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Edited Transcript of EPR earnings conference call or presentation 30-Oct-19 12:30pm GMT

Q3 2019 EPR Properties Earnings Call

Kansas City Nov 5, 2019 (Thomson StreetEvents) -- Edited Transcript of EPR Properties earnings conference call or presentation Wednesday, October 30, 2019 at 12:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Brian Moriarty

EPR Properties - VP of Corporate Communications

* Gregory E. Zimmerman

EPR Properties - Executive VP & CIO

* Gregory K. Silvers

EPR Properties - President, CEO & Trustee

* Mark Alan Peterson

EPR Properties - Executive VP, CFO & Treasurer

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Conference Call Participants

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* Anthony Paolone

JP Morgan Chase & Co, Research Division - Senior Analyst

* Brian Michael Hawthorne

RBC Capital Markets, Research Division - Senior Associate

* Collin Philip Mings

Raymond James & Associates, Inc., Research Division - Analyst

* Craig Allen Mailman

KeyBanc Capital Markets Inc., Research Division - Director and Senior Equity Research Analyst

* John James Massocca

Ladenburg Thalmann & Co. Inc., Research Division - Associate

* Joshua Dennerlein

BofA Merrill Lynch, Research Division - Research Analyst

* Nicholas Gregory Joseph

Citigroup Inc, Research Division - Director & Senior Analyst

* Robert Chapman Stevenson

Janney Montgomery Scott LLC, Research Division - MD, Head of Real Estate Research & Senior Research Analyst

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Presentation

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Operator [1]

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Good afternoon, everyone, ladies and gentlemen, and welcome to the Third Quarter 2019 EPR Properties Earnings Conference Call. (Operator Instructions) As a reminder, this conference is being recorded. I would like to turn the conference over to your host, Mr. Brian Moriarty, Vice President of Corporate Communications. Sir, you may begin.

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Brian Moriarty, EPR Properties - VP of Corporate Communications [2]

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Thank you, operator. Hi, everyone, and welcome. Thanks for joining us today for our third quarter 2019 earnings call. I'll start the call today 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 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.

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 the company's -- in today's earnings release and supplemental information furnished to the SEC and in our Form 8-K. If you wish to follow along, today's earning 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 the company's President and CEO, Greg Silvers.

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Gregory K. Silvers, EPR Properties - President, CEO & Trustee [3]

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Thank you, Brian. With me on the call today are the company's CFO, Mark Peterson; and making his debut, our CIO, Greg Zimmerman. I'll start with our quarterly headlines and then pass the call to Greg to discuss the business in greater detail. Mark will then follow with a review of the company's financial summary. So let's get started.

Our first headline, strong quarter anchored by continued demand for experiential assets. Our focus on the experiential economy continues to sustain solid portfolio performance and consistent rent coverages. As evidenced by the third quarter Box Office results and the positive results in our attraction properties, the consumer continues to support our tenants and properties devoted to the experiential economy. This trend of increasing consumer demand for our tenant offerings should translate into opportunities to fuel our future growth.

Our second headline, record-low bond yield and spread. During the quarter, we issued new 10-year senior notes in the largest side and at the lowest yield and spread in the company's history, and we completed the redemption of higher-priced senior notes that were due in 2022. As a result, we have lowered our cost of debt and significantly extended our average debt maturity.

Our third headline, well-positioned balance sheet with ample capacity. In addition to our debt activity, we continued to raise common equity during the quarter, and we have nearly $120 million of unrestricted cash on hand at quarter end, and nothing outstanding on our $1 billion line of credit. Clearly, we are well positioned for growth.

Our fourth headline, increasing earnings and investment spending guidance. Consistent with the strong results year-to-date and our forecast for the remainder of the year, along with a robust pipeline of attractive opportunities in the experiential space, we are increasing our guidance for FFO as adjusted per share as well as investment spending. Mark will provide the detail on guidance in his comments.

With that, I'll turn it over to Greg Zimmerman, and then rejoin you after Mark's comments for questions.

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Gregory E. Zimmerman, EPR Properties - Executive VP & CIO [4]

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Thanks, Greg. At the end of the third quarter, our total investments were nearly $7.2 billion, with 416 properties in service that were 99% occupied. During the quarter, investment spending was $118.1 million, and our proceeds from dispositions were $294.4 million. Our company-level rent coverage was 1.89x, demonstrating the continuing strength and consistency of our portfolio. At quarter end, our Entertainment portfolio comprised approximately $3.4 billion of total investments, with 2 properties under development, 195 properties in service, and 26 operators. Our occupancy was 99% and our rent coverage was 1.76x.

Strong movie product continues to be the key driver of solid Box Office results, with the third quarter Box Office up by approximately 3% year-over-year. The momentum was anticipated to extend with the fourth quarter expected to exceed 2018, which should drive 2019 Box Office close to the 2018 all-time high. The fourth quarter opened strongly, with the Joker's record-breaking opening weekend to be followed by a strong film slate, including Star Wars, The Rise of Skywalker, Frozen 2 and Jumanji: The Next Level. Our Entertainment investment spending totaled $10.9 million in the third quarter, consisting primarily of development and redevelopment projects across our portfolio of theaters, entertainment retail centers and family entertainment centers.

At quarter end, our Recreation portfolio comprised approximately $2.3 billion of total investments, 83 properties in service and 19 operators. Our occupancy was 100% and our rent coverage was approximately 2.28x. The operators in our attractions portfolio, which is part of our Recreation segment, has delivered solid results this season, with visits and revenue through the August trailing 12 months period up approximately 4% and 7%, respectively, versus the trailing 3-year average.

Investment spending in our Recreation segment totaled approximately $89.6 million, which included $68.7 million of new mortgage loans for recreational properties, $6.6 million on the Kartrite Waterpark Hotel and the balance consisting primarily of build-to-suit developments of golf entertainment complexes and attractions. The primary new investment was a $64.2 million mortgage loan as opposed to the traditional REIT hotel operating structure secured by the recently opened Margaritaville Nashville Hotel (sic) [Margaritaville Hotel Nashville] in the heart of Nashville's SoBro district, one of the country's hottest experiential destinations, within walking distance of Bridgestone Arena, the Ryman Auditorium and the Nashville Convention Center.

On the disposition front, on July 1, as previously announced, we received payment in full on our $189.8 million Schlitterbahn mortgage note. This payoff was facilitated by Cedar Fair's purchase of 2 of the Schlitterbahn Group's Texas water parks for $261 million, including both the operating business and the real estate. Also in the third quarter, Vail Resorts closed on their previously announced acquisition of Peak Resorts. Vail operates our Northstar California Resort and, as reflected in our supplemental, with the addition of the 6 Peak Resorts investments, Vail is now our fifth-largest customer.

At quarter end, our Education portfolio comprised approximately $1.3 billion of total investments, 137 properties in service and 55 operators. Our occupancy was 98% and our rent coverage was 1.51x. We continue to make excellent progress on the transition of our CLA schools to Crème de la Crème. Through the end of October, we have successfully transferred 17 of our 21 properties to Crème, and they anticipate taking over the remaining 4 CLA schools during the fourth quarter. Investment spending in our Education segment total approximately $17.6 million, primarily consisting of acquisitions, build-to-suit developments and redevelopments of public charter schools, private schools and early childhood education centers.

During the quarter, we received $104 million in disposition proceeds related to the sale of 4 operating charter schools, 1 early childhood education center and the payoff of a mortgage note secured by the charter school. These proceeds included $11.3 million of termination fees and $1.8 million of prepayment fees. The transactions reflect the strength of the municipal bond market available to charter schools.

The consumer continues to evidence strong demand for experiences. We have a deep pipeline of opportunities to expand our already broad-based portfolio of experiential assets. We continue to shift our focus from non-experiential areas of business towards experiential properties, an asset class that we have been successfully investing in for over 20 years and one that will be the primary growth driver going forward.

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

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Mark Alan Peterson, EPR Properties - Executive VP, CFO & Treasurer [5]

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Thank you Greg. I will begin today by discussing our financial performance for the quarter. FFO as adjusted for the quarter was $1.46 per share versus $1.58 per share in the prior year. During the third quarter of 2018, we recognized $20 million in prepayment fees related to the payoff of a mortgage note that was secured by ski properties. If you exclude this income, our FFO as adjusted per share for the quarter increased by about 10% versus prior year. Note that FFO as adjusted per share amounts for both periods include the impact of education-related lease termination fees, which I will discuss later in my comments.

Total revenue for the quarter increased by about 18% when you exclude the $20 million of prepayment fees from the prior year that I just discussed. This revenue increase was driven primarily by revenue from new investments, net of dispositions. Percentage rents and participating interest for the quarter totaled $3.6 million versus $2.7 million in the prior year. As previously reported, we received payment in full on mortgage notes receivable totaling $189.8 million related to the Schlitterbahn water parks on July 1. And during the quarter, we also received $17.8 million related to the early payoff of a mortgage note secured by a charter school, which, as anticipated, included a prepayment fee of $1.8 million.

Note also that The Kartrite Resort & Indoor Waterpark opened during the second quarter, and continues to be operating under the traditional REIT lodging structure, which impacts other income included in total revenue as well as other expense. Finally, about $7.5 million of the revenue increase relates to the adoption of the new lease accounting standard, which is offset by higher property operating expense, as I have discussed on previous calls. The income tax benefit of $0.6 million versus income tax expense of $0.5 million in the prior year related primarily to the deferred tax benefit resulting from the operations of The Kartrite.

Additionally, transaction costs were $6 million for the quarter and related primarily to the transfer of 9 CLAs to Crème. As a reminder, deferred taxes and transaction costs are excluded from FFO as adjusted. Severance expense was $1.5 million for the quarter and $1.9 million year-to-date. This expense was the result of a shift in resources from non-experiential areas of our business toward experiential properties.

Finally, during the quarter, we also completed property sales for net proceeds totaling $86.8 million and recognized a combined gain on sale of these properties of $14.3 million. Included in the property sales were 3 charter school properties sold pursuant to tenant purchase options for net proceeds of $59.4 million, and the related termination fees totaling $11.3 million included in gain on sale had been added to FFO to get to FFO as adjusted. These fees were higher than anticipated as an operator of 1 larger public charter school elected to exercise his option but was not in our plan. I'll have more on both our expected disposition and termination fee levels later when I discuss our revised guidance for the year.

Now let's move to our balance sheet and capital markets activities. Our debt-to-adjusted-EBITDA ratio was 5.2x at quarter end. Our net debt to gross assets was 40% on a book basis and 32% on a market basis at September 30. At quarter end, we had total outstanding debt of $3.1 billion, all of which is either fixed-rate debt or debt that has been fixed through interest rate swaps with a blended coupon of approximately 4.3%.

During the quarter, we issued $500 million of new 10-year unsecured notes at a coupon of 3.75% and redeemed all $350 million of our 5.75% senior unsecured notes at the make-whole cost. Strong investor demand allowed us to upsize the amount on the notes beyond our original plan as we took advantage of a very attractive coupon, the lowest in the company's history. Additionally, we paid in full a secured mortgage note payable totaling $18.6 million and fixed the interest rate on our only remaining secured debt of $25 million for a period of 5 years at 1.39%, which was lower than the previous variable rate.

We are pleased to now have a weighted average debt maturity of approximately 7 years and no debt maturities until 2023. We think extending our average debt duration as well as fixing variable interest rate debt in today's low interest rate environment makes a lot of sense. Also during the quarter, we once again took advantage of the market support of our experiential strategy and issued approximately $52 million in common equity on our Direct Share Purchase Plan as well as another $17 million subsequent to quarter end at a combined average price of $76.59. This brings our year-to-date issuance under this plan to approximately $306 million.

The decision to take on the additional long-term debt proceeds versus using our line of credit, as well as raising incremental equity, both of which were not in our previous plan, had the impact of reducing near-term earnings. However, with low leverage, $116 million of unrestricted cash in the bank at quarter end, nothing outstanding in our $1 billion line of credit and no near-term debt maturities, our balance sheet is now even better positioned to fund our growing pipeline of opportunities as we finish the year and move into 2020.

Based on the results to date and our expectation for the fourth quarter, we are raising our guidance for 2019 FFO as adjusted per share to a range of $5.44 to $5.52, from a range of $5.32 to $5.48, and raising our guidance toward the upper end for investment spending to a range of $775 million to $825 million from a range of $700 million to $850 million. We are also increasing our expected disposition proceeds for 2019 to a range of $400 million to $475 million from a range of $300 million to $400 million.

Guidance can be found on Page 30 of our supplemental. There, you will also see that we are raising our guidance for 2019 termination and prepayment fees related to education properties by a total of $8.2 million to what we have earned through 9/30. Note that this means that we are expecting no additional such fees in the fourth quarter.

Note that, overall, our guidance for the full year 2019 FFO as adjusted per share is increasing by $0.08 at the midpoint, which is to reflect $0.10 more in education-related fees and $0.03 more related to the strength of our core business, offset by $0.02 related to the impact of additional capital-raising activities and $0.03 related to higher dispositions than previously expected.

Finally, note that when you exclude the noneducation-related prepayment fees of $71.3 million we received for the full year 2018 or $0.93 per share, the midpoint of our increased FFO as adjusted per share guidance for 2019 of $5.48 reflects about 6% growth.

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

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Gregory K. Silvers, EPR Properties - President, CEO & Trustee [6]

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Thank you, Mark. As we've discussed today, the third quarter was very productive for EPR, whether that be from asset performance, investments or balance sheet management. We continue to position the company to take advantage of the many opportunities that the experiential economy is creating. With that, I'll open it up for questions. Sarah?

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Questions and Answers

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Operator [1]

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(Operator Instructions) The first question comes from the line of Craig Mailman from KeyBanc Capital Markets.

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Craig Allen Mailman, KeyBanc Capital Markets Inc., Research Division - Director and Senior Equity Research Analyst [2]

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So you guys are bringing down leverage here, kind of bolstering capacity, raising 2019 investment spending a bit. I mean could you talk about -- I know you're not giving guidance here for '20. But I mean, are you guys anticipating a ramp in investment spending in '20 and that's what you're trying to kind of lower leverage here in the anticipation that -- in case there's any market choppiness? Or could you just give some insight into the -- I know you hit on a little bit, but maybe a little bit more insight into what you're seeing on the opportunity that prompted the extra capital raises?

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Gregory K. Silvers, EPR Properties - President, CEO & Trustee [3]

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Sure, Craig, and this is Greg Silvers. Since we have 2 Gregs now, we'll probably kind of need to distinguish ourselves. But I think it's a little bit of both. I think, one -- I think -- we think the opportunity set is getting stronger. I think, also, just kind of prudent balance sheet management and understanding the way that the 10-year has bounced around today. When we have a price that works for us and works for our tenants, it's prudent of us to take advantage of that. And we're always looking forward as in the way that we're preparing for. I think, overall, I do believe that we've got a -- we've kind of, over the last couple of years, changed the dynamic to where we're kind of run rate somewhere around that $700 million to $800 million, maybe more, of investment spending. And I think you're going to see that at least coming at us forward. But Greg, I don't know if you have anything to add to that.

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Gregory E. Zimmerman, EPR Properties - Executive VP & CIO [4]

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No, I don't. I would think that we a robust pipeline, and we need to be prepared.

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Craig Allen Mailman, KeyBanc Capital Markets Inc., Research Division - Director and Senior Equity Research Analyst [5]

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I mean given where the stock is, is there anything else baked into guidance for potential incremental capital raises to give you even more capacity?

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Mark Alan Peterson, EPR Properties - Executive VP, CFO & Treasurer [6]

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At the midpoint, no. But in the range, we could decide to raise capital if we decided to, as we did this quarter, to kind of create a war chest. But no, our guidance doesn't assume any more equity issuance when we begin the fourth quarter, beyond the $17 million we already did in the fourth quarter.

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Craig Allen Mailman, KeyBanc Capital Markets Inc., Research Division - Director and Senior Equity Research Analyst [7]

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Got you. Okay. And Greg, the other Greg, maybe can you talk about kind of the areas where you're seeing the best opportunity flow among your kind of different segments?

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Gregory E. Zimmerman, EPR Properties - Executive VP & CIO [8]

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Sure. I think we're seeing, as Greg mentioned, I think we're seeing opportunities across all of our investment opportunities. We're still seeing opportunities in theaters, opportunities in family entertainment centers, experiential lodging. A lot of opportunities is as reflected in our investment in Nashville, which is one of the hottest experiential places in the country, with 15.2 million visitors a year. So those are the kind of opportunities we're looking for, and we're seeing them.

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Craig Allen Mailman, KeyBanc Capital Markets Inc., Research Division - Director and Senior Equity Research Analyst [9]

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And then on CLA, could you guys just talk about -- I know it may be a little bit early, but just how those transition schools are doing in terms of retaining students and (inaudible)?

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Gregory K. Silvers, EPR Properties - President, CEO & Trustee [10]

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Yes, this is Greg Silvers. I think you can interpret the rate at which we originally forecast, that would be March of 2020, and we pulled that number back. I think that's a reflection of the success that this new operator is enjoying and the fact that they wanted to accelerate it. So I don't think that we -- we don't report on individual kind of assets or tenants, but I think their actions are indicating that they're successful with this and want to get them under their umbrella faster. And I think that bodes well for their performance.

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Craig Allen Mailman, KeyBanc Capital Markets Inc., Research Division - Director and Senior Equity Research Analyst [11]

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I mean when you guys recut the rents, I guess could you guys give us a sense of where you thought pro forma coverages would come in versus maybe where CLA original coverage kind of indicated on the $20 million?

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Gregory K. Silvers, EPR Properties - President, CEO & Trustee [12]

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Right. If you remember, Craig, our coverages on the properties are actually not bad. We just had a tenant that was having structure from other properties that were owned, so I think we would think that those coverages would at least be where they were at before, which was around the [1.5] range, if not increasing with what we think is an operator that's not in stress as CLA was.

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Operator [13]

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Your next question comes from the line of Nick Joseph from Citi.

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Nicholas Gregory Joseph, Citigroup Inc, Research Division - Director & Senior Analyst [14]

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Can you just walk through what makes the Margaritaville Nashville Hotel attractive from an experiential standpoint?

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Gregory E. Zimmerman, EPR Properties - Executive VP & CIO [15]

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Sure this is Greg Zimmerman. One thing we like about it is it has a lot of amenities, it has got the Margaritaville brand, it's got a rooftop bar. It is right in the heart of the SoBro District near Broadway and downtown Nashville so it's walkable to Ryman Auditorium, it's walkable to the Bridgestone Arena where the Predators play, and it's walkable to the Convention Center and Broadway Street. So there are 15 million visits a year in Nashville, 44% are for leisure travel, and the average stay is almost 4 nights. So for us it's exactly the kind of experiential lodging that we're looking to invest in.

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Gregory K. Silvers, EPR Properties - President, CEO & Trustee [16]

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The other thing I would add, Nick, is as we talked about again, we got this into a fixed income type investment, be it in a mortgage, so our commitment to stay out of the variability of a hotel model, I think we've honored in the way that we have done this, we think that on an LTV basis, this asset is worth significantly on the lower end of the leverage relative to it. It's also where the SIRUS Margaritaville station is actually broadcasting from this hotel. So again, it's got a lot of experiential lifestyle brand to it, and we think that it's consistent kind of being in an entertainment district with directionally what we said the strategic focus of our efforts in this area are directed.

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Nicholas Gregory Joseph, Citigroup Inc, Research Division - Director & Senior Analyst [17]

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Thanks, that's helpful. And maybe just on gaming, can you give an update on where you are in terms of entering the space? And if you've bid on any asset or if there are any in the pipeline currently today?

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Gregory K. Silvers, EPR Properties - President, CEO & Trustee [18]

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We don't talk about the specific, whether we're bidding or not. Again, we continue to make progress in that area. We were just out at the G2E conference and had 17 or 18 meetings. So I think, hopefully, in the near term, we'll have something, there is nothing, as Mark said, there's nothing in our guidance that would indicate that we have something planned. But it's -- we're making efforts. People are very interested in talking to us. So hopefully, that will translate into opportunities sooner rather than later.

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Operator [19]

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The next question comes from the line of Tony Paolone from JPMorgan.

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Anthony Paolone, JP Morgan Chase & Co, Research Division - Senior Analyst [20]

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Just clarifying question for Mark, the $0.03 of strength from the core business, is that just investment activity? Or is that like percentage rents like on the kind of wide side? Where's the $0.03?

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Mark Alan Peterson, EPR Properties - Executive VP, CFO & Treasurer [21]

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It's a combination of a number of things, one of the things was Cartwright ramped a little better during the quarter than we had anticipated, so that was one of the major things behind that. But there's a number of things. It was kind of everything else besides what's indicated there, but Cartwright was the main kind of driver there.

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Anthony Paolone, JP Morgan Chase & Co, Research Division - Senior Analyst [22]

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Some of it is kind of organic and some of it's being dollars out the door and investment income is that, just trying to...

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Mark Alan Peterson, EPR Properties - Executive VP, CFO & Treasurer [23]

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Yes, dollar out the door were pretty consistent. We're raising our guidance $25 million at the midpoint, so investment spending is slightly higher. But I just think we had better kind of performance, kind of driven by Cartwright, particularly since that's an operating asset, it did a little better during the quarter than we had planned.

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Anthony Paolone, JP Morgan Chase & Co, Research Division - Senior Analyst [24]

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Okay. And then as I look across your categories, in education, it seems like there's almost 3 distinct businesses within the category. What's the -- and you commented on it a couple times, I guess about the pivot towards more experiential assets like what -- how should think about just education as we look out the next year or 2? Could there be more sales candidates in that bucket, do you want to be in all 3 of those subcategories? How are you thinking about that?

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Gregory K. Silvers, EPR Properties - President, CEO & Trustee [25]

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Again, I think at this time, it's a fair question, Tony. I think we are, we've clearly said that the charter, especially the charter school opportunity is very competitive with the municipal bond market, and we don't see the risk-reward return for that. So again, right now, we're seeing that naturally come down with sales. I don't know that we are prepared to talk about anything about accelerating that, but what we have said is, at least for the foreseeable future, we're not going to be devoting a lot of it -- time or investment dollars in that area given that risk/reward equation right now.

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Anthony Paolone, JP Morgan Chase & Co, Research Division - Senior Analyst [26]

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Okay. And if we -- and I know you're not giving the 2020 guidance, but it did turn out to be a pretty heavy year in terms of dispositions and paybacks and mortgages and such. Do you think this level of portfolio recycling this something you would continue with into the future?

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Gregory K. Silvers, EPR Properties - President, CEO & Trustee [27]

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I think it's abnormally high this year. If you look at the Schlitterbahn asset, that's an asset that we had owned for 14 years. I think given the noise around that, we were happy with the outcome. We've always maintained that the value was there and what Cedar Fair paid kind of demonstrated that. But those, if you go back and look I think, we kind of -- our cost of capital is working now so it's not we will probably be doing more dispositions and kind of portfolio improvements, but I don't think they're going to raise to near the level that we saw this year.

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Anthony Paolone, JP Morgan Chase & Co, Research Division - Senior Analyst [28]

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Okay. And can you walk through yields that you're achieving on major types of investment buckets [that you're going] into?

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Gregory K. Silvers, EPR Properties - President, CEO & Trustee [29]

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I think consistent with what we've said, most of our properties are trading or again, kind of mid-7s the low 8s. As we've said, you know, on the coast some of those are very things that could get down to the low 7s or 7, and then were seeing theater transactions that are trading below 7. So in that space, given our cost of capital that creates a very attractive spread and given our relationships and Greg's work in this area, we've been able to harvest a lot of those opportunities and continue to be excited about those that are being presented to us.

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Anthony Paolone, JP Morgan Chase & Co, Research Division - Senior Analyst [30]

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Are your build-to-suits at those the same kind of levels?

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Gregory K. Silvers, EPR Properties - President, CEO & Trustee [31]

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No, they're generally as always -- they're generally going to be 50 to 100 basis points wide of that just to accommodate for the risk associated with kind of a build-to-suit.

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Operator [32]

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Your next question comes from the line of Rob Stevenson from Janney.

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Robert Chapman Stevenson, Janney Montgomery Scott LLC, Research Division - MD, Head of Real Estate Research & Senior Research Analyst [33]

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Original Greg, in terms of lodging deals going forward, the first ones, I think where is the resort was at AJB, Nashville is in a note, is that likely to be -- one of those 2 types of structures likely to be how you approach lodging and I guess also possibly gaming going forward? Or is there a likelihood -- is there a value and is there a likelihood that are going to wind up having the stuff on balance sheet as an ownership position at some point?

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Gregory K. Silvers, EPR Properties - President, CEO & Trustee [34]

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Sure. First of all Rob, the only time I've been called the original OG. So that's --

I'm going to take advantage of that.

Actually think if you look at our portfolio, we have all 3. And if you look at what we did at like at Pagosa Springs, that's in a lease. If you look at what we did here in Nashville it's a mortgage, if you look -- I think what you will see us be either be in the lease or the mortgage, our preference is to be in the lease. But there are certain times where for tax reasons or otherwise that may not be worth, but we want to be is in a fixed income like instrument as opposed to the variability of the hotel REIT model. So to go back, our preference would be to lead to the triple net lease and be in that fashion. Occasionally, we may have mortgages. I doubt you'll see as a significant amount in that hotel REIT model.

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Robert Chapman Stevenson, Janney Montgomery Scott LLC, Research Division - MD, Head of Real Estate Research & Senior Research Analyst [35]

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Okay.

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Mark Alan Peterson, EPR Properties - Executive VP, CFO & Treasurer [36]

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That will also apply for the casino space.

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Gregory K. Silvers, EPR Properties - President, CEO & Trustee [37]

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Yes, like I said if we were in the casino space, it would be in the net lease space, in a lease structure.

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Robert Chapman Stevenson, Janney Montgomery Scott LLC, Research Division - MD, Head of Real Estate Research & Senior Research Analyst [38]

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Okay. This quarter, the Regal exposure went up. How comfortable are you and continuing to increase the exposure over all of the movie theaters in sort of you guys have at this point from a diversity standpoint, not specifically to AMC or regal operator wise, but just how much you guys are sort of willing to do in the upper end in terms of theaters within the portfolio?

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Gregory K. Silvers, EPR Properties - President, CEO & Trustee [39]

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Again, like I said, I think we've always said if we can find high-quality theaters, we'd like that business. It's been a very, very stable business for us for 22 years. And last year, we set an all-time record in Box Office. So I think we like the space. It's not as much exposure to AMC regal or Cinemark, it's about finding the right asset with really good coverage and often, this involves cut theaters that have been recently renovated and so if we like the trajectory, we like that exposure, and we'll continue to invest in that space.

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Robert Chapman Stevenson, Janney Montgomery Scott LLC, Research Division - MD, Head of Real Estate Research & Senior Research Analyst [40]

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Okay. And then last one for me, how many Topgolfs do you still have under construction and are there any more behind us in the pipeline?

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Gregory K. Silvers, EPR Properties - President, CEO & Trustee [41]

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I think we have, I don't want to speak out of term, but a couple of that are still...

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Mark Alan Peterson, EPR Properties - Executive VP, CFO & Treasurer [42]

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Just put one in service...

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Gregory K. Silvers, EPR Properties - President, CEO & Trustee [43]

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Okay. But as we've said, we pretty much see almost every Topgolf opportunity. We are being -- not because the opportunities are good, but because we are managing exposure little more selective, I would think that we will have Topgolfs in the future as part of that, and that will continue. It probably won't be as robust given the level of where we have the exposure, but we will selectively add new assets to our portfolio when we think the opportunity is really strong.

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Operator [44]

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Your next question comes from the line of Brian Hawthorne from RBC Capital Markets.

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Brian Michael Hawthorne, RBC Capital Markets, Research Division - Senior Associate [45]

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On the lease expiration schedule. In education, the ones that are due, 12-point whatever million dollars that's due this year. Is that all tied to CLA?

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Mark Alan Peterson, EPR Properties - Executive VP, CFO & Treasurer [46]

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Yes. That's the 8 that were left as of quarter end, so we have taken that number down from 17, as you saw last quarter, down to 8 and then since that time another 4 had converted. So those are moving from kind of near-term leases all the way to, subsequent to 2038, so that's exactly what that is. So those should, by the end the year, that should be 0.

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Brian Michael Hawthorne, RBC Capital Markets, Research Division - Senior Associate [47]

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Okay. Great. And then with TopGolf going public, I know you just said that you investment won't be as robust with them, but is there potentially going public, I guess does that change your ability to invest in them at all?

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Gregory K. Silvers, EPR Properties - President, CEO & Trustee [48]

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Again, I think, remember our limitation is a self-imposed limitation on an exposure. I think -- so I think we'll just have to evaluate whether or not they go public is probably not as big an issue in that. I mean clearly, people will have a view to their profitability at that point. But trust me, we have that view already because we get kind of those level of financial details. So it's really kind of managing exposure, which we set kind of when they were the only participant in this type of space. What may change some of that is, as more operators get in there and there is more ease of transferring operations and different operator options, we may take a broader view of that.

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Operator [49]

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Your next question comes from the line of Joshua Dennerlein from Bank of America.

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Joshua Dennerlein, BofA Merrill Lynch, Research Division - Research Analyst [50]

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Just 1 big picture, if I may. How comfortable are you with your tenant industry concentration, your levels are I guess, relative to peers is pretty high?

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Gregory K. Silvers, EPR Properties - President, CEO & Trustee [51]

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I think generally speaking, we feel really good about the experiential sectors that we're in. I mean if you look at any metric, what we're spending on these type of expenditures as opposed to traditional retailers doing nothing but accelerating, so as compared to some of our competitors who are more focused in the retail space, we actually think we're more -- well-positioned and that the durability of that is going to only become more valuable.

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Operator [52]

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Our next question comes from the line of John Massocca from Ladenburg Thalmann.

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John James Massocca, Ladenburg Thalmann & Co. Inc., Research Division - Associate [53]

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So I know you have commented a little bit on the Margaritaville investment you made during the quarter, but maybe how much of the Margaritaville's kind of underlying revenues is tied to kind of rooms? Is there any like revenue driver besides some of the traditional kind of lodging drivers that maybe is kind of going to be underlying the interest payments to you guys?

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Gregory K. Silvers, EPR Properties - President, CEO & Trustee [54]

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I think of there's a significant FNB component to this. Again, there is a rooftop kind of bar lounge. Like I said, there is a lot of activity planned there, so I think this is not at all positioned as kind of the traditional business traveler. This is tapping into what we think is an exciting and dynamic entertainment district, and there is not only a lot of activity in the actual a lodging offering but there is a lot of activity going in and around the area, which I was kind of significantly driving demand for what we think is this experiential or lifestyle brand.

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John James Massocca, Ladenburg Thalmann & Co. Inc., Research Division - Associate [55]

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Okay. And then you commented it a little bit but to the extent you can, can you provide some more color on the LTV on the loan? I mean is it sub-50 or lower than that? Just kind of how you guys got comfortable maybe on the security of the interest?

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Gregory K. Silvers, EPR Properties - President, CEO & Trustee [56]

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I think it's probably -- again, I think what we would say is that on a relative to appraisal that in that 55% to 65% range, we feel very comfortable in this space.

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John James Massocca, Ladenburg Thalmann & Co. Inc., Research Division - Associate [57]

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Okay. And then given the commentary on the severance charge, what are maybe some of the nonexperiential assets or investment verticals that you guys are moving away from?

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Gregory E. Zimmerman, EPR Properties - Executive VP & CIO [58]

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I mean what we've talked about John pretty openly is that we're spending less and less and not devoting resources to the charter school space. So there is no doubt that our focus is more, and has continued to trend more toward the experiential assets for the reasons I said earlier about whether it's broadening the diversity of our product or the durability of that product as we've seen, and you look and like I said in a number of studies correlated to the economy, that these assets actually outperform. So it's primarily in that -- in what I would say broadly the education space but more specifically, in the charter school space.

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John James Massocca, Ladenburg Thalmann & Co. Inc., Research Division - Associate [59]

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Okay. But the other 2 kind of some sub-verticals would still be giving investments or is education in general kind of being moved away.

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Gregory E. Zimmerman, EPR Properties - Executive VP & CIO [60]

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Again I think is primarily in the charter school because even in the other 2, those are long-term leases, we don't -- I mean there is a lot of focus that we've had like I said in the charter school space and the turnover in that and the termination fees and in the volatility that, that brings, whereas in the other space in other parts of our education, those are long-term leases without that volatility. So we still think that -- and it's not nearly there's not a municipal bond market in those other 2 spaces. So I would say it's right now focused in the chartered school space.

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John James Massocca, Ladenburg Thalmann & Co. Inc., Research Division - Associate [61]

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Okay, understood. Sorry if you guys already commented on this but I know you talked about the education asset, around kind of near-term lease expirations but maybe the 3 theater assets, any potential there for re-leasing? Or how you guys feel about those assets going forward I know it's a relatively small number but if there's any commentary?

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Mark Alan Peterson, EPR Properties - Executive VP, CFO & Treasurer [62]

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2 of the 3 were already extended in the fourth quarter.

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Operator [63]

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(Operator Instructions) Your next question comes from the line of Collin Mings from Raymond James.

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Collin Philip Mings, Raymond James & Associates, Inc., Research Division - Analyst [64]

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First one just a big-picture question, Greg. Just you made a point in the past just how focused you are on data. And I'm just curious, just recognizing the broader tailwinds for your experiential focus, are there any subset or maybe you've seen some weakness or as you've done more due diligence on, again, we've spoken in the past a lot about potential areas of future growth that you maybe decided to take a step back from engaging in, just kind of curious as you paint this broader brush around experiential some more nuanced trends you might be picking up on there?

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Gregory K. Silvers, EPR Properties - President, CEO & Trustee [65]

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To date, it's been like I said, really strong. I think what we're trying to focus on as always and in economic, we're always trying to underwrite the downturn. So trying to see how things are -- how they operate. I think where we are at least not concerned but aware and following, is the higher price point activities. Again, if you think about the movies, they're almost countercyclical. A lot of these things are low-cost alternatives, and so we're very closely aware of where the various price points of the offerings that we have. And as you move up into higher points of kind of what the cost of the activity is, that you see some more correlation to economic downturn as opposed to countercyclical.

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Collin Philip Mings, Raymond James & Associates, Inc., Research Division - Analyst [66]

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Got it. That's helpful color there. And I just want to get back to Rob's question earlier, just recognizing it was much smaller but just curious what the other mortgage investment on the recreation front was during the quarter? And then just as you look at your pipeline is how many other opportunities -- kind of mortgage investment opportunities are currently in the pipeline? And is there anything of the magnitude of Margaritaville?

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Mark Alan Peterson, EPR Properties - Executive VP, CFO & Treasurer [67]

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The other mortgage investment was a fitness center in Kansas City that we invested in, the Genesis Fitness Center. And then as far as the mortgage versus...

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Gregory K. Silvers, EPR Properties - President, CEO & Trustee [68]

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I don't think there is a significant -- I mean like I said, a lot of these are tax motivated as a way to manage that issue. But if you look at these mortgages, they often have escalators and everything else there kind of reads like leases. But you can get a lot of tax efficiency by using that structure.

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Mark Alan Peterson, EPR Properties - Executive VP, CFO & Treasurer [69]

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Like Greg said, we target leases, but these mortgages in cases maybe there's a tax issue. But like you said, we try to structure those just like leases. So it's hard to predict the mix, but we certainly have done a lot more leases than we've done mortgages, and expect that trend to continue, I think.

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Operator [70]

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I'm showing no further questions at this time. I would now like to turn the conference back to Mr. Greg Silvers.

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Gregory K. Silvers, EPR Properties - President, CEO & Trustee [71]

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Well, again, thank you for time this morning. We appreciate you guys all tuning in, and we look forward to seeing many of you at May REIT and talking to again on our fourth quarter call. Thank you.

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Mark Alan Peterson, EPR Properties - Executive VP, CFO & Treasurer [72]

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Thank you.

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Operator [73]

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Ladies and gentlemen, this concludes today's conference. Thank you for your participation and have a wonderful day. You may all disconnect.