Q1 2020 Earnings Call
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Pardon me, ladies and gentlemen, this is your operator I'd like to let you know.
Apartment communities coal is scheduled to begin 11, 15 am eastern approximately 12 million again call will begin approximately 12 minutes. Please continue to stand alone.
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I know that our preferred apartment communities coal is scheduled to begin.
In 15, and eastern approximately five minutes, we continue to stay on the line.
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Good morning, and welcome to preferred apartment communities.
2020, <unk> earnings conference call.
This call is being recorded.
I'd now like to introduce your host for today's call.
Colin Executive Vice President Investor relation.
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Thank you for joining us this morning, and welcome to preferred apartment communities first quarter 2020 earnings call.
We hope each of you had an opportunity to review our first quarter earnings reports, which we released yesterday after the market closed.
At the moment.
Turned the corner to Joe Murphy, our Chief Executive Officer to share some initial thought.
And then John Isaacson, our Chief Financial Officer will share some additional details about financial metrics and capital markets.
And Joe would turn to conclude our prepared remarks.
Joe remarks, we'll be pleased answer any questions you may have.
Also present Bluff this morning, as Mike Cronin, our Chief Accounting Officer, Jeff Sherman, Michael aid <unk>, the business leaders up our multifamily grocery anchored retail and office verticals.
I like everyone to noticed that forward looking statements may be made during our call. These statements are not guarantees of future performance and involve various risks and uncertainty.
Actual results may differ materially these risks and uncertainties include but are not limited to the impact of code 19, pandemic and our business operations and economic conditions in the markets in which we outbreaks.
Our ability to mitigate the impact.
Arising from Cobot, 19, and information about the second quarter 2020 rental collections and lighter cobot 19.
For discussion of these risks and uncertainties you should review the forward looking statements disclosure in yesterday's earning press release.
Well as our FCC filing.
Our press release and other FCC filings can be found at our website at <unk> P.J.C.A.P.T.S. Dot com.
The press release also includes our supplemental financial data reports for the first quarter 2020, with definitions and reconciliations of non-GAAP financial measures and other terms they may be using today's discussion.
And the reasons management uses these non-GAAP measures. We encourage you to refer to this information during the review of our operating results and financial performance.
Along with our earnings press release, we also furnished an investor presentation regarding cobot 19 business updates and that can be found on our website at <unk> see ABTS dot com under the Investor tab.
Yes, we otherwise indicates also share results. We discussed this morning are based on the basic weighted average shares of common stock and class a partnership units outstanding for the period.
I'd now like to turn the call over to Joel Murphy Joel go ahead.
Thank you Paul.
Good morning, everyone and thank you for joining our call.
Since we last spoke in February the world, our country and our markets have changed dramatically due to cover the 19th.
I hope everyone on this call and their families are staying safe and healthy as we all work together to navigate this challenging environment.
Yeah, we're focused on the continued health and safety our associates, our residents and our tenants.
We effectively implemented our business continuity plan, including full work from home policies.
Our business has remained fully functional during this time and I'm extremely proud of our team's hard work and dedication.
We're also proud to be so closely associated with our grocery store partners, whose companies and employees work and are therefore, our communities providing access to groceries and other essential items.
Well, the depth and breadth and long term impacts of the pandemic remain uncertainty the impacts on society in health in general have obviously been significant and real estate assets and markets have not been I mean.
However, what has not changed is our dedication to the mission of creating long term stockholder value.
The locations over 107 owned assets in 13 states.
And our diversified strategy run back experienced in specialized teams.
Our recent operational results demonstrate that commitment the strength of our markets and the value of our diversified operating platform.
People collections were somewhat less impacted than we initially thought across all of our operating verticals.
We disclosed some April month today collections in our April 24th covert 19 business update and now updated through the end of April.
We have received 97% of our multifamily rents.
96% of our office rents.
Just shy of 80% of our grocery anchored shopping center rats, and 97% our student housing rents.
In aggregate, we collected over 92% of our total revenues for April across all of our.
We're running at approximately the same pace of collections in may for each vertical as are the same day to Naples.
But it's too early to tell how this will end up for may and on engine.
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More than 30 million, new jobless claims in aggregate since this pandemic began and shelter in place orders that have kept office workers and retail customers at home. We are encouraged by these collection results, which highlights the resiliency of our portfolio and its composition.
That said, we're keenly aware of the uncertainties posed by this pandemic and the macro economic impacts in scope and endure ration to our economy into our markets.
Accordingly, our board has elected to rightsize, our second quarter common dividend to 17, and a half cents per share.
We believe this was a prudent action based on uncertainties that lie ahead, and our focus on our balance sheet, our liquidity and our commitment to long term stockholder value.
When we set out to construct the company's portfolios, we built out each of our strategies independently with focused management teams that had deep expertise in each specific vertical in times of stress in volatility such as today that experience and portfolio composition serves us well.
Let me just briefly recap for use some of the long term benefits of this diversified portfolio.
First.
Multi housing comprises approximately 58% of our revenues we own class a apartments newly constructed with an average age of less than six years.
Our sunbelt focus means we continue to benefit from continued migration do our markets and our high credit quality resident pool has so far been Brazilian based on our rent collections today.
For additional details on our multifamily portfolio. Please refer to pages nine and 10 of our business update furnished in connection with our press release.
Our student housing assets have similarly held steady.
Fall pre leasing remains solid and generally on pace with where we were as of this same week last year.
We're also aware that there is inherent risk in this segment and even schools in our markets choose not to reopen for fall classes. Although at this 0.6 of our eight universities have stated they plan to reopen for in person classes in the fall.
While our intention remains to exit this business to further focus our overall portfolio and to use the proceeds from any such disposition prudently in connection with our balance sheet.
We continue to lease and operate these high quality assets, we believe there and attractive portfolio asset class over the long term.
For additional details on our student housing portfolio. Please refer to pages 11, and 12 of our business update.
Next grocery anchored retail comprises approximately 21% of our revenues. This is a 100% pure play grocery anchored strategy.
76% of those centers are anchored by Publix, Kroger and Harris Teeter top performers across all of our markets.
52% of our portfolio is considered essential and all of our centers have remained open three the pandemic.
Please refer to pages 13, and 14 of our business update for specifics on our grocery anchored retail portfolio and composition by tenet type.
Finally office comprises approximately 21% of our revenues this segment of our business afford stability, we're 97% leased across nearly 3.2 million square feet in our contractual leases are with predominantly well capitalized large corporate users and carried more then.
Seven years of weighted average term remaining.
Please refer to pages 15, and 16 of our business update for additional details on our office portfolio composition and tenant base.
These strategies, while built independently share many characteristics, including preferred markets submarkets demographics in employment concentrations.
These characteristics, let us to general invest in sunbelt markets with broad economic drivers diverse employment basis, hi, educational attainment and above average household incomes.
Our unifying sunbelt focus means we continued to benefit from positive net migration trends.
2005 to 2018 seven of the top 10 states for net migration were located in the sunbelt, including the top six we expect this trend to sustain if not accelerate over the long term.
Additional details on our markets are shown on page five of our business update.
We believe that our product specific and collective investment theses have held up well very early in this downturn as unemployment has hit hourly workers harder than salaried employees small businesses have suffered more than larger.
And nonessential retail both large and small has been particularly vulnerable while grocery anchored and a central retail has held up relatively well.
That said, we are truly an unprecedented times.
The scope and duration of the economic downturn remains uncertain.
We will be vigilant as events change and be prudent interactions. We're focused on both the president and the future for our stockholders and we believe that continued access to liquidity is the best course of action at this time.
Despite the primary focus on the current climate and interim second quarter performance and activities first quarter was a solid quarter for us in terms of operating performance across all of our platforms. Most notable was our first quarter quarter over quarter, 4.3% same store NOI growth in our core multifamily.
Business. This same store pool now comprises 8694 units, which is more than 80% of our multifamily units and revenue as of the end of the first core.
As previously disclosed we completed the closing of our internalization transaction on January 31st where the management functions of preferred apartment advisers and Indian P. advisors were brought inside pack.
Significant benefits of the internalization have been notable in the alignment of the management team and our board and our collaborative short and long term response to cover 19. This was always the transaction that needed to happen to unlock the company's long term potential.
We discussed this in our last quarter call in late February and with the Terminalization complete we're set to focus on Pratt packs broader capital strategy.
We were share our plans and strategies with you and the market as they take shape, where the renewed and fresh perspective on our capital stack and on our balance sheet.
Certainly the pandemic has impacted the timing focus and deployment of any capital strategy in the near future and we remain focused on both near term and long term goals.
Finally, we will continue to focus on achieving excellence with particular attention on our company wide operating performance, our governance, the training and development or our associates, our culture, our E.S.G. initiatives and our philanthropy of giving back to the communities in which we operate.
These attributes are now more important than ever.
Now, let me turn the call over to John Isaacson John.
Thanks, Joel first off I Echo Joe's sentiments, where the safety and health of everyone. On this call all my best to you and your families.
For the first quarter 2020 pack generated revenues of approximately $131 million.
Oh negative $3, a 42 cents a share at that phone noted internalization costs 31 cents a share core I thought was 38 cents a share at the FFO of 47 cents a share.
You will note our revenues are up over 17% compared to the first quarter of 2019, owing to the continued growth in all of our property verticals.
I'll also note that AFFO results are skewed dramatically due to the treatment of internalization expenses that closed in January the adjustment for internalization alone encompasses over 98% of the difference between our AFFO and our core AFFO number.
We have noted in the past the variability an AFFO and if that's due to a variety of factors in our business.
In an effort to produce a metric that we'll adjust for those variations and provide a more stable measure of the company's operating results. We have decided to move to core AFFO as the main measure of the company's performance.
Well, we will continue to report I thought that would add though and discuss those results. Our focus will be on core AFFO and the implications of its results for current and future performance.
Yes, I phone number continues to be impacted by the results of our real estate investment loan program, which we have mentioned previously.
As these loans are repaid our accrued interest gets paid and recognized in our AFFO number making it lumpy quarter to quarter for the quarter. We had three real estate investment loans payoff, which contributed to us receiving more than 13 million today at the full benefit this quarter and a form of accrued interest and purchase option termination paint.
Yes.
We currently have approximately $20 million of accrued interest from 24 real estate investment loans that are booked as a receivable on our financial statements.
The loan portfolio continues to add accrued interest every quarter from both carloads and new loans that are at the payoffs on these loans are difficult to predict due to the timing of the sales of these assets whether to pack with third parties.
The balance in our investment loan program stands at just over $373 million and commitments, but there were $310 million drawn at quarters at our mezzanine loan book, which was wants 25% of our total assets today is less than 10%.
As discussed in our April 24th releases, we withdrew our full year 2020 guidance due to the economic and social disruption from the Koeppen 19 pandemic.
During the quarter, we took steps to provide liquidity in a time of unprecedented uncertainty, we drew down our corporate lot of credit to approximately $192 million.
Beyond the current capacity of 200 million and our line, we have an accordion front additional hundred million.
The company is currently pursuing efforts that should raise an additional $125 million to $200 million outside of the slide capacity.
To accomplish this the company can utilize a pool of unencumbered assets is value is an excess of $200 million for liquidity facility.
Beyond the unencumbered pool, the company has assets, whose near term maturities provide an opportunity for early refinancing or asset sales.
These early refinancings have the dual benefit of removing maturity risk beyond 2021, and locking up debt at near the low at near historic low rates.
We feel very comfortable with the schedule our property level debt maturities our ratio of data Undepreciated book is 53% and we have no debt maturities in 2020 and less than 20% of our portfolio has maturities before 2024. Our previously mentioned refinancing efforts will further reduce these near term maturities.
Please refer to the graph on page four of our business update which clearly delineated these maturities.
In addition to debt measures, we continue to raise funds to the preferred stock program and while we've seen a decline of the volume of the raise we're comfortable with its pace.
In addition to the raise we have seen an increase in the pace of redemptions.
We have found this redemptions manageable to date and anticipate they will be in the future in total these circumstances provide us with comfort when combined with the company's operations.
Hey, Pts should continue to have ample liquidity for the foreseeable future.
In addition to raising capital in both the debt and equity markets, we have significantly curtailed our pre coated plans on capital investment for new acquisitions.
As we look ahead, we will be selective and focused on external opportunities that we believe create the most long term value.
We're already seeing some of these kinds of opportunities with renewed interest for multifamily developers and our real estate investment loan program, which has consistently been one of our most attractive capital investment options.
You may have seen in our press releases that we acquired two multifamily communities in Florida over the past five weeks both of these assets, we're squarely inside our core multifamily strategy, but also note we committed to these acquisitions pre cobot 19, when either from earnest money or the acquisition was pursuant to negotiated rights in our real estate investment.
Loan documents and both were acquired with sub 3% long term property level debt that is not available in the marketplace today.
Both of these assets represent accretive long term investments for the company.
Well the economic fall out of the pandemic will likely impact properties, we have invested and through our mezzanine loan program. We expect that such issues will be more about timing and less about overall performance, we could see longer construction schedules longer lease up time frames and lower rental rates for a period of time.
However, based on the underwriting of our loans and our current view on the market. We believe this portfolio will hold up well over time and continue to be accretive to our result.
In summary, the company continues to be well position financially and operationally to navigate the impact to the current crisis longer term, we want to be nimble enough to selectively take advantage of opportunities when they present themselves.
To that end as Joe referenced previously our board has made the decision to rightsize, our common dividend for the second quarter to seven seem to have sensed a share. We believe this is an appropriate dividend moving forward and believe it to be a prudent and measured step in light of ongoing volatility and uncertainty in the market.
Again, we believe we can create more stockholder value through improvement and changes in our balance sheet and we look forward to discussing these with you as they evolve.
Further we have put a pause at all non recurring capital expenditures other than any emergency life safety items or capital related to the leasing of space and our grocery anchored and office verticals.
But that being said I'd like to turn the call back over to Joel person protocols Joel.
Thank you John.
You know in addition to the first quarter, 4.3% same store NOI growth in multifamily or we do have other notable trends.
For example of that is that our grocer sales increased by an impressive 6% year over year in 2019 pre 'cause it and certainly we expect this trend to continue well into 20, given the significant increase in sales they were driven by the cover 19 locked down related shopping.
Activity.
While there is uncertainty as to when some parts of the country's restrictions will be relaxed are lifted 87% of our retail tenant base is located in states that are already reopening.
Certainly many of our small shop tenants have been impacted we're working out deferral arrangements on a case by case basis as well as helping them apply for government assistance, we've been using this as an opportunity to keep an open in productive dialogue with our tenants to create holistic mutually beneficial solutions.
As states across the Sunbelt look to reopen their economies, we expected our markets will even be more attractive longer term in a post covet environment.
To recap, we're real estate company of significant scale that has operating teams and assets operating well in high growth Sunbelt markets and now with an optimized organizational structure in place. We look forward to taking prudent steps with regard to our liquidity capital structure balance sheet and.
Progress.
As we stated in our annual stockholders letter in our annual report what got US here wont get us there.
Those words and our belief were written and in place pre kind of it but they are even more true now.
I'll now turn the call back over to Paul.
Thanks, Joe and I like to ask our operator to open up the floor for any questions. You may have operator go ahead.
Well now begin the question answer session.
Ask a question. Please press Star then one on your Touchtone phone.
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'cause withdraw your question you can press Star then too.
Our first question today comes from Michael Lewis with Suntrust.
Great. Thank you.
My first question I I understand that this isn't too.
Dividends.
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The yield on the common is still pretty high you think you know part of that maybe allows us to common shares and you think if you weren't next year round here without the particularly accretive or dilutive theoretical there.
You know interesting Michael Ah first thank you for the question.
No I think you know look.
Everything that goes into dividend policy and everything is a function of all the things going on at a company at that time, but certainly I mean, just if if somebody did the math, obviously, we're not signaling anything about issuance, but clearly something that would have a lower yield would be more attracted to us as an issue or that as opposed to a higher yield.
But you know really this this directional thing that we did you know.
It was difficult in a prudent decision by the board does reflect the uncertainty of the times.
But as we said in our prepared remarks, we took a number of other steps to preserve liquidity.
And one of which was the change in the dividend, which took into account really everything pandemic and just where the company is as it sits today.
Okay, and they're kind of leads me into a question about liquidity I guess, it's kind of a two parter you talked about some of the steps you're taking I wanted to ask about I think it was China not mentioned in 200 billion of potential unencumbered asset sales.
Could you comment at all on what kinds of assets you might look to sell what property types.
And does that number includes the go student housing portfolio that you may still looks as though.
So Michael I'll answer that said the what I was quoting the unencumbered pool that I was talking about the $200 million that's the.
Value of those assets that we would finance against.
We also have some additional near term maturities that we're looking at refinancing.
We're selling some of those assets our student assets, but it is not completely inclusive of student housing.
Okay. So if we were to sell all of the student housing assets that that would be properties. In addition to those that I mentioned.
Okay and high season, how and the student housing sale was not factored into my comments.
Okay.
Michael Let me add onto that little bit also for John is that you know it really this this is as we go as we evolve, especially so in this internalized structure capital recycling is a as a part of our strategy. The the assets that would be teed up here or what.
Whether they be multifamily whether it be retail whether it be student housing you know the office assets or earlier in their generation of of life with the company. We're always looking through that in many of those that's one things we love about the young vintage if our more of our multifamily would be an asset that we might say you know it's time, we've had our run with this week.
Like it and it would just be natural apart and would do it, especially as it rolls up into near term maturities. So it's interesting that it really that strategy, while while beneficial in something that we will be doing in this world and environment. We are now it's something that we plan to be doing as a matter of course anyway.
And would point out that we've done that in the past and we sold a significant number of assets over the last three or four years and harvested a good bit of capital and reinvested it pretty creatively.
Great. Thanks.
You took own credit cards, a this quarter.
Can you talk about no baby the assumptions that that went into that talc on the charge and.
As any other color regarding you know how you're thinking about the safety of ultimately continuing to receive those interest and principal.
And accrued interest payments when do given all kinda, though the new stress in the in the broader economy.
Sure Michael I think the single most important thing to point out is that the accounting structure for reserves changed in Q1 and now we have the Cecil environment.
So we created a model and booked a.
You know beginning balance if you will in our seasonal reserve at the ended the quarter. We added to that reserve based on the model that we created to monitor those are those loans and assets you're going to see that seasonal balances. Another reason why we're going to core FFO, you're going to see.
That seasonal ballots change every quarter as loans payoff and those reserves get released a as new loans get added a and reserves get increased reserves are gonna get increased and decreased every quarter.
So it is it is not a it is not necessarily owing particularly to the change in the environment, Although that did have an impact on our reserves.
But I think the structure of Cecil and the fact that they've got implemented in Q1.
It's just as important.
Okay. Thanks, and then.
Lastly from me.
I wanted to ask about you know the co founder lend Silverstein designs.
And I think you may have had one other board member resigned during the quarter I don't know if there's any color comments to make around why land decided to leave the company now.
Yeah, Let me lessened, yeah, clearly as far as Lenny right co founder and obviously and all that everything.
Everything that was related to that was put out in our May I think as Bart third a press release on that were lending elected not to continue on as a member of the board as far as the other as far as the other ones. The the one that we mentioned another member resign that actually not is not technically correct I'm a this is John.
On wanes on as we noted he actually agreed.
Grief asked do not stand for reelection as did Johnny Gresham. It was another long time director of the company John Wiens was connected to and employment situation. This was disclosed in our SEC filings, where he had a conflict that is employer did not allow him to sit on the board of a public company, we hated to Liz.
John as board member, but Weve respected that I think probably the biggest piece of that Michael is that companies need to go through the evolution of of their boards and the fact that we haven't turned over now of three board members all for different reasons, and then elected terrific John can I terrific.
New director with deep multifamily experience, particularly in the debt and financing markets a multifamily.
Really made our board stronger.
Thanks for taking my questions.
Thank you.
Our next question comes through Gaurav Mehta with National Security.
Yeah. Thanks, Good morning, plus question I was hoping if you could provide more color on your capital needs activity I know in the prepared remarks, you said you've seen a decline in the volume increases and redemptions.
Oh, so maybe even talk about what kind of run rate you're expecting to see this year.
You know glove its still too early to tell and there's some cross currents here the as you're aware.
We sold out the previous offering and started a new offering in January and when you start a new offering you have to go through the process of reciting all of the selling agreements that you had previously.
And so you can't just transfer over and start back up with the same group. So we have significantly fewer selling agreements today a than we had at the end of last year and we're continuing to sign those agreements and we're continuing to go through the Didnt do due diligence process as we have several times before we certainly know how this works.
So at this point, it's hard to tell.
Yes, our raise is being more affected by the pace of selling agreements or by Investor sentiment I think we'll have a little bit better idea that if we get a little further ended the year and the same goes for redemptions I mean, the paces redemptions has picked up.
But also the balance of our outstanding shares of preferred stock has picked up a we have 45 or 60 days here that we've done in this in this pandemic and I think it's too early to say are we getting more redemptions. Because you know people are going to cash are we getting more redemptions because people had been with us for awhile and it's just sort of the not just the.
Sort of law of large numbers, you're just going to get more redemptions, because you have more shareholders.
I think we'll have better visibility as we get later ended the year.
Today, we're very comfortable with both the pace of the race and the pace of redemptions and our ability to manage that you know when we'll give you an update as we get further entity or.
Okay.
Second question, maybe it's not provide some color on what you're assuming the transaction market and your ability to redeploy them. When you got that you maybe then.
Yeah, I'll take that garb Ah. Thanks for your question so.
You know as as we said, we're gonna be really measured I Miss mom and you know John described we did acquired two assets terrific assets. They record our strategy, but those were committed to pre kind of it and actually had attached to it not known we now the one of the assets really well it was because we were them as a lender.
On it.
So we do get everything about it for the last three years and Ah.
And as important in addition, knowing the assets, we had pre covet sub 3% long term debt, which clearly when and available in the marketplace today.
So that is then and now is now and you know we're gonna be very measured on how we look at external growth opportunities its going to have to be the right thing for us to do there are assets that are out there I mean, I think the world generally is out in a little moment of price discovery.
And but so far you know it's interesting not related to us, but you know a little bit apocryphal play there are some some deals that we've seen that I've been out in grocery anchored sector.
I have traded during this to private buyers on the capture rates were virtually the same.
As they would have been pre Kevin maybe a little elevated the way below what the even the broker was giving his initial guidance of it that said you know we're gonna be very selective with our capital on whether because there's choices for that capital.
We can involve in an external growth.
We can deploy it against our balance sheet in a variety of different in different ways, but the one that I would probably say they will see and John referenced it is our mezzanine loan program.
The reason is what's interesting about that it's in our core multifamily business. It is not a significant amount of capital.
Relative to buying you know a full full on asset it's spread out over time and then the ultimate pay off of it is going to be moving across the next 25 36 38 months. After the development is complete at which time, we could acquire it like we've done for many buyers.
Okay, just collect our.
Our mezzanine loan interest overtime, we have seen the first good signs of movement in that market to our favor where deals that probably pre coded as far as returned to us in total numbers.
We probably haven't seen a that higher return available to us.
And maybe over the last two years, probably two to three years. So what's happening is that market has moved and we're also seeing on a risk adjusted basis, perhaps that it's even better because in addition for us getting higher returns. The developers are willing to put more equity ahead of us.
Okay.
And lastly, I want to quite a lot on your comments on selling from a business.
Sets are you expecting to sell assets that this year. So maybe talk about the timing and you know what kind of valuation would you got for those assets.
Oh My God I think it's you know we're not a position where we have to sell assets were only going to solve them. If it's a if there's a smart decision at the market is going to generate a value. The that were attracted to and I think it's too early to tell whether the market is gonna be there or not or when it is gonna be there.
We're continuing to market that a monitor that market as Joe mentioned and I mean, we've seen some early signs that maybe the transactional market is gonna be a little healthier than than people might appeared yeah, 30, 60 days ago, but I think it's still a little ways before we before we really know.
Okay. Thank you that's all I had.
Thank you appreciate go up.
This concludes our question and answer session I would like to hand, the call back over the Joel Murphy for any closing remark.
Oh, well listen thank you very much a we appreciate the time and effort or did you have done to listen to our call and to review our materials. We appreciate the questions asked.
We value you as people that are interested in our company I know, we're very interested in and we're very focused but we also know that this is a very challenging time for people their families that workplaces.
We look forward to that we look forward to further conversation with you next quarter.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.