When the Missouri Board of Education yanked the charters for five schools operated by Imagine Inc., the real estate investment trust that owned the school properties suddenly spotted "a cloud in an otherwise sunny picture." Entertainment Properties Trust had to address the closings and the threat of more at Imagine-operated schools in Georgia andMissouriin reporting first-quarter performance.
Education blogger Ken M. Libby produced a helpful transcript of the earnings conference call between Entertainment Properties Trust officials and some clearly nervous investors. I now have to reconsider my assumption that Wall Street types are infatuated with charter schools only because they serve as a lucrative pass-through of public tax dollars to private investors. It turns out that some of the investors actually believed the line about charters offering a superior education experience to students from low-income families.
Again, with thanks to Ken Libby, here's the fascinating exchange between EPT'S Greg Silvers and Conor Fennerty of Goldman Sachs:
Conor Fennerty: I guess coming back to the charter school, you know, what gives you guys comfort that these problems are confined to these kind of select, I think you mentioned 9 or 10 schools?
Greg Silvers: Well I think the issue, I think, Conor, you know, and I- I-… As we've said, I think part of the issue is specifically to academics. I think you, when you see, if you follow what's going on inSt. Louis, the issue is not the financial capacity of the schools. The schools, as David said, actually grew in enrollment. We went, we had actually a close to 10 percent enrollment growth inSt. Louis last year. So we have demand for the charter school space. What we have is this operator in this scenario with these principals and these teachers who are not delivering the academic quality that they need to be whereas if you, we can look at the rest of our schools and see that academic progress, they're not similarly situated. So we do not think this is across the board a systemic problem, but it is more that we can identify it with specific schools.
Fennerty: Okay, but isn't that a little worrisome that, you know, in theory one of the best operators is having academic issues? 'Cause isn't that the kind of core, kind of crux of the argument behind charter schools?
Silvers: I think if, this is the point we would make, and we can talk about this as much as you want, is when, what we would agree with you is that Imagine is clearly probably the, has the best balance sheet in the space. However, we have, we have… come to understand that they need to have, do some work on their academics. And therefore, you know, we have increased our underwriting and our focus on that to validate those processes as we acquire new assets and you see when we introduce BASIS and some of the other operators the quality academic performance that they have. So when we defined Imagine as one of the better operators, when we came into this space, Conor, we came in with what we thought was a beachhead operator who had a strong balance sheet that can provide across the (?) portfolio and had a substantial as I said cashflow to withstand any sort of issues. That's proven to be true. Now have they expanded potentially a little too fast and got into some things that stretched their resources and they need to improve that? No doubt. Have we learned as part of the process that we needed to refine our underwriting and do a better job on academic evaluations? No doubt. But I think, again, as we structured the deal, everything continues to work, we do not think we're gonna have any hiccups in our financial payment responsibility from Imagine and that we will go forward and continue to be very positive on the category.
Fennerty: Okay. And not to beat a dead horse, but just, you mentioned kind of strengthening your academic controls, your academic underwriting, I mean is that looking at the operator's kind of national performance or how can you kind of get comfortable at the local level or is it more getting comfortable with the operator?
Silvers: It's all of the above what you said. It's looking at their national performance, it's actually evaluating their local board and seeing if they have the right people on their board to have an academic focus and do they have the right sort of individuals from a governance perspective who not only focus on the business side of it but also focus on the academic side of it. So we've got some best practices that have, that we've been part of, being shared by us by the national charter alliance that we're trying to make sure we find those in all of our developments. (End transcription)
Libby has a nice summary of EPT's clever spin on the Imagine problem: "EPT isn't too bothered by the closings because the closing schools can be swapped for other schools run by Imagine as part of the master lease, Imagine can continue paying for the facilities if a school doesn't occupy the building, or another operator can be found. According to the comments from EPT, Imagine's income at the parent (i.e. management organization) level combined with a line of credit assuages any worries about the closings and Imagine's ability to make future payments."
What the investors don't learn from the conference call is that more Imagine schools in the EPT portfolio are struggling. The Mind Trust, the Indianapolis-based outfit with a proposal to take over Indianapolis Public Schools, has called for the closing of three of Indiana's Imagine schools on the basis of academic performance – two in Indianapolis and one in Fort Wayne.
EPT owns the Imagine MASTer Academy property in Fort Wayne and features the attractive Wells Street campus in its investor relations materials.
If you're wondering why a real estate investment trust whose portfolio also includes ski parks and movie megaplexes has interests in public charter schools, just remember that it's all about the rent money – and lots of it.