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Edited Transcript of MR.UN.TO earnings conference call or presentation 15-May-20 3:00pm GMT

Q1 2020 Melcor Real Estate Investment Trust Earnings Call

Edmonton May 21, 2020 (Thomson StreetEvents) -- Edited Transcript of Melcor Real Estate Investment Trust earnings conference call or presentation Friday, May 15, 2020 at 3:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Darin Anthony Rayburn

Melcor Real Estate Investment Trust - President, CEO & Trustee

* Naomi Marie Stefura

Melcor Real Estate Investment Trust - CFO & Corporate Secretary

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Conference Call Participants

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* Kyle Stanley

Desjardins Securities Inc., Research Division - Associate

* Matt Logan

RBC Capital Markets, Research Division - Analyst

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Presentation

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Operator [1]

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Welcome to the Melcor REIT Q1 2020 Results Conference Call. (Operator Instructions) And the conference is being recorded. (Operator Instructions)

I would now like to turn the conference over to Mr. Darin Rayburn, President and CEO of Melcor REIT. Mr. Rayburn, please go ahead.

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Darin Anthony Rayburn, Melcor Real Estate Investment Trust - President, CEO & Trustee [2]

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Thank you, Galyn, and good morning, everyone. Thank you for joining our conference call for the first quarter of 2020. With me on today's call are Naomi Stefura, Chief Operating Officer for the Melcor REIT.

Our updates typically review the results of the past quarter and provide insight into where the REIT is going in the current year. We usually celebrate the past and look forward to upcoming quarters. However, with the current global COVID-19 pandemic and the OPEC price war, Q1 2020 feels like an awfully long time ago. These events have produced the double whammy for Alberta with sub-$10 barrel for Western Canadian Select oil and the forced shutdown of many retail service industry operators to stop the spread of COVID-19. Both these events led to significant reductions in consumer spending and labor with both temporary and permanent layoffs.

This continues to unfold before our eyes without any clear indication of when we will see the other side of the pandemic or the oil price war. But before we talk further about our present situation, we would still like to look back, reflect on Q1 2020, which is acting as the foundation for us to sprint forward during current time.

Naomi?

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Naomi Marie Stefura, Melcor Real Estate Investment Trust - CFO & Corporate Secretary [3]

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Thank you, Darin. And while I would like to think I got a promotion to Chief Operating Officer, I'd like to clarify that I'm still the Chief Financial Officer of Melcor REIT. Hello, everyone. Thank you for joining us today to hear about our results for Q1 2020.

I'd like to remind you that the materials related to this call, including the MD&A and the financial statements, are available on the Investor Relations section of our website at melcorreit.ca and also on sedar.com. Our goal is to keep our remarks to a brief high-level review of the year and then open up the call for your questions.

Before I get started, I have a few mandatory statements to make. First, certain statements made during this call may be forward-looking. For a complete discussion of items that may cause actual results to differ, please refer to the business environment and risk section of our annual management discussion and analysis.

Second, we report our financial results in Canadian dollars and in accordance with IFRS. We supplement our financial reporting with nonstandard measures, including funds from operations, adjusted funds from operations, adjusted cash flow from operations and net operating income. We believe these measures are important in evaluating our performance, but caution listeners, they may not be comparable to similar measures presented by other companies. These nonstandard measures are defined and reconciled in our MD&A.

I will now walk everyone through a few key financial highlights for the first quarter of 2020. The 12% growth in our portfolio square footage via third-party acquisitions in 2019 contributed to revenue growth of 8% and NOI growth of 9% compared to Q1 2019.

Net income in the current and comparative periods is significantly impacted by noncash fair value adjustments on Class B units due to the changes in the REIT's unit price. Management believes funds from operations is a better reflection of our true operating performance.

FFO was $6.73 million or $0.23 per unit compared to $6.53 million or $0.23 per unit in Q1 2019, an increase of 3%. Adjusted cash from operations was up 7% from Q1 2019 at $4.97 million or $0.17 per unit compared to $4.63 million or $0.16 per unit. Management believes that ACFO better reflects our cash position. Our ACFO payout ratio was 99% compared to 102% for the same period last year.

On April 1, 2020, we commenced a normal course issuer bid, enabling us to purchase and cancel 5% of our outstanding trust units. We believe that the trading range of our unit does not reflect our intrinsic value. However, in an effort to conserve cash during these difficult economic times, the Board has suspended all purchasing through the NCIB effective the end of this current lockout period.

At March 31, 2020, we had $1.89 million in cash on hand and $10.11 million in additional capacity on our credit facility. We are actively monitoring our liquidity on a daily basis. We are in a process of working with all of our lenders for payment relief on various deaths as a result of the COVID-19 pandemic. Temporary payment relief, combined with other capital management strategies deployed, will allow the REIT's near-term liquidity to support our tenants and partners through this period of uncertainty. The REIT has strong, long-standing relationships with its lending partners and we are committed to working with our lenders through this period.

To date, we have successfully arranged for deferral of mortgage payments on 64% of the mortgages in our portfolio, resulting in deferral of just over half our regular monthly mortgage requirements. The agreements reached with lenders vary for each lender, whereby, in some cases, the deferrals are principal only and some principal plus interest. The majority of deferrals are for a period of 3 to 4 months, representing total relief over the period of $3.74 million. We also have several mortgages up for renewal in the current year. We are already in discussion with all lenders to secure extensions on these mortgages if required.

At the same time, we continue to pursue options for refinancing despite some of the uncertainties surrounding property cash flows. We currently have no lenders who have indicated they will force repayments of a loan.

I will now turn the call back over to Darin.

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Darin Anthony Rayburn, Melcor Real Estate Investment Trust - President, CEO & Trustee [4]

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Thank you, Naomi. That was then and this is now. This pandemic is having an undeniable catastrophic effect on our economy. We're all navigating this global challenge that has significantly negatively impacted and may continue to impact our tenants, particularly if health and government authorities implement further restrictions and shutdowns. While the recently announced government programs are designed to support businesses in financial stress, it's still too early to determine how and when these programs will start to take positive effect.

When COVID-19 is under control, and while it's looking positive as our province in Alberta began to open up for economy yesterday, at this point, the truth is, is that no one truly knows. But when it's under control and Alberta and Saskatchewan, our primary markets open up, many predict we will transition over the COVID depression back into the oil-based recession. The thought of a recovery being coined to recession seems counterintuitive, but it is what it is.

Frankly, in Alberta, we've been battling volatile oil prices one way or another for a long, long time. And in terms of the Melcor REIT, we've been battling headwinds since oil dropped from $100 a barrel to $50 a barrel in 2014. Yet here we are, still kicking and fighting, never ever, ever giving up. It's the Alberta way. It's the Canadian way.

In March, when the pandemic arrived in Western Canada, the Melcor REIT responded quickly, implementing a variety of measures to provide safe and clean work environments to keep our tenants and visitors to our properties safe while doing our part to slow the virus spread. We also initiated a series of intentional measures to conserve cash and place REIT in a position to support our tenants through these times.

On March 20, we announced that our April distribution, payable May 15, will be cut by 47%, down to $0.03 from the $0.05625 that the REIT had maintained for 82 consecutive months. This difficult yet proactive decision was made by our Board and management to preserve cash so that we are better positioned to support tenants who require rent relief and survive the crisis. We are taking this step along with implementing other cost-saving and cash management strategies to continue to strengthen our balance sheet, to lay the foundation to respond to reduced demand for space over an uncertain time period in the wake of the crisis.

In addition to the measures Naomi mentioned, there is deferred capital spending planned for 2020. We at the Melcor REIT moved quickly from a reactionary position due to the spread and speed at which the economy shut down and now find ourselves responding to needs and focusing on intentional actions to manage through the crisis. With a diversified portfolio, proven management team and a history of adapting through challenging times, we remain positioned to manage through this period of uncertainty.

We do anticipate that going forward, the emergency measures enacted to contain COVID-19 and the resulting economic impact may affect and impact many of our tenants, have negative repercussions on future cash flow and net operating income. The extent and duration of the impact on our results cannot be actually predicted at this time.

What we do know is that we collected 79% of our April rents and have agreements in place to collect an additional 12%, resulting in a 91% potential recovery of all April rents. We continue to work with the tenants representing the remaining 9%, who have not paid or have not agreed to pay.

So far in May, we've collected 71% of the rents with numerous agreements to repay deferred rents. We continue to work with our tenants as partners so that we can all get through this together. We believe that continued solidarity in partnership with our tenants will provide them the best opportunity to endure the pandemic and be successful in the long term.

Managing cash flow, while also maintaining a safe environment for our tenants and visitors is our priority. We hope that the measures we have taken and are continuing to take will reduce stress on tenants and slow the spread of the virus so that we can all return to business.

Tenants in our retail developments are a mix of essential services such as national grocers, gas stations, pharmacies and businesses. Some that have been shut down, others that have been shut down by government of Alberta, BC and Saskatchewan, such as smaller local service providers.

Retail property rental revenue comprised 46% of the REIT's total rental revenue in 2019. As I said earlier, we do not know if the disruption will be short term or if it will linger. Only time will tell. We continue to monitor the situation, make thoughtful decisions and take actions to come through this together with our tenants.

I would like to express my deep appreciation to our REIT trustees, thank them for their ongoing support, guidance and wisdom, in particular, over the past few months. We are also incredibly grateful to the Melcor Development's operations and finance teams, who are our service providers for the REIT, for their commitment, their passion, their dedication to the exceptional work they do every day to take care of the Melcor REIT tenants and to manage our properties. I'm extremely proud of the team's response to the challenges the current situation has created and specifically to our tenants. Thank you for your continued business. We commit to work together to respond to the crisis and find a way through it so we can all move forward and get back to business.

Finally, I'd like to thank our unitholders for your ongoing support and trust in the REIT and our business. The road has been stormy and these past few weeks particularly difficult. We appreciate your notes of support as we navigate through these strange times, doing our best to make the right decisions for everyone. We are an ecosystem that relies on one another, and we strive to make decisions that support our unitholders and our tenants for the long-term success for each and every one of us.

At this point, we'd like to open the phone lines and take your questions. Galyn, can you please open the phone lines?

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question is from Matt Logan with RBC Capital Markets.

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Matt Logan, RBC Capital Markets, Research Division - Analyst [2]

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Darin, as you think about managing through the current crisis, can you talk a little bit about the support from Melcor Developments? And how you see that helping the business over the next few quarters and years?

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Darin Anthony Rayburn, Melcor Real Estate Investment Trust - President, CEO & Trustee [3]

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Sure. Thanks for the question, Matt. Just to remind other callers that Melcor Developments is the largest REIT unitholder. And our interests have been aligned from the day we started the REIT and they continue to be aligned. The Melcor REIT is Melcor Developments' largest single asset. So I think through all that, Matt, I can answer the question to say that there is a specific interest in making sure that the REIT survives and thrives in a sustainable long term, going to the future, and the distribution cut that was put through had an impact on Melcor Developments, the largest REIT unitholders. We thought that was important because we're all in this together, including the largest shareholder. So hopefully, that answers your question, Matt.

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Matt Logan, RBC Capital Markets, Research Division - Analyst [4]

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Maybe just looking at the capital structure, Darin, as we come out of COVID-19, is there anything that you'd like to change? Or -- how do you see yourself addressing some of the mortgages? If you could give us any commentary on indicative rates, that would be appreciated.

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Darin Anthony Rayburn, Melcor Real Estate Investment Trust - President, CEO & Trustee [5]

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I'll give a general comment and, Naomi, maybe you can comment on rates. And please on this call don't take this to be smug, but what I'd like to change is lower interest rates with quicker positive response from our lenders that we've been paying for a long, long time. Now the truth is the majority of our lenders have been supportive, and I thank them for that, but not all of them. So we are learning quickly, in times of crisis, who will be our partners going forward and who won't be. So beyond that, from a capital stack perspective, Naomi, is there anything that we should add to Matt's question that we would want to change?

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Naomi Marie Stefura, Melcor Real Estate Investment Trust - CFO & Corporate Secretary [6]

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I mean I think the ongoing reality is that we'd obviously like to change our leverage levels, but at our current share price, raising equity for the Melcor REIT is probably a long way off. And so I think our best way to sort of manage paying down our debt right now is watching our cash and what we're spending it on, sort of stopping some of the capital programs that aren't necessary for ongoing true maintenance of the building.

As far as rates go, unfortunately, I can't really comment on any indicative rates because we're having trouble having anybody bid on lending right now, to be honest. I think most banks are a little bit leery in placing new capital. The banks that we do have on our current mortgages seem willing, I'd say, to extend. But no, I have not received any sort of indicative rates on new lending.

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Matt Logan, RBC Capital Markets, Research Division - Analyst [7]

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And in terms of any upcoming maturities, would the plan to be address those with the credit facility? And if so, do you see yourself as having sufficient availability on your line?

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Naomi Marie Stefura, Melcor Real Estate Investment Trust - CFO & Corporate Secretary [8]

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Yes. It's a good question. I think the upcoming maturities, the plan would be to address them with short-term extensions, more likely. We have some properties that are coming up for renewal that we think have strong ability to take out more proceeds when and if the cash flows are stabilized. And like I said before, we have talked to all the lenders about doing extensions. And so I think we're more working on that angle for now because we would like to refinance the majority of the properties that are up for renewal.

Having said that, if we did require some form of pay downs in some instances, we have sort of stress tested our cash flows for the next 18 months, and I do believe that we have the appropriate availability. We obviously could not pay out all of the mortgages that are up for renewal, that would be impossible, but I don't think that would ever be a likely scenario.

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Matt Logan, RBC Capital Markets, Research Division - Analyst [9]

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And in terms of the mortgages that are coming due, you'd say that all of the lenders are amenable to extensions in the near term?

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Naomi Marie Stefura, Melcor Real Estate Investment Trust - CFO & Corporate Secretary [10]

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On some of them, we have received confirmation that they are amenable. And in some, we are in negotiations. And so I can't comment, but I haven't received any direct negative feedback, but I would caution that I also can't say with certainty.

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Operator [11]

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(Operator Instructions) The next question is from Kyle Stanley with Desjardins.

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Kyle Stanley, Desjardins Securities Inc., Research Division - Associate [12]

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So on last quarter's call, we discussed kind of the strong start to 2020 the REIT had in terms of leasing. And I mean -- as you've discussed and as we all know, things have changed since then. Just wondering what your expectations are for leasing for the balance of the year?

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Darin Anthony Rayburn, Melcor Real Estate Investment Trust - President, CEO & Trustee [13]

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Well, thanks for the question, Kyle. And I don't want anyone to think that we have rose-colored glasses because it's a strange time, but let me just talk about some facts. During the time of COVID, from March 18 to April 30, we completed just under 10,000 square feet of new lease deals at rates that were equal to what we're asking before. And during that time, again, from March 18 to April 30, we completed just over 57,000 square feet of renewals, again, at virtually some of the same rates. So while it feels really strange right now, what we haven't seen is, a, people trying to lower the rent significantly or people shy away.

So I guess the answer to your question, Kyle, is when I look at what we've done to date and on our plan, we have already agreed to renewals for 8 of our 10 largest tenants expiring in 2020. So while COVID caught us off by guard, the oil price war really didn't. So our strategy all along has been to renew early and get those commitments. So those are in place. And we've completed, to date, signed deals of about 68% of our planned renewals in 2020. So it was a really good start.

I'm not suggesting that our phone is going to start ringing off the hook tomorrow. But I am suggesting that as the province, we noticed in BC, Alberta and Saskatchewan, begins to open up, that we have people who are looking before, who perhaps deferred, not knowing what's going on, who still have a business and a business plan, who have come back. Now Kyle, I fully expect people to try and grind rates, like I get it. It's a tough time, people take advantage of that. But the reality is, we don't think we'll just hear crickets. Like we think that based on the activity we've seen in the last couple of weeks, that should and will pick up going forward. So, so far, I'm delighted that we have the commitments we have to date. And I guess for the future, we'll see how it goes.

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Kyle Stanley, Desjardins Securities Inc., Research Division - Associate [14]

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Okay. Fair enough. That makes sense. And I guess with the leasing that you've done kind of since the beginning of COVID, what types of tenants has that been? Has it been more in the retail space or industrial office? I don't know if you can provide some color there?

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Darin Anthony Rayburn, Melcor Real Estate Investment Trust - President, CEO & Trustee [15]

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Sure. Yes. I mean no industrial, but definitely a mix between office and retail. There was 1 large 19,000 square foot retail educational institution -- office educational institution that renewed with us. And frankly, I was worried about that one. But they've committed and continued, which is good. And beyond that, it's a big mix. And I guess, I'll just remind everyone that the Melcor REIT tenant profile is predominantly those smaller tenants. So of our 644 tenants, 506 are under 5,000 square feet. So you can look at that with 2 sides. You can think that's a risk or not a risk. But again, a lot of these people that are renewing, we're not dealing with facility managers from different provinces. We're dealing with the owner entrepreneur who is sitting down the street from us or whose kids are playing soccer in the old days with our kids.

So as folksy as that sounds, to answer your question, a lot of the deals that we're doing are local companies, local businesses, ones who decided -- have decided that they want to come out of this pandemic and, regardless of the oil price war, want to continue going. So Kyle, I'd expect that to continue. I'd expect us to have to do this 2,500, 5,000, 7,500 square feet at a time.

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Kyle Stanley, Desjardins Securities Inc., Research Division - Associate [16]

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Okay. And then just given your expertise in some of the smaller Alberta markets, I'm wondering if you could provide us of your view on potential changes to cap rates over the next little while? I'm fully understanding that it's still early and there's likely not been much in terms of transactions in those markets.

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Darin Anthony Rayburn, Melcor Real Estate Investment Trust - President, CEO & Trustee [17]

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Yes. It's an interesting conversation that we've had with a number of groups because -- and I can't speak for the entire country, but I can speak for rural Alberta, and you have to think from a different lens. We're talking about the larger cities coming back downtown and how we are going to take our elevators and how we are going to work, if people don’t want to work at home. In a lot of rural Alberta right now, we don't have the COVID cases and they read about this in the newspaper, hear about it on TV, but they're still farming, and they're still doing their cattle, and they're still going forward. And I'll remind everyone that our largest acquisition was in Grande Prairie in November, which is a purely retail project. And while not all the retail tenants are open, there's still activity there, and there's still lineups at Starbucks and things are happening. So I am not here to disparage any rural Albertans or people from Saskatchewan or BC, but to answer your question is we do still see some activity in the rural areas. Now I think that this is a conversation that I'm going to have to have. And Naomi will have a lot more, especially with banks going forward because there's a brush painted on all of Alberta that all retail is suffering, and that's not the case.

So who knows what the cap rate discussion will be, interest rates will stay low, which helps. And I think it depends, the rate on which retail opens back up and the sales reported over the next 4 to 6 weeks, that will help that conversation.

Does that answer your question?

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Kyle Stanley, Desjardins Securities Inc., Research Division - Associate [18]

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Yes, it does. And then just the last one for Naomi. I missed your comment earlier about the mortgage deferrals that you've received thus far. Would you be able to just repeat that?

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Naomi Marie Stefura, Melcor Real Estate Investment Trust - CFO & Corporate Secretary [19]

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Yes, absolutely. So of our mortgages, 64% of them, we've reached some form of an agreement and that effectively on a monthly basis, means we've deferred approximately half of our regular mortgage commitment. And so then because of the fact that these commitments are kind of 3 to 4 months in length and vary from principal or just interest or both, the total relief kind of to date is $3.74 million, which has been deferred. That will come between April, May and June, basically.

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Operator [20]

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(Operator Instructions)

There appears to be no further questions. So I will turn the conference back over to Mr. Darin Rayburn for any closing remarks.

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Darin Anthony Rayburn, Melcor Real Estate Investment Trust - President, CEO & Trustee [21]

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Thanks, Galyn, and thanks, everyone, for joining us today. As always, we're happy to answer your questions. We look forward to speaking with you again soon.

In closing, I just want to express my gratitude to all of those who are working so hard to make our community safe and livable. And everyone on the call, please stay safe, healthy, strong. And we'll talk to you next quarter. Thank you.

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Operator [22]

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This concludes today's conference call. You may disconnect your lines. Thank you for participating, and have a pleasant day.