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EPR Properties (EPR) Q1 2019 Earnings Call Transcript

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EPR Properties  (NYSE: EPR)
Q1 2019 Earnings Call
April 30, 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 Q1 2019 EPR Properties Earnings Conference Call. (Operator Instructions) As a reminder, this conference call maybe recorded.

I would now like to introduce your host for today's conference, Mr. Brian Moriarty, VP of Corporate Communications. Mr. Moriarty, you may begin.

Brian Moriarty -- Vice President, Corporate Communications

Thank you, Josh. Hi, everybody, and welcome. Thanks for joining us today for our first quarter 2019 earnings call.

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 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.

Greg Silvers -- President & Chief Executive Officer

Thank you, Brian, and good morning everyone. Welcome to our first quarter 2019 Earnings Call. I'd like to remind everyone that slides are available to follow along via our website at www.eprkc.com. As is our standard protocol, I'll get started with our quarterly headlines, discuss the business in greater detail, then turn the call over to the company's CFO, Mark Peterson, who will review the company's financial summary.

Our first head line is solid fundamentals, continued investment spending momentum. Our focused investment strategy continues to deliver with increasing revenues and FFO as adjusted per share growth of 8% versus the same quarter previous year.

Additionally, we sustained the investment spending momentum we established in the second half of 2018 starting the year strong with investment spending totaling $174.6 million with the majority of our investments focused on entertainment and recreation. Second, investment segments remained healthy, highlighted by the resiliency of the box office and the strength of our recreation portfolio. Our primary investment segments continue to demonstrate long-term stability and broad consumer demand. This may be best characterized by the recent MPAA THEME report, which identified that last year's box office attendance was over 1.3 billion. That's billion with a B, compare that to all major league football, baseball, basketball and hockey, whose combined attendance was 131 million.

Additionally, 75% of the North American population went to see a movie at a theater at least once in 2018. This provides context to our referring that movie going remains the dominant choice for out of home entertainment and is broadly supported by all demographic segments. Third, new leadership for focused growth as we continue to build on our differentiated and deep expertise in the experiential space, we are pursuing opportunities for expansion in the Entertainment and Recreation segments, which play directly into our underwriting proficiency. To help lead the growth of these segments. I'm pleased to welcome, Greg Zimmerman the company's new Chief Investment Officer, Greg's strong experience and thought leadership provide a great fit for this role. And we are excited to have him join the company to help lead our efforts in becoming the market dominant player in the experiential space. We look forward to Greg's participation in future calls and for the opportunity for many of you to meet him in the near future.

Fourth, significant growth capacity. With an improving cost of capital, great access to the public capital markets, ample recycling proceeds and untapped capacity on our revolver, we are uniquely positioned to pursue growth in the experiential real estate space. We have the resources, both financial and human capital, to respond to our growing opportunity base.

Now I'll take a few minutes to review the business in greater detail. At the end of the first quarter, our total investments were almost $7 billion with 395 properties in service that were 99% occupied. During the quarter, investment spending was $174.6 million and our proceeds from dispositions were $37.7 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 $3.1 billion total investments with 175 properties in service and 24 operators.

Our occupancy was 99% and our rent coverage was 1.84 times. As anticipated, North American box office revenues were softer in Q1 versus the prior year. The 2018 period included Black Panther making for a difficult comp. Industry pundits continue to call for a very strong second and fourth quarter and overall growth for the 2019 year.

The Q2 box office certainly received a boost with the opening of Avengers: Endgame this weekend, which grossed approximately $350 million in North America and $1.2 billion worldwide, representing the largest opening weekend in the history of the North American box office and establishing expectations for 2019 to exceed the previous all-time record, which was established in 2018.

Investment spending in our Entertainment segment totaled $117.9 million, which included $93.3 million of theater property acquisitions with the balance consisting primarily of build-to-suit developments and redevelopment of megaplex theaters, entertainment retail centers and family entertainment centers. We also continue to see interesting opportunities to acquire in-service theaters as evidenced by our $79 million four-theater transaction with Xscape Theaters that closed in late March.

At quarter end, our recreation portfolio included approximately $2.3 billion of total investments with three properties under development, 79 properties in service and 18 operators. Our occupancy was 100% and our rent coverage was approximately 2.12 times. Our ski operators continue to enjoy an outstanding season, attendance in revenue are up 16% and 14% respectively versus the trailing three-year average for the season to date through February.

Additionally, our Kartrite Waterpark hotel in the Catskills had a soft opening over the Easter weekend and is ramping up for the project's grand opening, which is scheduled for May 10. The grand opening should receive extensive media coverage across the New York market, including airtime on Good Day New York. Investment spending in our Recreation segment totaled approximately $44.2 million, which included $31.9 million on the Kartrite Waterpark's hotel with the balance consisting primarily of build-to-suit developments of golf entertainment complexes and attractions.

On the disposition front, we are anticipating that our Schlitterbahn mortgage note will be paid off during the second quarter and we have extended the maturity by one month to June 1, 2019. Based on discussions with the Schlitterbahn Group, we understand that they are nearing the completion of a definitive agreement with a third-party that would provide proceeds sufficient to fully repay the note. As Mark will speak to, this comes with no change to our earnings guidance despite an upward revision to our disposition guidance.

At quarter end, our Education portfolio included approximately $1.4 billion of total investments with four properties under development, 140 properties in service and 57 operators. Our occupancy was 98% and our rent coverage was 1.37 times. Investment spending in our Education segment totaled approximately $12.3 million, primarily consisting of build-to-suit developments and redevelopments of public charter schools and early childhood education centers.

During the first quarter, we received $33.7 million in disposition proceeds related to the Education segment, including $5 million of termination fees. The disposition properties include three operating charter schools, one charter school land parcel and two land parcels previously designated for the development of early childhood education centers. We have revised the original structure for transferring our 21 CLA properties to Creme de la Creme due to the bankruptcy court's failure to rule on our February 2019 agreement.

The revisions are not material and we continue to expect the properties will be transferred to our replacement tenant throughout the remainder of the year with no expected change in our revenue stream or cash outlays. Our short-term lease with CLA is still in effect and they have paid rent through April 2019. Creme de la Creme continues to make substantial progress with their license applications and preparations to begin operating these schools later this year.

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

Mark Peterson -- Executive Vice President, 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 first quarter was $59.3 million or $0.79 per share compared to $23.5 million or $0.32 per share in the prior year. FFO was $93.1 million compared to $61 million in the prior year.

Lastly, FFO as adjusted for the quarter increased to $102.6 million versus $94 million in the prior year and was $1.36 per share versus $1.26 per share in the prior year, an increase of 8%. Turning to the next slide, I want to discuss the impact of the new lease accounting standard we adopted at the first of the year. As expected, there was no impact to our earnings but I would like to briefly summarize, how the new standard impacted our first quarter financials.

Note that we elected like many REITs to not restate prior year numbers, so certain line items are not directly comparable year-over-year. At adoption, we recognized right of use assets of $215 million, straight line receivables of $24 million and an offsetting lease liability of $239 million, primarily related to our ground leases where we are the lessee, and we sublease the ground to our building tenants.

During the quarter, we recognized rental revenue and property operating expense totaling $7.9 million each over that, which would have been previously recognized primarily related to the ground lease cost and related sublease revenue as well as the gross-up of other expenses that are paid by us and then reimbursed by tenants.

Lastly, and less significant, we no longer recognize bad debt expense as part of property operating expense, but rather as a deduction to rental revenue. 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 two public charter schools during the quarter for net proceeds of $23.3 million and recognized termination fees included in gain on sale of $5 million, which has been added to FFO to get to FFO as adjusted.

Second, transaction costs were $5.1 million for the quarter and $4.6 million of this amount related to pre-opening expenses in connection with the Kartrite Indoor Waterpark Hotel. As discussed in our last call, we currently own and operate this investment in a traditional REIT lodging structure.

Now let me walk through the key line item variances for the quarter versus the prior year. Our total revenue increased 6% compared to the prior year to $164.5 million. Within the revenue category, rental revenue increased by $17.8 million versus the prior year to $150.7 million. This increase resulted from rental revenue related to new investments, as well as $2.2 million more in rental revenue from Children's Learning Adventure during the quarter related to the required payments under the release agreement.

Additionally, $7.9 million of the increase relates to the adoption of the new lease accounting standard I discussed previously. Tenant reimbursements, included in rental revenue, were $6.1 million for the quarter versus $4 million for the prior year. The increase related to the gross-up of certain tenant reimbursed expenses with the adoption of the new lease accounting standard.

Additionally, percentage rents for the quarter also included in rental revenue were $1.4 million versus $1.3 million in the prior year. Mortgage and other financing income was $13.5 million for the quarter versus $21.4 million in the prior year. The decrease was due primarily to note pay-offs as well as the sale of four Imagine Schools in July of last year, classified as investment in direct financing leases. This decrease was partially offset by an additional $900,000 fee received from OZRE related to their mortgage note that was paid off in 2018.

On the expense side, our property operating expense increased by approximately $8.2 million versus the prior year, primarily due to the adoption of the new lease accounting standard. Income tax benefit was $605,000 for the quarter versus expense of $1 million in the prior year, approximately $1 million of this decrease was due to lower deferred taxes. We call that deferred taxes are excluded from FFO as adjusted. The remaining $600,000 decrease was due primarily to lower current income taxes related to adjustments associated with tax reform provisions that will not repeat in future quarters.

Turning to the next slide, I'll review some of the company's key credit ratios. With fixed charge coverage at 3.2 times, debt service coverage at 3.7 times and interest coverage also at 3.7 times and our debt to adjusted EBITDA ratio was 5.7 times at quarter end. This ratio was slightly higher than our stated range of 4.6 to 5.6 times, due in part to the $79 million acquisition of four theaters on the last business day of the quarter, as well as construction in process for which no EBITDA is included in the denominator of this calculation.

Our adjusted net debt to annualized adjusted EBITDA was 5.4 times at quarter end, this ratio adjust for the impact of assets acquired or put in service during the quarter as well as for other items such as construction in process, as described in our supplemental. Our net debt to gross assets was 42% on a book basis and 33% on a market basis. Note, also as Greg discussed, we expect to receive proceeds in the second quarter from the Schlitterbahn mortgage note payoff totaling approximately $190 million. This path is expected to significantly reduce our leverage in the near term as well as reduce our need to raise capital to fund investments over the remainder of the year.

Lastly, we increased our common dividend -- monthly common dividend by over 4% in the first quarter to an annualized dividend of $4.50 in 2019. This marks the 9th consecutive year with a significant dividend increase.

Now let's turn to the next slide for a capital markets and liquidity update. At quarter end, we had total outstanding debt of $3 billion, of which $2.9 billion is either fixed rate debt or debt that has been fixed through interest rate swaps with a blended coupon of approximately 4.6%. We had $70 million outstanding at quarter-end on our $1 billion line of credit and $11.1 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. We issued approximately 1.1 million common shares during the quarter under on our direct share purchase plan at an average price of $74.47 per share for net proceeds of $78.6 million. The DSPP plan continues to be a very low cost and effective way to raise common equity.

Subsequent to quarter end, we took advantage of a low projected LIBOR rate and entered into an interest rate swap to fix the remaining $50 million of our $400 million term loan at 3.35%. As a result, our entire $400 million term loan is now hedged at a blended rate of 3.18% until February 2022. Our balance sheet and liquidity position continue to be very strong and this puts us in a great position for 2019 and beyond.

Turning to the next slide, we are confirming our 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. We are increasing our expected disposition proceeds for 2019 due to the anticipated Schlitterbahn note payoff to a range of $300 million to $400 million from a range of $100 million to $200 million. Note that the dilution to 2019 earnings expected from the Schlitterbahn note payoff of approximately $0.03 per share, which was not in our original plan, is expected to be offset by additional percentage rents of about $1 million for the year as well as the favorable impact of the mix and timing of our investment spending. Excluding the non-education 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 continues to reflect over 4% growth.

Before concluding, I wanted to also note that just like last year, we expect lease termination and mortgage prepayment fees related to our education properties, as well as percentage rents to be heavily weighted to the back half of the year. As a result, we expect a reduction in Q2 FFO as adjusted per share versus Q1 with an acceleration in earnings over the back half of the year.

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

Greg Silvers -- President & Chief Executive Officer

Thank you, Mark. As the first quarter demonstrated, we continue to see a strong flow of opportunities to deploy investment capital and we have positioned ourselves to take advantage of these opportunities. In the coming months, we look forward to building on that momentum that we've established in the first quarter. With that, why don't I open it up for questions? Josh.

Questions and Answers:

Operator

(Operator Instructions) Our first question comes from Craig Mailman of KeyBanc Capital Markets. You may proceed with your question.

Craig Mailman -- KeyBanc Capital Markets -- Analyst

Hey, good morning guys. Just first on Schlitterbahn, do you guys have a sense of why they're going away from you to refinance, just to get out from under the cross-collateralization or they feel like their cost of capital has come down enough that they can go elsewhere?

Greg Silvers -- President & Chief Executive Officer

Again, Craig, I think it's probably better for them to answer that question as to why they're changing their strategy. Again, I think it could be a number of different issues, it's been well documented, it's been a difficult couple of years for them with all of the noise. So rather than us comment on what their thoughts of their strategy is, I would leave that to them.

Craig Mailman -- KeyBanc Capital Markets -- Analyst

Okay, that's fair. And are you guys still -- water park's still a place you guys want to be, or has this experience kind of dissuaded you a bit from putting capital out there?

Greg Silvers -- President & Chief Executive Officer

No, actually we still like the space and over time that I think we will all look back and see that from a financial standpoint other than that, a very unfortunate event. That's been a very strong investment. So I think we continue, we invested we have water parks with Six Flags and others that have -- as the coverage demonstrates in our recreation portfolio, has demonstrated strong performance and I think the consuming public has demonstrated their desire for having that type of product to spend their dollars that. So we still feel very good about it.

Craig Mailman -- KeyBanc Capital Markets -- Analyst

Okay. And I know it was just a soft open up at Kartrite, but any early indications of success there versus your expectations?

Greg Silvers -- President & Chief Executive Officer

Again, it's so early and soft openings are just that to kind of work the kinks out. So they didn't even open all the rooms available. So, I think part of this was -- is just to get through the operating, I think, as we get toward May and in the summer, we'll have a better view of how that's performing.

Craig Mailman -- KeyBanc Capital Markets -- Analyst

Okay and then just on the Xscape theater acquisition, could you give us a little bit of color on cap rate there and maybe a little bit more about the operator?

Greg Silvers -- President & Chief Executive Officer

Again, it's a family operation. If you go back and look, it's the son of -- when we had the Xscape portfolio a couple of years ago, the family -- this is one of the children of that group. So that ended up being sold to Regal. Now this is the son going back in and I would take that we've -- because of those kind of relationships, we were able to secure this deal at or around an 8 (ph) . So we feel very good about the experience level of the operator. The markets that they've chosen and our ability to turn a relationship-based business into opportunity.

Craig Mailman -- KeyBanc Capital Markets -- Analyst

Okay. And then just one last one, with Avengers coming out, and a pretty good slate here for the back half of the year, I mean, what's the percent rent related to the theater portfolio or could there be additional upside if ticket sales kind of continue to accelerate to the back half of the year?

Greg Silvers -- President & Chief Executive Officer

I think there could be -- the percentage really wasn't on the theater side just because of timing, but we still see opportunity. As we noted last year, we had some additional theater percentage rent as we went into the end of the year and with the strong kind of slate that's still out there, that opportunity still exists to exceed where we were last year on theater percentage rents.

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

Yeah, the percentage rent increase really related to private schools, the revenues were a little higher than expected. And then secondly, we have a good outlook as Greg went over with respect to what's going on with the ski properties, we had a good season.

Craig Mailman -- KeyBanc Capital Markets -- Analyst

Okay, perfect. Thank you.

Greg Silvers -- President & Chief Executive Officer

Thanks, Craig.

Operator

Thank you. And our next question comes from Nick Joseph of Citi. You may proceed with your question.

Nick Joseph -- Citi -- Analyst

Thanks. Greg, you talked about an expansion into Entertainment and Recreation. I mean, is that more into existing operators, or are you looking to either expand operators or expand concepts?

Greg Silvers -- President & Chief Executive Officer

I think, Nick, it's safe to say it's probably a little of both. When you heard us last quarter and we talked about the City Museum in St. Louis and some other concepts that we were looking at. We think that we have established a strong thought leadership in the experiential space . And so I think it would broadly fall within either our Entertainment and Recreation areas. So we think it's within our purview. But it would still be again existing product types within those segments and new product types, nothing to announce today, but we continue to look, to identify new concepts and operators that will allow to grow our business and take advantage of, as we've talked about, where the consumer wants to spend their money.

Nick Joseph -- Citi -- Analyst

Thanks. And just maybe on Education. Rent coverage ratio came down a little sequentially. Is that CLA driven or something else?

Greg Silvers -- President & Chief Executive Officer

Again, my guess is, it's not CLA driven, it's something else, it's probably -- it's somewhat a little bit of our charter schools as we get into this year, you know, the timing of sales and things like that can impact kind of that coverage, you know, on the margin.

Nick Joseph -- Citi -- Analyst

Thanks.

Operator

Thank you. And our next question comes from Rob Stevenson of Janney. You may proceed with your question.

Rob Stevenson -- Janney -- Analyst

Good morning, guys. Greg, can you talk about the competitive landscape today for acquired theaters, seems like several of the large public triple net REITs have started to move away from the space. You guys seeing any less competition out there? Or any impact on pricing?

Greg Silvers -- President & Chief Executive Officer

Not really. I mean, again, we are -- I would hope that you're correct, Rob. We like that space and having less competitors would be nice, but in the marketplace we're not seeing that. Again, you've got a lot of triple net players that have substantial theater exposure and are looking to continue to do -- to grow that. I think the challenge as we've articulated before is finding the right theaters. There are a lot of -- there's not a lot, but there's several theaters that are out in the market for sale, they don't mesh well with the quality and performance of our portfolio. But I don't think we've seen a lot of pulling back from that product type.

Rob Stevenson -- Janney -- Analyst

And the ones (ph) that you acquired this quarter, have they already had the updated conversions done to them? Or are these assets that you plan to do conversions on redevelopment, I mean, how should we be thinking about the ones (ph) that you added in the quarter?

Greg Silvers -- President & Chief Executive Officer

Yeah. In the quarter, these are amenitized theaters already. So these are the new version, so it wouldn't be in accordance with that investment, but we're continuing to see opportunities as we talked about for redevelopment but it wouldn't be associated with these theaters that we acquired.

Rob Stevenson -- Janney -- Analyst

Okay. And then how are you guys feeling today about incremental investments in the education portfolio? I mean, is that -- whether by happenstance or by design, the first quarter acquisitions were heavily weighted toward the theaters. As we go through the remainder of the year, I mean, I think Mark has talked about the acquisitions being largely back-end weighted, but do you anticipate a greater percentage of the mix being education or is there some sort of conscious sort of pause there on your part in terms of looking at that segment?

Greg Silvers -- President & Chief Executive Officer

Yeah, I think it will be not as -- we are not as -- spending as big in investment dollars in education, it's primarily, Rob, for the idea that the competitive market has gotten much stronger in that area, not from some of the traditional competitors, but the bond market especially in the charter school area. You know, years ago they wanted 7 to 10 years of operating experience and now we have bond people who are doing build-to-suit deals. So what you're not going to see us do is reach for transactions. We have a substantial amount of it and we're talking about it today, opportunities in other areas. And on a risk/reward standpoint, we feel the risk/rewards are better right now in our Entertainment and Recreation sector. So we're focusing more in that space.

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

And Rob, I didn't say acquisitions were back-end weighted. I said, termination fees and prepayment fees as well as percentage rents, those two things that come with our earnings were more back weighted to the back half of the year.

Rob Stevenson -- Janney -- Analyst

Okay, sorry. Thank you. And then just last one for me following up on the question that Nick asked. Was there anything new concept wise that you guys added to the recreation portfolio this quarter?

Greg Silvers -- President & Chief Executive Officer

No, these are all in established areas that we've been, but I do -- as I've mentioned with Nick, we are continuing to look at different concepts. So I don't want to -- even though we didn't have anything this time just like we had in the fourth quarter of '18, we are continuing to look at new and evolving recreation and entertainment concepts that we feel fit within our portfolio and are supported by strong underlying consumer demand.

Rob Stevenson -- Janney -- Analyst

Okay. Thanks, guys. Appreciate the time.

Greg Silvers -- President & Chief Executive Officer

Thank you, Rob.

Operator

Thank you. And our next question comes from Collin Mings of Raymond James. You may proceed with your question.

Collin Mings -- Raymond James -- Analyst

Thanks. Good morning. First question for me just -- again, recognizing that there are some timing issues with the acquisitions and the mortgage payoff. But just given where your current cost of capital stands and really the expanding opportunity set for investments you're talking about, does it make sense to maybe run leverage toward the lower end of your target range? Or maybe even bring that range down here modestly? Just an update on how you're thinking about the leverage targets out there.

Greg Silvers -- President & Chief Executive Officer

Well, I think the first thing is that the payoff of Schlitterbahn here in the second quarter is going to reduce our leverage substantially. So in the near term, we'll have our line paid off in cash in the bank. So that's kind of the near-term opportunity. But I agree, we have opportunistic -- we could look opportunistically at raising capital, raising equity given our strong stock price performance, and as you saw in the first quarter, we raised $78 million on our direct stock purchase plan. So I understand what you're saying but near term wise, we've got a big inflow coming.

Collin Mings -- Raymond James -- Analyst

Okay. Fair enough. And then switching gears just to the portfolio. Albeit (ph) we discussed in-depth last quarter, but maybe just an update on how the JVs on the property here at St. Pete are progressing? And just as it relates to the additional opportunity set, just any other updates on potential other recreational lodging opportunities that you're seeing?

Greg Silvers -- President & Chief Executive Officer

Again, nothing that we have that's right now announceable are really kind of as anywhere ready to announce. I mean, I think we continue to look at trying to direct those more to kind of a fixed income, kind of a triple net lease as opposed to the operating model that we have. I think on this two specific assets, St. Pete is actually slightly outperforming where we were our expectations. So it's moving along well. I think -- and Mark may have mentioned, we put and we now put some leverage on that JV and executed on that. So I think overall, we feel with those two -- that asset is well positioned and is moving along nicely, but nothing additionally to announce in that space.

Collin Mings -- Raymond James -- Analyst

Okay. Thank you.

Greg Silvers -- President & Chief Executive Officer

Thank you.

Operator

Thank you. And our next question comes from Anthony Paolone of JPMorgan. You may proceed with your question.

Anthony Paolone -- JPMorgan -- Analyst

Thanks and good morning. Just staying on the different property type theme here, have you all considered revisiting things like casinos or moving outside the US much?

Greg Silvers -- President & Chief Executive Officer

Again, Tony, and I don't know that we've talked about this, we had some long discussions here in our previous kind of investor conferences about that, you are correct. We have and said that we intend to revisit kind of the casino idea. If you go back and look, when we looked at it five years ago, it really wasn't an institutional product, but when you look at it now, it's much more of an accepted product type -- whereas we didn't feel we were the right group to lead that out. We now think that it's much more established. So, yes, we would and have engaged investors to let them know that we're definitely going to look at that product type.

As far as international, again, nothing that's on our horizon right now. Again, if we had tenants that led us to an opportunity set, I think that could be interesting, but nothing really right now. Tony.

Anthony Paolone -- JPMorgan -- Analyst

Okay. Can we see something by the end of this year do you think on the Casino side?

Greg Silvers -- President & Chief Executive Officer

Again, I don't know, it really is driven by the opportunity and if it's the right property for us relative to what we're looking for, I would tell you that we are engaged in conversations with people but as everyone on this call knows, conversations don't necessarily mean transactions. And we've got to have a meeting of the minds both in terms of the quality of the property and the cost that we want to charge on that. So we shall see but what we do think it does is provide yet another growth opportunity and drive the investment momentum that we've got to where we can be and maintain our thought leadership in that experiential space. It's a product type that fits in there and while we would never be dominated by that product type. We think adding that to our existing experiential portfolio makes sense.

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

We don't have any investment spending in our guidance for casinos. But as Greg said, if we did do something it'd be additive to that $700 million kind of midpoint of investment spending.

Anthony Paolone -- JPMorgan -- Analyst

Okay. And then over on Schlitterbahn, can you just remind us what the sort of GAAP yield or cap rate for that matter is on the money you'll be getting back?

Greg Silvers -- President & Chief Executive Officer

It's little bit over 8% (ph) .

Anthony Paolone -- JPMorgan -- Analyst

Okay. And then on Kartrite, also I think you have that basis kind of blended in with some other projects in the supplemental. What is the expected basis in that, if you can remind us that? And then also remind us how that yield will work, whether it comes on a little bit at a time or whether day one, you started a certain yield on that cost?

Greg Silvers -- President & Chief Executive Officer

Well, again, on the improvements, it's about a couple hundred million dollars and remember right now, we're operating that, Tony, under a lodging model. So the yield, what we've said is, for this year being the opening year, we expect little contribution for that in 2019.

Anthony Paolone -- JPMorgan -- Analyst

Okay. And what's the anticipation when it's kind of fully up and running? Like what do you think the yield on that couple hundred million dollars is?

Greg Silvers -- President & Chief Executive Officer

Again, I think we would be a part of that overall development if we could get to low to mid-sevens, we would think it was a very solid relative to how it activated that entire investment.

Anthony Paolone -- JPMorgan -- Analyst

Okay. And then last question for Mark, I think you touched on some of the changes on the accounting side with the right of use assets and the ground leases and subleases. Can you bottom line what impact those changes had on FFO if any?

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

It didn't have any impact.

Anthony Paolone -- JPMorgan -- Analyst

Okay. Great, thank you.

Greg Silvers -- President & Chief Executive Officer

Sure. Thank you, Tony.

Operator

Thank you. And our next question comes from Brian Hawthorne of RBC Capital Markets. You may proceed with your question.

Brian Hawthorne -- RBC Capital Markets -- Analyst

So I guess, first question on Schlitterbahn, is that payoff contingent on not getting the deal done? And if they don't, do they have an alternative way to pay back?

Greg Silvers -- President & Chief Executive Officer

Again, what we can tell you, Brian, is they've expressed a very high degree of confidence that they've got multiple alternatives to deal with this. We've talked to several of those. So we have a high degree of confidence that it will get executed.

Brian Hawthorne -- RBC Capital Markets -- Analyst

Okay. And then now that Greg's been there about two weeks. I guess where do you see kind of the most opportunities with the new CIO?

Greg Silvers -- President & Chief Executive Officer

Again, what we talked about, and we talked about him in the third place, he's joining us here today he's just not speaking. So we got to be very careful that I don't say something too much but we talked about in our comments, his background is -- has been in that experiential space. So I think that's on the immediate front. That's where he's going to be able to help lead those efforts and as we're talking about today, not only with existing but help push us and find new opportunities within those spaces. So it's both increase our pace of investments, but also the breadth of those investments as well.

Operator

Thank you. Our next question comes from John Massocca of Ladenburg Thalmann. You may proceed with your question.

John Massocca -- Ladenburg Thalmann -- Analyst

Good morning.

Greg Silvers -- President & Chief Executive Officer

Good morning, John.

John Massocca -- Ladenburg Thalmann -- Analyst

If we're kind of going back to the comments you gave earlier in the call on CLA, can you provide more color on the revised structure with Creme in terms of transferring the assets and just any impact that may have on the rent Creme will end up paying in kind of 2020 and beyond? I'm imagining it's not going to affect what CLA pays you through 2019.

Greg Silvers -- President & Chief Executive Officer

It's actually not going to affect either. I think from our standpoint, the big issue for us is -- the primary thing is, we didn't want to get involved in groups and creditors fighting over the amount of money that was being paid. We don't really care. We just want to get our properties transferred. And so we continue on that path and I think it's our belief that it's not going to have any impact relative to what's in our numbers or the speed at which we're able to execute this. So we don't really see any impact to us.

John Massocca -- Ladenburg Thalmann -- Analyst

Okay. Good. On tangible level, what's kind of the impact of giving up on pursuing this, I'm assuming this is like the physical operating of those (ph) properties. What do you think is going to be transferred to Creme as a result of this change from CLA. Is this the physical operating aspect of the properties?

Greg Silvers -- President & Chief Executive Officer

Yes, the properties, it's the same things were going to be transferred under both scenarios. This really is not changing our -- either in terms of what assets are transferred, how they are transferred and the speed at which they are being transferred.

John Massocca -- Ladenburg Thalmann -- Analyst

Okay. And then maybe touching on kind of Colin's question a little bit more with regards to some of the potential recreation assets that may be structured under kind of A lodging REIT structure. Are any of those in your 2019 kind of investment spending guidance beyond what you've already closed year-to-date?

Greg Silvers -- President & Chief Executive Officer

Yeah. Listed some additional like follow-on with Kartrite to finish it. But it's nothing new.

John Massocca -- Ladenburg Thalmann -- Analyst

And then was there any positive kind of guidance impact from taxes versus the guidance you guys provided last quarter and if there was, can you provide some color on that?

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

No, we anticipated that as far as that benefit we got in the first quarter. So no change in guidance as a result of that.

John Massocca -- Ladenburg Thalmann -- Analyst

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

Greg Silvers -- President & Chief Executive Officer

Thanks, John.

Operator

Thank you. (Operator Instructions) And I'm not showing any further questions at this time. I would now like to turn the call back over to Greg Silvers for any further remarks.

Greg Silvers -- President & Chief Executive Officer

Thank you, everyone. We appreciate your time and attention and we look forward to talking to you at the end of next quarter. Thanks for your participation.

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

Thanks, everyone. Bye-bye.

Operator

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

Duration: 42 minutes

Call participants:

Brian Moriarty -- Vice President, Corporate Communications

Greg Silvers -- President & Chief Executive Officer

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

Craig Mailman -- KeyBanc Capital Markets -- Analyst

Nick Joseph -- Citi -- Analyst

Rob Stevenson -- Janney -- Analyst

Collin Mings -- Raymond James -- Analyst

Anthony Paolone -- JPMorgan -- Analyst

Brian Hawthorne -- RBC Capital Markets -- Analyst

John Massocca -- Ladenburg Thalmann -- Analyst

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