Hello, ladies and gentlemen. Welcome to the second quarter EPR Properties 2019 earnings call. At this time, all participants are in 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, press star then zero on your touch-tone phone. As a reminder, this conference call is being recorded. I would now like to turn the conference over to your host, Brian Moriarty.
Thank you, operator. Hi, everybody, and welcome. Thanks for joining us today for our second quarter 2019 earnings call. I'll start the call today by informing you that this call may include forward-looking statements as defined by the Private Securities Litigation Reform Act of 1995, identified by such words as will be, intend, continue, believe, may, expect, hope, anticipate, or other comparable terms. The company's actual financial condition and results of operations may vary materially from those contemplated by such forward-looking statements. Discussion of these factors that could cause results to differ materially from these forward-looking statements are contained in the company's SEC filings, including the company's reports on Form 10-K and 10-Q. Now I'll turn the call over to Company President and CEO, Greg Silvers.
Thank you, Brian, and good morning, everyone. Welcome to our second quarter 2019 earnings call. I'd like to remind everyone that slides are available to follow along via our website at www.eprkc.com. I'll get started with our quarterly headlines, discuss the business in greater detail, then turn the call over to the Company CFO, Mark Peterson, who will review the company's financial summary. Let's get started with our first headline. We had a productive quarter anchored by strong investment spending volume. We've established strong investment spending momentum for the first half of the year with nearly $600 million deployed, highlighted by our 18-theater acquisition of Regal Cinemas. In addition to the volume, we continue to be very pleased with the quality of entertainment and recreation assets we're seeing.
Our unique position as the leader in the experiential space, built over 20 years of forging relationships, continues to pay strong dividends as operators are focused on capturing the strong consumer demand for experiential assets. Our second headline, enhanced portfolio credit profile. Over the past year, the credit profile of our portfolio has consistently strengthened. The recent announcement of Vail Resorts' anticipated acquisition of Peak Resorts and our earlier announcement of Six Flags acquiring certain operations of Premier Parks both speak to our process of identifying high-quality assets that generate strong cash flows, which over time are highly desired by the largest players in their respective industries. Our third headline, experiential assets continue to perform. The consumer continues to demonstrate their desire for the experiences our assets deliver.
Whether it's the outstanding performance of our ski assets this season, as reflected by increased percentage rents, or the live-action The Lion King's nearly $200 million opening weekend, consumers continue to spend their dollars on experiences that they can share with family, friends, and colleagues. Our fourth headline, strengthened balance sheet capacity. We recognize the importance of positioning our balance sheet to take advantage of the opportunities before us. The market support of our experiential strategy has allowed us to issue nearly $160 million of equity during the quarter and nearly $240 million year to date. This equity issuance at very favorable pricing provides all the equity we need to fund our upsized investment spending guidance. We are well-positioned to take advantage of the increasing interest in experiential assets and the opportunities presented. Our fifth headline, we are increasing investment spending guidance.
Consistent with our investment spending narrative, we're pleased to report that we are increasing our investment spending guidance and are confident about our ability to execute on this plan. Now let me go into the quarter in more detail. At the end of the second quarter, our total investments were over $7.3 billion, with 417 properties in service that were 99% occupied. During the quarter, investment spending was $391.9 million, and our proceeds from dispositions were $95.8 million. Additionally, our company-level rent coverage was at 1.86 times, which demonstrates the strength and consistency of our portfolio. Now I'll provide an update on our three segments, entertainment, recreation, and education. At quarter end, our entertainment portfolio included approximately $3.4 billion of total investments, with two properties under development, 195 properties in service, and 26 operators. Our occupancy was 99%, and our rent coverage was 1.76 times.
The year-to-date box office results continues to lag the all-time record prior year, but the industry remains optimistic about the releases scheduled for the back half of the year and continues to expect full year 2019 to perform at or slightly above the record 2018 levels. Key titles for the back half of the year include the aforementioned live action The Lion King, Frozen II, and Star Wars: The Rise of Skywalker. Investment spending in our entertainment segment totaled $311.6 million, highlighted by $284.5 million of theater acquisitions, driven in large part by our acquisition of 18 Regal Cinemas and a $270.5 million sale-leaseback with Cineworld. The Regal transaction demonstrates the benefit of our deep industry relationships and our sophistication in executing large-scale acquisitions. At quarter end, our recreation portfolio included approximately $2.4 billion of total investments, with one property under development, 83 properties in service, and 20 operators.
Our occupancy was 100%, and our rent coverage was approximately 2.22 times. Our water park hotel resort in the Catskills, The Kartrite, had its grand opening on May 10th and has been well-received by the local community, travel journalists, and our guests. Now that the summer season has started in the Northeast, we are seeing increasing demand for this new resort offering. We continue to expect the first year of operations to be one of ramp-up while building awareness through the various marketing channels. Investment spending in our recreation segment totaled approximately $56.8 million, which included $24 million for the acquisition of two attraction properties, $14 million on The Kartrite Waterpark Hotel, and the balance consisting primarily of build-to-suit developments of golf entertainment complexes and attractions. On the disposition front, on July 1st, as anticipated, we received payment in full on our $189.7 million Schlitterbahn mortgage note.
This payoff was facilitated by Cedar Fair's purchase of two of Schlitterbahn Group's Texas water parks for $261 million, including both the operating business and the real estate. Additionally, last week, our customer, Peak Resorts, announced that they were being acquired by Vail Resorts. The $11 per share price was more than double where Peak shares closed the day before the announcement, a premium of 116%. Vail is the operator at our Northstar California ski resort. Based on our second quarter financials, a combined Vail and Peak entity would've been our fifth-largest customer based on revenues. The transaction is still subject to various closing conditions, such as regulatory approval and the approval of Peak shareholders. The Cedar Fair and Vail transactions highlight the premium valuations placed on experiential assets and the rising demand for quality properties by top-tier operators.
This dovetails with the credit upgrade we recognized in 2018 when Six Flags purchased five of our assets from Premier Parks and became a top 10 customer. History shows that an industry's best assets tend to migrate over time to the industry's best credit operators. As the market-leading REIT in experiential real estate, these transactions further validate our investment thesis of owning market-dominant experiential real estate. At quarter end, our education portfolio included approximately $1.3 billion of total investments, with four properties under development, 138 properties in service, and 57 operators. Our occupancy was 98%, and our rent coverage was 1.47 times. Investment spending in our education segment totaled approximately $23.5 million, primarily consisting of build-to-suit developments and redevelopments of public charter schools, private schools, and early childhood education centers.
During the second quarter, we received $58 million in disposition proceeds related to the education segment, including $6.5 million of termination fees. The disposition properties included five operating charter schools and one land parcel. We are making excellent progress on the transition of our CLA schools to Crème de la Crème. Through the end of July, we have successfully transferred seven of our 21 properties to Crème. Crème continues to make substantial progress with the remaining license applications, they anticipate taking over the remaining 14 CLA schools over the next six months. Additionally, both tenants are paying their rent timely on their respective schools. With that, I will turn it over to Mark for a discussion of the financials.
Thank you, Greg. I'd like to remind everyone on the call that our quarterly investor supplemental can be downloaded from our website. Turning to the first slide, net income for the second quarter was $60.6 million, or $0.79 per share, compared to $85.5 million, or $1.15 per share in the prior year. FFO was $93.4 million, compared to $139 million in the prior year. FFO as adjusted for the quarter was $105.2 million versus $141.8 million in the prior year, and was $1.36 per share versus $1.87 per share in the prior year. During the second quarter of 2018, we recognized $47.3 million in prepayment fees related primarily to the payoff of a mortgage note by Och-Ziff Real Estate that was secured by ski properties. This large prepayment in the prior year skews the comparative quarterly results.
If you exclude this income, our FFO as adjusted per share increased by almost 8% versus prior year. Before I walk through the key variances, I want to discuss two adjustments to FFO to come to FFO as adjusted. First, pursuant to tenant purchase options, we completed the sale of four public charter schools during the quarter for net proceeds of $46.7 million and recognized termination fees included in gain on sale of $6.5 million, which has been added to FFO to get to FFO as adjusted. These fees were higher than expected for the quarter, although most of this increase is timing related versus that which we had expected in the second half of the year. I will have more on this later when I discuss our revised earnings guidance for the year.
Second, transaction costs were $6.9 million for the quarter. Four point eight million of this amount related to pre-opening expenses in connection with the Kartrite Resort and Indoor Waterpark and $1.6 million related to the transfer of four CLAs to Crème during the quarter. Now let me walk through the key line item variances for the quarter versus the prior year. Our total revenue decreased compared to the prior year from $202.9 million to $175.7 million. Within the revenue category, rental revenue increased by $20.3 million versus the prior year to $157.3 million. This increase resulted from rental revenue related to new investments and was partially offset by the impact of dispositions. Additionally, $7.7 million of the increase relates to the adoption of the new lease accounting standard I discussed last quarter that is offset by higher property operating expense.
Additionally, percentage rents for the quarter also included in rental revenue were $4.1 million versus $1.7 million in the prior year. This increase exceeded our expectations and related to strong performance at our ski properties, CLA Early Education properties, and our private schools. Other income increased by $5.1 million to $5.7 million versus the prior year and primarily related to the revenue from The Kartrite, which opened during the quarter and is being operated under a traditional REIT lodging structure. Mortgage and other financing income was $12.6 million for the quarter versus $65.2 million in the prior year. The decrease was due primarily to note payoffs, including the related $47.3 million in prepayment fees received last year that I discussed earlier, as well as the sale of four Imagine Schools in July of 2018 that were classified as investment in direct financing leases.
On the expense side, the increase in other expense of $8.1 million primarily related to the operations of The Kartrite. Income tax benefit was $1.3 million for the quarter versus expense of $642,000 in the prior year. This is mostly due to higher deferred tax benefits related to The Kartrite and our Canadian properties. As a reminder, deferred taxes are excluded from FFO as adjusted. 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 3.2 times, debt service coverage at 3.7 times, interest coverage also at 3.7 times. Our net debt to adjusted EBITDA ratio was 5.8 times at quarter end.
This ratio is slightly higher than our stated range of 4.6 to 5.6 times, due to the proceeds we were expecting of approximately $190 million that were received on July 1st from the payoff of the Schlitterbahn notes and that were used to pay down our line of credit, as well as the impact of a large Regal transaction, which did not close until June 12th, and thus had only a partial month of earnings in the quarter. If you pro forma the impact of these two transactions at June 30th, our net debt to adjusted EBITDA was lower at 5.4 times. Our net debt to gross assets was 42% on a book basis and 34% on a market basis at June 30th. Let's turn to the next slide for our capital markets and liquidity update.
At quarter end, we had total outstanding debt of $3.2 billion, of which $3 billion is either fixed rate debt or debt that has been fixed through interest rate swaps with a blended coupon of approximately 4.6%. We had $240 million outstanding at quarter end on our $1 billion line of credit, which of course, does not reflect the pay down from the $190 million of note proceeds we received in July 1st that I just discussed, and we had $6.9 million of unrestricted cash on hand. We are pleased to have a weighted average debt maturity of approximately six years and no debt maturities until 2022. During the quarter, we took advantage of a strong stock price and issued approximately $158 million in common equity under our Direct Stock Purchase Plan at an average price of over $78 per share.
This level of issuance was substantially higher and earlier than what we had in our plan. We think this move was prudent despite the near-term impact on our earnings per share, given the recent volatility we have seen in the stock market, along with our attractive pipeline of investment opportunities. Year to date, we have raised approximately $237 million in common equity under our DSPP plan at a very low cost. This now puts us in the enviable position of not needing to raise any equity over the remainder of the year to fund our upsized investment spending plan while maintaining our conservative leverage targets. Turning to the next slide.
We are narrowing our guidance for 2019 AFFO per share to a range of $5.32-$5.48 from a range of $5.30-$5.50, and increasing guidance for investment spending to a range of $700 million-$850 million from a range of $600 million-$800 million. We are confirming our expected disposition proceeds for 2019 of $300 million-$400 million. Guidance can be found on page 30 of our supplemental. There you will also see that we are raising our estimates of percentage rents and participating interest for the year by $2.5 million and increasing our G&A expense by $1.5 million, primarily due to increased payroll costs, including incentive compensation as well as professional fees. Note that G&A expense is still expected to be lower than last year. Turning to the next slide.
Although the midpoint of our FFO adjusted per share guidance is not changing, I thought it'd be helpful to provide a summary of the changes in our latest expectations from our previous plan. Starting with the previous midpoint of $5.40, we add in $0.05 per share for the increase in investment spending and favorable timing, and then $0.03 per share for the increase in expected percentage rents and participating interest. We then subtract $0.07 per share related to the increase in size and timing of our equity issuance that I discussed earlier, $0.02 per share for the increase in expected G&A expense, and add $0.01 for all other changes net. Finally, note that the changes for termination and prepayment fees related to education properties offset each other, such that there is no change in our expectation for these in total for the year.
To conclude, excluding the non-education related prepayment fees of $71.3 million we received for the full year 2018, or $0.93 per share, the midpoint of our FFO adjusted per share guidance for 2019 of $5.40 continues to reflect over 4% growth. With that, I'll turn it back over to Greg for his closing remarks.
Thank you, Mark. Overall, this has been an incredible quarter for EPR, as the company has materially grown its asset base, raised substantial equity capital at attractive prices, and upgraded the quality of our top 10 customer list. Our balance sheet and our team are well-positioned for growth, and we're excited by the substantial opportunities in front of us to continue to upgrade and grow our portfolio of experiential real estate assets. With that, why don't I turn it over for questions? Operator?
Ladies and gentlemen, if you have a question at this time, please press star and the number one on your touch-tone telephone. If your question has been answered or you wish to remove yourself from the queue, please press the star key. Your first response is from Craig Mailman of KeyBanc Capital Markets.
Hey, good morning, guys.
Craig.
One quick one on guidance, Mark. You'd mentioned that this quarter's lease term fees are a little higher because you pulled forward some. How do you see the balance trending in three Q and four Q?
Yeah. We expect to collect fees in both quarters. It's always hard to predict the timing. I think we're good at predicting it for the year. We don't control exactly when they close quarter to quarter, but we do expect the termination fees and prepayment fees for the year to be unchanged from what we guided to earlier.
Okay. Then just bigger picture, for things back a year or two ago when the market went against you guys, it was harder to buy things. Och-Ziff clearly was a help to get that restarted. As we're sitting here today, you guys are trading at a premium 10 AV. You have a good investment pipeline. I acknowledge that you raised more than you thought you would in the quarter. You want to balance it with dilution, but internally, what's the discussion around over-equitizing this year when the cost of equity is attractive and you have plenty of uncertainty on the horizon with the election and rates and trade to bring that leverage towards the low end of your range to build capacity to head into next year?
It's a good question, Craig. Clearly, managing the balance sheet is one of our top priorities. We're always looking at it. As Mark said, we took advantage of that and hit our DSPP practically every month within the quarter of the second quarter. I think all of those things come into play for us. Again, we're not managing for the quarter-to-quarter performance, but the long haul. All I would say is that it is top of mind for us and the volatility that exists out there, and we're not afraid when the situation warrants it to issue more equity to put us in a position for that long play. I think our second quarter demonstrated that.
Okay. Then just on the acquisition pipeline, what segments are you guys seeing better opportunities in? Just generally, where are the yields the most attractive here? Also, could you just give us an update on casino opportunities?
Yeah, I think it's still kind of consistently with what we've said in the entertainment and recreation area, I think are where we're seeing the best. I think mid 7s to mid 8s, all around 8 at a midpoint is where those opportunities lie. We think there's really good depth and quality that we're seeing. Additionally, as we talked about in gaming, we're continuing to explore that. We have nothing to announce, but as we move forward with that, we'll definitely keep the market apprised of it.
Great. Thanks, guys.
Thank you, Craig.
Thanks.
Thank you. Your next response is from Nick Joseph of Citi.
Thanks. Maybe just staying on gaming. Did you bid on either of the recent transactions, Century Casino or Jack Cincinnati?
Actually, we did not. I think the Century deal is probably a great deal for VICI. It's probably not an entrance transaction for us in rural Missouri. That's not necessarily a comment on those assets, but we're mindful of the message that we want to send. The overall Jack's transaction, I think, was part of a larger group that was already in play well before we announced our intention to look at the space.
Thanks. How do you think about getting expertise in the gaming sector and competing against other REITs who have been in the sector for longer?
Yeah. We're aware of the fact that if and when we move into that space, we'll have additional expertise. Clearly, on a couple of points. There are groups or people that we can hire on a consulting basis that will allow us to give us insight into that. I would also point out, for those who didn't notice, that we made an addition to our board with Virginia Shanks, who is a longtime veteran of the gaming business, well over 20 years, and knows everyone and all these properties. We have a lot of resources that are available to us. I think to your question, Nick, as we move and get into the space, you'll see us adding headcount to reflect our commitment to it.
Thanks.
Thank you.
Thank you. Your next response is from Brian Hawthorne of RBC Capital Markets. Please go ahead.
Hi. One of my questions. Vail has a history of wanting to own its own real estate. Do you think they'd want to buy EPR out?
You'd have to talk to Vail about that. We've had history with them where we've been in a lease. The Northstar asset has been leased by them for several years. I don't know. They just entered into a leasing relationship in Utah. I don't know if that mindset is continuing, but I would direct you to talk to them as opposed to us speaking for them.
Sure. Okay. One quick one on gaming. Has the market changed at all or become more competitive given the recent transaction activity?
I don't know that we think it's become more competitive in the sense that it's no different than other net lease. It's a function of cost of capital, and you've got three players, and we're hoping to see if we can find a transaction that makes sense to become the fourth player in that. I don't think that I've seen it materially move to date.
Got it. Thank you.
Thank you.
Your next response is from Collin Mings of Raymond James.
Thanks. Good morning, everyone.
Morning, Collin.
First question from me, can you just expand on the two attraction properties you acquired during the quarter?
I think what we did is, we got two additional museum properties, that were, again, what we think is admissions and concessions businesses. Not large, but again, taking advantage of that overall experiential market and driving deeper and wider into that space, with long histories. As we roll out, we'll put more color on that.
Okay. Fair enough. Just going back to the prepared remarks, just given some of the negative headlines out there on the theater front, can you maybe just talk about if you're seeing any shift in the transaction market there, specifically?
Not really. Like I said, we still believe that this year is going to be a very solid year and meet or exceed last year's record year. I think it is just different, we've talked about this, Collin. When you go quarter to quarter in the theater business, it's very difficult to see any one quarter where we're at. Remember, we were down nearly 20% in the first quarter, and we sat here now down about 6%. We always knew this was going to be a second half of the year building through the summer. I think we'll hold judgment till we get to the end of the year.
The resiliency of this has always been proven, that when we deliver quality content, that the audiences show up, and we've seen that, like I said, I referenced whether it was "The Lion King," and we'll see it again with The Fast and the Furious takeoff on Hobbs & Shaw this coming weekend. When content is there, the audience will be there.
Got it. I understand that from kind of an operational standpoint, but just in terms of the transaction market, I guess your point there is it really hasn't caused any sort of movement in terms of cap rates or buyer appetite or anything like that out there.
No, I think it's still a competitive market. I think the theater space is widely accepted by almost all of our net lease kind of peers. I think it's still very much in demand by kind of all net lease. You talk about whether it's the mall guys, the strip guys, and go back and read their comments. The entertainment and recreation segments are what is driving business. Our relationships, as I said, forged over 20 years with those tenants, I think will bode well for us as we move forward.
Okay. I appreciate the color. Thank you.
Thanks, Collin.
Again, if you would like to ask a question, please press star and the number 1 on your touch tone phone. If your question has been answered or you wish to remove yourself from the queue, please press the star key. We have a response on the line of John Massocca of Ladenburg Thalmann. Please go ahead.
Good morning.
Morning, John.
What kind of ranges for the performance at Kartrite are you baking into guidance? And do you have any color on how the property's performed, maybe from, like, a contribution to AFFO in both 2Q19 and maybe just the general performance in July?
Again, John, we don't want to comment on a specific asset. What I can tell you is, as we haven't changed guidance, that this is performing as we anticipated. We put the numbers out there. We knew it was a ramping story. It's a marketing story, especially in the first part of the year. When we opened originally, we didn't even open, pursuant to the management recommendation, all the capacity of the hotel, because getting the operational efficiencies out and understanding how to operate that property was key. I think we don't see contribution, and in fact, in part of our plan, we see drag in what is in 2019, but that's consistent with how we planned it. What we hope that means is that this can be really a story about 2020.
Is it maybe contributing to kind of the size of the difference between the low and high end of guidance a little bit, though?
There's no doubt that is the volatility that we have to account for. We try to accurately reflect what the best information that we have, understanding that this is a ramping environment. As I said, we went into this year knowing that the Kartrite was gonna be a 2020 story, not a 2019 story.
Yeah, I think there's really three things that contribute to that a little wider, as Greg said. As you just went over, Kartrite's part of it because it's ramping up. Termination fees have a range, and percentage rents have a range. We have that level of range to accommodate really those three primary things.
Okay. Switching over to theaters, what was the cap rate on the Regal portfolio?
We don't disclose cap rates on any transaction, but I think we could say it was consistent with the range that we have said we've bought theaters before.
Okay. Given Regal has been kind of marketing, at least from my understanding, a couple of portfolios, what made this particular tranche of assets attractive versus other theater assets that might be out there for sale?
Again, for us, it was well presented. We've had a long-standing relationship for Regal. The coverage was 2.0 or above on the portfolio. We structured this as a master lease across this 18-theater portfolio. We like the exposure. The portfolio that we put together with them has exposure, California, Texas, Florida, which is the demographic areas that we really like. I think if you looked at it, you would see we kind of shaped this transaction to feel like we wanted this group of properties. Again, if you compared it to some of the things they did, this has the highest concentration of California properties. It has the demographic profile that we like. I think you would see that we were meaningful, whether they went and did a different portfolio, I think we had a hand in how that went off.
Okay. Then, on kind of the build-to-suit side, are your tenants continuing to see kind of the same returns from moving to a high-amenity theater format as they were getting, say, 12 or 24 months ago? Has maybe some of the kind of additional competition in that market scaled back returns a little bit from conversions?
Yeah. It's a function of what mover that you are in the market. What we've talked about is, of those returns are still very strong and very high if you're a first mover, and they work to probably 20+% returns through the fourth mover in a market. Again, it's not so much the competition, it's at what point are you making that relative to your competition in that market.
I guess generally speaking, how much kind of runway is there for additional conversions, maybe within your own portfolio or even kind of just nationally?
If you think overall that nationally we're still less than 50% conversions, we're slightly above that in ours. I think what you're gonna see is the evolution of starting. Some of the theater operators are starting to look at their very, very high-performing theaters and start to get in front of letting someone else with a lower quality, kind of do a conversion and take share away from them. We're starting to have more discussions. I would've told you 12 or 18 months ago, we were talking about, we have some theaters that are so high-performing, it's difficult to deal with. At least now we're engaging in conversations with operators about their trying to be proactive and get in front of that and drive that consumer experience even in some of their highest-performing theaters.
That's very helpful. That's it for me. Thank you.
Thanks.
Thank you. I am showing no further questions in the queue at this time. I would like to turn the conference back over to Greg Silvers.
Well, thank you, everyone, for your interest this morning, and we look forward to talking to you next quarter.
Thank you.
Thank you.
Ladies and gentlemen, this concludes today's conference. Thank you for your participation, and have a wonderful day. You may now all disconnect.