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EPR Properties (NYSE:EPR)Q4 2018 Earnings Conference CallFeb. 26, 2019, 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 yearend 2018 EPR Properties Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will follow at that time. If anyone should require assistance during the conference, please press *0 on your touchtone telephone. As a reminder, this conference call is being recorded.
I would now like to introduce Mr. Brian Moriarty, Vice President of Corporate Communications. You may begin.
Brian Moriarty -- Vice President of Corporate Communications
All right. Thank you and thanks to everyone for joining us today for our fourth quarter 2018 yearend 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 or 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 that are contained in the company's SEC filings including the company's reports on Form 10-K and 10-Q.
Now with that, I'll turn the call over to company President and CEO Greg Silvers.
Greg Silvers -- President and Chief Executive Officer
Thank you, Brian, and good morning to everyone. Welcome to our fourth quarter and yearend 2018 earnings call. 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 and Chief Financial Officer and Treasurer
Good morning.
Greg Silvers -- President and Chief Executive Officer
First, as always, I'll get started with our quarterly headlines then discuss the business in greater detail. Our first headline is "The Strong Fourth Quarter Caps a Successful Year". In 2018, we delivered record results with both total revenue and FFO as adjusted per share increasing by 22% versus the prior year. Solid performance from our existing investments was enhanced by the $71.3 million in prepayment fees received from payoffs of approximately $280 million of noneducation related mortgage notes. Certainly, a strong return by any measure.
Second, "Investment Spending Regains Momentum". During 2018, we were disciplined in our approach to capital allocation as we executed a capital recycling plan and prudently redeployed that capital. As the year progressed, our cost of capital returned to levels which allowed us to achieve reasonable spreads in pursuing a creed of investments and we accelerated our growth during the back half of the year. We also began to broaden our investments in the experiential space which we've highlighted as having a substantial future potential. I'll have more on this topic as I review our investment spending in more detail.
Third, "Tennant Segments Broadly Strong and a New Tennant for CLA Properties". 2018 was a record year for the box office with revenues reaching $11.9 billion an increase of over 7% versus the prior year and up over 4% versus the previous record year set in 2016. Additionally, attendance was up over 6%. Overall, 2018 provided further affirmation that theater exhibition remains at the dominant out of home entertainment option. In our recreation segment, our ski properties are demonstrating solid performance supported by early and sustained snows across the US. Separately, we are pleased to announce that we've entered into an agreement with Children's Learning Adventure which will allow us to execute on a plan to transition all 21 of our CLA properties. Furthermore, we're excited to announce that we've signed leases with Crème de la Crème to become our tenant on all 21 of these properties.
Fourth, "Monthly Dividend Increase". Subsequent to the end of the quarter, we increased our monthly common dividend for 2019 by over 4%. This equates to a $4.50 annual dividend and represents our ninth consecutive year with a substantial dividend increase. Having successfully executed our significant capital recycling plan in 2018, this increase demonstrates the ongoing strength of our investment portfolio.
Fifth, "Introducing 2019 Guidance". Our 2019 FFO as adjusted per share guidance range is $5.30 to $5.50. The midpoint of this range reflects over 4% earnings growth when we exclude the noneducation related prepayment fees received in 2018. Additionally, the company's investment spending guidance range is $600 million to $800 million with disposition proceeds expected to total from $100 million to $200 million. We are pleased to be starting the year back on offense. As we broaden our aperture for expansion and experiential real estate, we are also uniquely positioned with the core organizational competencies to identify and underwrite strong opportunities to drive a creed of growth.
Now, I'll discuss the business in greater detail. At the end of the fourth quarter, our investments were over $6.8 billion with 394 properties in service that were 99% occupied. During the quarter, investment spending was $217 million, bringing us to a total of $572 million year-to-date. Our proceeds from dispositions were $71.7 million, bringing us to a total of over $471 million year-to-date. Additionally, our company level rent coverage was at 1.92 times, nicely above the 1.74 times average we've seen over the past three years and highlights the strength and consistency of our operator's 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 170 properties in service and 22 operators. Our occupancy was 98% and our rent coverage was 1.92 times. As I previously referenced, North American box office revenues were up 7.4% in 2018 versus the prior year and set a new all-time record. The industry pundits expect 2019 to be another strong year. While it is very difficult to predict which quarters will outperform or underperform, we believe that Q1 will likely be very soft due to the tough comparisons to a 2018 Q1 which had the blockbuster show of the year Black Panther. 2019 has a very promising film line up from Disney including Captain Marvel, Dumbo, Avengers: Endgame, Aladdin, Toy Story 4, and Star Wars Episode IX. These films are expected to drive strong second and fourth quarters at the box office where 2018 strength was in the first and third quarters.
Investment spending in our entertainment segment totaled $27.2 million, which included a $14.9 million theater acquisition with the balance consisting primarily of build-to-suit developments and redevelopment of Megaplex Theaters, entertainment retail centers, and family entertainment centers. During the fourth quarter, we received $28 million in disposition proceeds, including a $4 million prepayment fee and the remaining $24 million outstanding balance on a mortgage note receivable secured by the observation deck of the John Hancock Tower in Chicago, Illinois.
At quarter end, our recreation portfolio included $2.3 billion of total investments with three properties under development, 80 properties in service and 18 operators. Our occupancy was 100% and our rent coverage was approximately 2.12 times.
Shifting to operator performance. For those of us not living in Florida have experienced the challenging winter season, this is exactly what our ski tenants like to see. Their year-to-date admissions and revenues are up 13% and 8% respectively through January. Investment spending in our recreation segment totaling approximately $159.5 million, which include a $68.5 million investment in two unconsolidated joint ventures that purchased two recreation anchored lodging properties in St. Pete Beach, Florida, $21.9 million on the Kartrite waterpark in the Catskills with a balance consisting primarily of the City Museum in St. Louis, Missouri, and build-a-suit developments of golf entertainment complexes and attractions.
Our new recreation anchored lodging properties are regional destination beach hotels located in St. Pete Beach, which is a Florida resort city located on a barrier island. As I mentioned, they will be held in two joint ventures with EPR owning 65% and our partner, Gencom, owning the remaining 35% and running the hotel operations through an affiliated company. The investments will be unconsolidated joint ventures due to our equal sharing of key decision-making authority with our partner. The properties uniquely own their beachfront which allows for expansion of the enhanced experience that consumers desire, including the ability to bring entertainment and provide food and beverage service right on the beach. The properties have a combined 258 rooms and our partner brings years of experience operating recreation anchored lodging properties for an impressive roster of institutional proffering.
Additionally, our partnership anticipates launching a $24 million investment program later this year that will introduce new amenities to the properties which will drive revenue growth over a longer-term investment horizon. We will fund out 65% share of this investment and have included this in our investment spending budget.
Please note that we now have five recreation anchored lodging properties. We began investing in this property type with the Camelback Resort and built on the success earlier this year with the Pagosa Springs Resort. Both of these investments are under triple net leases with their respective operators.
I would like to comment on the structure behind our investments in the Kartrite Water Park Hotel in the Catskills and the St. Pete Beach joint ventures. Both assets will initially be held in the traditional relodging structure with a third-party management company that will employ the staff and actively run the day to day operations. However, it is our intent upon stabilization of these properties to convert these investments into a more traditional triple net lease or debt structure. We believe that it will be in our advantage to wait until the properties have ramped up and have an operating history upon which to establish a long-term rental payment. Our intent is to continue to be a net lease company. We are utilizing the relodging structure as a bridge through stabilization to our desired outcome, and we intend to limit investments with this type of lease structure to 10% or less of our total portfolio. We are confident that these types of investments will allow us to broaden our portfolio of high-quality experiential assets and derive attractive shareholder returns.
The City Museum in downtown St. Louis is a highly interactive and artistic children's museum with a 20-year history of delighting guests and generating a stable stream of cash flows. The museum delivers an immersive experience that engages all of a person's senses and delivers an interactive path of discovery. Check it out on Instagram or look at over the 8000 Google reviews on it. The property demonstrates the variety of experiential assets that exist in the marketplace and that can and should be part of our portfolio. City Museum's 20-year history of durability, along with consistent and reliable cash flows across diverse economic cycles demonstrates the value of experiential assets. Our intention is to pursue additional experiential museum properties that share similar performance characteristics.
At quarter end, our education portfolio included over $1.4 billion of total investments, with five properties under development, 143 properties in service, and 59 operators. Our occupancy was 98% and our rent coverage was 1.48 times. Investment spending in our education segment totaled approximately $16.4 million, primarily consisting of build-a-suit developments and redevelopments of public charter schools and early childhood education centers. During the fourth quarter, we received $42.3 million in disposition proceeds, including $3.4 million of prepayment fees. The remaining $38 outstanding on mortgage notes secured by four charter schools and a land parcel of approximately $0.9 million for the sale of an early childhood education property.
In February 2019, we entered into agreements with Children's Learning Adventure providing for the purchase and sale of certain assets associated with the businesses located at our 21 operating CLA properties, whereby we can nominate a replacement operator or take an assignment and transfer of the assets from CLA. The closings will occur on a school by school basis as we satisfy various closing conditions, which include our replacement operator obtaining the licenses and permits necessary to operate the schools. The outside date is March 31, 2020, and any schools that have not transferred to a replacement operator by this date will be surrendered by CLA. The aggregate cash consideration is anticipated to be approximately $15 million, which includes approximately $3.5 million for equipment utilized in the operations of our schools.
CLA has agreed to lease and operate each of the 21 properties for an aggregate of approximately $1 million per month of minimum rent until the transfer or surrender of each property. CLA is required to file a motion this week with the bankruptcy court and the court's approval is a condition to the effectiveness of our agreements with CLA.
We believe that Crème de la Crème will be an exceptional operator of these properties and their long-term success will allow us to meaningfully grow our rental stream from the $1 million per month that we anticipate during this transition period as also in February we entered into triple net leases with all of our 21 properties with Crème de la Crème, a premium early childhood education operator that operates nationally. These leases are contingent upon EPR delivering possession of the properties and include different rent structures based on whether or not CLA delivers the in-place operations of the school. Additionally, Crème will buy the CLA equipment that I referenced earlier in exchange for a note.
Moving to our investment spending guidance. We are introducing our 2019 investment spending guidance of $600 million to $800 million and our disposition guidance range of $100 million to $200 million. Both of these guidance ranges reflect a return to levels more consistent with the last several years of our experience without any large individually significant acquisitions or dispositions and stable capital markets.
With that, I will turn it over to Mark for a discussion of the numbers.
Mark Peterson -- Executive Vice President and Chief Financial Officer and Treasurer
Thank you, Greg. I'd like to remind everyone on the call that our Quarterly Investor Supplemental can be downloaded from our website.
Now, turning to the first slide. Net income for the fourth quarter was $48 million, or $0.65 per share compared to $54.7 million or $0.74 per share in the prior year. FFO was $97.7 million compared to $78 million in the prior year. FFO, as adjusted for the quarter, increased to $105.1 million versus $95.9 million in the prior year with $1.39 per share versus $1.29 per share in the prior year, an increase of 8%.
Before I walk through the key variances, I want to explain the financial impact of three items which are excluded from FFO as adjusted. First, we recognize $5.9 million of severance expense including $3.2 million of accelerated vesting of common shares related to the termination of the agreement with our former Senior Vice President and CIO and another employee. We expect to have an announcement of a new CIO soon. Second, we recognize an impairment charge of $10.7 million related to our guarantees of $24.7 million in bonds secured by lease, hold interests and improvements at two theaters in Louisiana. The operator of these theaters obtained this special bond financing post-Hurricane Katrina under a program to spur new investment in the affected area. No further losses are anticipated on these guarantees as the charge booked approximates the difference between the estimated market value of our collateral and the outstanding debt should these assets and debt eventually comes onto our balance sheet.
Note that this is not expected to have much impact on our 2019 results as the interest on the debt we would take on is about equal to the rent we would likely charge a new tenant. It should also be noted that these are the only two of off-balance sheet debt guarantees we have in our portfolio.
Lastly, transaction costs were $1.6 billion for the quarter and $1.3 million of this related to preopening expenses in connection with the Kartrite indoor water park hotel. As Greg explained, we currently own and operate this investment in a traditional relodging structure. I will discuss how the Kartrite and certain other recreation anchored lodging investments impact our 2019 guidance in a bit.
Now, let me walk through the key line up on variances for the quarter versus the prior year. Our total revenue increased 13% compared to the prior year to $166.5 million. Within the revenue category, rental revenue increased by $22.1 million versus the prior year to $145.5 million. This increase resulted from rental revenue related to new investments as well as Endeavour School's exercising their right to convert their $143 million mortgage note into a master lease arrangement during the first quarter of 2018. Additionally, we recognize $3 million in rental revenue from Children's Learning Adventure during the quarter related to their required payments under the month leave agreement. This represented an increase of $12 million verse the prior year, which included a reversal of straight-line revenue of 9 million.
Tenant reimbursements, included in revenue, were $3.9 million for the quarter versus $4.1 million for the prior year. Additionally, percentage rents for the quarter, also included in rental revenue, increased to $5 million versus $3.1 million in the prior year. The increase of $1.9 million related to several of our recreation investments as well as additional percentage rents from private schools.
Mortgage and other financing income were $20.5 million for the quarter, an increase of approximately $3.1 million versus the prior year. The increase was due primarily to prepayment fees received of $4 million related to the payoff of the remaining mortgage notes secured by the John Hancock Observatory and $3.4 million related to charter school mortgage note payoffs versus $0.8 million of prepayment fees received in the prior year. This increase was partially offset by the impact of Endeavour School's lease conversion, as I mentioned earlier, as well as the sale of four Imagine Schools in July that was classified as investment in direct financing leases.
On the expense side, our property operating expense decreased by approximately $4 million versus the prior year, primarily due to $4.6 million less expense booked related to CLA. If you recall, we booked $6 million in bad debt expense related to CLA in the fourth quarter of 2017. This quarter, we recorded a net $1.4 million of property tax expense related to CLA that we do not expect to be reimbursed during the transition to Crème de la Crème.
G&A expense increased to $12.2 million for the quarter, compared to $9.6 million in the prior year. Primarily due to an increase in payroll and benefit costs including incentive compensation. Finally, there were no termination fees related to charter schools included in gain on sale and added back to FFO's adjusted for the quarter versus $13.3 million of such termination fees in the prior year.
Now, turning to our full year results in the next slide. Our total revenue increased 22% versus the prior year to a record $700.7 million and FFO adjusted per share also increased 22% versus prior year to $6.10, another record for EPR. Note that prepayment and termination fees totaled $76.6 million in 2018. In addition to the fees received from the disposition of public charter school assets. These fees include a total of $71.3 million or $0.93 per share of noneducation fees related to the payoff of mortgage notes by Och-Ziff and the owners of the John Hancock Observatory. Prepayment and termination fees totaled $20.9 million in 2017 and related solely to public charter schools.
Turning to the next slide, I'll review some of the company's key credit ratios. As you can see, our coverage ratios continue to be strong with fixed charge coverage at 3.3 times, debt service coverage at 3.8 times, interest coverage at 3.8 times, and our net debt to adjusted EBITDA ratio was 5.5 times at quarter end. Note that each of these ratios excludes all fees. Our net debt to gross assets was 43% on a book basis, and 37% on a market basis. We increased our monthly dividend by our 6% in 2018 and our FFO as adjusted payout ratio was 78% for the quarter and 71% for the year. The lower payout ratios than usual were due to the impact of the fees I discussed earlier.
Our previously announced monthly common share dividend for 2019 is well covered and represents an annualized increase of over 4% consistent with our expected growth and FFO as adjusted per share excluding the non-education related fees in 2008.
Now let's turn to 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 or interest rate swaps with a blended coupon were approximately 4.6%. We had $30 million outstanding at quarter end on our $1 billion line of credit and $5.9 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.
Subsequent to year end, we issued approximately 490,000 common shares under our direct share purchase plan for net proceeds of $35.6 million, averaging $72.68 per share. The DSPP plan continues to be a very low cost and effective way to raise common equity. Our balance sheet and liquidity position are very strong, and this puts us in a great position for 2019.
Turning to the next slide, we are introducing guidance for 2019 FFO as adjusted per share of $5.30 to $5.50 and guidance for investment spending of $600 million to $800 million. Disposition proceeds are expected to total $100 million to $200 million for 2019. Excluding the noneducation related prepayment fees of $71.3 million in 2018 or $0.93 per share, the midpoint of our FFO as adjusted per share guidance for 2019 reflects over 4 % growth.
Before concluding, I would like to give some additional details regarding 2019 guidance. As Greg mentioned, during the fourth quarter we invested $68.5 million or $29.5 million net of pro rata debt assumed in two unconsolidated joint ventures that own and operate recreation anchored lodging properties in St. Pete Beach, Florida. These unconsolidated joint ventures utilize the traditional lodging structure and we'll be investing in these properties over the next two years. Due to these ongoing investments, 2019 guidance includes only a small impact on FFO related to these properties. We expect a return on these joint venture interests to significantly increase as investments are completed in 2020.
Additionally, the Kartrite Indoor Water Park is also owned and operated through a traditional relodging structure and its grand opening is planned for this spring. Because we own 100% of this investment, it will be consolidated on our books and as a result, we will be recording the revenue and operating expenses of this water park hotel. In addition, in our 2019 guidance, we have included as transaction costs approximately $7 million of pre-opening costs for this project which will be excluded from FFO as adjusted. Finally, as the property will be ramping up in 2019, our guidance assumes no contribution to FFO as adjusted after the opening dates.
As Greg also mentioned, we are working toward an orderly transition of our 21 open CLA properties to Crème de la Crème. We have included approximately $12 in rental revenue related to these properties in 2019 guidance. Additionally, related to the transition to Crème de la Crème from CLA, we have included $11 million of the approximately $15 million in consideration to CLA as transaction costs in our 2019 guidance which will be excluded from FFO as adjusted.
Some other items to note related to 2019 guidance and related timing, mortgage prepayment fees are expected to be much lower in 2019 as we currently expect a range of $2.9 million to $3.9 million with just over $1 million of this expected to occur in the first quarter. Termination fees related to purchase options exercised by public charter school tenants are expected to increase in 2019 and we currently expect a range of $12 million to $16 million. Termination fees in the first quarter are expected to be approximately $5 million. Percentage rents and participating interests are expected to be similar to last year in a range of $9.5 million to $11.5 million. Also, with respect to timing, similar to last year we expect such amounts to be heavily weighted to the back half of the year.
Lastly, G&A expense is expected to decrease in 2019 to a range of $45 million to $47 million due to lower legal fees and payroll costs primarily related to stock grant amortization. Guidance for 2019 is detailed on page 30 of our supplemental.
Turn to the next slide. I thought it might be helpful to put this all together for you and reconciled the midpoint of 2019 FFO as adjusted per share guidance to our actual Q4 results. Starting with the Q4 actual reported FFOAA per share result of $1.39 multiplied by 4 you get $5.56. As prepayment and termination fees reported in Q4 multiplied by 4 are higher than that expected for 2019, due primarily to the prepayment fee received in Q4 related to John Hancock Observatory, you must subtract out $0.16. Second, as I mentioned earlier, although we expect percentage rents and participating interest to be about the same as in the prior year, they are much higher in the fourth quarter than any other quarter so you must subtract $0.13 to get to the proper annual total for this item.
Third, as I also mentioned for the Kartrite, we have included zero contribution post opening in 2019. But capitalized interest will be significantly lower post opening than the runway book in the fourth quarter. And less significantly, there will be some new costs at beginning 2019 related to the infrastructure bonds previously issued. Thus, you must subtract an additional $0.08 for this. On the positive side, you need to add $0.04 for the lower expected G&A total in 2019 than the fourth quarter times four. And then about $0.17 for the estimated impact of net investment in tenant activity, rent bumps, financing, and other smaller items.
To conclude, I want to make a few points about the new lease accounting standard that became effective on January 1. Due to certain operating ground leases and other lease arraignments, we will book right of use and straight-line receivable assets totaling between $235 million and $245 million and a corresponding lease liability of the same amount in the first quarter of 2019. Also, because of 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 in 2019 and going forward. That amount is expected to be between $22 million and $24 million for 2019. In addition, certain other costs paid directly by us and reimbursed by our tenants under triple notes leases, such as property taxes, will require a similar gross-up of revenue expense in equal amounts in future income statements, again with no expected net impact. This amount is less significant and expected to be between $8 million and $10 million.
Now with that, I'll turn it back over to Greg for his closing remarks.
Greg Silvers -- President and Chief Executive Officer
Thank you, Mark. Before we get to questions, I want to summarize our thoughts today. 2018 was about capital recycling and being prudent capital allocators. And while we are proud of our success, we are excited about our announcement today of a resolution of CLA and our intent to again ramp up our investment spending. As Mark mentioned, we anticipate making an announcement about a new Chief Investment Officer in the near future, which combined with the strength of our talent and the depth of our opportunities should translate into productive results for our shareholders for this year and beyond.
With that, let's open it up for questions. Tiffany?
Question and Answers:Operator
Thank you. Ladies and gentlemen, at this time, if you have a question press * then 1 key on your touchtone telephone. If your question has been answered or you wish to remove yourself from the queue, please press the # key. And to prevent any background noise, we ask that you please place your line on mute once your question has been stated.
And our first question comes from Nick Joseph with Citi. Please proceed.
Nick Joseph -- Citi -- Analyst
Thanks. The St. Pete hotels what does the $20 million planned upgrades entail and what return on that expend are you targeting?
Greg Silvers -- President and Chief Executive Officer
Again, I think what we're looking at, Nick, is more food and beverage and entertainment options as we talked about. This is a unique property where we own the beach. We can actually serve and provide a level of entertainment right directly on the beach. And we see that these facilities already drive over 60% of their revenue from food and beverage and we see ways to enhance that. So, again, I would think that we would be hoping for kind of low double-digit returns on that investment.
Nick Joseph -- Citi -- Analyst
Thanks. And with the return to larger net acquisition growth this year, what does guidance assume in terms of equity issuance?
Greg Silvers -- President and Chief Executive Officer
Again, I think you look at, and Mark could speak to this, I would think we're traditionally a 60/40 issuer. And if you take out where our dispositions are and then apply a 60/40 balance on that, that would probably be kind of in line. Mark?
Mark Peterson -- Executive Vice President and Chief Financial Officer and Treasurer
Yeah. Just to elaborate on that, we have investment spending of $600 million to $800 million. So, kind of $700 million at the midpoint. Disposition is $100 million to $200 million. So, that's $500 million to $600 million of capital required and as Greg said, if you kind of do the math on that at say a little less than 60% equity, that implies in excess of $250 million of equity. And we do have that in the plan. We plan to raise that. The direct share purchase plan or perhaps a bigger offering. I will say that we do have a note maturity related to Schlitterbahn of $180 million. We haven't assumed that paying off, but that is a possibility and obviously, that would reduce that need for equity going forward.
By the way, on the debt side, we have a lot of capacity on our line of credit. So, the way things are looking, we'd probably just be using our line of credit to fund the debt portion of that incremental net investment of $500 million to $600 million.
Nick Joseph -- Citi -- Analyst
Thanks.
Greg Silvers -- President and Chief Executive Officer
Thanks, Nick.
Operator
And our next question comes from Craig Mailman with KeyBanc Capital Markets. Please proceed.
Craig Mailman -- KeyBanc Capital Markets -- Analyst
Hey, good morning, guys. Just on the CLA transition to Crème de la Crème. Could you talk a little bit more about any downtime associated with the leases or how you guys are thinking about the cash flows this year, I know you said maybe a little bit more than a $1 million a month that you're currently getting? Can you kind of give us maybe what the lease entails relative to currently what you're getting from CLA, and maybe also relative to the $20 million that your originally signed the deal with CLA? Just kind of curious about the recovery.
Greg Silvers -- President and Chief Executive Officer
I think this year and in through March of next year is really a transition period. So, I would kind of target that $12 million range is about the amount. Because at any one times, we're transitioning these over and part of the agreement, Craig, was to not overwhelm an operator and give Crème the chance to really be successful and to not try to take on all of these at once but kind of orderly migrate them from CLA to Crème. I think as we go forward, we've structured these leases with percentage rents that we've always said that we think that based on that 20, that we can get back to kind of a 70%-75% recovery. So, you think, can that $12 million go to the $14 million to $15 million range as they begin to ramp up? We think that's directly where this will be headed, but I would think over the next 12 months I would plan on that $12 million because at any one time some will be being operated by CLA, some will be in Crème and we'll be in that transition.
But our goal was for this to be orderly to not be disruptive to teachers and students. And we feel like we've structured a deal that will allow for that transition and cause the least disruption possible.
Mark Peterson -- Executive Vice President and Chief Financial Officer and Treasurer
As I mentioned, we included in our guidance that $12 million estimate as well.
Craig Mailman -- KeyBanc Capital Markets -- Analyst
Right. And just a clarification, I think. $3.5 million of $15 million is for kind of equipment?
Mark Peterson -- Executive Vice President and Chief Financial Officer and Treasurer
Right.
Craig Mailman -- KeyBanc Capital Markets -- Analyst
Is that basically the note amount that you guys are going to have out to Crème de la Crème and kind of what kind of yield on that?
Mark Peterson -- Executive Vice President and Chief Financial Officer and Treasurer
That's correct and it's at a 7% yield.
Craig Mailman -- KeyBanc Capital Markets -- Analyst
And then just, Mark, going back to the Schlitterbahn note potentially. Can you remind us where that yield is? I could pull this up, but I'm just curious.
Greg Silvers -- President and Chief Executive Officer
It's about an 8.
Mark Peterson -- Executive Vice President and Chief Financial Officer and Treasurer
Yeah. About 8%.
Craig Mailman -- KeyBanc Capital Markets -- Analyst
So, if you guys were to use that to finance investments, there would be a little less secretion on that kind of 180 than you could do just doing the DSP.
Greg Silvers -- President and Chief Executive Officer
Yeah. It depends upon the transaction and how you deploy it. But, again, there could be a little, it could be a push. It should not be measurably different relative to -- As opposed to if we issued equity, depending on our price, it could not be as attractive as issuing equity.
Mark Peterson -- Executive Vice President and Chief Financial Officer and Treasurer
Right. It's probably a couple pennies of impact if it pays off and then we reduce our equity needs. So, it's probably a couple pennies. It's not that significant because it mostly replaces equity in the plan.
Craig Mailman -- KeyBanc Capital Markets -- Analyst
This last one from me, as you guys have kind of evolved the portfolio from primarily theaters to now education and some other retail kind of assets now a little bit more this lodging that could be 10%. I guess just the thought process number 1 on a little more of destination type attractions or some of this lodging at this point in the cycle and the volatility that doing some of these traditional lodging structures, at least in the interim, could kind of introduce to earnings? Just kind of the thought process on that evolution and the risk-reward of doing that.
Greg Silvers -- President and Chief Executive Officer
Craig, the only thing I would do is I would challenge -- I think this is consistent with our focus on what we think of are experiential assets. And let me assure you that we actually went back on these assets or these types of assets and looked at how they performed during different economic cycles. If you look at how these assets have performed, they performed quite well. These are a drive to destinations, which is consistent with our them that we've had across the board and I think, again, we keep going back to the comment that these experiential assets are where consumers are wanting to spend their money, where they're frequenting, and we seem them actually as very stable. And we're very comfortable that this portfolio that we're building, and like I said I reference City Museum, it's a 20-year history. Go back and look at how well this did during the recession and these are assets that perform and perform well during these periods. And therefore, rather than volatility, we think we're introducing stability.
Craig Mailman -- KeyBanc Capital Markets -- Analyst
Okay. Great. Thank you.
Greg Silvers -- President and Chief Executive Officer
Thank you.
Operator
Thank you. And our next question comes from Rob Stevenson with Janney. Please proceed.
Rob Stevenson -- Janney -- Analyst
Hi, good morning, guys. Mark, other than the $7 million of Kartrite preopening costs that you're excluding from FFO as adjusted and the $11 million from CLA/Crème that you're doing, that $18 million is there anything else material that the gap between FFO Nareit and FFO adjusted?
Mark Peterson -- Executive Vice President and Chief Financial Officer and Treasurer
Well, we do have the add back for termination fees and so forth that we typically have on the charter school side. But I pointed out that transaction cost just because that's much larger than normal. We typically have some transaction cost, but certainly, those two events, the Kartrite preopening and the CLA consideration, will increase that. A
As far as the different, I think it's kind of the ordinary stuff as the difference between FFO and FFO as adjusted, other than that.
Rob Stevenson -- Janney -- Analyst
Okay. And the $7 million of Kartrite preopening costs, that's all in the first half of the year?
Greg Silvers -- President and Chief Executive Officer
Yes.
Rob Stevenson -- Janney -- Analyst
Okay. And then the Crème stuff is throughout the year?
Greg Silvers -- President and Chief Executive Officer
Yes. Periodically. It's, again, as you can imagine we structured this to incentivize the orderly transition.
Rob Stevenson -- Janney -- Analyst
Okay. And then, do you have any assets currently with Crème before this new deal?
Greg Silvers -- President and Chief Executive Officer
We do not. We did not.
Rob Stevenson -- Janney -- Analyst
Okay.
Greg Silvers -- President and Chief Executive Officer
We had a relationship talking to them and they came to the table interested. I mean, they operate larger size children's centers, so this was a natural fit for their type and size of business with the facilities that we had.
Mark Peterson -- Executive Vice President and Chief Financial Officer and Treasurer
Rob, I know you keep track -- Oops. Sorry. I was just going to give you a little more guidance on that transaction cost. That $7 million, because I know you track FFO Nareit, that $7 million is, if it opens in the spring, it's primarily the first quarter. So, I wanted to give you a little more guidance on that. And then the CLA amount, that $11 million, is probably more weighted to the back half of the year, just the way the transition goes. So, I just wanted to help you out a little bit on the timing of those two things.
Rob Stevenson -- Janney -- Analyst
Okay. And then, just back to Crème. When you take a look at them versus your other early childhood operators and the portfolio excluding CLA, how do they stack up and compare and what are the expectations there operationally? I mean, are they at the top end of the operating spectrum? Are they sort of middle of the road? How should we be thinking about them as an operator within your overall early childhood operating portfolio?
Greg Silvers -- President and Chief Executive Officer
I would say consistent with their name, they're at the top end. They are highly thought of and offer a premier experience, which we thought, Rob, partnered well with what we think was our premier facilities. As I said, this kind of felt like a natural fit with their kind of upper-level kind of focus and their ability to deliver outstanding performance and reviews. And I think when people go out and look at them, they will see that alignment between our facilities and their operations.
Rob Stevenson -- Janney -- Analyst
Okay. And this last one for me. In terms of, if you guys look at other lodging opportunities, are you guys willing to go Caribbean, Mexico, all-inclusive and things of that nature? Or was this more a less a unique opportunity for you and mostly consistent with staying in the US?
Greg Silvers -- President and Chief Executive Officer
I would say where we're at is these are what we think of as recreation anchored lodging. That's the way we look at it. That's really kind of what we're looking at in what I would say the US. This is not... If you look at where we've been with water park hotels, with these type of things, I don't think this going to be this big -- As I said, we're not going to become a lodging -- These are unique assets that have unique opportunities to exploit what we think are recreation or entertainment options and those are quite unique compared to the lodging world. So, I think these are what we think are tuck-in opportunities to an experiential portfolio, but not a driving force.
Rob Stevenson -- Janney -- Analyst
Okay. Looking forward to the investor day down there next year.
Greg Silvers -- President and Chief Executive Officer
Thanks, Rob.
Mark Peterson -- Executive Vice President and Chief Financial Officer and Treasurer
Thanks, Rob.
Operator
Thank you. And our next question comes from Collin Mings with Raymond James. Please proceed.
Collin Mings -- Raymond James -- Analyst
Good morning.
Mark Peterson -- Executive Vice President and Chief Financial Officer and Treasurer
Good morning, Collin.
Greg Silvers -- President and Chief Executive Officer
Morning.
Collin Mings -- Raymond James -- Analyst
Just given the JV structure on the properties here in St. Pete, how should we think about your appetite for additional joint venture deals? Particularly, as you look at maybe some property types that are outside your traditional buckets?
Greg Silvers -- President and Chief Executive Officer
I think that's always kind of an interesting way to look at to de-risk those, to share capital, to create alignment, and to present an ability for us to execute and combine our expertise on those recreation entertainment availabilities, what we can bring to the table with someone that has that unique lodging experience. So, I think, Collin, we looked at it as a way to not only de-risk our investment but create alignment. And we also had to find someone who saw the vision that we did: at some point in time, converting these more into a traditional structure. So, it takes the right partner, but we have to create kind of alignment of interest and we think we've done that.
Collin Mings -- Raymond James -- Analyst
Okay. So, it sounds like you're open to it, but it would be pretty selective.
Greg Silvers -- President and Chief Executive Officer
Yes. Always.
Collin Mings -- Raymond James -- Analyst
And then you touched on the museum deal in the quarter and just the appetite to do more deals on that front. Maybe update us on where you stand as far as moving forward with live performance venue investment opportunity. I know that's kind of another area that you guys have highlighted of potential growth going into the future.
Greg Silvers -- President and Chief Executive Officer
Sure. I would say right now our opportunity set and the level and depth of what we're talking to as far as opportunities have never been greater. There is a lot of transaction opportunity as we expand and talk to people about the aperture of this experiential portfolio. And so, while we don't have anything beyond what we've said, we're constantly seeing where the consumer is moving and spending their dollars and want to spend their dollars. And we think that's going to create new opportunities. We think that investors want exposure to these macro trends that we're taking advantage of and we think we are uniquely positioned to not be just theaters, not just attractions, but the entire experiential focus. And so, we're working hard at it, Collin, and we think there will be new and exciting announcements to come that will continue this focus on all things experiential.
Collin Mings -- Raymond James -- Analyst
Okay. And then, maybe just on the investment spend number. Any initial thoughts on kind of the mix as you look at the pipeline right now as far as what that might look like in terms of acquisitions versus say development or other spending?
Greg Silvers -- President and Chief Executive Officer
Right. I think it will be weighted more toward the acquisition side this year. I mean, last year it ended up being about 50% acquisition. I think it could be higher this and it will be more focused in our entertainment and recreation segments. As I said, we're spending a lot of time on our experiential segments, those two, and seeing a lot of receptivity both from opportunities and from appreciation from investors. So, I think we're acquisition weighted and more weighted in those two areas.
Collin Mings -- Raymond James -- Analyst
Okay. One last one for me, just following up on that one and then I'll turn it over. Is there anything, in particular, that is kind of driving as you think about what areas you want to focus on why that lends itself to be a little bit more focused on acquisitions versus the development or some other investment? Why does it lend itself more toward acquisitions?
Greg Silvers -- President and Chief Executive Officer
You know, I just think right now construction costs are rising at a pretty rapid pace and I think that acquisition opportunities are probably just more prevalent than the -- The level of spread that we used to achieve on a risk-adjusted basis on development is not quite as attractive right now as it is on acquisitions.
Collin Mings -- Raymond James -- Analyst
Helpful color. I'll turn it over. Thank you.
Greg Silvers -- President and Chief Executive Officer
Thank you, Collin.
Operator
Thank you. And our next question comes from Michael Carroll with RBC Capital Markets. Please proceed.
Michael Carroll -- RBC Capital Markets -- Analyst
Yeah. Thanks, Greg. I wonder if you could talk about CLA and Crème de la Crème again real quick. I believe in the press release you were talking about the initial rental rates for Crème de la Crème would depend largely on if in place operations are transitioned to them? What's your expectation there? What does CLA have to do to ensure an orderly transition of the operations and do you expect that there are risks that they won't transition those?
Greg Silvers -- President and Chief Executive Officer
Well, again, this is... And I think it's written, Michael, in fairness, any time you're doing something over time there is a risk that that breaks apart. We don't anticipate that, but I think the nature of the business that we're in says things happen. If we get sideways, we've structured this deal to incentivize that and payments are structured to incentivize that. So, we anticipate that it will be orderly, and it will be a natural and easy transition. But the nature of public disclosure is you've got to account for what if something goes wrong. And so, you see some of that language in there, but that's not our anticipation.
Michael Carroll -- RBC Capital Markets -- Analyst
Okay. And you were talking about the rent stream from the new operator. I know Mark said, I think, $12 million is included in the 2019 guidance. How is the lease written to account for ramp-ups? Is there a variable amount if they achieve certain operational hurdles then the rent stream goes up? Is it written fixed that it goes up $2 million every year? I mean, how is that written?
Greg Silvers -- President and Chief Executive Officer
It's a great question, Michael. It's actually written that there, you've got it both ways. There is a ramp up that's based upon how well the properties do, and then there is a reset of the property rent in several years once stabilization has occurred. So, I think we tried to incorporate both of those concepts to allow for them to introduce their concept to make any adjustments that they need to do to ramp these up to levels that we've seen them do, and then to reset that more to a fixed rent level.
Michael Carroll -- RBC Capital Markets -- Analyst
So, what is the stabilized rental rate that could be achieved if everything goes as planned over the next few years?
Greg Silvers -- President and Chief Executive Officer
I think $15-$16 million, which would get us 75%-80% of our original rate.
Michael Carroll -- RBC Capital Markets -- Analyst
Great. And then, how should we think about the TRS structure? Are you going to keep it as a TRS structure, or would you eventually switch that to a triple net lease structure over time?
Greg Silvers -- President and Chief Executive Officer
Our goal is to get it to a more triple net lease structure.
Mark Peterson -- Executive Vice President and Chief Financial Officer and Treasurer
CLA is triple net.
Greg Silvers -- President and Chief Executive Officer
Yeah. CLA will be triple net.
Mark Peterson -- Executive Vice President and Chief Financial Officer and Treasurer
I think he's referring to --
Greg Silvers -- President and Chief Executive Officer
I'm assuming the lodging --
Mark Peterson -- Executive Vice President and Chief Financial Officer and Treasurer
Yeah. If you're asking about recreational lodging, we would, as Greg mentioned, hope to transition that to triple net down the road. But CLA is triple net.
Michael Carroll -- RBC Capital Markets -- Analyst
Yeah. I was referring to lodging. Great. Thanks, Mark. And I guess the last question related to the Schlitterbahn loans. I know you don't expect repayment of those this year, but you said there is a possibility of that occurring. I guess, what would have to happen for that to actually occur? Would they need to be able to refinance those bonds with the government agencies, or how do we think about that?
Greg Silvers -- President and Chief Executive Officer
Let me jump in on that, Michael. This is Greg. I think there's a lot of avenues that they could pursue. They could recap their entire business. They could refinance that if they were able to access the bond financing that is available in Kansas and pay that. So, we just allow for a variety of scenarios that we have to account for. And I think that's why Mark said we're not planning for that, but it is a possibility.
Michael Carroll -- RBC Capital Markets -- Analyst
Okay. Great. Thank you.
Greg Silvers -- President and Chief Executive Officer
Thank you, Michael.
Mark Peterson -- Executive Vice President and Chief Financial Officer and Treasurer
Thanks.
Operator
And as a reminder, ladies and gentlemen, if you do have a question, please press * then 1.
Our next question comes from Ki Bin Kim with Suntrust. Please proceed.
Greg Silvers -- President and Chief Executive Officer
Ki Bin? Operator, I think --
Operator
You may be... Can you please unmute?
Alexis Ratliff -- SunTrust Bank -- Analyst
Hello? Can you hear me?
Greg Silvers -- President and Chief Executive Officer
Yes.
Alexis Ratliff -- SunTrust Bank -- Analyst
Yes. Hi, this is Alexis, Ki Bin's associate.
Greg Silvers -- President and Chief Executive Officer
Okay, great.
Alexis Ratliff -- SunTrust Bank -- Analyst
My first question relates to CLA. I just want to make sure I understand the situation correctly. So, the tenant currently pays a minimum rent of $1 million per month or $12 million per year, which is what you have in your 2019 guidance. But I understand that the tenant does not pay property taxes? So, what is that property tax leakage on an annual basis?
Greg Silvers -- President and Chief Executive Officer
No. Depending on who is operating the property will pay the property taxes. So, there should not be leakage on that number.
Mark Peterson -- Executive Vice President and Chief Financial Officer and Treasurer
Either CLA or the new tenant will pay that.
Greg Silvers -- President and Chief Executive Officer
Depending on where we are at in the transition.
Alexis Ratliff -- SunTrust Bank -- Analyst
I see. Okay. And then my second question relates to the two theaters assets where you recorded an impairment on the bond guarantee. Who is the operator there and if it comes to that, how difficult do you think it would be to find a suitable replacement for those locations?
Greg Silvers -- President and Chief Executive Officer
Again, the operator on that was Southern Theaters on that, which they only operator two properties. Currently, they have a management agreement with Regal who is operating that. To give a little bit of color on that so everybody understands. This was a very unique opportunity in which these were bonds that were associated with the Katrina catastrophe and some rebuilding up of New Orleans. Due to the nature of the bonds, the ability to do reinvestment in the properties was very difficult just because putting additional capital or using different ways to get that was complicated. However, again, all the theaters in that market amenitized and so, their attendance was greatly affected.
And so, when we looked at that and looked at the level of debt on those, we felt like there was a need to make the charge that we did to right size that investment relative to our guarantee.
Alexis Ratliff -- SunTrust Bank -- Analyst
Okay. Thanks for that color. That's it for me.
Operator
Thank you. And our next question is a follow-up from Nick Joseph with Citi. Please proceed.
Michael Billings -- Citi -- Analyst
Hey, it's Michael Billings speaking. Greg, when you talked about the 10%, what falls into that 10%? Is that a bucket where you're going to have a certain amount of transition assets, whether they be lodging or something else, that eventually roll to a net lease structure? How should we think about that 10 % that you referenced?
Greg Silvers -- President and Chief Executive Officer
What we referenced were recreational lodging assets that are not in a triple net structure.
Michael Billings -- Citi -- Analyst
And the eventuality is that those just like the Beachcomber and the asset that you bought, that eventually, your intent is to transition those to a net lease structure.
Greg Silvers -- President and Chief Executive Officer
That is correct.
Michael Billings -- Citi -- Analyst
You're saying at any one moment in time you're not going to have more than -- If your balance, you take a billion dollars today, $800 million in transition assets?
Greg Silvers -- President and Chief Executive Officer
That is correct.
Michael Billings -- Citi -- Analyst
And then, I understand that these two assets in St. Pete are doing a high amount of SMB, but relative to whether it's a water park, a ski hill, a casino, it still is a hotel in a hotel market that just happens to have a handful of restaurants. People are still going there probably to vacation rather than to go ski, go to the casino, go to a water park. So, on a rank order of recreational activity, it's more an extension of a vacation, eating and drinking, rather than the actual recreational activity of going to the slot machines, going down the water slide, going to ski. So, I'm just trying to better understand entering into a more traditional lodging.
Greg Silvers -- President and Chief Executive Officer
I think you're thinking about it in terms of traditional lodging but what if you put a wave park right there on the beach that you have? There are things that you can do to introduce new recreational or entertainment concepts given the fact that you own the beach, that you have a lot more optionality as far as creating more destination.
Michael Billings -- Citi -- Analyst
What's in the $24 million. These hotels need a lot of probably less --
Greg Silvers -- President and Chief Executive Officer
We're working through all the planning of all of that, but we think there is a lot of potential to add, again, more recreation and entertainment concepts.
Michael Billings -- Citi -- Analyst
And then, what happens as you transition those to a net lease? Is your partner -- Do you have a buy out on your partner share? Does your buyer continue with an operating subject to the 65% being a net lease to you? How will this unfold?
Greg Silvers -- President and Chief Executive Officer
We have kind of the traditional buy rights pre-negotiated on the transaction.
Michael Billings -- Citi -- Analyst
At what point does that meet a stabilization? What's the expectation about when these assets, either this or even the Kartrite, would transition to a full net lease?
Greg Silvers -- President and Chief Executive Officer
I mean, I think we would think it's somewhere in a three-year time horizon.
Michael Billings -- Citi -- Analyst
And how do you view sort of the accretion/dilution? Because arguably, being in the equity position getting the full operational EBITDA and then transitioning to a lease structure which arguably is going to be set at an average ratio that is going to be much less than the EBITDA, right? A different security, right, obviously. But how do you think about that transition from an FFO perspective which could be a dilutive event?
Greg Silvers -- President and Chief Executive Officer
Again, as I said, you're exactly correct. But that in some ways, we're going to hopefully, what we're planning on is some lift to that and then given the fact that we're doing that one in a JV, we think that we will have the ability that as we're ramping up, when we set this, that it will not be as diluted. It has the potential. There's no doubt that relative to that risk that setting lower levels with rent. But we think, from an investor's standpoint, that risk-reward as being more of a fixed income instrument as opposed to carrying the volatility of the P&L. That's a trade we're willing to make.
Michael Billings -- Citi -- Analyst
And how should we think about the security of the operator? Lodging and net lease assets have typically not worked that well due to the volatility in that business. And I can understand you talked about the stability of some of the more recreational aspects. Many times, what is protected, the lease held interests in bid some sort of corporate back stock from the operator. So, how should we think about those aspects to protect EPR shareholders in the event of very weak operations?
Greg Silvers -- President and Chief Executive Officer
Again, I think it will some combination of really strong coverage and corporate backstop to make that work. I think your insights are spot on, Michael, in the sense that you look at the coverage levels that we have set in some of our recreational anchored lodging, which are near 2 times. So, there is substantial free cash flow beyond our rent payment, which creates very strong incentives for the operator or the tenant in that case.
Mark Peterson -- Executive Vice President and Chief Financial Officer and Treasurer
And you mentioned it. We do expect, and I think it's the key, less volatility with these investments than in traditional lodging. Because we've looked over it in the long-term and there is, in fact, less volatility in these assets than you would see in traditional lodging.
Michael Billings -- Citi -- Analyst
Right. Is there a split on those two assets? I know there were two assets. What's the split between room count between the two and sort of the value between the two and where you're going to anticipate the spend?
Mark Peterson -- Executive Vice President and Chief Financial Officer and Treasurer
We'll have more on that. I don't think on the call we're ready to go into all the detail on that investment spend and we'll be working with our partner on rolling that out.
Michael Billings -- Citi -- Analyst
Okay. All right. Thank you.
Greg Silvers -- President and Chief Executive Officer
Thank you, Michael.
Mark Peterson -- Executive Vice President and Chief Financial Officer and Treasurer
Thanks
Operator
Thank you. And our next question comes from John Massocca with Ladenburg Thalman. Please proceed.
John Massocca -- Ladenburg Thalmann -- Analyst
Good morning.
Greg Silvers -- President and Chief Executive Officer
Good morning, John.
John Massocca -- Ladenburg Thalmann -- Analyst
Particularly given you're now going to own Kartrite for at least initially kind of in a non-net lease structure, can you remind us what some of the other drivers potentially to that water park asset are beside the casino property there? And just kind of how reliant do you feel that water park is on the casino and maybe what prevents someone from going in and opening a similar indoor water park type establishment down the road closer to the metro New York area to kind of cut you off upriver if you will?
Greg Silvers -- President and Chief Executive Officer
As I said, I don't think it's that significantly tied into the casino. I think there are other drivers up in the area, whether it's the music festivals in that area. There's a lot of things going on in the Catskills. I think, likewise to what we see in the Poconos, there are multiple water park operators that operate in that area, but it's truly about the execution and the property that drive the fundamental success of the property. And when we open that property here in the spring, I think we will invite everyone here up to see and I think it will be readily apparent why we're going to be successful there. This is an outstanding property in a very bucolic setting which offers the latest state of the art kind of water park hotel that I think the public is going to embrace. So, we feel that it's well positioned relative to the marketplace and with a depth of population in an around it, we think it will be very successful.
John Massocca -- Ladenburg Thalmann -- Analyst
Okay. And then, switching gea
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