Q3 2020 Extra Space Storage Inc Earnings Call
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Thank you for standing by and welcome to the quarter three 2000 cheat sheet hasn't went the extra space third quarter earnings Conference call. At this time, all participants are in listen only mode. After the speakers presentation.
It will be a question and answer session to ask a question during that session. Please press star one on your telephone.
If you were quite any further assistance please press star zero.
I will now turn the call over to Mr., Jeff Norman Please begin sir.
Thank you Jenny and welcome to exercise grades, Georgia, <unk> third quarter 2020 earnings call.
In addition to our press release, we have furnished unaudited supplemental financial information on our website.
Please remember that managements prepared remarks and answers to your questions may contain forward looking statements as defined in the private Securities Litigation Reform Act.
Actual results could differ materially from those stated or implied by our forward looking statements due to risks and uncertainties associated with the company's business.
These forward looking statements are qualified by the cautionary statement.
Contained in the company's latest filings with the FCC, which we encourage our listeners to review.
Forward looking statements represent managements estimates as of today November 5th 2020.
The company assumes no obligation to revise or update any forward looking statements because of changing market conditions or other circumstances. After the date of this conference call I'd now like to turn the call over to Joe Margolis, Chief Executive Officer.
Thanks, Jeff Thanks to everyone for joining us on today's call I Trust, everyone in their families remain healthy and managing through this difficult time.
2020, it's been a challenging investing here [laughter].
Unprecedented conditions related to the pandemic have made it difficult to forecast performance.
On our last call we discussed the Tailwinds, we are experiencing in terms of rental activity muted vacates positive achieved rate trends and the resumption of normal operations, yes.
We also discussed the potential headwind because we believed we could face, including economic and political risk as well as changing customer behavior and new supply.
During the third quarter and today.
Hello things have proved stronger than we expected while the headwinds have not been as significant or have not materialized.
Rental volume remains healthy well they keep buying remains muted, resulting in all time high occupancy of approximately 96%.
Through July occupancy was implanted with non paying customers due to the inability to auction boosted units.
However, as the quarter continues its auction disease, we have been able to maintain our high occupancy.
And collections have returned to historically normal levels.
Our elevated occupancy resulted in return of pricing power during the third quarter inch.
In short our stores are performing significantly better than you expected earlier in the pandemic.
On the last call you stated that we expected got negative same store revenue growth in the third and fourth quarters due.
Due to the continuation of the Tailwinds. We are experiencing we have achieved positive revenue growth in October and are confident we will produce positive revenue growth in the fourth quarter.
We remain mindful of the potential macro and industry specific uncertainties do we have referenced during the third quarter.
However at present these risks do not appear to be negatively impacting the demand for storage or consumers ability and willingness to pay for our product.
The primary headwind impacting performance is new supply in certain markets.
While the pandemic has delayed deliveries and may reduce new projects in planning properties are still being delivered and excess inventory still leasing up which will continue to do some press release gross in high supply markets.
Despite the improving trends our same store NOI remain negative in the third quarter.
However, even with the disruption profit 19 caused to our operations. We continue to grow core FFO per share, which is our ultimate goal.
In the third quarter FX.
FFO per share increased 5.6% and SSL growth for the first three quarters was 5% both.
Both sizable beats over consensus.
Our flexible organizational structure and focused on innovative capital light strategies have enhanced death battle through new external growth channels and non same store income streams.
These contributions paired with improving same store trends.
Lead us to believe that our 2020 ethanol will comfortably exceed the high end of our pre Colgate expectations.
Turning to external growth.
Acquisition volume has picked up in the sector as markets have started to settle the.
Pricing for widely broker deals, particularly for stabilized properties remains very competitive.
During the quarter, we have close to put under contract an additional $140 million of acquisitions, bringing our total expected investment in 2000 $20 million to $287 million.
In addition to acquisitions.
Continue to find ways to creatively invest capital in the storage sector.
Our bridge loan program continues to grow with approximately 315 million in bridge loans scheduled to close in 2020 with the expectation to sell 70% to 80% of the balances.
We've also approved a $167 million of loans to close in 2021.
We also purchased 103 million senior mezzanine note at a small discount and subsequent to quarter end, we invested an additional $50 million in Smartstop do our previously negotiated preferred equity investment.
And through three quarters, we have added 72 stores net to our third party management platform.
In short we continue to execute on our strategy to maximize shareholders long term value to optimizing property level operations and efficiently and creatively investing capital in the storage sector.
Acceptable risk levels.
Ill now turn the time over to Scott.
Thank you, Joe and Hello, everyone.
As Joe mentioned, we've seen a number of positive trends during the quarter that are continuing into the fourth quarter. During September and October we typically see occupancy and achieved rates start to moderate due to seasonality. This year. This has not been the case rentals remained steady while vacates are still down.
And and October occupancy remained relatively similar to this summer's highs at just under 96% a positive year over year Delta of approximately 260 basis points.
With less than 20 basis points of inflated occupancy related to non paying tenants.
New customer rates also remained strong achieved rates to new customers were flat year over year in July and improved to approximately 11% in August September and October.
We have completed the rollout of our online leasing platform rapid rental and have seen approximately 20% of rentals come through this channel. We have also reinstated existing customer rent increases in most markets with a focus on bringing customers with below market rates closer to current levels.
To date, such increases have not cause outsized vacate activity.
Despite these strong trends same store revenue remained negative in the quarter, primarily driven by lower other income due to fewer assess late fees and auction fees. We've tried to work with our customers and have been lenient where appropriate given challenges related to the pandemic.
We have been proactively controlling expenses to offset lower revenue, while ensuring we are occurring hurting the long term value of our properties or our business X.
Expense growth from property taxes was generally offset by savings in utilities, and repairs and maintenance and we managed to keep payroll generally flat without furloughs layoffs or pay cuts. We continue to view marketing spend as an investment in topline revenue growth I will continue to use this lever to drive revenue.
When the return warrants it.
We have been tracking the results of California's prop proposition 15 boat carefully and it appears that that it will not pass and have an impact on property tax expense we.
We continued to strengthen our balance sheet and have access to many types of capital at attractive pricing, we received $425 million from our previously completed private placement transaction and subsequent to quarter end. We use these funds revolver capacity and shares to settle our $500 million convert.
Well notes.
All in all 2020 has been an eventful year and we've certainly seen the landscape shipwreck shift rapidly over the last few quarters, while we can't predict the future of all we can't predict the future challenges. We may face, we believe our flexible organizational structure, our focus on innovation and ultimate.
We are people position us to react quickly to change and to capitalize on various opportunities to follow we operate in a fantastic sector and our diversified portfolio advanced platform and talented team will continue to maximize shareholder value regardless of the economic climate.
With that lets turn it back over to Jenny to starter QNX.
Again, if you have a question press star one on national happen keypad.
Operator, we are ready for the first question.
Yes, your first question.
Is from Jeff.
Yes, Thats fair thank them in there.
Guys I hopped on a little bit late but I think Joe you said 20.
2020 will exceed pre covert expectations is that correct.
As for SFL, Yes, Thats correct, Jeff Okay, that's a powerful statement and so I just want to.
We thought the results were very strong stock underperforming today a bit.
Im just trying to think about market concerns again, maybe youre comfort visibility on the business I know thats tough, but how are you thinking about.
21 guidance I guess, you typically provide next quarter like.
What gives you comfort to make the to provide that guidance at that time versus not is it vaccine is it.
Just watching cases and potential risk of shutdowns.
So Jeff I'm not sure I understood. Your question what gives us comfort to provide 2021 guidance or not right. The question just trying to think ahead to correct. The next quarter and given this was no more resilient than expected a lot of the issues.
That.
You and your peers were concerned over starting back in March you know didn't transpire again.
FFO better than pretty cobot expectations like.
Are you planning to provide 21 guidance and if not.
What do you what would help help determine that.
So our current plan is to provide 2021 guidance, if the political or medical situation gets to the level of uncertainty that we don't feel we could provide a range comfortably.
We will have to rethink that position.
Okay, that's fair.
And then on a couple of the drivers.
That were discussed on the previous call in.
I know we've talked to you about the.
Work from home benefits X, our sector has been seeing or.
Moving on in the economy I mean from your standpoint, what's what's the most important thing to watch from here is it is it the housing market.
The work from home or work from anywhere seems to continue at least for now I know, there's always different levers at different times different cycles, but.
What's most important as we head into 21.
So.
We'll watch our customers' behavior, we don't have perfect visibility as to how some of the things you're talking about work from home housing market.
The direct correlation a translation to customer behavior. So we try to literally every day.
Customer behavior across a whole lot of metrics and.
Optimize operations based on what we see.
Great. Thank you.
Sure. Thank you Jeff.
Your next question is from Rick Smith with Citi.
Hi, there.
I just wanted to ask you about.
Move out activities and if you've seen that relatively.
Low relative to where you normally would have which seems to be kind of like an industry issue, but I'm just trying to think about it as that returns to maybe more normal levels at a post pandemic world How do you think about.
More normalized occupancy is and how might you encourage customers.
To stay with you.
Try to entice them with rents are your occupancy levels, where you could stand to maybe have that decline a little bit.
So occupancy I'm, sorry, vacate levels are still viewed it they're still below historical norms, there or not.
As you did as they were earlier in the pandemic, but one of the.
Yes factors a strong factor in our very high occupancy is that vacates are needed and I agree with you a risk of the future is that customer behavior returns to normal vacates returning to normal and that puts pressure on occupancy. However, we don't think there is any way to encourage.
People to stay in storage storage is a need based product and at some point people won't need that the storage anymore and at that point. They may not be immediately because of inertia accumulated they're going to realize they don't need this anymore and even if we cut their rent to a dollar they don't need it.
And they're going to go and move on and do whatever they need. So we can encourage people to state. What we can do is make sure that we can replace those tenants in the most efficient manner at the lowest cost than it is the best rate that we we can.
Okay Fair enough and then.
Yeah, maybe you could just touch on the debt maturities that you have coming up through the balance of this year I think going into next year and kind of how you're thinking about.
Handling those.
Yes, Smedes. This is Scott the major maturities that we had coming due at the end of this year were really two items. One was a $70 million loan that came due in September that we actually extended for a year. So that will come due in the year and the second piece is a $575 million convert and that was actually paid off in two trial.
As part of a 71 million getting paid off the first of October and that the other 504 million getting paid off the second day of November. So we have paid we've either extended or pay those off and we paid that off with the proceeds from our private placement, which was a 425 million our private placement and then that proceeds from our lines of credit.
Great. Okay. Thank you.
Thanks Spencer.
Your next question is from Rick Good morning, let Goldman Sachs.
Great Joe and Scott.
Joe could you just talk a little bit more about the bridge loan program.
And how you assess the credit risk and then how you think about the pacing of that capital and the rates on the on those loans. Thanks sure happy to so we started this program in 2019, we lend to only on existing products. They are not developing the product.
Yes, we can present operating we manage each of these loans. So in addition to the economics of the loan you get the economics of the management contract we know.
We look somewhat at the bondholders funny.
Financial capacity, particularly because they have obligations personal obligations to replenish operating and interest reserves, but our primary collateral is the real estate. We underwrite these real estate as if we're going to buy at the same team that underwrites, our acquisitions and we are we made.
Loans were were comfortable if we have to own the property at our loan balance that we will be happy that we did that.
The second question with regard to pacing.
This program has grown frankly faster this year than we thought and we get $100 million in our first year will.
We will find or approved for funding probably close to over 500 million. This year and I think the acceleration is because more people are just looking for a way to get to a better tomorrow. When this weird position. They just want to get some financing that will let.
Them get their store to a more stabilized number and then they can put permanent financing or sell do whatever it's important to remember that we sell 70% to 80% of the balances the loan. So they're structured is first to mezz raise be we'll sell the first position and retain the second.
Position that both Leverages, our return and allows us to control the amount of capital that's allocated to this program sorry for the long answer.
And as you look to 2021 X.
Expectations thinking about the bridge loan program to.
Continuing at those at the similar 2020 level or do you think it increases or comes down a bit.
So I would expect the program to grow up our our goal is to grow these programs as we develop more relationships have more programmatic borrowers, it's kind of like a snowball rolling down the hill. So it's my hope and expectation that we do more.
2021, and we Didnt 2020.
Great. Thanks, Joe.
Sure. Thank you.
Your next question is from Todd Thomas with Keybanc capital.
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Thanks.
Just following up on the bridge loan program a little bit.
I guess, you said you have an expectation to sell 70% to 80% of the balance but what's on the books today and what is the average yield on those loans and sort of the weighted average maturity.
So what's on the books today isn't representative of.
Our final capital investment when we first started this program we would simultaneously closed and sell the first tranche. So that never showed up on our books. We now think a better execution is to.
Close them all on balance sheet package. It up in 30, 40 50 million chunks, then take those to the market and sell it. So we currently have more on the balance sheet than we ultimately will because we're in the middle of selling a couple of those.
Crunches.
Yields on the whole loan or.
Between five and 6% there is theres a LIBOR floor that puts the yields now place once we sell it the yields on our piece are between nine and 11% and those numbers don't include management fees and the insurance that we get from managing the property.
Got it just so yes.
No I was just going to make the comparison of where we see cap rates an opportunity to make money buying wholly owned properties versus the yields we can get from this.
Plus the management contract plus we've already bought three assets out of the loan program at somewhat of an acquisition pipeline and it allows us just to create more partnerships more relationships, which is so important to us in everything we do.
Okay, so as you're sort of warehousing these loans and ultimately retaining 20 or 30%.
Of the balance how large or how much of an appetite do you have.
For this type of structure.
Finance finance investment portfolio overall, and do you plan on adding some additional disclosure to describe some of the details around this.
As as it continues to grow.
Yes, So I think I think your second point is spot on Novitas has gotten significant we need to we need to add some things to our sops and we will do that in 2021.
Seeing that we sell the vast majority of the the loan balances I don't see a.
The only meaningful cap on what we can do I don't know if we can grow this big enough, where we won't we won't have the capital to do it.
Okay.
And then Joe your so your comments about supply still impacting fundamentals.
I just wanted to circle back there. So your occupancy for the portfolio overall is 95.9% and rates are trending higher so what impact is new supply having on on the business today, it's hard to see those pressures right now I guess is demand just overwhelming that.
Supply at this time or or is there something else can you just expand on those comments a bit.
Yes. Those are those are macro stats, if you broke it down to the store level and look at stores that.
Matt.
Hi, Brad.
New supply challenges and new supply competitors, they may still be up.
Quickly or have very high occupancy with their rate growth there rate power very different than stores that don't have that new supply challenge. So were able to fill all our stores up the impact of new supply is on how much rate power, we have and Todd you can see that some in the sub.
And then also if you look at it by market. So for instance, if you look at Dallas, or South, Florida, or New York City, you'll see that those are performing from a revenue growth perspective below the average versus markets that are performing above the average and we would tell you. They supplied markets are typically performing below the average.
Right, Okay and.
I guess given the improvement in fundamentals that the industry has seen.
Are you anticipating new supply growth too.
Reaccelerate a bit it sounded like it was expected to fall or moderate what's what's the outlook like today. Thanks.
So I do expect moderation.
No.
Equity this probably equity out there.
No I think that is harder to get.
And there's some markets that it's just harder to underwrite to get the deal. So new supply is not going to stop but I wouldnt expect moderation.
Alright, thank you.
Thank you.
Yeah.
The next question is from Spencer Atlanta with Green Street.
Commenting about the transaction markets continue to open that I was just wondering if you could provide some color around what portion of the deals you're seeing are.
Either.
Assets are there some things that we saw pressure, though there are stabilized.
Hi, So I actually don't know five ever.
Divided deals we're seeing I don't know if I know the answer to what percentage of deals. We're seeing or are you set versus stabilized I'll tell you. The deals. We've we've approved this year, we've approved 22 stores for acquisition none of them were stabilized overall.
Between.
It averaged about 64% occupancy.
And Thats stabilized period, just six to 36 months with stabilized cash flow in the mid sixes. So.
Those are the type of deals that are attracted to attractive to us now stay.
Stabilized stores at sub five cap rates or is not all that attractive to us.
Okay. That's helpful. And then you guys also mentioned that rental volumes have remained healthy can you elaborate a little bit more on the move ins from them, whether or not this growth is widespread throughout the whole portfolio are there any markets that stood out in terms of elevated activity.
Yes, I would tell you the rental volume and occupancy is our consistent across the portfolio. So it's not just urban versus suburban if.
If you look at our property occupancy it were fall across the U.S.. If you look at kind of rentals and vacates throughout the quarter.
We actually had higher vapor.
Vacate volume this quarter due to auction than we normally would because the kind of move six months' worth of auctions in the three months here and so I would tell you our rental volume while it might be slightly below last year last year was a really good year with July being very high we're very close to historical norms. So our rental volume.
Has been strong and we've also been able to offset any vacancy that was created by the increase in auctions in the third quarter. So we had those pent up auctions as we paused during the stay at home timeframe.
Okay. Thank you.
Thanks Spencer.
Hi.
The next question is from the line scenario with CMO capital markets.
Hi, Thanks, just hoping you could elaborate a little bit on the payroll slide.
For same store pool was down slightly year over year, what's driving that is that more of the.
Rental without having to to talk to anybody just the automated process or is it just more cost controls and you guys are trying to manage that that line item and the expectation is going forward.
So in the first and second quarters I would tell you. It was up slightly for a couple of reasons. One is we had a very tough comp from last year, we had very low payroll last year as we had.
Our turnover that was maybe a little higher and our time to fill was a little higher last year than it is this year. So this year, we've had very little turnover. We also tried to be fair with our employees as people got sick as they add family members, who got six so our staffing as maybe a little higher in the second quarter as we moved into the third quarter, we've seen that normalize.
Somewhat and in the second quarter. The other thing we saw nobody was taking vacations that you're accruing the vacations that nobody was taking time off and so we would expect it to be up slightly but.
But not to the degree it was in the first and second quarter.
Great. Thanks, and then.
I was just hoping you could talk to.
The scene.
Options et cetera, the late fees.
Yes, so what part is that stopping that drag is it does it have to do with how high occupied you are today.
Other words.
Is the higher occupancy working against you on the feed in some respects or is that just because the move outs are down also obviously tied to it so.
So your occupancy just if you could just help us.
And that will pass that pressure on the same store revenue line.
So I would tell you lay fees are down for a couple of reasons. One is you have state of emergency orders that don't allow us to charge late fees in certain markets. So in the Los Angeles area, we're not charging right fees or were being lenient with white piece. The second one is early in the pandemic and as we moved in and as people went to auction we have been more lenient on late fees as we have to.
To be fair with our customers as the that auction volume has slowed many we've gotten through some of the pent up options. We would expect that to normalize in areas, where we have had auctions and do not have state of emergency.
Thank you.
Excellent.
Your next question is from Kevin Kim with Chili's.
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So when you look at the customer mix.
Occupancy lately.
I mean, I guess is logical to assume that has to do with housing and people moving from different states, but.
But is there something about that demand that you are getting that you think is more transitory in nature, maybe they will stay as long purposes.
What's more typical of a Tennessee.
Well.
We don't know we don't know how this is going to play out and.
How long some of this demand generated by the virus is going to last we do know that is a good thing that more people are getting exposed to the product in using the product and now know that it's an option.
But one of the uncertainties is it was all the colleges go back to normal and if people move back into the city and out of their parents' home.
We knew some of this demand it's a risk.
Okay.
And we've seen a lot of acquisition activity in the self storage sector hopefully for time usually.
Usually you guys win more than our fair share so I'm just curious.
What this thing about just excessive pricing or the quality of some of the deals out in the market.
Or is it that you just see more value and the bridge loan program.
And thats, the timing or capital.
Yes, so we don't judge.
Success in the acquisition market, Hi, Fi, who bought the most I mean, we could buy the most we have the money. We can go out to bid more than anyone else, but at the end today. It's about the returns you produce.
For your investors. So we are going to be active in the acquisition market. When we can produce the good returns we're going to be active in the bridge loan market, we're going to find creative ways, whether its preferred deals or otherwise to do that and we're also can increase our management and capital light businesses.
So the ended today.
We're not seeking to buy the most were seeking to make the most money.
Okay.
Your next question is from Hong sang with JP Morgan.
I was wondering so you talked about expecting positive same store revenue growth in the fourth quarter is there any I guess baked in assumptions about move outs or rent growth that goes into that.
So I would tell you obviously, we've made some assumptions I think that.
We do have some vacancy assumptions in their bank had assumptions and.
You know if those.
I think that if anything if it keeps going like it is we are very confident that that will be positive I think that right now.
We had positive rent growth that in October our.
Occupancy is.
Still two and a half plus percent ahead of last year and rate increases have kicked in.
Got it and I guess would you able to quantify how much of a drag the.
The.
The rents that on.
Sign in the pandemic and act and the rent posit that add on just your overall rent number.
So in terms of quantifying them.
We were not looking to quantify them here today, but I would tell you that many of those are getting rate increases today that are going to be outsized as we move people more to market levels. So.
Our typical rent cycle is such that many of them have received grant increases or will be over the next month or two so we should be moving them to market and it should be much less of a drag into the fourth quarter.
Got it and it sounds like you're accelerating that is that right.
So our rent increases our overall pretty similar to what they typically are in terms of our existing customer rate increases remember, we still do have some state of emergency areas that are limiting the amount of rent increases that we can't pass throughs.
Got it thank you.
Thank you and if you have a question press star 100 telephone keypad.
Let's start once our question.
Your next question is from Ronald Camden Morgan Stanley.
Quick ones from me just gone back to the.
Demand question and the customer behavior, just asking in a different way just systematically.
When you join the analysis you are looking at the customer behavior.
Is there anything that stands out to sort of expand.
Explain sort of the demand drivers whether it be college students are small businesses work from home demand or people living in the city. Just schematically is there anything to call out there and the corollary to that would be as we think about normalization scenario.
What what what is one time versus what what's going to recur as well as what are we thinking about things normalize that could actually be a demand that.
Thanks.
So dramatically I would think about demands broadly two ways one is theres.
There is no.
Demand for storage is driven by life events at least on the non.
And those life events occurred during a pandemic some of those lights events occurred during a pandemic and not during a pandemic right people are getting divorced there people are dying moving to folks told folks home all the stuff that gives rise to storage demand before the pandemic is still happening. In addition, you.
You have unique things like college students not going back to college restaurants salmon store half their tables and chairs.
People, leaving the city to work from home people, even distributed back with their parents because it only BDC.
And that stuff some of that stuff may eventually go back to normal some of it may be more permanent in nature, and we don't know the mix of that but we do know that we live in a dynamic country, where there is economic.
Movement with theirs.
Movement of people and that will continue and people will continue to use storage based on that and on our customer acquisition platform will continue to reach out and and acquire those customers.
Great Thats helpful and then not to beat the dead horse on external growth.
But just just thinking about it sort of a different way.
In terms of just the run rate I think you said you said earlier about obviously you could buy more more deals. If you wanted to but clearly the focus is about making money, but six months ago.
Until that hit I think we're all trying to get their arms around it clearly the sector has done that really well. So we just expect level run rate activity acquisitions, the increase simply because maybe there's a little bit more confidence a little bit more visibility.
Can we get back to 200 300 million, maybe even more an acquisition assuming those opportunities are out there.
And again, they sort of meet your return requirements, how should we think about that.
Well we have.
$287 million already this year that we've closed or under contract to close on the acquisition side. So.
I guess, we have gotten back to the levels you have.
Spoken about and then we have our other growth activities. So.
No.
If we can go into year I don't think this will ever happen and buy nothing because the pricing doesn't make sense.
Destroy value and not create value then we'll do that if we have an opportunity to place a billion dollars because it's accretive to our shareholders. Then then we'll do that.
And it's incumbent on us to be aware of all the transactions to manufacture transactions to structure things that create value for our shareholders and I think if you look historically, what we've done in the volume we've done and how successful it's been I hope that gives you some confidence that we will continue.
So in the future.
Great. Thanks, so much.
Thanks, Rob.
At this time there are no further questions I will now turn the call back and Kim now Kelly Chief Executive Officer for closing remarks.
Thanks Jenny.
We're very happy to to achieve 5.6% AFFO growth. This quarter, that's that's very meaningful accomplishment for us, particularly in a quarter, where we have negative same store NOI growth and we do this through.
Moving store performance, both inside and outside the same store pool and you create is external growth and capital line activities, but none of this is possible without the teams at the stores and here is our corporate office and at the call Center, who worked really hard all the time, we exhibit our down.
To use the word work his teams while managing through the pandemic and.
I Wouldnt want to end this call without acknowledging the hard work.
All of our teammates. Thank you much and I hope everyone has a great day.
That does conclude todays call you may now disconnect.
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