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Edited Transcript of AD.TO earnings conference call or presentation 25-Jul-19 3:00pm GMT

Q2 2019 Alaris Royalty Corp Earnings Call

CALGARY Jul 30, 2019 (Thomson StreetEvents) -- Edited Transcript of Alaris Royalty Corp earnings conference call or presentation Thursday, July 25, 2019 at 3:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Curtis James Krawetz

Alaris Royalty Corp. - VP of Investments & IR

* Darren Driscoll

Alaris Royalty Corp. - CFO

* Stephen Walter King

Alaris Royalty Corp. - CEO, President & Director

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Conference Call Participants

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* Anoop Prihar

GMP Securities L.P., Research Division - MD & Special Situations Analyst

* Brenna Phelan

Raymond James Ltd., Research Division - Equity Analyst

* Derek Spronck

RBC Capital Markets, LLC, Research Division - Analyst

* Gary Ho

Desjardins Securities Inc., Research Division - Analyst

* Jaeme Gloyn

National Bank Financial, Inc., Research Division - Analyst

* Jeffrey Michael Fenwick

Cormark Securities Inc., Research Division - MD & Head of Institutional Equity Research

* Scott Douglas Fromson

CIBC Capital Markets, Research Division - Director of Institutional Equity Research & Research Analyst

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Presentation

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Operator [1]

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Good morning. My name is Leonie, and I'll be your conference operator today. At this time, I'd like to welcome everyone to Alaris Royalty Corp. Q2 2019 Earnings Conference Call. (Operator Instructions) I would now like to turn the conference over to your host, Mr. Curtis Krawetz. Please go ahead.

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Curtis James Krawetz, Alaris Royalty Corp. - VP of Investments & IR [2]

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Thank you, Leonie. Good morning, ladies and gentlemen, and welcome to Alaris Royalty Corp's Conference Call and Webcast to discuss the financial results for the 3 and 6 months ended June 30, 2019, as well as a brief corporate update. I'm Curtis Krawetz, Vice President of Investments and Investor Relations, and I'm joined on this call today by Steve King, President and Chief Executive Officer; as well as Darren Driscoll, Chief Financial Officer.

After a short presentation from Steve and Darren, there will be a question-and-answer session. The lines will be placed on mute until then to avoid background noise. Before we begin, I would like to remind our listeners that all amounts given are in Canadian dollars, unless otherwise noted. Listeners are cautioned that comments made today may contain forward-looking information. This forward-looking information is based upon a number of important factors and assumptions. And as a result, actual results could differ materially. Additional information concerning the underlying factors, assumptions and risks are available in yesterday's press release and our MD&A for the period under the headings forward-looking statements and risk factors, copies of which are available on SEDAR at www.sedar.com, as well as our website.

Non-IFRS data is also presented, it may differ from other companies, from the way other companies present such data. As with the forward-looking statements, please also refer to last night's press release and MD&A for more clarification.

I'll now pass the call over to Darren Driscoll, Chief Financial Officer.

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Darren Driscoll, Alaris Royalty Corp. - CFO [3]

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Thanks, Curtis, and thanks, everyone, for joining us today. I'll just start with some of the financial highlights. Revenue in the quarter of $27.4 million. We estimated that at $27 million when we issued our Q1 results, and that's compared to $28.4 million in Q2 last year. And $27.4 million in Q1 of this year. You'll recall, Q2 of last year had a special pickup for some previously foregone distributions from Labstat, of just over $4 million. So backing that out, we're up 13% on a per share basis over the prior year period.

A new deployment on the back half of 2018 is the main reason that's with GWM and BCC, plus another tremendous weighted average performance reset of approximately 4% effective January 1. Normalized EBITDA in the period of $24 million as compared to $20.3 million in Q2 of last year. Transaction costs this year -- or this period of $828,000 versus nil in the prior year. Now you'll recall that in prior years, that number was capitalized as part of the cost or value of a new deal. So we've added that back to the normalized EBITDA, and we'll continue to do so going forward. Again, this number will be lumpy and deal timing specific, and an estimated 1% to 1.5% of invested capital.

Our deployment in the quarter of CAD 70 million into Amur, and including the Planet Fitness deal at USD 60 million a week or so ago and a couple of other smaller follow-ons, approximately $170 million of gross deployment as of today.

Our net deployment of $150 million with 2 small redemptions of redeemable units as planned from SBI and Fleet. Cash G&A expenses in the quarter of $2.46 million compared to just over $3 million in Q2 of last year, and $2.5 million in Q1, our outlook still is around $10 million for G&A for the year.

Unique to the quarter is a $2 million recovery of an old bad debt that we had written off. In the quarter, we received USD 1.6 million from a company that bought KMH's U.S. assets. Again, we've written everything off more than a year ago. We still have another potential earn-out with this company, that's a few years out of up to USD 4 million, but our books show nothing and we won't book anything, obviously, until we receive it, like what occurred this quarter.

Bank covenants are all very good standing and currently about $80 million to deploy in our balance sheet, subsequent to funding that Planet Fitness deal subsequent to June 30. During the quarter, we completed a $100 million convertible debenture offering on a bought deal basis, a tremendous piece of payout for Alaris and its shareholders with 5.5% interest and a 30% conversion premium. Immediately deployed those funds into Amur and PFGP on an accretive basis, and having an immediate positive impact on the payout ratio.

With a recent deployment, along with confirmed weighted average resets of 4%, our payout ratio has decreased from the mid-90s early in the year to 84% today, which is the lowest our payout ratio has been in 3 years, since Q2 of 2016.

Our goal remains to get it below 80%, with another year of really strong resets expected in January 2020. And for the first time, potential common equity distributions from Amur more progress is on the way. Some fair value adjustments each of them positive in the quarter, SCR, we're seeing some really solid results out of them, in 2019, and with no lender, full control over increasing those distributions. Those have now increased from $150,000 a month to $200,000 a month for Q3. And our fair value calculation anticipates further increases in Q4 and into 2020, translating to just under a CAD 4 million increase to the fair value of the SCR units.

SBI, the year-to-date performance well out in front of the 8% collar, we went part of the way estimating a 5% increase, and that's still results in a USD 1.1 million increase to the fair value of SBI's units. And Planet Fitness to deal, again, we announced subsequent to quarter end, saw the exchange of our current units for new ones at the redemption value saw a USD 2.9 million increase to the Planet Fitness unit reflects that.

All told, a CAD 9.3 million increase to the fair value of our portfolio in the quarter. A quick comment on each of the partners. At BCC still has an ECR of below 1, but it is just below 1. And the last 3 months have been on plan and we continue to expect an ECR over 1 in the next few months.

BCC Management has been exceptionally cooperative, transparent, and we're pleased with what we're seeing. Remember, no senior lender here in the balance sheet with cash on it, so not something we're concerned about.

ccComm and Kimco continue to have ECRs below 1. But again, we like what we're seeing in both management teams and results are slowly improving.

Providence, showing improvement as expected. We have that 2-year arrangement where we're receiving $195,000 a month. We are picking the rest, but we'll only record what we've received out of Providence, but last couple of months, showing some promising improvement. As again mentioned, SCR making a significant come back and monthly distributions moving up. Only 5 or 6 months worth of data, but looking like top of the collar resets for SBI at 8%.

GWM at 8%, Planet Fitness at 5% and Unify at 6%. LMS is uncollared and heading to a strong 2019. We expect that to be better than the 7% increase from last year. Federal Resources, DNT, Accscient and Fleet performing as expected, and the Sandbox sale process is well underway. We continue to expect a full return here, which includes a premium of about 10% above our current fair value of $43 million on redemption, in addition to receiving all outstanding debt and associated interest.

And one of the things you'll see in our disclosure this quarter is switch to communicating changes in ECR from quarter-to-quarter. And only noted if it changes ranges. ECRs can fluctuate for a number of reasons within a few months, including timing of CapEx or even some seasonality or lumpiness in a business. So from here on, you'll only see when something moves from one range to another, rather than movement within a range. So for example, Federal Resources' ECR increased on improved financial results to the point that it moved from the 1x to 1.2x range to now in the 1.2x to 1.5x range.

Another new item we added is our weighted average ECR for the portfolio, which is approximately 1.5 to 1 and we'll update that going forward on a quarterly basis. Some continued disclosure on our tax note relating to the potential changes in the U.S., first of all, none of these proposals are final yet, not sure if and when they would take effect and the later in the year it goes, it does seem less likely to be backdated to January 2019, but we just don't know either way.

Secondly, the amount of $5.5 million in the first half of the year is a bit misleading as it does include a portion of deferred taxes, and it's also based on our current capital structure. So to clarify, as we did in the last quarter, the changes is around potentially disallowing our intercompany interest deduction, which would add 6% or 7% to our U.S. tax rate. I should add that our current run rate payout ratio of 84% already assumes a portion of that increase to what -- from what we're paying today. And that number also assumes we don't actually adapt our tax structure, which we certainly will do, depending on what the new set of rules look like and likely impact, again, will be somewhere in the middle, which is what we based our public payout ratio on. So the same messaging as last quarter, we'll advise as soon as we have more clarity, but are actively managing with a number of tax advisers. So I'll close my comments with a quick look back to 12 months. So on this same call, a year ago, after a couple of very profitable redemptions in Labstat and end of their role, we stood at run rate revenue of just under $90 million and a payout ratio of 98%. In the last 12 months, we've deployed approximately CAD 300 million into 4 new partners, BCC, GWM, Amur, and I guess a follow-on into Planet Fitness, plus a few other smaller follow-ons.

A couple of small redemptions of redeemable units from Fleet and SBI for net deployment of about $280 million in that 12 months. So today, we sit at run rate revenue of $120 million. That's a 33% increase over a year ago, and a payout ratio down 14 points to 84%. Now that's it for my comments. I'm going to pass it over to Steve, and then, we'll take some questions after that.

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Stephen Walter King, Alaris Royalty Corp. - CEO, President & Director [4]

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Great. Thank you, Darren, and obviously, we're very proud of our reporting period this quarter with normalized EBITDA growth of more than 20% in the 6 months. Capital deployment on pace easily beat our previous record, book value increase, and nearly across the board improvements in our coverage ratios.

On the deployment front, 2 large investments year-to-date with Amur Capital and to follow-on with Planet Fitness. Amur was our first Canadian investment in -- actually, more than 5 years, we have been 93% U.S. assets before then; we're high 80s now. We're really pleased to have won a competitive bid process that was really based on our unique ability to bring a less expensive form of equity, flexibility and an indefinite investment horizon to a second-generation family business that's been around for over 50 years. The situation, the management team and the financial performance and the outlet for the business couldn't have been a better fit for us, so we're delighted to add them as a partner.

With Planet Fitness, it's been one of our best-performing partners for more than 5 years. And if you remember, they actually redeemed a portion of our investment over a year ago when they did a large balance sheet recapitalization. This company has been subject to numerous takeover offers from private equity because of the success of the Planet Fitness system in general, as well as this company's own incredible results. But instead of selling out, the owners decided to stay in long term. But wanted to take a small portion of the enterprise value out to diversify their family holdings. And so with the addition of a small amount of common shares by us, we were able to find a solution that met their needs and allowed them to stay in the partnership that they knew and trusted.

So both Amur and Planet are perfect examples of the benefits of adding a small amount of common equity to our traditional preferred equity offering. The common equity allowed us to provide the alignment of interest that Amur wanted, and the check size that Planet Fitness wanted. It allows us to increase the total returns for our shareholders by adding a security with unlimited upside in 2 growing companies, and it allows us to extend the average hold period for our investments, which will increase our long-term growth rate.

A key for us in continuing to decrease our payout ratio, which, as Darren mentioned, has come down more than 10% over the last several quarters, is to make sure that even with the common equity component and assuming no cash distributions from those common shares in these companies, that it would be cash accretive for our shareholders in each case. And that was the case for each of these two investments. In addition, Amur is, in particular, is expected to pay a common equity dividend starting later this year, that will further bring down that payout ratio below the 84% that Darren talked about. We feel that the addition of a small amount of common will allow us to deploy a significant amount of additional capital moving forward, and obviously, that thesis is already playing out. We also feel that we can improve on our historical IRR of 17% that we've displayed over the full course of our 15-year history. With all that being said, I don't expect common equity to be used in the majority of our deals. At the end of the day, successful high-performing companies still want our less dilutive common share -- sorry preferred shares instead of the higher cost of common equity in most cases.

In fact, I still chuckle that people that don't know our company very well, talk about us as expensive lenders or talk about good companies wanting to replace us with cheaper forms of equity. Our preferred shares are the least expensive equity in the market for good companies, and we represent too much of the company's capital structure to be replaced with senior debt. It's more than a subtle nuance to understand that we're inexpensive equity for good companies and non-expensive debt for bad. You simply can't put up the kind of returns that we put up historically by putting expensive debt into substandard companies.

Looking forward, our pipeline of opportunities remains very strong for the remainder of this year, we'll manage our requirement for additional equity, along with our internal cash flow generation and expected redemption of one of our partners at Sandbox, and the room that we have in our debt facility. We have both small cap and larger opportunities as well as a couple of follow-on opportunities with our current partners on the front burner. So we look forward to continued progress when we report our third quarter in November. And Leonie, we'll open it up for any questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions)

Your first question is from Gary Ho from Desjardins.

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Gary Ho, Desjardins Securities Inc., Research Division - Analyst [2]

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Just wondering, if you can elaborate on your ccComm BCC comment. I guess with ccComm it looks like you've invested a bit more for working cap, kind of what's the outlook there. And for BCC, how's the turnaround progressing?

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Stephen Walter King, Alaris Royalty Corp. - CEO, President & Director [3]

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I think for ccComm, first, we did put in an initial amount that was a working capital infusion. They had -- their main and really sole vendor that supplies their phone devices accelerated their payment terms across the board to all of the different Sprint dealers. So that caused a bit of a cash pinch for them. We were happy to provide that for them. They continue to pay all of our distributions. And while the ECR is not at 1, we are optimistic that this business will get to get above 1 over the next few quarters. So we're seeing some slow, but steady progress out of ccComm.

For BCC, it's a little easier to see the path to that coverage ratio of above 1. Their business, we know why it went below 1, they fixed it, and we are seeing above plan results. And we are expecting that, again, not to be above 1 by our next quarter reporting and then even better standing by the end of the year. So both companies are -- have management teams that we stand very much behind. And certainly, in BCC's case, we expect a quicker recovery and to that above 1 number.

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Gary Ho, Desjardins Securities Inc., Research Division - Analyst [4]

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Great. And then, I guess, you guys have been quite busy with the 2 large transactions recently. Steve, can you give a bit more color in terms of the pipeline and how you would think about financing them, maybe sequentially, and I know you guys have kind of $30 odd-million plus the $50 million in Accordion, but Sandbox looks like it could be coming back later this year. How does that jive with your pipeline looking out?

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Stephen Walter King, Alaris Royalty Corp. - CEO, President & Director [5]

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Yes, we don't want to be too much higher than where we are on our debt facility, we need to show any new adviser or entrepreneur that we have the capacity to close their deal without needing to raise the money. So we are kind of monitoring the situation with Sandbox. And that situation is actually going extremely well. So we do expect a fairly significant cash infusion from Sandbox over the coming months. So we -- we're kind of monitoring our pipeline with regards to the timing of Sandbox, and anything over and above what we're getting back from Sandbox would probably call for us to come to the market in a small way.

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Gary Ho, Desjardins Securities Inc., Research Division - Analyst [6]

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Okay. That's helpful. And then maybe just last question, just on the Amur equity piece, you mentioned you expect a dividend payout. Is that more of a Q4 event? And how should we think about the timing and maybe magnitude over a 12 to 24 months looking out?

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Stephen Walter King, Alaris Royalty Corp. - CEO, President & Director [7]

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Yes, the company has expressed a desire to build up a cash position on their balance sheet that is larger than a full year's distribution of our preferred dividends. So they're going to not pay any dividends over the next few months. But with that being said, the principals of Amur do not take any salary. Their sole form of compensation is by way of common equity dividends, and we now get a percentage of those dividends that get paid out. So it will start fairly quickly. And the company has no debt and no CapEx. It's a free cash flow machine. So we won't kind of give guidance on the common dividends. But obviously, we will report when we start getting them. And I think that will be, that number won't have too much volatility on it other than just tracking the growth of the business because there's really nothing else to spend the capital on in that business.

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Gary Ho, Desjardins Securities Inc., Research Division - Analyst [8]

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But if you look out to kind of more 2020. That -- were the dividends coming on a quarterly basis, or would that be on a annual basis?

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Stephen Walter King, Alaris Royalty Corp. - CEO, President & Director [9]

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Shipping quarterly.

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Operator [10]

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Your next question is from Scott Fromson from CIBC.

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Scott Douglas Fromson, CIBC Capital Markets, Research Division - Director of Institutional Equity Research & Research Analyst [11]

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A couple of questions on future investments. Do you have any situations where you might increase the debt component of the investment partner?

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Stephen Walter King, Alaris Royalty Corp. - CEO, President & Director [12]

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So like kind of a blended package of third-party senior debt along with our prefs, that's what you're asking?

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Scott Douglas Fromson, CIBC Capital Markets, Research Division - Director of Institutional Equity Research & Research Analyst [13]

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No, along with the straight debt structure, like you have done with ccComm.

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Stephen Walter King, Alaris Royalty Corp. - CEO, President & Director [14]

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So the only time we would have debt in our structure is just trying to be flexible for a certain partner's tax situation. So every deal in our portfolio is the exact same in terms of economic outcome and kind of rates and remedies. But sometimes, we do provide a little bit of flexibility if debt helps their tax situation more than prefs would. But really, that's just kind of a mechanical behind the scenes thing. It doesn't make any difference to our returns or our risk profile.

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Darren Driscoll, Alaris Royalty Corp. - CFO [15]

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I think Amur federal resources and GWM, were all ones that use -- technically use some debt as part of the -- of our investment. But in all 3 of those instances, the economics and consent rights and everything are virtually the same.

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Scott Douglas Fromson, CIBC Capital Markets, Research Division - Director of Institutional Equity Research & Research Analyst [16]

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Okay. I was thinking more of ad hoc situations where the company may have short term needs.

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Stephen Walter King, Alaris Royalty Corp. - CEO, President & Director [17]

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Yes, that's something that we have done historically in the right situation elements. LMS was a great example of that, a couple of years ago, they had a buying opportunity from a rebar manufacturer in Asia. And they needed capital quicker than what their bank could provide. And so they came to us as their equity partners, and it didn't make sense to have that amount of capital going in as permanent equity. So we put it in as debt instead and allowed them to pay it back as they recycle that, that rebar that they bought. So yes, it depends on the opportunity, it would always be small amount, really kind of a nonmaterial amount for us. Our really bread and butter is the preferred equity, but we want to be good long-term partners. And if we can provide them some good business opportunities with some flexible capital, we'll do that, but in a very small way.

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Scott Douglas Fromson, CIBC Capital Markets, Research Division - Director of Institutional Equity Research & Research Analyst [18]

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Okay, that's helpful to understand. There's no real change in the strategy. On the -- along the similar lines, are there any situation where you may invest in the common equity of a current partner?

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Stephen Walter King, Alaris Royalty Corp. - CEO, President & Director [19]

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There is, yes, we're looking at a situation right now on a follow-on deal. And just like we did with Planet Fitness, if somebody has either an acquisition or a liquidity need for a shareholder, and we're not comfortable or they're not comfortable doing it with all prefs. And we want to keep the coverage ratio higher then we're not afraid to use some common, especially it's actually easier in a current partner because we've got a track record with them. We know them. We know the kind of equity returns that they can put up. So that's something we wouldn't be afraid to do.

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Operator [20]

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Your next question is from Derek Spronck from RBC.

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Derek Spronck, RBC Capital Markets, LLC, Research Division - Analyst [21]

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Just with regards to the run rate, a $120 million distribution. I'm assuming that doesn't assume any forward 12-month potential rate resets. Is that correct?

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Darren Driscoll, Alaris Royalty Corp. - CFO [22]

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Correct. That is $120 million is exactly what we're getting from everybody today.

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Derek Spronck, RBC Capital Markets, LLC, Research Division - Analyst [23]

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Okay. And any sort of color or if we were to think about the potential distributions in 2020, net of potential rate resets as -- your partner portfolio is trending today. Is there any sort of sense what the distribution rate could be in 2020?

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Darren Driscoll, Alaris Royalty Corp. - CFO [24]

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Yes. We're -- basically, I mean, we are only 5 and 6 months in based on our reporting, but even with the ones that we know are going to hit the top end of that collar, we're already looking at kind of another, say, 3 and change million of distributions in January 2020. So $0.08, $0.09, $0.10 a share, somewhere around there of new earnings from the resets. And then you've also got increased expectations out of SCR. We do expect Kimco to start at some point in the next couple of quarters. And any common distributions from Amur, so all things that will be helpful to that 84%.

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Derek Spronck, RBC Capital Markets, LLC, Research Division - Analyst [25]

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Okay, that's great. And are you starting to get to a point with that sort of 2020 outlook in the current distribution rate, where perhaps you might revisit your dividend?

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Stephen Walter King, Alaris Royalty Corp. - CEO, President & Director [26]

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I think, Derek, the market, in general, for dividend paying companies has changed over the last few years, where yields are higher, people aren't getting paid for the dividend, like they were in the past. And I also feel that just watching the volatility of our stock over the last couple of years compared to our operating results. I think a lot of that volatility has come from having a higher payout ratio. So I would say, more of our focus is on reducing the payout ratio as we have been doing. So I'd like it to be below 80%. Once we're there, I think, we can start increasing our dividend again, but probably not for the next couple of quarters.

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Derek Spronck, RBC Capital Markets, LLC, Research Division - Analyst [27]

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And presumably, the potential dovish or potential pause in both the U.S. and Canada, places that relative yield positioning more attractive without having to increase it.

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Stephen Walter King, Alaris Royalty Corp. - CEO, President & Director [28]

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Yes.

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Derek Spronck, RBC Capital Markets, LLC, Research Division - Analyst [29]

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Okay. And just one last for me, if I could. The -- how much capacity would you say you have towards additional investments at this point. And outside of potential reinvestments within the existing portfolio, are you still finding some new opportunities? Are there still attractive new opportunities that you're exploring at this point?

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Stephen Walter King, Alaris Royalty Corp. - CEO, President & Director [30]

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Yes. Yes. So we've got a very good pipeline of both new and current partners to invest in. I would say, for the last 6 months at least, we've had probably some of the best companies come on to our lap that we've seen in some time. So yes, we're very happy. It's, even now, with kind of the dog days of July, we're still getting very good deals coming in, so we're excited about that.

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Operator [31]

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Your next question is from Brenna Phelan from Raymond James.

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Brenna Phelan, Raymond James Ltd., Research Division - Equity Analyst [32]

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So just on the Sandbox process. So the -- what is the debt that you extended to them used for? Just to kind of bridge to get them to another seller, sorry, buyer?

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Stephen Walter King, Alaris Royalty Corp. - CEO, President & Director [33]

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Yes, that's correct.

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Darren Driscoll, Alaris Royalty Corp. - CFO [34]

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Yes, we are their senior lender now. So we took out their senior debt in order to have full control of process. So that's -- it is -- it's additional working capital, helping them sort out with some vendors. And really, we are their senior lender until this gets closed.

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Stephen Walter King, Alaris Royalty Corp. - CEO, President & Director [35]

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Just drawing down on the facility they have that we took out.

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Brenna Phelan, Raymond James Ltd., Research Division - Equity Analyst [36]

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Okay. And with BCC. So with the improvements expected based on the forecast, do you still expect to be able to deploy the incremental capital to them throughout 2020?

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Stephen Walter King, Alaris Royalty Corp. - CEO, President & Director [37]

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That's the plan, yes.

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Darren Driscoll, Alaris Royalty Corp. - CFO [38]

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It would be late 2020. They have a ways to go, and I said to another analyst on the call last night that if we're putting money into VCC, everybody's going to be happy because we have a -- part of the arrangement is they have to maintain an ECR of 1.5 after our deployment. So that would mean things are back on track, and that's certainly -- certainly, our expectation.

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Brenna Phelan, Raymond James Ltd., Research Division - Equity Analyst [39]

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Okay. So late 2020?

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Stephen Walter King, Alaris Royalty Corp. - CEO, President & Director [40]

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Yes.

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Operator [41]

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Your next question is from Jeff Fenwick from Cormark.

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Jeffrey Michael Fenwick, Cormark Securities Inc., Research Division - MD & Head of Institutional Equity Research [42]

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I wanted to focus my question in on the common equity component that you're doing here. Can you just give us a bit of color about how you're approaching valuing the price that you're buying in at with these partners? And what's the dynamic like there? Are you able to negotiate maybe a little better valuation there if you're bringing that large profit component alongside it, so you're bringing a full capital package? How are you tackling that?

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Stephen Walter King, Alaris Royalty Corp. - CEO, President & Director [43]

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Yes. Obviously, in any bid situation or negotiation, there's probably a little more art than science to it, but in both of those cases, and I would say, the vast majority of cases that we'll be in, we're in the middle of a competitive process, so there's usually a pretty broad group of bidders that are bidding solely on the common. So it really does kind of set the market for what each company's common equity is worth. So we're certainly not going to come in at the high end of that. But in order to compete, you've got to be somewhere in that range of where the market is setting the price at. So that's kind of how we view it. I would say we wouldn't get a discount on the common because of the prefs, but we would win the deal because of them.

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Jeffrey Michael Fenwick, Cormark Securities Inc., Research Division - MD & Head of Institutional Equity Research [44]

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That's helpful. And it is in the context, I was thinking of PF Growth. We know that the private equity space has been very active in the franchise area. Pretty aggressive bidding going on there. So I'd assume you're paying roughly in line with what the industry has been paying in the space?

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Stephen Walter King, Alaris Royalty Corp. - CEO, President & Director [45]

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Yes, we got our common in PF at a slightly lower multiple than what they are now trading at, which seems to be growing on a monthly basis. So yes, we're happy with that, especially with the results of this particular franchisee.

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Operator [46]

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(Operator Instructions) Your next question is from Jaeme Gloyn from National Bank Financial.

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Jaeme Gloyn, National Bank Financial, Inc., Research Division - Analyst [47]

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First, first here, just want to focus in on the expense side. In terms of salaries and benefits, obviously you're not incurring any of those expenses at this point. Just wondering how that looks sort of like, I guess, off-balance sheet or off income statement in terms of the accrual that you would expect to hit in Q4? Would it be on a similar level as 2018 or somewhere lower or above? Just some color on that.

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Darren Driscoll, Alaris Royalty Corp. - CFO [48]

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It should be -- at this point, I mean, obviously it depends what happens in the back half of the year. But based on current math should be about similar to last year.

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Jaeme Gloyn, National Bank Financial, Inc., Research Division - Analyst [49]

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Okay, great. And then in terms of the legal and accounting fees coming down, is what we saw in Q2 '19. Is this more a run rate level, given that there aren't as, I guess, aren't any problem files, let's say, or issued files that are under review? Is that the best way to think about this is that if the portfolio is performing normally, that this is a good run rate level?

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Darren Driscoll, Alaris Royalty Corp. - CFO [50]

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I suppose, it's a really hard one to pin down because there is -- a company that's doing well could be -- could require some extra -- maybe we're just helping them sorting out, sorting out something to do their business that we've offered to help with. I think last year was a definite spike because of the challenges we had on a couple of fronts that did require a little more heavy lifting. So that, last year is not a run rate and this year is closer, but it will -- this one -- that number will be a little lumpier because it is situation dependent. And if we're going to act as a good partner, and it may cost a couple of hundred grand a quarter, we're not going to be shy to do that.

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Jaeme Gloyn, National Bank Financial, Inc., Research Division - Analyst [51]

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Okay. And that's kind of a commentary that reflects part of the strategy you guys talked about a couple of quarters ago, where you're looking at in some of these services as part of your investment into the firms as a sort of a competitive advantage. Or maybe even just table stakes relative to some of the BDCs in the U.S., is that fair?

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Stephen Walter King, Alaris Royalty Corp. - CEO, President & Director [52]

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Yes. I think it is interesting. We've actually got -- with the size of our portfolio now, we actually have some partners in our portfolio that can provide really valuable services to new partners at current [CAGR]. So we will go into a bid situation, offering up the services of SBI to improve the company's revenue or now global wide if a company is an advertiser. So different things like that, that we can offer and we'll offer that make us more competitive. That kind of check one of the boxes that sometimes, traditional private equity has beaten us at in the past of the promise of taking a company to the next level.

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Jaeme Gloyn, National Bank Financial, Inc., Research Division - Analyst [53]

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Got you. And then looking at transaction diligence costs, was the 2% of a transaction amount still about the right level, came in a little bit lower this quarter than I would have expected based on that sort of rule of thumb. So I guess, do any of those costs carry into your future quarters, and is that 2% is still about right?

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Darren Driscoll, Alaris Royalty Corp. - CFO [54]

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Yes. So 2% has been our historical average. We did have some more expensive deals that we've done historically. The Amur deal, the Canadian deals are materially less expensive. The law firms in Canada charge a heck of a lot less than U.S. firms, so Amur was little less than 1%. So I think I said earlier on the call, I think it's sort of 1% to 1.5% is probably a better number, 1.5% for U.S. deals, 1% for Canadian is a pretty good number to hold to.

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Jaeme Gloyn, National Bank Financial, Inc., Research Division - Analyst [55]

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Okay, great. And then just shifting to funding the future transactions or upcoming transactions, given where the leverage is going pro forma, the Planet Fitness and now maybe some follow-ons here in Q3, you'll be approaching the cap on a credit facility. So if you could just give us a little bit of color as to where you are in terms of negotiations on expanding that credit facility, maybe looking at doing some other form of equity financing as well to continue to grow the portfolio, barring any significant repayments.

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Darren Driscoll, Alaris Royalty Corp. - CFO [56]

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Yes, sure. From a credit facility standpoint, our bank syndicate has been entirely flexible throughout. We are chatting with the new banks to expand the size of the syndicate. The terms we have, I think, are as good as we're going to get that max of 3x leverage is, I think, a goalpost that we need to work towards. So but again, at our EBITDA levels today, we can go beyond that $350 million with further investment. So if we can add another bank or 2, I think you'll see us do that. But I think our focus in the near-term is on the timing of a Sandbox. But if we had a big deal that we had to do, pardon me, in the next month or 2, I am certain, we would get short-term accommodations from our senior lending syndicate.

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Stephen Walter King, Alaris Royalty Corp. - CEO, President & Director [57]

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And on top of that, so the Sandbox proceeds that we expect will bring our debt down into a very comfortable level. So anything above that, we wouldn't be afraid to come to the equity markets to fund. But people should know that, that's only going to happen if you've got an accretive use of proceeds to go along with it, so it will never be a dilutive offering.

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Operator [58]

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We have a follow-up question from Scott Fromson from CIBC.

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Scott Douglas Fromson, CIBC Capital Markets, Research Division - Director of Institutional Equity Research & Research Analyst [59]

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Just a quick question. Just wondering if there's any implications from the Sandbox situation on the relationships with the other investment partners. Is there any kind of learnings that you've conveyed to your current investment partners?

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Stephen Walter King, Alaris Royalty Corp. - CEO, President & Director [60]

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Don't breach our covenants. No, no, there really hasn't been, Scott. I mean, we just had our partner conference a month ago, and I think a lot of our partners do know what's going on with some of our others. And everybody gets up at the conference. And tell their story and lets everybody know how they're doing because also a lot of our partners are shareholders in Alaris, and people are interested and follow it. But certainly with any entrepreneur I've ever met, if they see something that has been done by somebody else that shouldn't have been done. It's not like they're saying, "Oh man, Alaris was mean and they shouldn't have done that and put the company up for sale. It's like those guys shouldn't have done that."

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Scott Douglas Fromson, CIBC Capital Markets, Research Division - Director of Institutional Equity Research & Research Analyst [61]

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Yes, I just wonder if there's any sort of change in perception from what you've learned from Kimco, from KMH, from SCR. And if there's a perception of a change in, I'll say it indelicately, in the sort of aggressive nature of what you're doing to affect change?

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Stephen Walter King, Alaris Royalty Corp. - CEO, President & Director [62]

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Yes. I know, I think, certainly, internally, we've really made it a focus over the last few years to put ourselves in a position to act quicker. And in previous years, with other situations like ones you mentioned, we really were unable to act more quickly because of the bank's involvement. And so our partners certainly have noticed the different, the different clauses that we have and the different agreements that we have with their bankers. But it's really to their own benefit. If we can take out a bank and stop a bad situation, a lot of the times the bank will put in these huge kind of penalty interest rates and accelerated amortization terms to try and force their way out. That's not in the best interest of the company or the -- or either equity holder preferred or common. So typically, I know us stepping in, like we did in Sandbox and taking out the creditor is a very good thing. I think we've protected the equity value of Sandbox, and they're going to get a full return not just for ourselves, but for the common shareholders as well, where that might not have been the case if the bank had stayed in.

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Operator [63]

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Your next question is from Anoop Prihar from GMP.

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Anoop Prihar, GMP Securities L.P., Research Division - MD & Special Situations Analyst [64]

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Just a quick question on ccComm. I see that in the MD&A, a portion of distribution reset down to 6%. Can you tell us what the actual decrease in revenue was on that particular tranche and the reason behind it?

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Darren Driscoll, Alaris Royalty Corp. - CFO [65]

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It was about $40,000 I think all in, Anoop. It was just on the first tranche of the capital that we put in, and it was just their revenue had declined. And so based on that, we get -- most of them hit the top end of the collar. This one was down 6% lower volumes. And as simple as that, but like, literally, a meaningless $40,000 reduction.

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Operator [66]

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Your next question is from Tim [Darimo], who is a private investor.

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Unidentified Participant, [67]

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Darren, Curtis and Stephen, I just want to say that you guys are doing a great job. As a private investor, I get a lot of comfort in knowing that you guys have so much skin in the game. So I just want to say, keep up the good work. And I know you're getting punished by a lot of these analysts who are not giving you credit for the stellar work that you're doing down there, the whole team.

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Stephen Walter King, Alaris Royalty Corp. - CEO, President & Director [68]

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That's greatly appreciated. Tim, thank you very much for the comment.

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Unidentified Participant, [69]

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I'm happy to be with you guys.

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Stephen Walter King, Alaris Royalty Corp. - CEO, President & Director [70]

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Thank you. And I guess, Leonie, that's the end of our questions.

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Operator [71]

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Yes. There are no more questions at this time.

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Stephen Walter King, Alaris Royalty Corp. - CEO, President & Director [72]

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Okay. Thank you. Well, I appreciate everybody coming in and just so everybody knows that was not my brother that last caller. And I look forward to checking in with you in November, with hopefully some more good results. Thanks very much.

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Operator [73]

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Ladies and gentlemen, this concludes your conference call today. We thank you for participating, and ask that you please disconnect your lines.