 million to a range of $40 million to $60 million.

In Q3, our investment spending was $36.8 million, bringing our total investment spending for the first nine months of the year to $135.5 million. This consisted of funding of experiential development and redevelopment projects commenced in 2022 and 2023. We're narrowing our investment spending guidance range for funds to be deployed in 2023 from a range of $200 million to $300 million to a range of $225 million to $275 million. At the end of Q3, we have committed an additional approximately $235 million in experiential development and redevelopment projects which we expect to fund over the next two years without the need to raise additional capital.

We anticipate approximately $63 million of that $235 million will be deployed over the remainder of 2023, and that is the amount included in our 2023 guidance range. Cap rates continued to be in the 8% range. In most of our experiential categories, we are seeing high-quality opportunities for both acquisition and build-to-suit redevelopment and expansion. We continue to be pleased with our pipeline and with new and existing customers and concepts.

But as we have consistently said over the past several quarters, we are exercising discipline in evaluating new transactions given our cost of capital and the current interest rate environment. I now turn it over to Mark for a discussion of the financials.

Mark Peterson -- Executive Vice President, Chief Financial Officer

Thank you, Greg. Today, I will discuss our financial performance for the third quarter, provide an update on our balance sheet, and close with providing updated 2023 guidance. We had another strong quarter of results with FFOs adjusted $1.47 per share versus $1.16 in the prior year, up 27% and AFFO of $1.47 per share, compared to $1.22 in the prior year, up 20%. Now moving to the key variances by line item.

Total revenue for the quarter was $189.4 million versus $161.4 million in the prior year, an increase of 17%. In addition to the effect of acquisitions, development, and scheduled rent increases, a number of other items contributed to this increase. As we discussed last quarter, Regal emerged from bankruptcy on July 31, and the new master lease became effective on August 1. In connection with reestablishing accrual basis accounting for Regal, we recognized approximately $700,000 in straight-line rental revenue during the quarter, as anticipated, related to the new master lease with Regal.

In addition, we recognized straight-line rental revenue that was not anticipated totaling $2.1 million, primarily related to recording a straight-line receivable on the master lease on the effective date related to four ground leases that are subleased to Regal. During the quarter, we collected a total of $19.3 million of deferral payments from cash-basis customers that was recognized as additional revenue. This included, among other collections, the $11.6 million of remaining deferred rent received from Southern related to its sale to Santikos and Regal stub rent and pre-petition rent for September of '22 totaling $3.8 million, as I outlined on our last call. We also received an additional $1.2 million of prior-period property operating expense reimbursements from Regal that were not previously anticipated.

Going forward, we could receive an amount related to our rejection damages with Regal that is treated as an unsecured claim in the bankruptcy, but any such amount is expected to be insignificant. With Regal's bankruptcy resolution and the full deferral payment by Southern, the deferred rent receivable not on our books, excluding the amount held in advance related to Regal, is reduced to approximately $12.7 million at quarter end. Of this amount, approximately $11.6 million relates to one cash-basis attraction tenant whose repayment timing is based on an earnings threshold which is not expected to be achieved in 2023. The remaining amount of approximately $1.1 million relates to two cash-basis tenants that are paying according to agreed-upon schedules through 2024.

Thus, while as you can see on the schedule of cash-basis deferral collections, we have recognized significant amounts of such revenue in 2022. And through the third quarter of 2023, we expect such amounts to be nominal in the fourth quarter of '23 and for all of 2024. After I go over our 2023 revised guidance, I will illustrate the impact these out-of-period deferral collections are expected to have on our anticipated growth in FFO as adjusted per share for 2023 versus prior year. Both other income and other expense relate primarily to our operating properties.

The increases in these amounts of $3.1 million and $4 million, respectively, compared to the prior year were due primarily to the fact that five of the 16 theaters surrendered by and previously leased to Regal have been operated by third parties on EPR's behalf since early August. These properties experienced a slight loss during the third quarter as anticipated. In addition, the net profit of the remaining managed properties taken as a whole was also slightly lower than prior year. Percentage rents for the quarter increased to $2.1 million versus $1.5 million in the prior year, primarily due to increased revenue at one cultural property.

On the expense side, G&A expense for the quarter increased to $13.5 million versus $12.6 million in the prior year due primarily to higher payroll costs, including noncash share-based compensation expense, as well as higher professional fees, including those related to the Regal resolution. Interest expense net for the quarter decreased by $1.5 million compared to prior year due to an increase in interest income on short-term investments and an increase in capitalized interest on projects under development. As Greg mentioned previously, during the quarter, we recognized impairment charges of $20.9 million related to two theater properties that are part of a workout with a small theater tenant. These charges are excluded from FFO, FFOA, and AFFO.

Turning to the next slide, I want to review some of the company's key credit ratios. As you can see, our coverage ratios continue to be strong with fixed-charge coverage at 3.8 times and both interest and debt service coverage at 4.5 times. Our net debt to adjusted EBITDAre was 4.4 times for the quarter. However, excluding the favorable impacts of out-of-period revenue and annualizing other items, net debt to annualized adjusted EBITDAre was 5.1 times for the quarter, still at the low end of our stated range of five to 5.6 times.

Additionally, our net debt to gross assets was 38% on a book basis at September 30. Lastly, our common dividend continues to be very well covered with an AFFO payout ratio for the third quarter of only 56%. Now let's move to our balance sheet, which is in great shape. At quarter end, we had consolidated debt of $2.8 billion all of which is either fixed-rate debt or debt that has been fixed through interest rate swaps with a blended coupon of approximately 4.3%.

Additionally, our weighted average consolidated debt maturity is four-and-a-half years with no scheduled debt maturities in 2023 and only $136.6 million due in 2024. We had $173 million of cash on hand at quarter end and no balance drawn on our $1 billion revolver, which puts us in an enviable position given the difficult backdrop of the capital markets. We are pleased to be increasing our 2023 FFO as adjusted per share guidance to a range of $5.10 to $5.18 from a range of $5.05 to $5.15. I will go over the changes from our previous midpoint of guidance in a moment.

Note that the revised 2023 guidance range implies an FFO as adjusted per share range for the fourth quarter of $1.10 to $1.18. As we have discussed previously, given our cost of capital in the current inflationary environment, we have consciously decided to limit our near-term investment spending. We are narrowing our 2023 investment spending guidance to a range of $225 million to $275 million from a range of $200 million to $300 million, and we do not anticipate the need to raise additional capital to fund these amounts. We're increasing our guidance for disposition proceeds for 2023 to a range of $45 million to $60 million from a range of $31 million to $41 million.

Lastly, guidance for percentage rent and G&A expense is unchanged. I want to remind everyone that none of the percentage rent expected for 2023 relates to the new Regal master lease which is based on lease year and is expected to start being recognized in 2024. Guidance details can be found on Page 24 of our supplemental. I thought it would be helpful to provide a bridge from the midpoint of our previous FFO as adjusted per share guidance of $5.10 to the midpoint of our increased guidance of $5.14 million.

As you can see on the slide, the $0.04 increase in guidance is driven primarily by the two favorable revenue items recognized during the third quarter that I discussed earlier: the $2.1 million of additional straight-line rent and the additional $1.2 million of operating expense reimbursements related to Regal. As I mentioned earlier, on the next slide, I want to illustrate the anticipated impact on growth in FFO as adjusted per share for 2023 when you remove the impact of out-of-period cash-basis deferral collections from 2022 of $18.4 million or $0.24 per share and from the midpoint of guidance for 2023 of $36 million or $0.47 per share. As you can see on the slide, FFO as adjusted per share growth from 2022 to 2023 is expected to still be a healthy 4.9%. Finally, I want to make one last point that I think is important to understand and perhaps sets EPR apart in a difficult environment for all REITs.

Over the next couple of years, given our low dividend payout ratio and modest debt maturities, we believe we can use excess cash flow, disposition proceeds, and some of our line capacity to increase investments a modest amount and still grow FFO as adjusted per share, excluding the impact from cash-basis deferral collections, by around 4% each year while maintaining our targeted debt-to-adjusted EBITDA range of five to 5.6 times. When this growth is combined with a well-covered dividend yield of nearly 8% currently, we believe that EPR offers shareholders a compelling investment opportunity. Now with that, I'll turn it back over to Greg for his closing remarks.

Greg Silvers -- Chairman and Chief Executive Officer

Thank you, Mark. In conclusion, I want to leave you with a few salient points regarding our performance. One, as Greg pointed out, 2023 box office is expected to be at or above $9 billion, a 24% increase over last year. Two, our theater coverage normalized for the Regal transaction currently stands at 1.5 times, and this is computed on a trailing 12-month box office of $8.1 billion.

With an anticipated $9 billion box office for 2023, we expect that we will be back to our long-standing pre-pandemic theater coverage range of 1.6 to 1.8. Three, even with the ongoing actors' strike, currently, most industry participants predict 2024 box office to be at least $9 billion. And four, our non-theater portfolio continues to significantly outperform pre-pandemic metrics. As these points demonstrate, our belief and the resilience of the experiential economy is grounded in performance.

Not only have we collected over $150 million of deferred rents, but our properties are now performing at or above their pre-pandemic levels. With that, why don't I open it up for questions? Victor?

Questions & Answers:

Operator

Thank you. [Operator instructions] Our first question will come from the line of Joshua Dennerlein from Bank of America. Your line is open.

Josh Dennerlein -- Bank of America Merrill Lynch -- Analyst

Yeah. Hey, guys, appreciated the color in the opening remarks. Just kind of thinking about your guide for the full year and then what it implies for 4Q, could you kind of help us bridge like where you are in 3Q to 4Q's like implied range.

Mark Peterson -- Executive Vice President, Chief Financial Officer

Yeah. There's a lot to that reconciliation, Josh, but I can go over kind of the major components here in a second. So first of all, obviously, you've got about $0.25 of deferrals in Q3, and we expect that to be nominal in Q4. So that's a big one as you head from Q3 to Q4.

We also had straight-line rent, kind of onetime of the $2.1 million, so that's another $0.03. And then if you think about it, once you get deferrals out of the way, the Regal base rent is higher for one month in Q3 than it is in Q4, and that's about another $0.02. So you work that down to get to about $1.17. Then as you head to Q4, there's a couple of things that are pretty big to keep in mind.

The managed properties and JVs really drop in Q4. That's their off-season, so there's quite a bit of drop in FFO from Q3 to Q4 for those properties. But on the other side, about 50% of our percentage rent of that $12 million is recognized in Q4. So that's an up of about $0.05, whereas the timing of managed and JVs is kind of down about $0.08, then there's other minor items.

So that's a long way of saying that's a way of getting from $1.47 this quarter to $1.14, but those are the major pieces as you head into Q4.

Josh Dennerlein -- Bank of America Merrill Lynch -- Analyst

OK. All right. That's super helpful. Appreciate that.

And then, Mark, you did mention just kind of where you think the company can kind of stabilize on a go-forward basis for growth. But I think without equity in your opening remarks, could you kind of go over that -- those assumptions again and just kind of how you're thinking about it, maybe what could drive maybe upside to that growth rate?

Mark Peterson -- Executive Vice President, Chief Financial Officer

Sure. So those comments are about over the next couple of years, so we're talking about 2024 and 2025. We think can grow approximately 4% in both of those years, driven by the fact that free cash flow that we're investing of over $100 million at 8%, 8.25% cap. Also, if you think about next year versus this year, we have the Regal percentage rents and operating theaters coming online that we didn't get the benefit of this year.

So this year, there's kind of a drop, the 20% drop in base rent. But next year, we'll get the benefit of the performance of those theaters as lease year -- during the lease year and the operating theaters for the whole year. So there's quite a bit of improvement there. And then I just think the investments -- some of the investments we did in '22, frankly, that was kind of outsized.

If you remember, we did $600 million worth of deals, and those are starting to come online this year and next year. So you put that all together and you have some things going the other way as well. You put it all together, though, we think that translates to about a 4% growth in both years. So fortunately, we have cash on hand and nothing drawn on our line.

So -- and we only have the $136 million of maturities in '24 and then $300 million in '25. We don't think that, if you do the math on our line, that we all need to access the capital markets to achieve that 4% growth through 2025. So we're encouraged by that.

Josh Dennerlein -- Bank of America Merrill Lynch -- Analyst

OK. Awesome. Thank you.

Greg Silvers -- Chairman and Chief Executive Officer

Thanks, Josh.

Mark Peterson -- Executive Vice President, Chief Financial Officer

Thanks, Josh.

Operator

One moment for our next question. And our next question will come from the line of Eric Wolfe from Citi. Your line is open.

Eric Wolfe -- Citi -- Analyst

Hey, thanks. I think you had previously given a sort of run-rate FFO guidance of like $471 million, which excluded sort of the impact on deferrals but also included the impact to the Regal restructure and other things. Is that still a good base from which to think about this growth that you just outlined?

Mark Peterson -- Executive Vice President, Chief Financial Officer

When you look at run rate for us, it's a bit difficult because if you pick, say, fourth quarter run rate, we've got build-to-suits going in service throughout the period. We have, of course, the Regal percentage rent and operating profit that really doesn't kick in until next year. So run rate, picking a quarter or even a kind of run rate for the year, I think $471 million sort of base run rate is probably a little bit high, but we have that embedded growth that I talked about in terms of Regal, in terms of build-to-suits coming online and so forth. But what I think you should focus on, if you remove the deferrals, which is important to Josh's previous comment, if we remove the deferrals, we think we can grow that base amount, that $467 million that we showed in that slide, by about 4% next year and then another roughly 4%.

We'll crystallize that number when we give guidance in February for the year, but that's how we look at it.

Eric Wolfe -- Citi -- Analyst

Got it. Makes sense. And then your cash balance grew by, I think, $73 million quarter over quarter. Just trying to understand sort of what drove that because it seemed like you actually had some investment activity in the quarter.

And as you mentioned, your free cash flow is about -- a little over $100 million a year, so call it $25 million per quarter. So just I was just wondering why it grew so much during the quarter.

Mark Peterson -- Executive Vice President, Chief Financial Officer

Yeah. We did collect the $19.3 million of deferrals that are shown on that schedule. So that's a huge number. Also, the timing of bond payments matters, and they're heavier in Q2 and Q4.

So there's some reversal of that coming in Q4, just the timing of the way our bond payments work. But yeah, it was a heavy high cash flow quarter given the low bond payments, the extra deferrals, and then just the growth in our operating business.

Eric Wolfe -- Citi -- Analyst

Got it. That's helpful. Thank you.

Operator

One moment for our next question. And our next question will come from the line of Rob Stevenson from Janney Montgomery Scott. Your line is open.

Rob Stevenson -- Janney Montgomery Scott -- Analyst

Good morning, guys. Greg, obviously, you have expansion commitments made to partners that you're still working on. But beyond that, are any new investments really penciling today given where the bid-ask spread is and your cost of capital in this interest rate world?

Greg Silvers -- Chairman and Chief Executive Officer

I would say, Rob, the answer is yes. I think things are taking time because of that bid-ask spread and getting people comfortable with that. But again, as Mark pointed out, given that we're spending cash as opposed to issuing new equity, we think on a risk/reward standpoint, things are -- and as he implied in our future growth, we'll continue to do that. It has taken more longer for -- to achieve that kind of price awareness that the market has moved substantially for everyone.

But I think Greg, and I'll ask Greg to comment. We're still seeing things that, again, we like the assets. We like the performance of these assets but making them pencil to where we think is where value is has taken a little longer, but we're seeing some movement in that area.

Greg Zimmerman -- Executive Vice President, Chief Investment Officer

Yeah, Greg, I think that's absolutely right. And the other thing, Rob, I would add is that we're seeing these opportunities in most of our verticals. We're seeing the Eat & Play, attractions, experiential lodging, so we still have what we feel is a pretty good pipeline. But I echo what Greg's comments are, it's just taking a little longer given the current environment.

Rob Stevenson -- Janney Montgomery Scott -- Analyst

OK. And then, Mark, how should we be thinking about how the NOI from the $200-and-some million of expansion commitments sort of comes in over the next couple of years, right? I mean, just round numbers, if I think about it as, call it, $300 million at a 7% cap, I mean, how does that sort of proratably sort of hit in '24, '25, '26? What's the sort of end sort of period as to when all of that stuff is income producing at full sort of speed?

Mark Peterson -- Executive Vice President, Chief Financial Officer

Yeah. We show a scheduled property under development on Page 20 of the supplemental that shows spending on build-to-suit and then when it goes in service. And I think if you look from beginning of '24 forward, we've got about $127 million worth of build-to-suit spending as it finishes out. So -- and then it shows on that schedule sort of how that build-to-suit comes into service.

And then on the mortgage side, of course, as we put the money out, that kind of earns that money right away. So by the way, don't think 7% cap. Think 8% or more in terms of when it goes in service. But I think that schedule is helpful to understand that timing.

Like I said, of that $200-plus million, about $127 million of it will be spent over -- most of which will be spent in '24, but there is some into '25 as well.

Rob Stevenson -- Janney Montgomery Scott -- Analyst

OK. And there is no meaningful delay? Like the water park that's going to be finished next summer, does that start producing at full speed immediately? Or is there a ramp-up, and it really doesn't start hitting at full speed until '25, that sort of thing?

Mark Peterson -- Executive Vice President, Chief Financial Officer

Once it goes -- yeah, once it goes in service, which is what we're showing on that schedule, it earns its full cap rate.

Rob Stevenson -- Janney Montgomery Scott -- Analyst

OK. That's helpful. Thanks, guys. Appreciate the time.

Greg Silvers -- Chairman and Chief Executive Officer

Thanks, Rob.

Operator

One moment for our next question. Our next question comes from the line of Jyoti Yadav from JMP Securities. Your line is open.

Mitch Germain -- JMP Securities -- Analyst

Hey, guys. It's actually Mitch here. Just help me out with the 2024 debt because you had suggested that you're not looking to tap the capital markets. So is that a suggestion that you're going to redeem the maturity?

Mark Peterson -- Executive Vice President, Chief Financial Officer

We would pay it off our line of credit. We have nothing drawn on our line of credit, so the plan currently is to pay it off our line. Of course, we'll look at the debt markets at that time and see if longer-term financing makes sense. But in the near term, we've got plenty of capacity through cash on hand and line of credit capacity to pay that off.

Mitch Germain -- JMP Securities -- Analyst

Great. And then so when you talk about that 4% for next year, you're implying a little bit of dilution associated with the refi of that debt. Is that kind of the way we should think about it?

Mark Peterson -- Executive Vice President, Chief Financial Officer

Correct, correct, because we're paying it off our line, and it's cheaper. Yes, we are -- you're correct.

Mitch Germain -- JMP Securities -- Analyst

OK, great. And then what's Santikos' long-term plan? Is that just a one-time purchase? Or do you think that they're going to look to maybe do some further consolidation?

Greg Silvers -- Chairman and Chief Executive Officer

Again, I think, clearly, if you know the Santikos brand, I think their thoughts are to continue to operate theaters to be opportunistic if presented, so I think they're still looking to grow their chain. So I – but, Greg, any --

Greg Zimmerman -- Executive Vice President, Chief Investment Officer

No. And, Mitch, we've had the opportunity to meet with them at length and understand what they're doing, and we're pleased to have them as partners.

Mitch Germain -- JMP Securities -- Analyst

Great. And then I think my last question is I think you -- Greg, you had mentioned $9 billion base case for 2024 box office, so kind of flattish year over year. Obviously, we continue to get some indication of some movies that are -- or big releases that are getting delayed. I mean, do you think that there is any sort of downside risk to that number should the strike on the actors' side continue? Or are you pretty confident that that kind of bakes in an elongated strike with regards to the actors?

Greg Silvers -- Chairman and Chief Executive Officer

Well, again, there's always risk that we can't anticipate. I think what we've said all along is the first half of next year is fairly baked. I mean, again, a lot of things are complete. So we'll start to see.

What's going to occur is when the strike gets resolved, which we know it will be resolved at some point, there's going to be a mad rush of, OK, completing anything that needs to be completed '24 versus starting new projects. So how that breaks out, I mean, remember, again, even two months ago, Mitch, the estimate was probably closer to the high 9s. So that $9 billion kind of has some of that built in, just kind of anticipating. I mean there's really not -- the only major release, Greg, that I'm aware of that's moved right now is MI-8.

Greg Zimmerman -- Executive Vice President, Chief Investment Officer

Yeah.

Greg Silvers -- Chairman and Chief Executive Officer

So we don't have a whole lot of things. And remember, Dune moved into that period of time from this year. So again, right now, not a lot of significant movement. It's -- like I said, it's probably got a 10% factor in there from a high 9s to low 9s, but we'll still have to see.

Mitch Germain -- JMP Securities -- Analyst

Appreciate that. Thank you.

Operator

One moment for our next question. Our next question will come from the line of Todd Thomas from KeyBanc Capital Markets. Your line is open.

Todd Thomas -- KeyBanc Capital Markets -- Analyst

Hi. Thanks. Good morning. Appreciate the update on the additional dispositions and the details around the theater portfolio.

Can you just comment on the pace of dispositions relative to your initial estimate that was provided with the Regal resolution and your ability to mitigate the dilution from carrying those assets or generate the recovery rent that you previously outlined?

Greg Zimmerman -- Executive Vice President, Chief Investment Officer

Yeah, Todd, I think we said last quarter, the history we've had since COVID is selling five or six per year, and we feel pretty comfortable about that pace continuing. As I mentioned, we have signed PSAs or LOIs for six of the remaining 10, so we -- and we're seeing good traction on all of them. So -- and that's from a standing start in July because we weren't able to market any of these before we announced the Regal deal.

Greg Silvers -- Chairman and Chief Executive Officer

The other thing I would add, Todd, is what we're achieving is consistent with the forecast that we gave at the time of the Regal, so I don't think we're changing from that expectation. Hopefully, it appears that, again, as Greg and his team has gotten into this, that they've achieved probably -- it's -- how long does it take to close them, but the interest has probably been faster than we had initially anticipated, which helps us, as you point out, not only with getting capital in, but eliminating some of those carrying costs and allowing us to deploy that capital and making it productive faster.

Todd Thomas -- KeyBanc Capital Markets -- Analyst

OK. That's helpful. And then your comments about investing free cash flow and continuing to put capital out the door. As you look ahead, I'm assuming the committed pipeline pricing has been established on those investments.

You're locked in, in that sort of 8% to 8.5% range. But are you seeing investment yields improve at all more recently, such that you'd expect to be north of that 8% to 8.5% range going forward? Just curious if you're seeing any adjustment in pricing as you continue to have conversations about new investments here.

Greg Silvers -- Chairman and Chief Executive Officer

I think it's a -- again, I wouldn't say necessarily -- there's always been kind of price awareness, but there's also issues of risk/reward, meaning maybe we're -- we would have been 75% of a deal, and we're now 60% of a deal, but we're still at 8.5%. So again, it's -- all of those things come into play. I think what we'd say is we're comfortably in the 8s, that we're very comfortable with the property types that we're seeing, with the quality of those types, with the quality of our operators and building a resilient portfolio. But, Greg, do --

Greg Zimmerman -- Executive Vice President, Chief Investment Officer

And the breadth. As I mentioned before, I mean, we're seeing a lot of opportunities in many of our verticals, which is really reassuring.

Todd Thomas -- KeyBanc Capital Markets -- Analyst

OK. And just lastly, I think you mentioned in your prepared remarks that in the attractions category, you're seeing some softness from lower spend, maybe lower traffic. Can you just provide a little bit more detail around what you're seeing there and how operator performance has trended? And then can you also just comment on whether you're seeing any softness at any other property types? I didn't hear anything but just curious about experiential lodging.

Greg Zimmerman -- Executive Vice President, Chief Investment Officer

Yeah. I actually said, Todd, that we were seeing pressure on EBITDARM from insurance and wage costs. We're actually seeing attendance gains and attractions. So I would say, generally, the takeaway is there is some pressure, mostly on wages and insurance in many of the verticals, but really hits attractions because it just got a larger insurance bill.

And then I also mentioned in the experiential lodging, we're seeing some normalization on RevPAR and ADR, but I would consider that coming back to normal from pre-pandemic levels rather than a decrease. Greg, I'm done here.

Greg Silvers -- Chairman and Chief Executive Officer

Yeah, I was going to add, I think what we would say is across the -- pretty much across the board, we're not seeing backing up from the consumer side, whether it's revenues or attendance. I mean, almost across the board, we saw continued positive growth in that. As Greg pointed out, insurance cost for a lot of our operators have gone up substantially, so we have seen some margin pressure. But as the coverage indicates going -- on a quarter-over basis, we went from a 2.7% last quarter to a 2.6% this quarter.

That's really about some of that expense pressure, but we've not seen any kind of pullback from the consumer at all, especially on experiential assets.

Todd Thomas -- KeyBanc Capital Markets -- Analyst

OK. Appreciate that clarification. Thank you.

Operator

Thank you. One moment for our next question. Our next question will come from the line of Aditi Balachandran from RBC. Your line is open.

Aditi Balachandran -- RBC Capital Markets -- Analyst

Hi. Thank you. Just a quick question. Can you talk a little bit about the buyer market or like I guess the depth of the buyer market, especially as you still have these four Regal theaters to sell in the pipeline?

Greg Zimmerman -- Executive Vice President, Chief Investment Officer

Yeah. I think the buyer market is pretty good. I'd say, again, this is rough, but about 50% of the theaters we're selling will likely go to an existing smaller theater chain and the rest to various uses. And again, it's all dependent on the location of the real estate.

So it could be multifamily. It could be industrial. It could be retail. We always market broadly, so we don't just target any particular user.

We hire a broker and target widely. So we feel like we have a pretty good handle on what the demand is for any particular asset.

Greg Silvers -- Chairman and Chief Executive Officer

I would say, Aditi, that the one indication is the speed at which Greg and his team have secured purchase and sale agreements or LOIs, when you look at that with one sold already in six, that's seven of 11. So that's a pretty high hit rate for what has really been about a 60-day period. So I think there's been a lot of interest, and I'll ask Greg to comment, but multiple parties involved in most of these assets.

Greg Zimmerman -- Executive Vice President, Chief Investment Officer

Yeah. That's accurate, yes.

Mark Peterson -- Executive Vice President, Chief Financial Officer

And as you saw this quarter, and we expect the future slightly above, in terms of price, slightly above what we're carrying that. So we're seeing some gains upon sale as well.

Aditi Balachandran -- RBC Capital Markets -- Analyst

Great. Thank you.

Operator

Thank you. One moment for our next question. Our next question from 1 from the line of Ray Zhong from J.P. Morgan.

Your line is open.

Ray Zhong -- JPMorgan Chase and Company -- Analyst

Hi. Good morning. Appreciate the color earlier. I have a question on other income line.

I know you guys mentioned the operating assets are all in there, so assume Cartwright is there and operating theaters. I know you guys mentioned the theaters were actually at a little bit of loss this quarter. Just kind of help us out in terms of modeling maybe moving forward. I know you guys talked about the -- if the box office is $9 billion, what the other income should be for next year on the theaters.

What about Cartwright? Can you guys help us out a little bit on the seasonality and the magnitude? How far is it from stabilized amount from here? Just anything help there would be appreciated. Thank you.

Mark Peterson -- Executive Vice President, Chief Financial Officer

Yeah. So other income versus other expense, we were down about $900,000 this quarter. And really, there's a couple of things going on there. We had additional -- the loss we said from taking on those five theaters, which was about $400,000 to $500,000, and we expect that to reverse in fourth quarter and still more or less breakeven in terms of that.

In terms of Cartwright, Greg mentioned the expense pressure on some of the -- some of our experiential lodging and actually the margin decrease there. And so that was the other contributor to that $900,000, if you will, degradation versus last year, both the operating theaters operating loss for the quarter and then the Cartwright having a slight increase in expenses that reduced their margin. If you go to the fourth quarter, this year, other income over -- this quarter, other income over expense was $1.3 million. We expect that number to be a slight loss in Q4, just due to the seasonality of the managed properties.

If you think about Cartwright, that's its off-season theaters will do better, that will slightly offset the Cartwright in fourth quarter. But really, Cartwright's off-season is what's going to drive that number down in -- kind of net profit down in Q4.

Ray Zhong -- JPMorgan Chase and Company -- Analyst

Got it. And then just kind of is that a fair run rate on the Cartwright piece moving forward to think about a little over $1 million quarter on the 2Q and 3Q? Or is that -- there's still some run rate to stabilization there?

Mark Peterson -- Executive Vice President, Chief Financial Officer

Well, Cartwright has been interesting. It was this kind of the first year it's been open for a full year, and there were some balcony construction going on there. So we do expect that to improve. Hard to say with the expense pressure how much that will improve.

Remember, too, when you talk about run rates, you're going to have first and fourth quarter be lower than second and third quarter with respect to Cartwright because you have in-season second and third quarter, and you have off-season sort of first and fourth quarter. So just make sure you get the timing of that right. But I do think we're hopeful that Cartwright improves over this year given the kind of the next year after the first year out of COVID having a full year and sort of having this balcony issue, which shut down some rooms for a while that will be fully open next year. So we're hoping for improved performance.

But again, there is some expense pressure we're seeing in that regard -- in that property.

Ray Zhong -- JPMorgan Chase and Company -- Analyst

Got it. Appreciate it. Thank you.

Mark Peterson -- Executive Vice President, Chief Financial Officer

Thanks.

Operator

Thank you. And I'm not showing any further questions in the queue. I'd like to turn the call back over to Greg Silver, CEO, for closing remarks.

Greg Silvers -- Chairman and Chief Executive Officer

Well, thank you, Victor, and thank you, everyone, for joining us today. We look forward to talking to you on our next call and have a wonderful day. Thank you.

Operator

[Operator signoff]

Duration: 0 minutes

Call participants:

Brian Moriarty -- Vice President, Corporate Communications

Greg Silvers -- Chairman and Chief Executive Officer

Greg Zimmerman -- Executive Vice President, Chief Investment Officer

Mark Peterson -- Executive Vice President, Chief Financial Officer

Josh Dennerlein -- Bank of America Merrill Lynch -- Analyst

Eric Wolfe -- Citi -- Analyst

Rob Stevenson -- Janney Montgomery Scott -- Analyst

Mitch Germain -- JMP Securities -- Analyst

Todd Thomas -- KeyBanc Capital Markets -- Analyst

Aditi Balachandran -- RBC Capital Markets -- Analyst

Ray Zhong -- JPMorgan Chase and Company -- Analyst

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