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EPR Properties (NYSE: EPR)
Q3 2024 Earnings Call
Oct 31, 2024, 8:30 a.m. ET
EPR Properties Reports Steady Growth in Q3 2024 Earnings Call
What We Learned from the Call
- Prepared Remarks
- Questions and Answers
- Call Participants
Prepared Remarks:
Operator
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.
Brian Moriarty — Senior Vice President, Corporate Communications
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 want to remind everyone that this call may include forward-looking statements as defined in the Private Securities Litigation Act of 1995, identified by words such as will be, intend, continue, believe, may, expect, hope, anticipate, or similar terms.
The company’s actual financial condition and operational results may differ significantly from those anticipated by these forward-looking statements. For more information, please refer to the company’s SEC filings, including its reports on Form 10-K and 10-Q. This call will also reference certain non-GAAP measures, which we believe provide valuable insight into the company’s performance. Reconciliations of these measures to the nearest GAAP measures are available in today’s earnings release.
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If you’d like to follow along, today’s earnings release, supplemental information, and presentation are available on the investor center page of the company’s website, www.eprkc.com. Now I’ll turn the call over to Greg Silvers.
Greg Silvers — Chairman and Chief Executive Officer
Thank you, Brian. Good morning, everyone, and thank you for joining us on today’s third quarter 2024 earnings call and webcast. In the third quarter, we made significant strides in positioning the company for ongoing growth. A key achievement was entering a new $1 billion revolving credit facility that strengthens our liquidity and offers better terms.
This facility demonstrates the strong confidence our banking partners have in our strategic direction, bolstering our financial health as we invest in selected experiential properties. Our investment strategy remains steady; we’re recycling funds from the sale of non-core assets and investing free cash flow into diverse experiential assets. We’re particularly enthusiastic about our latest investment in fitness and wellness, enhancing our portfolio with premier Hot Springs properties to meet the rising demand for wellness-oriented experiences.
The growth in our investments, such as well-located climbing gyms, highlights our focus on profitable areas in the fitness and wellness industry.
Overall, our coverage ratio remains robust, though it slightly decreased from 2.2 times to 2.1 times. Non-theater coverage stayed constant, reflecting sustained consumer demand. However, we did anticipate a decline in theater coverage due to the production calendar. Quarterly results in theater exhibitions are improving, with key titles performing particularly well. The National Association of Theater Owners recently announced that eight of the largest theater chains plan to invest over $2.2 billion to upgrade and modernize theaters over the next three years. This enhancement will likely include advanced projection technologies, improved seating, and essential maintenance upgrades to boost the moviegoing experience.
During the quarter, Topgolf Callaway revealed its plan to spin off Topgolf into a separate entity. We believe this move will be beneficial for Topgolf, enabling a sharper focus on its successful Eat & Play brand. Post-spinoff, Topgolf is expected to be well-capitalized and debt-free, positioning itself for further achievements.
Our partnership with Topgolf continues to thrive, and we look forward to their growth and success as they implement their strategic initiatives. Lastly, we want to extend our sympathies to those affected by the recent hurricanes. Our hotel properties in St. Petersburg Beach were significantly impacted, and we understand the profound effects these events have had on the community.
Now, I’ll turn it over to Greg Zimmerman for a detailed update on the quarter.
Greg Zimmerman — Executive Vice President and Chief Investment Officer
Thanks, Greg. At the end of the quarter, our total investments were about $6.9 billion, with 352 properties that are 99% leased, excluding properties we plan to sell. During the quarter, our investment spending amounted to $82 million, entirely within our experiential portfolio.
Our experiential portfolio consists of 283 properties with 52 operators, making up 93% of our total investments or approximately $6.4 billion. Excluding properties intended for sale, this portfolio was also 99% leased at quarter-end. Our education portfolio includes 69 properties with eight operators, which were 100% leased, again, excluding properties earmarked for sale. Turning to coverage, the most recent data…
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Box Office Recovery and Asset Insights Amidst Challenges
Financial Overview and Box Office Performance
Our latest financial assessment reflects a solid overall portfolio coverage of 2.1 times, which has decreased slightly from last quarter. Specifically, the non-theater portion of our portfolio maintains a coverage ratio of 2.6 times, while the theater coverage stands at 1.5 times, corresponding with a box office gross of $8.1 billion for the trailing 12 months.
This coverage report assumes that the Regal deal influenced the entire trailing 12-month period. The minor decline in theater and overall coverage is mainly attributed to a box office drop, anticipated due to the writers’ and actors’ strikes affecting film release schedules. We anticipate that the adverse effects of the strikes are concluding, and with the box office on the rise, improvements in theater coverage are likely to be observed in Q4 and Q1 of 2025.
Impact of Hurricanes on Florida Properties
Our thoughts go out to the communities affected by Hurricanes Helene and Milton. The storms significantly impacted our two joint venture hotels located on St. Petersburg Beach: the Bellwether Beach Resort and the Beachcomber. With both hurricanes striking within a short time frame, we are currently finalizing an assessment of damages.
At this time, we do not expect either hotel to reopen until 2025. We are working collaboratively with our joint venture partners, non-recourse debt providers, and insurance companies to determine the best way forward, which may lead to both hotels being removed from our portfolio. Consequently, we recorded impairment charges amounting to $12.1 million and fully wrote off the carrying values during the quarter.
Box Office Trends and Future Expectations
Encouragingly, the North American box office has been rebounding, totaling $2.7 billion in Q3 and $6.2 billion for the first nine months of the year. Although the first half of 2024 showed a 19% decline compared to the same time in 2023, the overall decrease for the first nine months narrowed to 12%. July experienced a 13% drop from the previous year, primarily due to the outperformance of “Barbie.”
In contrast, box office sales increased by 10% in August and 25% in September, with the significant success of films like “Deadpool.” Notably, in Q3, six titles surpassing the $100 million mark highlight the correlation between box office success and the number of releases. Heading confidently into Q4, we believe that film releases impacted by the strikes will no longer hinder box office performance. Thus far in 2024, 16 films have grossed more than $100 million, with another 12 earning between $60 million and $100 million.
Looking ahead, major films poised for release in Q4, expected to exceed $150 million in gross revenues, include “Venom 3,” “Gladiator II,” “Wicked,” “Moana 2,” “Sonic the Hedgehog 3,” and “Mufasa: The Lion King.” We are optimistic that the strength of our upcoming film slate will foster continued box office growth into 2025 and 2026. Based on year-to-date results through September 30th, we are raising our 2024 box office guidance to a range of $8.3 billion to $8.7 billion, up from the previous forecast of $8.2 billion to $8.5 billion, compared to last year’s total of $8.9 billion.
Tenant Operating Status and Other Developments
Despite the rise in box office figures during most of Q2 and Q3, the Regal lease year—encompassing the trailing 12-month period that concluded on July 31st—was at $7.9 billion. This figure reflects the impact of the lack of new releases during the strikes, aligning with our previous forecasts. Examining our broader customer groups, we have noted positive trends in value-oriented destinations, although operators are still grappling with expense pressures, leading to slight revenue decreases in some properties. Consequently, this resulted in minor dips in EBITDARM.
Construction is underway for Andretti Karting locations in Kansas City and Oklahoma City, with entitlements progressing for a Schaumburg site. Topgolf has completed self-funded refreshes across four more locations, bringing their total to 8% of our portfolio. Meanwhile, Six Flags and Cedar Fair focused on operational efficiencies post-merger in July, enhancing overall customer experiences. Notably, our Gravity House in Breckenridge received recognition as the eighth-best hotel globally by Conde Nast Traveler’s Reader’s Choice Awards.
The expansive construction at the Springs Resort in Pagosa Springs is ongoing, with projected openings set for spring 2025. Despite these developments, the resort is maintaining robust performance, and we believe this expansion will promote further growth. Additionally, our Murrieta Hot Springs Resort is now fully operational and is receiving positive reviews as it continues to ramp up.
Within our educational portfolio, we are witnessing strong performance, with portfolio-wide customer revenue up 3% year-over-year, though EBITDARM decreased by 1% due to rising wage costs. KinderCare, which manages 15 of our early childhood assets under the CREM brand, went public shortly after the third quarter concluded.
Continued Investment and Future Commitments
Our managed theaters are showing signs of recovery alongside rising box office numbers. However, performance in our joint venture experiential lodging properties was below expectations, influenced primarily by the two hurricanes and other weather events. In Q3, our investment spending totaled $82 million, bringing our year-to-date total to $214.6 million.
We successfully closed a $52 million mortgage for Iron Mountain Hot Springs in Glenwood Springs, Colorado, developed by Off Road Capital Partners. This asset, which features natural hot springs and pools with unique minerality, has consistently ranked among the top three hot spring attractions in the U.S. for attendance and EBITDA.
Excitement surrounds the addition of this remarkable asset to our growing collection, including the Springs Resort and the recently opened Marietta Hot Springs Resort. We are refining our investment guidance for 2024 to a range of $225 million to $275 million, previously at $200 million to $300 million. To date, around $150 million has been committed for experiential development projects that are closed but await funding over the next two years. We are keenly pursuing high-quality acquisition and redevelopment opportunities in most of our experiential categories.
Given our cost of capital, we will keep a disciplined approach, financing these investments primarily through cash reserves, operational cash flow, proceeds from asset sales, and access to our enhanced unsecured revolving credit facility. In Q3, we sold two vacant former Regal locations and a former KinderCare school, yielding net proceeds of $8.7 million but resulting in a loss of about $3.4 million. From January through September this year, our total disposition proceeds reached $65.1 million. After Q3, we sold another vacant Regal theater, generating net proceeds of $2.6 million.
In just over 14 months post-Regal bankruptcy, we have successfully sold nine of the 11 vacant former Regal theaters we acquired.
Cinemark’s Disposition Strategy Leads to Adjusted 2024 Financial Outlook
Company continues to streamline operations amid theater market challenges.
In recent updates, Cinemark has made progress in selling off some of its theater assets. The company recently executed a sale agreement for one of its remaining two properties and is actively marketing the last one. Additionally, after Labor Day, Cinemark closed on a previously vacant Regal theatre in California that had been under its management. This location is now up for sale.
Aside from these three Regal theaters, Cinemark has a vacant Xscape theater and is still looking to sell one AMC theater. Since early 2021, the company has disposed of 23 theaters, and it expresses satisfaction with the pace of selling vacant Regal theaters. Consequently, Cinemark has updated its 2024 guidance for asset sales to a range of $70 million to $100 million.
Mark Alan Peterson — Executive Vice President, Chief Financial Officer and Treasurer
Turning to the financial metrics for the third quarter, I will provide a detailed overview of Cinemark’s performance, balance sheet, and revised guidance for 2024. Funds from Operations (FFO) adjusted for the quarter stood at $1.30 per share, down from $1.47 the previous year. Similarly, Adjusted Funds from Operations (AFFO) fell to $1.29 per share from $1.47 year-over-year. A significant factor in this decline was the absence of collection deferrals from cash basis customers, which contributed to a decrease of about $0.25 per share compared to last year.
When excluding this factor, adjusted FFOs have actually increased by over 6% compared to last year. Total revenue for the quarter reached $180.5 million, a decline from $189.4 million in the same period last year, primarily due to a $15.3 million drop in rental revenue.
However, the company’s rental revenue was positively impacted by percentage rents, which rose to $5.9 million from $2.1 million a year earlier. This surge correlates with the Regal master lease and increased contributions from other tenants. Additionally, mortgage and other financing income rose by $3.4 million, attributed to new investments in mortgage notes.
It’s important to note that both other income and other expenses are mainly tied to the company’s consolidated operating properties, including the Kartrite Hotel & Indoor Waterpark and seven active theaters. An increase in these figures compared to last year was largely due to five theaters previously leased to Regal, now operated by third parties since August 2023. This led to the decision to close and market one of these theaters for sale.
On the expense side, General and Administrative (G&A) expenses dipped to $11.9 million from $13.5 million a year prior, largely due to reduced payroll costs and lower professional fees related to the Regal situation. Meanwhile, interest expenses rose by $1.7 million as borrowings under the revolving credit facility increased and interest income from short-term investments decreased.
FFOs adjusted from joint ventures saw a decline of $1.1 million, primarily due to rising expenses like insurance and interest, compounded by weather disruptions from Hurricane Helene, which impacted operations at the company’s properties in St. Pete Beach, Florida. Consequently, in response to damages from both Hurricane Helene and Hurricane Milton, the company acknowledged an impairment charge of $12.1 million regarding its joint venture holdings in St. Pete Beach. This charge has been excluded from both FFO and AFFO calculations.
Looking at key credit ratios, the company remains financially solid. The fixed charge coverage ratio is at 3.4 times, with both interest and debt service coverage ratios standing at 4.0 times. The net debt to adjusted EBITDA ratio was recorded at 5.0 times for the quarter. Additionally, net debt to gross assets was reasonably low at 39% as of September 30, with a well-covered dividend payout ratio of 66% for the third quarter.
At the end of the quarter, Cinemark had consolidated debt of $2.9 billion, with the majority (about $2.8 billion) being fixed-rate debt, maintaining an average interest rate of approximately 4.4%. The company fully repaid the $136.6 million in Series A private placement notes during the quarter, with an average debt maturity of just under four years and only $300 million maturing by 2025. The recent amendment to their $1 billion revolving credit facility, which extends the maturity to October 2028, reflects their strategic moves for improved financing terms.
Looking ahead, Cinemark is optimizing its liquidity with $35.3 million in cash and only a $160 million draw on its new $1 billion revolving credit line. This positions the company well for future operations and investments. Cinemark has revised its 2024 guidance for adjusted FFO per share to a range of $4.80 to $4.92, alongside investment spending expectations narrowed to $225 million to $275 million, which were previously set between $200 million and $300 million. Meanwhile, disposition proceeds guidance was increased to $70 million to $100 million from $60 million to $75 million.
Furthermore, the company is raising its guidance on percentage rent to $13.5 million to $16.5 million, up from the earlier $12 million to $16 million range. General and administrative expenses are confirmed to remain within the range of $49 million to $52 million. Adjustments were also made on guidance regarding other income and expenses as well as equity losses from joint ventures, primarily due to weather-related impacts on properties in St. Pete Beach.
Financial Outlook: Key Insights from Our Recent Earnings Call
In our recent earnings report, the removal of certain properties from our portfolio is expected to have a minimal effect on our 2025 earnings. This is largely due to the heightened costs associated with these properties, which we faced even before the hurricanes struck. Detailed guidance is available on Page 24 of our supplemental materials.
In the following slide, we provide an updated projection for growth in FFOs adjusted per share for 2024 at the midpoint of our guidance. If we exclude the impact of deferred cash basis items from our 2023 audit, totaling $36.4 million (or $0.48 per share), alongside the anticipated collection of $0.6 million in 2024 (approximately $0.01 per share), our adjusted FFO growth remains at 3.2%.
As illustrated in the schedule, this growth rate shows resilience, particularly in the fourth quarter, where we will only be matching a smaller amount of out-of-period deferrals—$600,000—collected in Q4 last year. I will now hand things over to Greg for his final comments.
Greg Silvers — Chairman and Chief Executive Officer
Thank you, Mark. Today’s discussions highlight the strong performance of our experiential-focused properties, particularly as we anticipate a significant recovery in our theater portfolio with a return to a normal film release schedule by 2025. Our recent renewal of our credit line under better terms reflects our credit partners’ confidence in our strategic approach. We are dedicated to continuing to deliver value to our shareholders and capital providers as we look ahead to 2025 and beyond.
Now, I would like to open the floor for questions. Operator?
Questions & Answers:
Operator
[Operator instructions] Our first question comes from Joshua Dennerlein at BofA Securities. Your line is open.
Farrell Granath — Analyst
This is Farrell Granath standing in for Joshua Dennerlein. I have a question regarding your box office forecasts. Considering last year’s results, particularly the slower performance from Venom and other releases, what gives you confidence in the increased guidance, and what factors do you see driving this growth?
Greg Silvers — Chairman and Chief Executive Officer
The primary factor here is the volume of titles expected to be released. We are witnessing a return to a more typical number of movie releases akin to pre-pandemic times. It’s important to note that while individual titles can vary widely in performance, having a sufficient number of major releases boosts our confidence. As has been noted, many titles may not perform as expected, but we are optimistic about overall trends.
Greg Zimmerman — Executive Vice President and Chief Investment Officer
To add some figures, in the first half of 2024, we had four fewer major releases compared to the same period in 2023, which resulted in an approximate $850 million loss in box office revenue. In Q3, we matched the number of releases from the previous year, leading to a $300 million box office increase. Individual title success is unpredictable; for instance, while Venom’s performance has slowed, films like Inside Out and Deadpool exceeded expectations.
Farrell Granath — Analyst
Thank you. Switching topics, with the recent news regarding Topgolf and its spin-off, how do you plan to manage your exposure to them moving forward? Are you looking to expand, maintain, or reduce that relationship?
Greg Silvers — Chairman and Chief Executive Officer
We are comfortable with our current level of exposure to Topgolf. We’ve invested in three locations over the last four years, primarily in major markets, which include San Jose, the Los Angeles area, and King of Prussia. These are among the top five locations for the chain. We’re pleased that Topgolf will have no financial debt post-spin-off and $200 million in cash, reinforcing our confidence in our assets.
Greg Zimmerman — Executive Vice President and Chief Investment Officer
I believe you’ve addressed that thoroughly, Greg.
Farrell Granath — Analyst
Thanks.
Operator
Our next question comes from Smedes Rose at Citi.
Smedes Rose — Analyst
Hello, and thank you. Do you have any preliminary thoughts on what the box office might look like in 2025?
Greg Silvers — Chairman and Chief Executive Officer
While we have not completed our projections, based on industry trends, many analysts are estimating box office figures to be in the mid-nines. Would you agree with that assessment, Greg?
Greg Zimmerman — Executive Vice President and Chief Investment Officer
Yes, Smedes. We’ve also gained more clarity regarding upcoming releases. For example, we initially expected 76 titles in 2024, but that number has now grown to 99 titles for 2025.
Smedes Rose — Analyst
That’s helpful. Lastly, as you search for growth opportunities, how would you assess the current transaction market? Have you noticed any shifts in pricing or seller behavior?
Greg Silvers — Chairman and Chief Executive Officer
We haven’t observed significant changes in pricing. We remain steady in the low eights. Given our capital constraints, we are applying a disciplined approach to investment. We are not attempting to fill a massive budget but are instead selective in targeting strategic acquisitions like the iconic hot springs asset mentioned earlier.
Greg Zimmerman — Executive Vice President and Chief Investment Officer
Correct, Smedes. As I noted earlier, we see a range of opportunities across virtually all sectors, but we remain disciplined in how we pursue them.
Smedes Rose — Analyst
Thank you.
Greg Silvers — Chairman and Chief Executive Officer
Thanks again.
Wells Fargo Executives Discuss Capital Strategy and Asset Management
John Kilichowski — Analyst
Thank you. Going back to the previous question about pricing, considering the current focus on mortgage loans instead of fee simple acquisitions, is the mid-eights figure you mentioned reflective of what you’re seeing for lending, or does it accurately represent cap rates available for fee simple acquisitions? If not, what factors would lead you to pursue such deals?
Greg Silvers — Chairman and Chief Executive Officer
John, keep in mind that with our financing, we have options for conversion. This means we can switch the loan to a fee-simple lease, which allows for future expansion. Most of our mortgages include features that provide this conversion possibility. Thus, we view this as a structural opportunity heading into fee simple net leased assets.
John Kilichowski — Analyst
Got it. Thank you. Moving on, regarding your cost of capital, you mentioned being capital-constrained. Can you explain your current approach to this and share your perspective on determining when to buy back stock versus issuing equity?
Greg Silvers — Chairman and Chief Executive Officer
It depends on various factors, especially what you’re purchasing. To determine the point of value, consider the multiple at which you’re trading, reverse that, and evaluate your equity costs. Currently, a 60-40 financing structure leads us to a threshold around nine. Unless acquisitions are in the double-digit multiple range, issuing equity doesn’t seem attractive at the moment.
We’re not seeking growth merely for growth’s sake. As Mark has indicated through his figures, we can maintain growth in the 3% to 4% range without chasing more assets. Coupled with our attractive dividend, we’re confident in achieving a robust double-digit total shareholder return. As recovery continues, we anticipate a more favorable cost of capital that will encourage broader capital deployment. However, we remain cautious stewards of our capital, avoiding growth initiatives that wouldn’t yield beneficial results per share.
Mark Alan Peterson — Executive Vice President, Chief Financial Officer and Treasurer
We remind our stakeholders that stock buybacks aren’t neutral in terms of leverage. We assess buybacks on a leverage-neutral basis, and at today’s prices, they are not compelling. We also prioritize our ability to serve clients, which we believe is beneficial for the long term.
John Kilichowski — Analyst
Got it. Thank you.
Greg Silvers — Chairman and Chief Executive Officer
Thank you.
Operator
Our next question comes from Rob Stevenson at Janney Montgomery Scott.
Rob Stevenson — Analyst
Hi. Good morning, everyone. Greg, I want to ask about the decision to divest the St. Pete lodging assets. Was this primarily due to hurricane damage, or did the previous operational performance lead you to reconsider further investment given Mark’s remarks about rising interest and insurance costs?
Greg Silvers — Chairman and Chief Executive Officer
It is a combination of both factors. Our insurance expenses have increased dramatically over the past two years, which has been a wake-up call. Additionally, experiencing two named storms means facing two separate deductibles, not to mention the anticipated costs to bring properties up to new codes. Given our responsibility as stewards of shareholder capital, it doesn’t make sense to invest further in this situation.
Greg Zimmerman — Executive Vice President and Chief Investment Officer
Rob, I also want to point out that aside from storm-related claims, these hotels have suffered from wind damage yet managed to remain operational. However, the strain of repeated storms over several years has definitely had a financial toll. For context, insurance costs represented approximately 9% of our revenue.
Greg Silvers — Chairman and Chief Executive Officer
Furthermore, rising operational costs, including interest rates, have stressed profitability. We had a SOFR-based loan and needed to purchase a cap that expired in June, increasing our expenses. Overall, while this won’t heavily impact 2025 earnings, the hurricane deductibles, alongside our considerations, made the decision straightforward.
Greg Zimmerman — Executive Vice President and Chief Investment Officer
Additionally, we lack clear forecasts regarding future insurance premiums, which raises further concerns in this environment.
Rob Stevenson — Analyst
Does this uncertainty influence your willingness to invest in coastal Florida properties going forward, or is it approached on a case-by-case basis?
Greg Silvers — Chairman and Chief Executive Officer
It is indeed case-by-case. Interestingly, most of our other properties in Florida have sustained little to no damage. This specific location, due to its beachfront position, has faced increasingly challenging insurability.
Rob Stevenson — Analyst
Understood. Lastly, regarding the recent investment in the hot spring mortgage, do you see this type of mortgage being your primary avenue for future investments, or was it specific to this case?
Strategic Insights on Movie Theater and Education Asset Management
Understanding Future Moves
Greg Silvers — Chairman and Chief Executive Officer
When considering future asset acquisitions in the hot spring and similar sectors, it’s essential to note that current strategies involve mortgage to fee ownership models. While we see potential for expansion, the presence of tax credits complicates any rapid changes.
Thus, it’s critical to view this phase not merely as a mortgage tool but as a step towards net lease arrangements for long-term ownership.
Greg Zimmerman — Executive Vice President and Chief Investment Officer
For clarification, both Pagosa Springs and Murrieta Hot Springs are set as net leases.
Market Activity for Movie Theaters
Rob Stevenson — Analyst
What is the current state of transactions involving well-occupied movie theaters? Are there any signs of movement beyond vacant properties?
Greg Zimmerman — Executive Vice President and Chief Investment Officer
Currently, there has been limited activity regarding desirable theaters. It appears the market remains somewhat stagnant.
Greg Silvers — Chairman and Chief Executive Officer
That’s correct. However, we’re optimistic about the box office recovery, which may eventually lead to a more active market. The absence of transactions is not unexpected.
Asset Sales and Future Strategies
Rob Stevenson — Analyst
Can you update us on your asset sale plans, specifically regarding the five vacant theaters? How should we interpret these initiatives as we move into 2025 and 2026?
Greg Silvers — Chairman and Chief Executive Officer
In addition to the vacant theaters, we are exploring our education portfolio for potential sales to boost capital availability. Greg and his team have effectively managed many vacant properties, allowing us to focus on maximizing our investment in experiential properties.
Greg Zimmerman — Executive Vice President and Chief Investment Officer
We also have two vacant educational assets alongside the theaters.
Michael Carroll — Analyst
Will the sales from the education sector be executed as smaller transactions, or are larger deals likely?
Greg Silvers — Chairman and Chief Executive Officer
Our approach will depend on finding the best value—whether breaking up assets yields higher returns or if a large portfolio deal presents itself.
Updates on Revenue and Income Projections
Michael Carroll — Analyst
Regarding the changes in guidance, specifically what factors increased the percentage rents? Was it strictly box office performance? Additionally, can you clarify the other income and expenses, particularly concerning Cartwright?
Mark Alan Peterson — Executive Vice President, Chief Financial Officer and Treasurer
The increase in percentage rents was mainly due to non-Regal contributions, adding about a million. As for Cartwright, we’ve faced a revenue reduction, but expenditures have been managed, resulting in a net decline of 500,000 linked directly to operations there.
Michael Carroll — Analyst
Thank you.
Mark Alan Peterson — Executive Vice President, Chief Financial Officer and Treasurer
Thank you.
Looking Ahead for Future Guidance
Operator
Our next inquiry comes from Anthony Paolone at J.P. Morgan.
Anthony Paolone — Analyst
As we approach 2025, can you shed light on net other income and JV FFO outlook? Their performance seems heavily influenced by operations and market conditions, impacting our projections.
Mark Alan Peterson — Executive Vice President, Chief Financial Officer and Treasurer
We remain hopeful that Cartwright improves in 2024, although its trajectory is uncertain. Some JVs may see growth next year, offsetting any losses primarily linked to St. Pete, which will be phased out of our portfolio.
Anthony Paolone — Analyst
If the JVs continue to operate at a loss but are removed from our numbers, how significant would that effect be on overall projections?
Mark Alan Peterson — Executive Vice President, Chief Financial Officer and Treasurer
Correct. As we adjust our accounting, St. Pete’s removal should lessen impacts from EBITDA and other financial metrics.
Anthony Paolone — Analyst
Lastly, you mentioned some tenants facing financial pressures. Can you discuss any specific entities that might be of concern?
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Future Growth in Fitness and Wellness on the Horizon: Insights from Leadership
Mark Alan Peterson — Executive Vice President, Chief Financial Officer and Treasurer
Currently, we don’t hold any significant concerns regarding our coverage, Tony. Our coverage ratio stands at 2.6, which is actually 30% higher than pre-COVID levels. This stability indicates that we’re managing well amidst challenges. However, passing cost pressures onto customers is proving more difficult than in the past.
As Greg mentioned, we are observing slight reductions in EBITDA margins. Thankfully, these changes have not had a major impact yet. No specific areas stand out as disproportionately affected, and our watch-list for potential issues is smaller than it has been in the last four to five years due to the proactive measures we implemented during COVID.
Anthony Paolone — Analyst
Thank you, Mark.
Operator
Next, we have Upal Rana from KeyBanc Capital Markets.
Upal Rana — Analyst
Thanks for your insights. Regarding the two beach assets, do you have any business disruption insurance to collect from, and if so, what’s the anticipated timeline?
Greg Silvers — Chairman and Chief Executive Officer
Yes, we are exploring business interruption insurance. However, this involves a joint venture, meaning that the lender controls all insurance proceeds. Given the complexities involved, this situation may take some time to resolve. After assessing the current economic landscape, we concluded that additional capital investment would not be prudent under these circumstances.
While our partners are managing remediation expenses, we are taking a cautious approach and prioritizing careful monitoring moving forward. It remains uncertain how this will unfold.
Upal Rana — Analyst
Understood. That was helpful. Earlier, you mentioned non-commoditized fitness and wellness assets. Could you elaborate on what these entail and if you plan to expand in this area?
Greg Silvers — Chairman and Chief Executive Officer
Our focus is on unique fitness experiences, such as hot springs and climbing gyms. These are not typical gyms but specialized venues that cater to customers willing to pay a premium for quality experiences. We see growing interest from two major demographic groups: Baby Boomers and Millennials, both of whom value curated health and wellness options significantly more than standard fitness offerings.
Greg Zimmerman — Executive Vice President and Chief Investment Officer
Additionally, we have investments in three hot springs resorts along with a spa hotel concept through our partnership with Miraval. Our strategy encapsulates an overall approach towards both fitness and wellness.
Operator
Our next question comes from Jyoti Yadav at Citizens JMP Securities.
Mitch Germain — Analyst
Hi, Mitch here. I wanted to ask about the new loan related to the Colorado Fitness asset. Is there an option to convert that to a net lease, and will this depend on negotiations at the end of the term?
Greg Silvers — Chairman and Chief Executive Officer
Yes, we do have a hard option available that includes tax credits, which we could recover if we convert within a specified time. Beyond that, we can choose to convert the asset to a net lease at our discretion.
Mitch Germain — Analyst
To expand on that, is this conversion option similar to some of the major assets in your loan portfolio, indicating a potential shift from loan to ownership?
Greg Silvers — Chairman and Chief Executive Officer
Indeed, Mitch. The majority of our mortgage agreements are structured to allow for a transition to a net lease investment. This feature is common across most of our loans, giving us flexibility.
Greg Zimmerman — Executive Vice President and Chief Investment Officer
Moreover, many of our mortgages have increasing interest rates, which are not typical in standard mortgages since they’re designed more like leases.
Greg Silvers — Chairman and Chief Executive Officer
Exactly. The terms and conditions of these loans closely resemble lease agreements when reviewed.
Mitch Germain — Analyst
Thank you for the clarity. Mark, regarding the joint venture’s FFO, is there still some seasonality we should be aware of due to your involvement in lodging?
Mark Alan Peterson — Executive Vice President, Chief Financial Officer and Treasurer
Yes, indeed. Most seasonality is tied to the RV parks, with some influence from St. Pete Beach. Since St. Pete Beach is the largest investment among our JVs, any fluctuations here can affect overall performance. The primary seasons for RV parks are during the second and third quarters, but they are also weather-dependent, so rain can impact operations.
Mitch Germain — Analyst
Thank you, Mark.
Mark Alan Peterson — Executive Vice President, Chief Financial Officer and Treasurer
Thank you, Mitch.
Operator
Next, we have Spenser Allaway from Green Street.
Spenser Allaway — Analyst
Thank you. I noticed you mentioned becoming more optimistic about asset sales within your education portfolio. While it may be early, do you have insights into the potential buyer pool for these assets based on your experiences?
Greg Silvers — Chairman and Chief Executive Officer
Spenser, we believe that there is considerable interest in the education sector within the net lease space from both public and private entities, large and small. As we examine our options for asset recycling, interest has grown from multiple quarters, and we view this positively.
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Topgolf Assets Show Strong Market Potential, CEO Greg Silvers States
Strong Real Estate Performance in Major Areas
Spenser Allaway — Analyst
Thank you. Regarding your Topgolf assets, these are sizable holdings. If you ever consider selling them, can you discuss their flexibility and the value of the underlying real estate based on their locations?
High-Quality Locations Drive Asset Value
Greg Silvers — Chairman and Chief Executive Officer
Indeed. Typically, these are substantial properties situated in major metropolitan areas. Thus, they are high-quality and well-performing assets. Historically, sales of Topgolf properties usually fall in the low seven figures or lower. For example, Fort Myers recorded a sale at a five million dollar price point within the last two years. Overall, there has been a strong demand for well-located Topgolf assets.
Closing Remarks from Leadership
Spenser Allaway — Analyst
Thank you.
Greg Silvers — Chairman and Chief Executive Officer
Thank you all for being here today. We look forward to our next conversation, and have a wonderful Halloween. Goodbye!
Operator
[Operator signoff]
Duration: 0 minutes
Call Participants
Brian Moriarty — Senior Vice President, Corporate Communications
Greg Silvers — Chairman and Chief Executive Officer
Greg Zimmerman — Executive Vice President and Chief Investment Officer
Mark Alan Peterson — Executive Vice President, Chief Financial Officer and Treasurer
Farrell Granath — Analyst
Smedes Rose — Analyst
John Kilichowski — Analyst
Mark Peterson — Executive Vice President, Chief Financial Officer and Treasurer
Rob Stevenson — Analyst
Michael Carroll — Analyst
Anthony Paolone — Analyst
Tony Paolone — Analyst
Upal Rana — Analyst
Mitch Germain — Analyst
Spenser Allaway — Analyst
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