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EPR Properties
Earnings Call Analysis
Q3-2024 Analysis
EPR Properties
EPR Properties continues to strengthen its liquidity profile, having secured a new $1 billion revolving credit facility. This marks a significant milestone that grants the company favorable terms and reflects the confidence its banking partners have in its strategic direction. In the ongoing evolution of its investment strategy, EPR is actively recycling proceeds from sales of noncore assets to invest in diversified experiential properties. The firm is particularly excited about its new investments in wellness-focused experiences, such as Premier Hot Springs properties, aligning with relevant trends in consumer demand.
During the third quarter, EPR reported a Funds from Operations (FFO) as adjusted of $1.30 per share, down from $1.47 year-over-year, due in part to the absence of significant cash basis deferral collections from the previous year. Excluding these impacts, FFO adjusted per share increased by over 6% compared to last year. Total revenue for the quarter stood at $180.5 million, a decrease from the prior year's $189.4 million, with rental revenue declining by $15.3 million. However, percentage rents surged to $5.9 million from $2.1 million driven by theater leases.
EPR Properties is refining its guidance for 2024, narrowing FFO as adjusted per share to a range of $4.80 to $4.92 from a previous range of $4.76 to $4.96. The company also increased expectations for disposition proceeds from a range of $60 million to $75 million to $70 million to $100 million, reflecting the successful sale of vacant theaters, specifically former Regal theaters. Similarly, the guidance for percentage rents has been revised upward to $13.5 million to $16.5 million from $12 million to $16 million.
Hurricanes Helene and Milton resulted in significant operational challenges. EPR recognized impairment charges of $12.1 million linked to joint ventures involving hotels in St. Pete Beach, which are not expected to reopen until well into 2025. The strategy going forward involves working with joint venture partners to navigate the repercussions and identify a pathway for exiting these properties from the portfolio.
The theater division is witnessing enhanced momentum with the return of major film releases. The Q3 box office yielded $2.7 billion, concluding a total of $6.2 billion for the first nine months of 2024. EPR anticipates a recovery in theater coverage moving into 2025 as the film industry stabilizes after a period of reduced activity due to strikes. The company sees consistent improvements in box office performance driven by a robust lineup of forthcoming releases, bolstering confidence in future revenues.
EPR Properties is experiencing slight decreases in revenue at some of its operators due to ongoing expense pressures. Specifically, the company reported a decrease in EBITDARM across various segments, reflecting rising costs tied to insurance and labor. Despite these pressures, the current EBITDA coverage remains solid, with projections indicating a stable outlook moving forward.
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Good day, and thank you for standing by. Welcome to the EPR Properties Third Quarter 2024 Earnings Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded.
I would now like to hand the conference over to your first speaker today, Brian Moriarty. Please go ahead.
Thank you. Thanks for joining us today for our third quarter 2024 earnings call and webcast. Participants on today's call are Greg Silvers, Chairman and CEO; Greg Zimmerman, Executive Vice President and CIO; and Mark Peterson, Executive Vice President and CFO.
I'll start the call by informing you that this call may include forward-looking statements as defined in the Private Securities Litigation Act of 1995, identified by such words as will be, intend, continue, believe, may, expect, hope, anticipate or other comparable terms.
The company's actual financial condition and the results of operations may vary materially from those contemplated by such forward-looking statements. Discussion of those factors that could cause results to differ materially from these forward-looking statements are contained in the company's SEC filings, including the company's reports on Form 10-K and 10-Q.
Additionally, this call will contain references to certain non-GAAP measures, which we believe are useful in evaluating the company's performance. A reconciliation of these measures to the most directly comparable GAAP measures are included in today's earnings release and supplemental information furnished to the SEC under Form 8-K. If you wish to follow along today's earnings release, supplemental and earnings call presentation are all available on the Investor Center page of the company's website, www.eprkc.com.
Now I'll turn the call over to Greg Silvers.
Thank you, Brian. Good morning, everyone, and thank you for joining us on today's third quarter 2024 earnings call and webcast.
In the third quarter, we continued to make meaningful and steady progress in further positioning the company for continued growth. A key milestone was entering into a new $1 billion revolving credit facility that enhances our already strong liquidity profile, while providing more favorable terms that this facility underscores the confidence our banking partners have in our strategic direction and strengthens our financial health as we invest in select experiential properties.
Our investment strategy remains on track as we continue recycling proceeds from the sale of noncore assets and use free cash flow to invest in diversified experiential assets. We are excited about our newest investment in fitness and wellness as we continue to build out our portfolio of investments of Premier Hot Springs properties, capitalizing on the growing demand for wellness-focused experiences.
As evidenced by our investments in well-located climbing gyms, our deliberate focus on growing non-commodity areas of the fitness and wellness industry, affords us the opportunity to source these proven investments. Overall, our coverage remains strong, although it moderated slightly moving from 2.2x to 2.1x.
Our non-theater coverage was unchanged, highlighting sustained consumer demand while we did see a decline in our theater coverage as we had anticipated due to the production calendar. Quarterly momentum continues to build in theater division with key titles delivering very strong results.
Separately, we were also pleased to hear the announcement by the National Association of Theater Owners, that 8 of the largest theater chains will be investing more than $2.2 billion, to modernize and upgrade theaters of all sizes over the next 3 years. It's expected that these updates will include adding the latest projection and sound technology, along with upgraded seating and key maintenance areas such as air conditioning, signage and lighting, while further enhancing the moviegoing experiences for audiences nationwide.
Also during the quarter, Topgolf Callaway announced its intention to spin off top golf into a separate entity. We believe that this will be a positive event for Topgolf as it will enhance the company's strategic focus as a highly successful Eaton play brand. The spin-off is expected to leave TopGolf well capitalized and debt-free, positioning it for success. We have continued to see strong performance from our TopGolf portfolio and have a great relationship with the Topgolf management team. We look forward to their continued success as they move forward with their strategic plan.
Lastly, our hearts are with those impacted by the recent hurricanes. Our hotel properties in St. Petersburg Beach were significantly impacted and we recognize the devastation these events have had on the lives of those who work and live in the area.
Now I'll turn it over to Greg Zimmerman for more detail on the quarter.
Thanks, Greg. At the end of the quarter, our total investments were approximately $6.9 billion, with 352 properties that are 99% leased, excluding properties we intend to sell.
During the quarter, our investment spending was $82 million. 100% of the spending was in our experiential portfolio. Our experiential portfolio comprises 283 properties with 52 operators and accounts for 93% of our total investments or approximately $6.4 billion. And at the end of the quarter, excluding the properties we intend to sell, was 99% leased. Our education portfolio comprises 69 properties with 8 operators. And at the end of the quarter, excluding the properties we intend to sell, was 100% leased.
Turning to coverage. The most recent data provided is based on a June trailing 12-month period. Overall portfolio coverage remains strong at 2.1x, down slightly from last quarter. Trailing 12-month coverage for the non-theater portion of our portfolio remains at 2.6x. Trailing 12-month coverage for theaters is 1.5x with box office at $8.1 billion for the same period. Our theater coverage reporting assumes that the Regal deal was in place for the entire trailing 12-month period.
The slight reduction in theater and overall coverage was driven by the dip in box office during the trailing 12-month period as we had anticipated from the writers and actors strikes impact on the release schedule. We expect this is the last remnant of the negative impact of the strikes. And with the rising box office, we will see a recovery of theater coverage into Q4 and Q1 of 2025.
Before updating you on the operating status of our tenants, I wanted to address the impact of Hurricanes Helene and Milton on our Florida properties. First and foremost, our thoughts remain with all those in the community who have been affected by the devastating storms.
Our only assets significantly impacted by the storms were our 2 joint venture hotels on St. Petersburg Beach, the Bellwether Beach Resort and the Beachcomber, which sustained considerable damage. Given the hurricanes hit within a 2-week period, we are still finalizing a comprehensive assessment of the damage.
As of now, we do not anticipate either we'll be able to reopen until well into 2025. We plan to work in good faith with our joint venture partners, the nonrecourse debt provider and the insurance companies to identify the path forward, which we expect will result in the eventual removal of both hotels from our portfolio. Accordingly, during the quarter, we recognized impairment charges on the joint ventures of $12.1 million, and fully wrote off our carrying values.
Turning to the operating status of our tenants. We continue to see a rebound in North American box office. Q3 box office totaled $2.7 billion, and ended at $6.2 billion for the first 9 months. The first 6 months of 2024 were down 19% for the same period in 2023, but the first 9 months were only down 12%.
And while July 2024 was down 13% from July 2023, largely because we were comping against the outperformance of Barbie, August was up 10% and September was up 25%. Led by the outsized performance of Deadpool and Wolverine, 6 titles released in Q3 exceeded $100 million in North American box office.
Box office growth ties directly to the number of titles released. As I previously mentioned, heading into Q4, we are confident the negative impact on box office, resulting from the lack of new releases related to the writers and actors strikes is behind us. To date, 16 films have grossed more than $100 million in 2024. Another 12 have gross between $60 million and $100 million. Titles to be released in Q4 and projected to gross over $150 million include Venom 3, Gladiator 2, Wicked, Moana 2, Sonic the Hedgehog 3 and Mufasa, the Lion King. We are optimistic that the quantity and quality of the slate for the last quarter and into 2025 and 2026, will continue to propel an upward trajectory in box office.
Based on the results through September 30, we are increasing our guidance for box office in calendar year 2024 to between $8.3 billion and $8.7 billion, from our prior expectation of between $8.2 billion and $8.5 billion compared to last year's $8.9 billion.
Finally, despite the encouraging uptick in box office results in most of Q2 and Q3, box office for the Regal lease year, the trailing 12-month period ending July 31, was $7.9 billion, owing to the lack of product from the strikes. This is consistent with the forecast we provided last quarter.
Turning now to an update on our other major customer groups. We saw good results across our drive-to value-oriented destinations. Our operators are seeing continued expense pressure and at certain properties experienced slight decreases in revenue, which combined, led to slight decreases in EBITDARM.
And [ ready carding ] is under construction in Kansas City and Oklahoma City and finalizing entitlements for plans in Schaumburg. Topgolf completed self-funded refreshes at another 4 of our assets taking the number of self-funded refreshes to or 20% of our portfolio.
Six Flags and Cedar Fair completed their merger in July, and are focused on driving cost efficiencies and enhancing the customer experience. Our Gravity Haus in Breckenridge was named the eighth best hotel in the world, 12:57 PM in Conde Nast Traveler's Readers' Choice Awards. Construction of the extensive expansion at the Springs Resort in
Pagosa Springs continues with opening scheduled for spring 2025. Even with the construction, the strength continues to -- its strong performance, and we're confident the expansion will drive growth at this outstanding asset. Finally, our Marietta Hot Springs Resort is completely open and continues its ramp-up while receiving good reviews.
In our experiential lodging portfolio, collectively, our operators' revenue was up slightly year-over-year. Our education portfolio continues to perform well. Our customers' revenue across the portfolio was up 3% year-over-year, while EBITDARM decreased by 1%, driven largely by wage increases.
KinderCare, which operates 15 of our early childhood education assets under their Creme Brand went public after the end of the third quarter.
Turning to our operating properties. Our managed theaters continued to show improvement with the box office recovery. Performance at our joint venture experiential lodging assets was lower than expected, driven primarily by the impact of the 2 hurricanes on St. Petersburg and other weather-related issues.
During Q3, our investment spending was $82 million, and year-to-date is $214.6 million. We closed on a $52 million mortgage financing for Iron Mountain Hot Springs in Glenwood Springs, Colorado, owned by off-road capital partners who also developed World Springs at Grandscape in Colony, Texas, Iron Mountain Hot Springs has both natural hot springs and World Springs pools with the same minerality as several hot springs throughout the world.
Iron Mountain Hot Springs is consistently well reviewed and among the 3 top Hot Springs attractions in the United States for attendance and EBITDA. We are pleased to add such an outstanding asset to our growing stable of iconic assets in the space, which also includes the Springs Resort and Pagosa Springs and the recently opened Marietta Hot Springs Resort.
We're narrowing our investment guidance for funds to be deployed in 2024 to a range of $225 million to $275 million from a range of $200 million to $300 million. Through quarter end, we have committed approximately $150 million for experiential development and redevelopment projects that have closed, but are not yet funded to be deployed over the next 2 years.
In most of our experiential categories, we continue to see high-quality opportunities for both acquisition and build-to-suit redevelopment and expansion. Given our cost of capital, we will continue to maintain discipline and to fund those investments primarily from cash on hand, cash from operations, proceeds from dispositions and with our borrowing availability under our increased unsecured revolving credit facility.
In Q3, we sold 2 vacant former Regals and a former KinderCare school for combined net proceeds of $8.7 million, resulting in a loss of approximately $3.4 million. For the first 9 months of the year, disposition proceeds totaled $65.1 million. Subsequent to the end of the quarter, we sold another vacant Regal theater for net proceeds of $2.6 million. At a little over 14 months after the conclusion of the legal bankruptcy and taking possession of 11 vacant former Regal theaters, we have sold 9. We have a signed purchase and sale agreement for 1 of the remaining 2 and continue to market the final one.
In addition, as indicated on last quarter's call, shortly after Labor Day, we closed a former vacant Regal theater in California, which Cinemark was operating for us. It is now being marketed for sale.
Beyond these 3 former Regal theaters, we have a vacant Xscape Theatre and 1 remaining vacant AMC theater. Since early 2021, we have disposed 23 theaters. We are very pleased with the overall disposition cadence and particularly with the pace of selling the vacant former Regal theaters. Based on that progress, we are updating our 2024 guidance for dispositions to $70 million to $100 million.
I now turn it over to Mark for a discussion of the financials.
Thank you, Greg. Today, I will discuss our financial performance for the third quarter, provide an update on our balance sheet and close with an update on 2024 guidance. FFO as adjusted for the quarter was $1.30 per share versus $1.47 in the prior year, and AFFO for the quarter was $1.29 per share compared to $1.47 in the prior year.
Note that there were no on-period deferral collections from cash basis customers included an income for the quarter was $19.3 million in the prior year, resulting in a decrease of about $0.25 per share versus prior year. Excluding this impact, FFO's adjusted per share increased by over 6% versus prior year.
Now moving to the key variances. Total revenue for the quarter was $180.5 million versus $189.4 million in the prior year. Within total revenue, rental revenue decreased by $15.3 million versus the prior year. The positive impact of net investment spending over the past year was more than offset by the reduction in out-of-period deferral collections that I just mentioned.
Within rental revenue, percentage rents for the quarter were $5.9 million versus $2.1 million in the prior year. The increase related to percentage rent for the theaters under the Regal master lease as well as an increase in percentage rents from other tenants. The increase in mortgage and other financing income of $3.4 million, was due to additional investments in mortgage notes over the past year.
Both other income and other expense related primarily to our consolidated operating properties, including the Cartwright Hotel and Indoor Water park and 7 operating theaters. The increase in other income and other expense compared to the prior year was due primarily to the additional 5 theaters surrendered by and previously leased to Regal, which have been operated by third parties on EPR's behalf since early August of 2023. Please note that on September 20, as previously discussed, we closed 1 of these theaters, and we plan to sell this location.
On the expense side, G&A expense for the quarter decreased to $11.9 million versus $13.5 million in the prior year due primarily to lower payroll costs, including noncash share-based compensation expense as well as lower professional fees, including those related to the Regal resolution.
Interest expense net for the quarter increased by $1.7 million compared to prior year due to an increase in borrowings under our unsecured revolving credit facility as well as a decrease in interest income on short-term investments.
Lastly, FFOs adjusted from joint ventures for the quarter decreased by $1.1 million versus the prior year, primarily due to higher expenses, including insurance and interest as well as weather issues, including the impact in late September of Hurricane Helane, which forced the shutdown of both of our experiential lodging properties in St. Beach Florida.
Additionally, as a result of the damage incurred by Hurricane Helane as well as the additional damage from Hurricane Milton in October, we determined that our investment in the unconsolidated joint ventures that hold the St. Pete Beach properties was not recoverable.
Accordingly, during the quarter, we recognized $12.1 million of impairment charges on these joint ventures to fully write off our carrying values. These impairment charges are excluded from both FFO as adjusted as well as AFFO.
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 3.4x, and both interest and debt service coverage ratios at 4.0x.
Our net debt to adjusted EBITDAre was 5.0x for the quarter. Additionally, our net debt to gross assets was 39% on a book basis at September 30. And our common dividend continues to be very well covered with an AFFO payout ratio for the third quarter of 66%.
Now let's move to our balance sheet, which is in great shape. At quarter end, we had consolidated debt of $2.9 billion, of which $2.8 billion is either fixed rate debt or debt that has been fixed through interest rate swaps with a blended coupon of approximately 4.4%.
During the quarter, we repaid in full our $136.6 million of Series A private placement notes using funds available under our line of credit. Accordingly, at quarter end, our weighted average consolidated debt maturity is just under 4 years with only $300 million maturing through 2025.
As previously announced on September 19, we amended and restated our $1 billion revolving credit facility to extend the maturity to October 2028 and with extensions at our option for a total of 12 additional months subject to conditions.
We are pleased that the new facility reduces the interest rate spread we pay on borrowings on the facility by 15 basis points, lessens our financial covenants consistent with being investment grade rated and modifies and simplifies the capitalization rates used to value assets under the facility.
As you can see, our liquidity position remains strong with $35.3 million of cash on hand at quarter end and only $160 million balance drawn on our new $1 billion revolver, which positions us well going forward. We are narrowing our 2024 FFO as adjusted per share guidance to a range of $4.80 to $4.92, from a range of $4.76 to $4.96. And investment spending guidance to a range of $225 million to $275 million from a range of $200 million to $300 million.
We are increasing our disposition proceeds guidance to a range of $70 million to $100 million, from a range of $60 million to $75 million. Additionally, due to higher percentage rent during the third quarter, we are increasing our percentage rent and participating interest guidance to a range of $13.5 million to $16.5 million, from a range of $12 million to $16 million, and confirming our general and administrative expense of $49 million to $52 million.
On the next slide, we have detailed the guidance we are providing on our wholly-owned operating properties and those held in joint ventures. We are revising the guidance for other income to a range of $54 million to $60 million, from a range of $55 million to $65 million, and other expense to a range of $53.5 million to $59.5 million from a range of $54 million to $64 million, resulting in a reduction of net profit from wholly owned operating properties of $500,000 at the midpoint. These changes relate primarily to the performance at the Cartwright Indoor Water Park and Hotel.
Lastly, we are revising our equity and loss from JVs to a range of $13 million to $10 million from a range of $10 million to $7 million, and FFO is adjusted from JVs to a range of negative $3 million to 0 from a range of 0 to $3 million.
This reduction is mostly due to weather issues, particularly the severe damage caused by the hurricanes at our hotels in St. Pete Beach. Because we expect the eventual removal of both of these properties from our portfolio, we have reduced our expected EBITDA on these properties to 0 for the fourth quarter.
Note also that if these properties are removed from the portfolio, we expect the income on the impact on 2025 earnings to be nominal due to the increased costs we have been experiencing at these properties prior to the hurricanes including both insurance and interest expense. Guidance details can be found on Page 24 of our supplemental.
On the next slide, I wanted to illustrate that in the last several quarters, the anticipated impact on growth in FFO as adjusted per share for 2024 at the midpoint of guidance. When you remove the impact of out-of-period cash basis deferrals from 2023 of $36.4 million or $0.48 per share and the amount we expect to collect in 2024 of $0.6 million or $0.01 per share.
As you can see on the schedule, we continue to expect FFO as adjusted per share growth without deferral collections from 2023 to 2024 to be 3.2%. We Additionally, note that in the fourth quarter, we begin to lap a more comparable result as we collected only $600,000 of out-of-period deferrals in Q4 2023.
Now with that, I'll turn it back over to Greg for his closing remarks.
Thank you, Mark. As evidenced by our call today, experiential focused properties continued to perform well in the current environment. our theater portfolio will benefit substantially from a return to a more normalized film schedule in 2025.
our recent credit line renewal at more favorable terms demonstrates our credit partners faith in our strategy. We look forward to continuing to reward our shareholders and capital providers as we move forward into 2025 and beyond.
With that, why don't I open it up for questions. Operator?
[Operator Instructions] Our first question comes from Joshua Dennerlein at BofA Securities.
This is Farrell Granith on behalf of Josh Dennerlein line. question about the box office projections. I was curious, just based on last year's results and kind of the back half weighted of a lot of the movie results coming out are the releases as well as the slow pickup of Venom and their box office performance, what's going to you the confidence for the increased guide as well as what's going to be driving the acceleration?
I think fundamentally, the issue that you're looking at is pure number of titles. Again, as we've seen and as Greg has talked about in many of his comments, we're seeing a more normalization to the number of titles released that's more consistent with what we saw kind of pre-pandemic, and we're seeing that growth in that.
Again, as far as expectations, the reality is no 1 title generally moves the needle substantially. So the number of titles and the expectations of those, you all heard some of the titles there will always be titles that underperform and overperform. But if we have the appropriate number of wide-release titles we get much more confident in that.
But Greg, I don't know if you?
Yes. And just some metrics on it. Through Q2, we were down 4 major releases in 2024 compared to 2023, and that translated to about $850 million less in box office. In Q3, we had the same number of major releases in '24 as we had in '23, and there was a $300 million increase in box office.
The other thing that we say all the time, to repeat what Greg just said is we're not good at predicting the individual performance of each title. So the fact that venom is down a little bit, okay, but no one expected Inside Out 2 to do $653 million or Deadpool to do $636 million. So as Greg said, we look at all that and are confident in our projections.
Okay. And also pivoting a little bit with the news of Topgolf and the spin-off. I was curious on your kind of strategy of your exposure with them going forward? Is this a relationship you'd want to be expanding or just maintaining or even reducing slightly?
I think we're comfortable with our exposure. As we've noted before, we clearly -- we've done 3 Topgolfs over the last 4 years. So it's not a rapid. We've stated publicly, we like major markets. So if you look at the 3 that we've done San Jose, suburban L.A. and King of Prussia, all open to top 5 locations for their chain.
So given our position and the strength of the properties that we have, we're very comfortable with our exposure. We like the fact that they are, again, being -- if a curve spun out with no financial leverage and $200 million of cash, so what we see, I don't know that it's a rapid or even a high-growth area for us, but we're very comfortable with our exposure and the performance of our assets. But Greg, I don't know if you have anything to cover for it.
Our next question comes from Smedes Rose, Citi.
I was just wondering if you had any thoughts at this point of what the box office could look like for 2025.
I would tell you what we've seen from others. We have not completed hours, but I would say most people are thinking kind of mid-9s. Is that consistent with what the analysts that you've seen. Greg?
Yes. and Smedes, we're also just seeing more visibility into titles on the slate. So we -- in October of last year, we thought there'd be titles in 2024. Now we think there's going to be 99 titles in 2025 in October. So that shows you we have more -- there's 23 more titles in the slate. So we're feeling much better about the cadence.
Okay. And then I just wanted to ask you, just in general, as you're kind of looking at opportunities that you've been more focused on? What is the transaction market kind of look like and maybe any kind of change in pricing or kind of sellers out there?
I don't know that we've seen a lot of change in pricing. I mean, we've been consistently in the 8s. And I think we have -- we are there, as Greg mentioned in his comments, we're given our capital constraints, we're very disciplined in how we're deploying that capital. We're not trying to fill a bucket that's multibillion.
So I think Greg and his team and their disciplined approach allows us to be selective and go for the assets like what you saw this time, which is an iconic Hot Springs asset. And it took time to get that asset, but we're very focused on the ones we want, and I think they've done a great job of doing that.
Yes. And Smedes, I would say, as I said in my prepared remarks, I mean, we're generally seeing opportunities in almost all of our verticals. So the pipeline is full. As Greg said, we're being disciplined.
Our next question comes from John Kilichowski at Wells Fargo.
Just kind of going back on the last question there and talking about pricing, just given maybe the lack of like fee simple regular way acquisitions and the focus on the mortgage loans, was the pricing that you're referencing the kind of mid-8 number what you're seeing on your ability to lend? Or is that where you're seeing cap rates are now for fee simple acquisition? And if not, like what kind of gets you to those type of deals?
John, I would say it's important to remember that even on this financing, we have conversion -- we have conversion possibilities so we can convert that loan into a fee simple lease -- net lease structure. So there's some expansion that's anticipated there.
So the structure that you see really isn't almost all of our mortgage had the ability for some period of time to convert that in. So we generally look like that there's always a plan in our mortgage features to have that ability to convert that. So I would think of that just as kind of an ownership, but a structural issue going -- moving into fee-simple net leased asset.
Got it. And then I guess maybe just on your cost of capital in general, you talked about being capital constrained. Could you just walk us through how you're thinking about it today and then the math when you're thinking about does the buyback make sense? Or at what multiple does it get attractive for you to start issuing equity?
Well, again, it's a function of what you're buying at. But if you look at kind of the point of accretion, it's very simple to say what multiple are you trading at? What's the inverse of that. and what is your equity costing, and we're generally financing things at a 60-40 basis.
So if you do that, unless you're -- I mean, again, it probably gets you to somewhere in the 9, so unless you're buying something in the double-digit area, it's really not attractive to issue equity right now. And so again, we're not going to grow just for growth's sake. We can still, as Mark has demonstrated in his numbers, we can still comfortably grow in that 3% to 4% range with what we're doing. And combine that with our dividend is still a very -- we think a very attractive double-digit kind of total shareholder return.
So again, I think as we go forward and as people get more comfortable with some of the recovery of these assets, that we will see a return to a more kind of attractive cost of capital that we've enjoyed in the past. And we will, again, then start to look at being more expansive in our capital deployment. But again, we're stewards of people's capital. So we're not going to just execute growth -- execute growing assets without the corresponding accretive per share results.
We always remind people that stock buybacks are not leverage
Neutral. So we look at it on a leverage neutral basis. And right now, at today's prices, that's not a compelling a compelling option of buyback stock. In addition, we're able to service our clients and our customers, which we think is very helpful over the long term.
Our next question comes from Rob Stevenson at Janney Montgomery Scott.
Greg, you're moving on from the St. Pete lodging assets. Is that just a result of the hurricane damage or was the previous operating performance not strong enough to warrant continued or even incremental investment on your part given Mark's comments on increased interest and insurance costs?
Well, I will say it's probably a combination of both. I mean, our insurance cost over the last 2 years have gone up substantially. I mean it has been a very, very eye-opening situation.
And then when you look at the idea that you have 2 named storms, which creates 2 separate deductibles, and you think about what the build, rebuild costs are going to be like there and bringing up things to new codes that will -- we just don't think being, as I said, being kind of stewards of our shareholders' capital, that that's not the best deployment of our capital. But Greg or Mark?
Yes. And Rob, on top of that, I would mention there have been a couple of other storms where there wasn't necessarily a water damage, but significant wind damage. We didn't make a claim, but the point is these hotels have been hit repeatedly by storms over the past 3 or 4 years. And to put a number on it for you, the insurance costs were essentially 9% of revenue. So it was significant.
In addition to the operating costs, including insurance, interest costs had also risen because we had a SOFR-based loan that we -- for the loan agreement needed to buy a cap on that expired in June. So obviously, putting that cap on again at a cap of 3.5% on SOFR was kind of expensive.
So I'd say, also interest had risen. So it was marginally profitable. I don't think it's going to have a big impact on 2025 earnings, but certainly the hurricane deductibles involved and sort of what we're looking at and made it a fairly easy decision.
And then just one more thing, not to continue. We have no visibility into what insurance premium costs will be going forward after this kind of devastation. So there was significant concern about that as well.
I guess that last comment, does that basically influence your desire to invest in any type of property in coastal Florida for the foreseeable future? Or is it case by case?
It's case by case. I mean as Greg noted earlier, most of our other properties actually sustained little to no damage in Florida. This is very unique that it's set right on the beach. And therefore, its exposure and its insurability have become increasingly troublesome for us.
Okay. And then, Mark, I know that gap sometimes is materially different than reality. Are you expecting any proceeds when you exit these assets? Or is getting out without paying anything additional victory here?
We don't expect any cash impact going forward. Now I would say the accounting is a little bit still to be decided. But kind of economically, we think we're sort of likely I say likely done with the property. There could be some costs that we report. But from a real cash perspective, we don't expect any cash outflows.
Okay. And then the investment this quarter in the hot spring, the mortgage, is mortgage the way that you'll be investing in these types of assets in the future? Or is this just this case particularly lent itself to a loan and you own assets as well? How should we be thinking about future asset acquisitions or investments in the Hotspring and similar businesses?
Again, I think this is mortgage to fee ownership. There's some expansion. There are some other things that are going credit tax credits that are involved there that we couldn't -- without jeopardizing those. So I would not -- as I said to the earlier caller, I would not think of this like as a mortgage vehicle. It's just an interim step to a net lease fee ownership.
And Rob, just for clarification, Pagosa Springs and Marietta Hot Springs are both net leases.
Okay. And then last one for me. Has the market for well-located and occupied movie theaters, is that still frozen in any transactions starting to happen out there in the marketplace for anything other than vacant or soon-to-be vacant assets?
I don't think we've seen a lot of transactions with good theaters. Greg, I don't know .
No, I think that's right. But I also think we're expecting the box office to continue to heal, which hopefully, along with rate reductions will unfreeze the market a bit. Not surprising to us, but there haven't been a lot of transactions.
Our next question comes from Michael Carroll at RBC.
Greg, I wanted to touch on the asset sale plans. I know obviously, you have a little bit still kind of baked into guidance right now. Should we think of that as just the 5 vacant theaters and beyond those potential sales, how should we think about that activity going into '25, '26, I mean, is there stuff that you still want to sell? Or should we expect some type of typical pruning within the portfolio that could continue to occur?
I mean I think the other thing that you will expect to see is starting to look more aggressively at our education portfolio and what we can harvest from there. As we continue this redeployment of capital, so Greg and his team have done a great job getting us through a lot of the vacant properties.
And now it's -- if we're wanting to continue to recycle and enhance our capital availability, we're going to start to look and get more thoughtful about our education portfolio as another lever for us to generate available capital for us to deploy in experiential properties.
And Michael, we also have 2 vacant education assets as well as the theaters.
Okay. And then the education sales, is that going to be kind of broken up into smaller transactions? Or could it potentially be a bigger deal?
Do you know what? It's kind of highest invest. If we think that there is a deeper pool for breaking it apart, do that. If somebody comes along and wants to pay us a good price for a large portfolio, again, ours is just driving the best value that we can for our shareholders.
All right. And then I guess, Mark, on the guidance changes, can you kind of highlight what drove the percentage rent number higher? Was it just the box office? And mean I know you explained why the JV income is lower, but what about the other income and expenses? Is that just due to challenges at Cartwright ?
Yes. So with respect to percentage rents, Regal kind of came in as we expected. So it was non-Regal percentage rents that took it up $1 million. With respect to other income and other expense, really, that is the Cartwright. There is kind of a reduction in revenue -- we've been able to offset that reduction in revenue by an offset in expenses. Net-net, it's down $500,000, as I mentioned, and that's all -- it's all current.
Our next question comes from Anthony Paolone at JPMorgan.
I guess, Mark, just trying to maybe avoid a miss on '25 or not getting this right looking into next year. But if you think about net other income and then this JV FFO going forward, I mean, how should we start to think about those 2 since they're related to the operating assets and the weather matters like what that looks like year-over-year?
Because it just seems like it could be a pretty big swing factor. And I've kind of lost the thread a bit on whether Cartwright is still ramping and where that goes. So any help there would be great.
Yes. We're hopeful Cartwright ramps next year. That was a little harder to predict. So we're not expecting massive increases there. I think with respect to the JVs, our prior midpoint for JVs was about $1.5 million. I'd say about $0.5 million of that was St. Pete related. So that will go away in the future. But -- so a pretty modest impact from St. Pete should we remove those properties from the portfolio.
I do expect sort of, hopefully, the remaining JVs to grow a bit in 2025 versus 2024, given some of the investments. I mean 1 of the RV parks just completed construction in '24. So it really is going to have its first full year following construction.
So it's a pretty modest investment that we have in JVs, particularly when we moved the 2 St. Pete properties. So these aren't huge numbers that we're talking about. But I do expect it to go down for St. Pete, and then have a bit of a growth in the other JVs.
Okay. But I guess just understanding that in the JVs, it sounds like even if from an accounting basis, they may operate at a loss or something if you're going to get rid of them, like you'll just take that out of numbers or -- and then so it's therefore not a major impact. Is that kind of what's likely to happen?
Yes. Yes, correct. We'll see how the accounting shakes out. We've removed the EBITDA from St. Pete in the fourth quarter and our guidance. But yes, it will just the expectation is that it will just be removed. The EBITDA, the interest and so forth going forward, will be just taken out of the numbers.
Okay. And then my second question is, I think you all mentioned that some of your tenants are seeing cost pressures and so forth. Can you comment on just any sort of watch list or even any smaller tenants that we might not be seeing on the major tenant list that are giving you any concern or cusp be on the coverage side at this point?
Not really, Tony. I mean, again, like our coverage is still which is 30% higher than when we went into -- went to pre-COVID. So again, it's holding up. I think everybody is dealing with the idea that it's not as easy to pass these cost pressures on.
So on the margin, we're seeing, as Greg mentioned, slight decreases in EBITDA, not enough that it's moved the needle yet, but there's no one that's kind of standing out as saying I'm feeling it disproportionately or getting where an area of concern for us. As we've said, our watch list is probably smaller than it's ever been in the last 4 or 5 years given all the work that we did through COVID.
Our next question comes from Upal Rana at KeyBanc Capital Markets.
As it pertains to the 2 same Beach assets, was there any business disruption insurance there that you can collect? And if so, could you share with us any timing associated to that?
Again, we're going to -- there was business interruption. The question that we're having to see it was a JV and that's something that let's be clear that the lender will take control of all insurance proceeds. And given the level of issue here, there's -- this could be a long prolonged issue.
And when we look at the economics of this going forward for many of the reasons that we've discussed today. We made this decision that this is not a good investment for the additional capital that we would have to put in given the cost structures that are experienced there now.
So we'll just have to see how this plays out and plays out with our partner. But we took a -- what we think is the conservative approach with this and kind of laid this out. We don't think there, as Mark said, there's a huge upside of anything here that there's expenses being covered right now for remediation already and to stop any sorts of issues, and our partners are doing those kinds of things now. So Upal, I just don't -- we don't know how all of that's going to play out.
Okay. Got you. That was helpful. And then you mentioned the noncommoditized fitness and wellness assets in your prepared remarks. Could you give us a little more color on what these assets are? And do you plan on doing more of those in the future?
I think what we're talking about is what you've seen what we've done, whether it's the hot springs, where there's the climbing gyms. I mean this isn't your on the corner fitness facility with a bunch of machines. These are curated experiences for which people are willing to pay a premium and which for where there's increased demand for.
It's really approaching 2 major demographic groups that being the baby boomers and the millennials, both of those people or groups are valuing this kind of curated health and wellness. And we feel that, that's a much greater kind of area of emphasis for us rather than the kind of commoditized fitness gym.
And I would add on the wellness side, in addition to the 3 hot springs resorts, we also have invested with Mirabel, which is a spa hotel concept. And to Greg's point, we have 3 climbing gyms. So we're looking at holistically fitness and wellness.
Our next question comes from Jyoti Yadav at Citizens JMP Securities.
It's Mitch here actually. I'm curious about -- I think you had said that the new loan in the Colorado Fitness asset, the hope was to convert that to net lease. So is that -- is there an option for that? Or is that a negotiation at the end of the term?
No, there's a hard option. That has some tax credits that would be recoverable if we converted within a certain period of time. But beyond that, we have a free right to just convert it to a net lease asset.
So is that -- I guess, Greg, I guess, to expand that, is this sort of similar with some of the bigger tickets in your loan book where there are actual options that exist with the loan to convert from loan to loan?
Generally, you're 100% correct, Mitch. I mean, generally, the mortgage is a structure to a net lease investment and almost all of ours have that feature to convert it with defined economics that just allow us to flip the switch and get there.
And to that point, our mortgages, a lot of them have interest increases, which you typically wouldn't see in a mortgage, which -- because it's kind of like a lease.
Yes, they read and look like a lease if you read them.
Got you. Okay. And then, Mark, while I have you, just piggybacking on Tony's question about the JV FFO, some seasonality, obviously, because of some of your lodging exposure, does that go away? Is that the way to think about it? Or will that -- will there still be some of that going forward?
I'd say most of the seasonality probably related to the RV parks, I think there was some seasonality related to St. Pete Beach. Just the magnitude of the numbers go down because St. Pete Beach was the biggest investment in the group of JVs. But I think there will still be some seasonality. If you think about RV parks, the sort of second and third quarter are their primary seasons. Well, and they're also subject to with because they're outdoors. So in a couple of [indiscernible] that impacts.
Our next question comes from Spencer Allaway at Green Street.
I know you mentioned you're starting to get constructive on prospective asset sales within the education portfolio. So I realize it may be a little early to ask this. But just curious, based on your history in the space, do you have any sense of the composition of the debt or depth, excuse me, of the potential buyer pool for those assets?
Spicer, I think we've always felt like it's a pretty widely held asset within the net lease group. And therefore, we've had a lot of interest in it, both from public players and private players. I think, again, as we start to think about our recycling we've just been engaging more from there. And Greg, maybe could comment, but I think we've had interest both from public and private, large and small.
It's a fairly deep pool.
Okay. Okay. Great. And then as it relates to your top golf assets, these tend to be large assets. And in the event that you did decide down the road to sell assets, can you just talk about the fungibility of these assets or perhaps the underlying real estate value just given where they tend to be located?
Yes. I mean, again, these are generally large parcels. And remember, our ownership is generally very major metropolitan area. So again, these are high-quality performing. And if you go back and you look at Topgolf sales, most of the Topgolf sales have been low 7s or below. I mean we've got records of Fort Myers, I think, sold out of 5 in the last 2 years. So again, it's generally been a fairly robust market for their well-located assets.
This concludes the question-and-answer session. I would now like to turn it back to Greg Silvers for closing remarks.
Well, thank you, everyone, for joining us today. We look forward to talking to you soon and.