Q3 2022 Broadmark Realty Capital Inc Earnings Call
Okay.
Greetings and welcome to the Boardwalk Realty Capital's fourth quarter 2022 earnings call.
At this time, all participants are in listen only mode.
A question and answer session will follow the formal presentation.
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As a reminder, this conference call is being recorded.
Now my pleasure to introduce your host Devin Papyri General counsel. Thank yourself. Please go ahead.
Good afternoon.
Thank you for joining us today for broad Brooke Realty Capital's third quarter 2022 earnings conference call.
In addition to the press releases issued this afternoon, we filed a supplemental package with additional detail on our results, which is available in the investors section on our website at www Dot broad Brooke Dot com.
As a reminder remarks made on today's conference call May include forward looking statements.
Forward looking statements are subject to risks and uncertainties that may cause actual results to differ materially from those discussed today.
We do not undertake any obligation to update our forward looking statements in light of new information or future events.
For a more detailed discussion of the factors that may affect the Companys results. Please refer to our earnings release for this quarter and to our most recent SEC filings.
During this call we will also be discussing certain non-GAAP financial measures.
More information about these non-GAAP financial measures and reconciliation to the most directly comparable GAAP financial measures.
Wind in our earnings release and SEC filings.
This afternoon's conference call is hosted by <unk> interim Chief Executive Officer, Jeffrey Piet <unk>.
Interim President, Kevin <unk>, and Chief Financial Officer, David Schneider.
Management will make some prepared comments after which we will open up the call to your questions.
Now I'll turn the call over to Jeff.
It's been a busy time here at broad Mark.
This afternoon, we announced the change in leadership for the company I have assumed the role of interim CEO , Kevin reverse a director and chair of the audit Committee has been named interim President.
The board is in the process of launching a search for a new Chief Executive Officer and Ken.
Kevin and I will serve on our roles until that individual is higher.
Also Kevin and I will remain members of the board and I will continue to serve as chair.
These appointments follow a mutual agreement to separate between the board and Brian Ward, who will leave his role as CEO and resigned as a director of the company effective immediately.
We thank Brian for his contributions to broad Mark and we wish them all success in the future.
Additionally, I am pleased to share that Jonathan Hermes has been hired as our Chief Financial Officer effective December one 2022.
He's a highly capable financial leader with technical accounting and capital markets experience.
John is no stranger to broad Marc as he worked closely with the company when we were going public.
John will succeed David Schneider previously announced his intention to resign to accept an opportunity. It's a private account at a private company.
David will remain with broad mark until year end to.
To ensure a seamless transition.
Given this is his last call with us David.
On behalf of the board of directors. We thank you for your numerous contributions it helps with the transition and.
And we wish you all success in your next chapter.
While we've experienced significant leadership change over the past year the.
The foundational principles of our business remain unchanged.
We founded broad mark over a decade ago in the wake of the global financial crisis. So we know a thing or two about navigating choppy waters.
We built this business from the ground up and have been tested through multiple economic cycles.
We have a long history of successfully deploying capital.
We have originated over $4 billion in loans since inception.
Through it all we have lived up to our commitments to our borrowers.
Right, it's a trusted go to provider of capital.
The key to our success had been woven into our DNA from the beginning we are disciplined underwriters requiring significant equity from our borrowers.
Our loans are generally short term in nature, allowing us to reprice, our book with relative speed.
Notably we have always operated with little or no debt significantly reducing risks associated with liquidity refinancing and interest rate exposure.
As we look to the future we remain confident in our cycle tested strategy.
We are diversified across our national footprint and have a deep and experienced team of ground level of real estate investment experts.
As we manage our existing portfolio and the current economic and financial market turmoil subsides over time.
We believe we will emerge in a strong position to take advantage of the opportunities that arise to resume growth and create value over the long term.
I'll now turn the call over to Kevin to share some additional perspective.
Thank you Jeff good afternoon, everyone.
I would like to comment a bit more on the external environment and on one additional announcement we made today.
22 continues to bring unprecedented challenges to the global economy real estate in the financial markets.
<unk> high inflation as far as the federal reserve to rapidly increase rates.
Impacting asset values in the near term.
30 year residential mortgage rates have risen from roughly 3% one year ago to over 7% today and commercial mortgage rates have followed a similar pattern.
And while overall employment has continued to grow real wages have declined and there are increasing signs of recession risk amid a backdrop of political uncertainty.
With countervailing risks of inflation, along with the rising rates and recession fears financial market volatility has hit levels not seen since the global financial crisis in 2008 2009.
Virtually all equity and fixed income assets has been significantly impacted.
Despite this environment, we believe that broad markets positioned to ultimately to thrive as opportunities arise as they always do from market dislocation and uncertainty. We believe over time, we will be able to capture more than our share as we move ahead.
Beyond originating new business and ongoing critical priority that we're focused on is effectively addressing our nonperforming loans.
Capital is precious.
While we have confidence we will ultimately resolve those loans in a manner favorable to broad mark until they are resolved. It continues to create a drag on our growth and our earnings.
To that point the team will remain hyper focused on this issue David will provide additional detail, but we wanted to call out that this will continue to be one of our most important areas of focus.
Let me now turn to our share repurchase program to.
Today, the board approved a share repurchase program to purchase up to $75 million of common stock we remain.
Committed to continuing to source and fund new loan originations, but we recognize the value of our company and wanted an additional capital allocation lever on which to potentially act opportunistically in the future.
I'll end by saying that the board has taken decisive actions on behalf of shareholders and stakeholders to ensure the company is positioned with strong leadership and clear strategy to weather the current environment and create long term value with an experienced team in place and the lowest levered balance sheet in the industry Brian .
Mark is poised to build the business in a disciplined and thoughtful manner.
I'd like to thank our team for their hard work and contributions and while this will take some time. We believe we are taking the right actions to move forward and achieve long term success and with that I'll turn the call over to David.
Okay.
Thanks, Kevin and good afternoon, everyone.
Our operating results are detailed on slide seven of our earnings presentation for.
For the third quarter of 2022, we produced total revenue of $27 1 million.
And net income of $2 6 million.
On a per share basis. This reflects GAAP net income of approximately <unk> <unk> per diluted common share.
The quarter over quarter change in GAAP net income reflects an increase to our CSO loan loss reserve.
Approximately <unk> <unk> per diluted common share.
This increase was primarily due to an increase in specific loan loss reserves of $9 6 million.
I will discuss shortly.
Adjusting for the impact of nonrecurring costs and other noncash items, our distributable earnings prior to a realized loss on investments in the third quarter were $18 million or <unk> 14 per diluted common share.
Interest income on our loans in the third quarter was $20 $7 million and fee income was $6 4 million.
On the expense side for the third quarter, we had cash compensation and employee benefits expense of $2 $7 million, while G&A was $3 million.
Our total cash compensation and G&A expense improved three 4% from the second quarter of 2022, and with $18 $3 million in expense year to date, we maintain our expectation of approximately $24 million in total cash compensation and G&A expenses for the full year 2022.
In the third quarter, we executed on 18 loan originations with an average loan size of $7 8 million and an unlevered yield of 12, 9%.
As a reminder, our loans remains short term with a weighted average term of 14 months at origination for the third quarter.
The short term nature of our loans reduces our exposure to interest rate fluctuations. It also allows us to be nimble and fairly quickly as the environment evolves.
Turning to portfolio management.
As of September 30, we had contractual default rate of 19% of the total portfolio by value.
During the third quarter before closed on one small loan and received payoffs on six months and contractual default status representing $18 million in total commitment.
At the end of quarter, we owned 11 foreclosed properties with $93 $5 million in carrying value.
As I noted earlier, our seasonal reserve was up in the third quarter.
This was primarily due to a specific $9 1 million dollar loan loss reserve associated with a loan collateralized by a hotel in Colorado, the borrower in bankruptcy and if they'll plan to flag the hotel, resulting in material material deterioration in the appraised value.
As a reminder, our portfolio was less than 5% hotels and weighted towards single and multifamily collateral substantially lower ltvs and we do not need this troubled loan is representative of a broader portfolio.
Outside of this specific reserve, we noted a 13% increase in our aggregate Cecil General reserve based on consideration of current macroeconomic factors.
From an earnings perspective as of September 30th we had approximately $115 $4 million in principal outstanding on loans and non accrual status and foreclosed properties, which resulted in a drag on earnings of approximately <unk> <unk> per diluted common share for the third quarter of 2022.
As Kevin mentioned effectively addressing our nonperforming loans remains a high priority as we continue to work diligently to resolve these issues to achieve the best results for broad market and in a manner accretive to shareholders.
Ultimately, we strive to generate strong cash flow and earnings growth. So effectively executing on this strategy is essential as we work to maximize performance.
Now turning to our balance sheet as detailed on slide 16 of our earnings presentation, we had $61 million of cash and a fully undrawn $135 million credit facility, our total liquidity of $196 million as of September 30th.
While our loan payoffs were significant in the third quarter of 2022 at $198 million. This was largely due to a few expected prepayments on storage facility loans.
However, given the changing economic backdrop, we began to see a slowdown in payoff activity in October associated with a decrease in available take out financing in the market.
We continue to work with borrowers to find exit opportunities as we focus on capital and liquidity preservation.
With our $100 million of five year, 5% fixed coupon senior unsecured notes outstanding. We currently have a debt to equity ratio of eight 8%, which remains the strongest in the mortgage REIT sector.
Maintaining a fortress balance sheet has always been a foundational principle for broad Mark and this provides a significant competitive advantage in the current environment and will allow us to remain opportunistic with an evolving market environment.
With that I'd like to pass the call back to Jeff.
Thank you David.
We understand that we delivered a significant amount of news. This afternoon, given the circumstances. The board will continue to take clear decisive action on behalf of shareholders as necessary.
Our leadership team in place that has significant proven industry experience that will work together to unlock long term value.
We understand this will take time, but we know the right path forward and given our alignment of interest with our shareholders, we can and will achieve the desired results.
This concludes our prepared remarks, we will now open up the line for questions operator.
Thank you Sir.
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Just last question is from Stephen laws from Raymond James.
Hi, good afternoon, Jeff.
Hi, good to talk to you again.
I guess the first one I'll start with what's you know talking to you you know the management change can you talk about timing of of you know what you think it will look like to get.
The new permanent team in place.
Any search expenses severance expenses, we need to think about the model.
I believe David gave a comment on the full year, but how do we think about expenses around the turnover.
I'll, let I'll, let David address those parts.
Hi, there.
Okay.
This just happens Stephen and so the board is going to begin with.
To find a new CEO and I think the important takeaway there is that.
Kevin and I, who both have a lot of experience working together in this company are committed to being here until we find that person and get him or her up to speed.
And then David you wanted to save costs and so on that part of the question.
Sure Yeah, absolutely. Thanks, Thanks, Stephen good to hear from you.
The current structure with the <unk>.
Leadership changes that we described.
Typically with Jeff and Kevin coming onboard those those will have no.
Material expense in fact, there's probably a bit of a net savings from that perspective longer term to your question. If we do <unk>.
Engaged a search firm there could be a potential search fees associate that similar to what we incurred.
In the first quarter of this year.
But it's probably too soon to tell what that number would be so I think right now I'm still comfortable running with the the $24 million of cash comp and G&A expenses and he can provide you an update in the interim and were in the fourth quarter.
Great. Thanks, David.
To think about the investment portfolio saw a footnote in the supplement. Thank you did your first mez loan of $10 million you know given the change in the increased focus on asset management are continued focus on improved portfolio performance. How do you think about.
Portfolio transition or appetite for Mezz loans is that something you'd be sort of put on hold until you get the new team in place or how do you look at that.
Jeff why don't you take that on the Mezz loan piece.
Apologies it seems Jeffrey has dropped off and even the three connecting.
So Stephen I'll take this this is Kevin hi by the way, it's been a little light.
No change to the strategy.
<unk>.
<unk> always made loan decisions based on.
Underwriting and attractiveness.
So they'll continue to do that but it's early days, so we're going to.
Look at all of that Dave do you have anything to add.
Yes.
No I mean I think.
When we did the person wont be said don't expect this to be a large portion of our portfolio I think the focus is just on finding good risk weighted investment.
Well also kind of juggling that with capital and liquidity preservation. So.
Doesn't mean, we're going to do a bunch of making loans it doesn't.
I think we're just looking for good opportunities to deploy capital while being mindful of the current macroeconomic.
Great and when you think about the dividend level you know.
Versus carb portfolio earnings given the performance levels you know how do you think about the trade off of continuing to maintain a stable dividend, it's not being covered or do you think about you know.
Right sizing the dividend and then increasing our back office portfolio performance improves.
I'll take that one.
Tim at least Steven this is a board decision that is reviewed and determined each month.
So.
In light of the rapidly changing business environment management is taking a hard look at the business.
That work is ongoing.
It will take a little time.
The board's policy is always strive to set a dividend that is sustainable.
And then over time as covered by distributable EPS.
But again, it's a board decision.
We will continue to review and determined that each month.
Alright, I appreciate the time, it's definitely Jeff.
Yeah, you're welcome.
You're back Jeff.
I am back yes, sorry.
Thank you, Sir ladies and gentlemen.
A reminder, if you would like to ask a question. Please press Star then one.
Christian we have is from Steve Delaney from JMP Securities.
Hello, everyone and Jeff and Kevin.
Nice to connect with you again.
Probably probably wasn't party necessarily part of your plan six months ago, but I respect do you have a lot of talent to bring to bear and the company is lucky to have you to step in.
Hum.
We are in a very different world.
We were.
Six months 12 months ago from a real estate standpoint.
Brian .
Obviously, some enthusiasm he referred to a rebranding I think just maybe trying to raise visibility and broadened.
Broadened products.
Unfortunately, maybe where we are right now in terms of priorities in the market for all real estate lenders, maybe you know broadening or expanding is less important than focusing on.
The existing portfolio.
I guess my question there is.
About your current lending focus.
Can you talk about what youre comfortable doing and Youre, having repayments obviously come in although the next part of my question is the slowdown there.
It was caught by David's comment about takeout financing event that seems logical.
As we think about it today and as your team comes to work what is the like intensity or focus about generating new credits relative to where it may have been over the last couple of years can you just comment that on that and whether there's a different level of selectivity yield requirement et cetera.
At this time and you're in your lending appetite.
Sure.
That's a lot packed into that question Steve.
Uh huh.
And and I guess that.
The overarching theme is that whether I was in the sea or Brian or now me again, we've never changed from.
Our strict underwriting standards.
Yes.
We you know when you and I first met I think we were in nine states.
We're now a national lender, we look at every market with the same.
Careful eye that we always have.
And so and every loan opportunity and so we still make sure that we're paying attention to loan to value ratios to loan to cost ratios. All those things that have always been underpinnings of our loan portfolio.
And you know in these markets. It's an it is an uncertain time and and so we probably want to to look a little more carefully not that that's probably not the right term, but we want to continue to look carefully and just make sure that we're underwriting good loans.
Hi, This is Kevin.
Yes, let me just ask a little bit to that place.
And I think carefully is.
As an appropriate word.
Payoffs are an important source of capital for us.
And.
For the reasons David mentioned.
Rising interest rates rising cap rates.
Exits are difficult for our borrowers and we expect that they will be for.
Who knows how long, but so we're just being cautious and careful but we are a lender and so we're going to continue to make good loans, where they are available.
And on your borrowers situation I assume if you have a good property and you have a reasonably responsible borrower and he's basically just saying one.
Normally you would think okay. If I completed I sell it to I, just you know I I refi. It in some fashion you have a certain term you're in there for the renovation or construction and youre not in there necessarily for a five year.
Alone.
Does this is your primary if it's if it's a good borrower and a good property.
It is the logical thing to do just to <unk>.
About extensions.
And have that developer.
You know get more involved in and leasing or whatever.
Strategic plan was for the property if in fact, the new operator can't be brought into the property or in fact.
Pour on your Oreo you guys have a lot of expertise do you are you thinking about somebody garage, if theres just not gonna be a bid that you like to kind of take over and manage that property in the interim and try to ride this thing out without giving away property.
Kevin or Dave I D.
Yeah, I'll take it I would say, it's Steve it's a case by case basis, and that's exactly what we're working on.
The answers are different depending on the situation.
Sure.
Yeah.
Well listen I know, it's a challenging time, you've got a great fortress balance sheet and.
I'm sure that.
You'll come through it and applaud the effort on the buyback and I kind of Echo.
No.
Stephen laws as comment.
The dividends, obviously, a board decision where.
There's going to be a lot of dividends reconsidered simply because you know one a 15% yield is kind of crazy, but two you know you've got a balance it against liquidity needs and the.
And the buyback opportunity so nobody nobody signed on buying your stock thinking they were going to get 15% yield. So I'll just leave it leave it with that thought and wish you all well and good health.
Thank you Steve Nice Scott.
Yes, Sir.
Yeah.
Thank you. The next question we have is from Christian now from Piper Sandler.
Thanks.
Hey, good afternoon, gentlemen, just starting with the leadership transition Jeff I'm, just curious why now for the change.
As Brian has just been in the seat for about eight months or so in what's been a very very difficult economic environment and just related to that.
Do you expect any strategic changes with a new fee.
Yeah.
The why now I think the answer is that.
The board and Brian sat down and looked around and decided this was the right time.
And and I.
I think.
I don't think I can go much beyond that candidly and then as far as.
Strategic changes.
You know Brian did a lot of good work around here I don't I don't see us unraveling all of the good work that he did.
If that's the question.
And.
We've got great management in place the underwriting and the portfolio management are all good folks and so I really think the underpinnings are good for where we are.
That's helpful.
And then a second one just on loans and contractual default so they're now.
Just under 290 million can you just speak to some of the key reasons for the continued increases that we've seen is it due to being more aggressive in putting loans on contractual default, which Brian has talked about in the past or is it the current environment or just curious what else might be at play here.
Sure.
Chris I'll take this one and let let Kevin and Jeff commented as needed.
So I think we were up quarter over quarter about $60 million.
Defaults.
And the biggest driver on Ts is primary the ladder in terms of being more aggressive I can note that I think 40 out of the 60 million was us deciding to strategically put.
Seven loans six of them were performing one was defaults with the same borrower and then put the whole package and default just to expedite the process around probably the most valuable but risky loan that was at the one in default, so we're making a little bit quicker decisions around.
Putting borrowers in default.
Exercising our right to start the foreclosure process to put a little bit more pressure and just trying to find more timely exits.
In the third quarter I think we had about $18 million of defaults are resolved in October had wanted to see if we were about $20 million and we're expecting kind of a little bit of an increased pace consistent with that on a monthly basis, just by way of being a little bit pushy or being a little bit tougher and being more aggressive.
With foreclosure action or threatened foreclosure action and finding ways to exit as quickly as we can.
Thanks, David and just one last one from me just on the $12 million provision in the quarter was that provision was it all due to the Colorado Hotel loan.
Then what is the size of that work.
Sure I'll take that one Christian it's nearly totally driven so I think our our increased quarter over quarter was about $10 million and 9.1 million of that was a specific reserve on this one Colorado walkers works.
Loan it was a.
About 40% discount to the to the principal outstanding and that creates value that we had originally expected on it.
Okay.
Thanks for taking my questions.
Thanks.
Thank you.
Final question, we have is from Matthew Howlett from B Riley.
Oh, good afternoon, Hi, Jasmine that nice speaking with you again.
Yes my question.
My question is on the buyback I mean, if I think a lot of shareholders, who had asked the question I'm curious to hear the answer when you look at.
Buying back shares today your stocks roughly at a 30% discount to tangible book value.
You look at that for sure originating.
New loans at 13% Unlevered.
What can you tell us in terms of propensity to the board today.
To aggressively pursue share repurchases.
In light of the stocks discount to tangible book and what metrics do you look at versus.
Originating for us buying back shares.
Yeah.
Kevin would you handle this one place sure sure so.
Hey, Matthew.
The board did approve a $75 million share repurchase program.
It's just one.
Additional capital allocation lever that we think is prudent to have.
So.
In terms of our use of capital our main businesses to source and fund.
Loan originations.
But we do understand the value of our company.
And.
Again, we thought it was prudent to have this additional lever.
To potentially act in the future.
I'll also say that we announced the plan.
But the amount the timing the execution all of that is part of our overall capital allocation strategy.
Which which we'll determine over time, so not much to add in terms of <unk>.
Price or expectation or all that kind of stuff in terms of the dividend you asked about that obviously, it's a balance it's both are taken to consideration or our shareholders.
Shareholders expect dividends our goal as I said as to.
We set a dividend that's sustainable over time and covered by distributable EPS. So we will continue to do that our board will continue to do that this is just another another use of capital lever that we now have.
Got you and when you look at tangible.
Tangible book value of that stock price to tangible book.
Good reason reasonable proxy.
When it would be attractive to buy back shares.
No.
Originating I mean, just let me just walk walk me through the accretion sort of analysis.
I guess my question is why wouldn't that take priority when they stopped doing that a tangible meaningful discount to book.
It's something we'll analyze.
I can't tell you exactly what the prices are how we're going to look at it.
We.
We put the plan in place and now we intend to do the work.
Execute when we think it's appropriate.
Okay Fair enough and then on that on the on the on the topic of yield I mean.
Obviously, there was there was guidance of yields falling over time, a 10 to 12 per cent and clearly the key putting tableau on 13% I mean with spreads now higher interest rates I mean.
And when can we sort of look at our models Jose.
Margin is to spread the unlevered spreads go to start moving the other way.
Given given the environment, we're in or is there something else there.
I'll I'll say something just generally and then I'll turn it over to David for more specifics, we do think given all the dislocation that there will be opportunities.
We want to be poised to take advantage of those opportunities.
It's still very early.
So but in terms of kind of where we see that I'll, let David answer the questions more specifically.
Sure. Thanks, Thanks for the question I have to say that yes.
Yes. So we were at 12, 9% on new originations all yield Unlevered. This quarter I think last quarter. We were around 10, 1%. So I think we talked a little bit last quarter about there being a lag in timing in terms of price discovery from a bid ask spread on construction lending. So I think this is the first quarter. We started to see that closed now I can say some borrowers are.
Probably hesitant to pull the trigger and do new loans, given the current macroeconomic environment, but we did finally start to see that gap close a bit from the from the bid ask spread and went in our favor. So I think you know I think we said in our prepared remarks expect to be somewhere around 12%, 13% at least in the near term.
I think thats just feels good based off of this past quarter.
Gotcha and I guess, just the last question, while I have you I mean.
Clearly the priority is to get through the non accruals as a classic free cash capital, but you know what.
Or are the debt markets open I mean are they available to broad market you talked about in the past you know maybe not maybe things have changed now, but it would be what you look at the leverage.
It does stand out I mean, there's nothing obviously due for a while and let's say eight 8%.
You know what when you talk about issuing debt what can you tell us in terms of.
You can issue at.
Sure I mean, I'll take this and let Kevin and Jeff chime in as well I mean, right now it doesn't seem like the time to be raising capital.
We still continue to have conversations where we're ready to access the capital markets day.
We see some windows of sustainability, but current current market you can see how few transactions there are.
So I think.
We certainly wouldn't be able to execute at a 5% fixed rate coupons like we did in November I wish I could go back in time and triple the size of that but I think you know in terms of cash liquidity position. We feel good about where we are for now we're measuring that against our origination pipeline other demands like the dividend and.
You know where.
Share repurchases could come into play in the future. So I think theres a few different levers that we're measuring but we don't need capital right now and now it seems like a time, where if you're raising capital it's a bit of.
A really urgent need or desperation, which were not in that position. So we continue to monitor it.
Hopeful that you see some more transaction volume in the near term.
I would just add.
Echo what David said, but that does the job is to stay in touch with the capital markets.
Like all Reits need to stay in touch.
The capital intensive business, we need capital.
So whether now is the right time.
I don't disagree with what David said, but that can change and so we need to just be ready.
And so that's what we'll do.
Yeah.
Well My question asked another way, but do you still feel like that the model could support when the time is right.
A turn of leverage.
Where there is a there's leverage on the balance sheet.
No decisions it all depends on on.
However, it's just another another.
Decision that we make.
It depends on.
Loans.
That we can originate so.
No I'm not I'm not signaling anything more than that.
Being in touch with the markets I think as David has mentioned in past calls.
We constantly evaluate.
The capital markets and make decisions all the time, so it will just keep doing that.
Quechua I'll leave it there and good luck on this ratio will await an update thank you.
Thank you.
Thank you Michelle.
That concludes the question and answer session I would like to turn the floor back over to management for closing remarks.
Jeffrey Please go ahead Sir.
Thank you everyone for joining us one last time, David Schneider, we all wish you the very best.
And I look forward to speaking with all of you on our next call. Thank you.
Okay.
Thank you, Sir ladies and gentlemen that then concludes today's conference. Thank you for joining US you may now disconnect your lines.
Yeah.
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