Q2 2023 Urban Edge Properties Earnings Call
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Great, Thanks, and well.
Come to the urban properties second quarter of two.
Chosen twenty-three earnings conference call.
At this time all participants are in the least.
And the only mode.
A brief question and answer session will follow the formal presentation.
If anyone should require operator assistance during the conference. Please press <unk> on your child a phone keypad.
As a reminder, this conference is being recorded it is now my pleasure to introduce your host.
Mr <unk>, Sir you'll may begin.
Good morning, and welcome to urban edge properties 2023 second quarter earnings Conference call.
Warning me today are Jeff Olson, Chairman and Chief Executive Officer, Geoff Morrell M, Chief Operating Officer, Mark Langer, Chief Financial Officer, Robert Milton General Counsel.
Scott Auster Executive Vice President ahead of leasing and Andrea Drazen, Chief Accounting Officer.
Please note today's discussion may contain forward looking statements about the company's views of future events and financial performance.
Which are subject to numerous assumptions risks and uncertainties in which the company does not undertake to update.
Actual future results financial condition and business may differ materially please.
Please refer to our filings with the S. E C, which are also available on our website for more information about the company.
And our discussion today, we will refer to certain non-GAAP financial measures reconciliation of these measures to GAAP results are available in our earnings release and supplemental disclosure package and the investors section of our website.
At this time it is my pleasure to introduce our chairman and Chief Executive Officer, Jeff Olson, Great. Thank you Aitan and good morning.
Ah results. This quarter reflects our continued progress towards achieving our 2023 net operating income growth and F. F O goals.
Giving us further confidence in a teeming our three year growth targets, we outlined at our Investor day in April .
Clooney in growing net operating income by at least 20% compared to 2022.
Achieving F S O of $1.35 per share in 2025.
Our conviction stems from the fact that approximately 80 per cent of our expected N O I growth is derived from executed leases and contractual rent bumps.
On that point.
We disclosed that's $6 million of annualized gross rents commence during the second quarter on previously signed leases.
Our current pipeline of sin, but not open leases amounts to $28 million of annual gross ranch representing.
Representing 11% of current annual N O y a.
Highest percentage in the shopping center sector.
Our strong performance. This year has exceeded our plan supporting our decision to raise guidance again this quarter.
Our new F F O as adjusted range is $1.16 to $1.19 per share an increase of one and a half cents at the mid point.
This follows the two cents per share increase we announced in the first quarter.
We continue to see strong demand from a variety of retail categories, especially grocers Discounters quick service restaurants, health and beauty and medical services.
This strong demand combined with limited supply and manageable bankruptcy risk has created a favorable environment for most landlords.
According to Cushman and Wakefield retail shopping center vacancy is currently at an all time low of 5.4%.
And new retail construction is significantly constrained by high construction and capital costs.
Especially in the D C to Boston corridor.
The most densely populated supply constrained corridor in the country.
Our same property occupancy rate is now 95.5%.
The highest level since 2018.
But still well below are 98% three year occupancy average from 2016 to 2018.
We are pleased to have recaptured 184000 square feet of the 206000 square feet or bed Bath and beyond space, We had at the beginning of the year.
Is it will allow us to upgrade our tenants at higher rents and increased traffic at these centers.
We are making great progress on our active redevelopment and anchor repositioning projects.
During the quarter, we completed three projects, which included a new walgreen's at <unk>.
Morris Children's health, <unk> and total wine at Cherry Hill.
We have approximately $200 million of active redevelopment projects currently underway that are expected to generate a healthy 12% and leverage return.
Of which 98 per cent of the total project G. L. A has been preleased.
We remain confident in our long term strategy.
Due to the favorable supply and demand dynamics of the shopping center industry.
Tequila late in our markets.
Signed but not open leasing pipeline is the fuel that will help us achieve our goal of increasing that operating income by at least 20% over the next three years.
This N O Y growth combined with our strong balance sheet.
Abundant liquidity and well ladder debt maturities gives us confidence in reaching our 2025 F F O target of $1.35 per share.
We are proud to have been named one of new Jersey's best places to work by N J Biz magazine for a second consecutive year.
We believe this is a direct result of our commitment to creating a collaborative culture that prioritizes the professional growth and wellbeing of our employees.
We recognize our employees are our greatest asset <unk>.
And are proud to have been acknowledged for our dedication to that I.
I will now turn it over to our Chief operating Officer, Jeff Llewellyn.
Thanks, Jeff and good morning, everyone.
The leasing environment is the best we have seen in the last 15 years.
Our portfolio has just nine bacon spaces that are 20000 square feet or larger including two that we just got back yesterday from bed Bath and beyond.
We are actively negotiating deals on eight of those nine vacancies with multiple retailers bidding on seven of the eight.
With more choices, we are able to extract higher rent and better terms.
Our focus is on selecting the right tenant for each asset and generating the most attractive capital adjusted returns.
The data coming out of the recent bed Bath bankruptcy is another indication of the healthy state of the industry.
Of 109 leases that were auctioned off in the first grouping of stores 71 were awarded to retailers with the backup bitter in many cases also being a retailer this.
This exemplifies the strong demand in the limited supply for box space in shopping centres today.
The second quarter, new leasing activity was light with 11 leases aggregating 28000 square feet spreads were negative compared to prior tenants as most of these spaces were interior mall locations in Puerto Rico that had been vacant for more than two years.
We expect increased activity in the second half of 2023, as we have about 400000 square feet of leases in the pipeline at a spread in excess of 40 per cent.
On the development side, we delivered three projects in the second quarter and continued to work through our sector, leading sign but not open Piper.
As we delivered a tenant's we've seen some construction savings from budgeted numbers as supply chain concerns of ease and material and labor prices have stabilised.
We also continue to work on monetizing some of our non-core land parcels. The most notable of which is our residential opportunity at Bergen Town Center.
In the second quarter, we received final site plan approvals for 456 multifamily units a credit to our entire development team who got this approved with a unanimous vote ahead of our projected timeline.
We are actively engaged with several residential developers to maximize value and we hope to announce a deal suit at a valuation on a price per unit basis that we believe will be one of the highest ever for Bergen County.
Lastly, I want to add a few comments about the transaction market today.
The second quarter has seen a real pickup and offerings and there are probably more assets in the market now than at any time in the last 12 months with the bid ask spread narrowing <unk>.
Sellers are prioritising, the certainty of closing to a higher degree than what we have store historically seen during other parts of the cycle.
As a well capitalised buyer with deep lending relationships. This provides us with a strong competitive advantage and we're using that advantage to spend more time looking at deals in our core markets.
We also believe there was a very attractive cap right spread right now between potential retail acquisitions and a number of the high quality low cap right assets that we all.
Including excess landed Bergen, our industrial portfolio and self storage properties.
As a result, we may look to dispose of certain low cap nonretail assets and recycled proceeds into higher yielding and in our mind undervalued retail properties in our core markets.
This aligns with our strategic plan to simplify our business and grow earnings.
I will now turn it over to our Chief Financial Officer, Mark Langer.
Thanks, Jeff Good morning.
I will discuss drivers of our second quarter results comment on our balance sheet and liquidity and will close with an update on our 2000 twenty-three guidance.
Starting with our results for the quarter we.
We reported F F O as adjusted or 30 cents per share in Saint property, NOI growth, including redevelopment of 3.5% compared to the second quarter of 2022.
The increase was primarily due to rent commencement on new leases and higher net recovery income driven by lower operating expenses.
Excluding the collection of amounts previously deem uncollectible in both periods Saint property NOI growth would have increased by 6.6%.
In terms of our balance sheet, we ended the quarter with $93 million of cash and no amounts drawn on our 800 million dollar line of credit.
We have been busy on the financing front.
In addition to the successful refinancing we announced on our call last quarter regarding Bergen town centres, New 290 million dollar $6, 3% seven year mortgage we close three other mortgage financing and the second quarter.
We refinanced our $9 million mortgage at shops at Bruckner with a new six year 38 million dollar loan at a fixed rate of 6%.
A portion of the proceeds was used to pay off our 29 million dollar variable rate mortgage on the Plaza, a cherry Hill that was bearing interest at 8.75%.
We also obtained a new 10 year 16 million dollar mortgage at a fixed rate of 6% secured by our Newington comments property. We now have only one remaining maturity and 2000 twenty-three limited to a 21 million dollar five per cent mortgage at Hudson Mall.
Looking forward, we feel very comfortable with our six mortgages maturing in 2024, and 2025, which aggregate only 10% of our total debt amounting to $173 million at a weighted average in place rate of 5.3%.
These are secured by high quality assets that we believe are financeable at rates and the 6% to 6.5% range today.
Considering the financing activity, we have announced this year less than 5% of our total debt is now unhedged variable rate debt and all of it relates to 2024 maturities.
In short we feel very good about the way our balance sheet his position.
Turning to our outlook for 2023.
As previously announced we increased our 2000 twenty-three F. F. O is adjusted guidance to her new range of $1 16 to $1.19 per share, which when compared to our prior guidance increases the lower end of the range by two cents a share and increases the upper end by a penny a share.
The increase reflects are better than expected performance year to date and our increased guidance for same property NOI growth, including redevelopment with a new mid 0.2%.
Up from the prior mid point of 1%.
The new midpoint assumes a general credit loss of 100 basis points of gross revenues and incorporates $1 million of lost rent for the remainder of the year on the two bed bath and beyond anchor leases that we recaptured.
In addition, our guidance assumes operating expenses normalize to levels similar to the third quarter of 2022.
Is this quarter benefited from the timing of certain deferred maintenance projects, which will likely start in the third quarter.
In terms of collections on past amounts deem uncollectible are updated 20 twenty-three guidance at the midpoint assumes we will receive two and a half million dollars during 2023.
An increase of a half a million dollars above our prior plan based on some payments that we received from bankrupt tenants that vacated in 2020.
We have received about $1.7 million in the first half of 2023 and expect another $800000 for the remainder of the year.
Nope that collections on amounts deemed uncollectible during the third and fourth quarter of 2022 were materially higher as we received about four and a half million dollars in the second half of last year.
This will be a headwind to our NOI growth for the remainder of this year.
Recurring G&A this quarter was $8.9 million.
This is in line with our G&A guidance, which we did not change from last quarter, when we update it and lowered it to reflect our expectation that full year recurring G&A will be between 34, and a half the 36 and a half million dollars <unk>.
5% reduction from 2022.
We are continuing our efforts to evaluate ways, we can extract savings and become more efficient and are pleased with the progress we have made.
In closing our team is focused on executing the growth plan, we outlined in April at our Investor Day.
We are grateful for the dedication and execution provided by the entire <unk>, who has made our success possible.
I will now turn the call over to the operator for questions.
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We will now be conducting a question and answer session.
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Our first question comes from.
<unk> <unk>, <unk> <unk> or I S I.
Good morning, everyone. Just curious just you know on the leases that you execute it.
You know what what do these annual rent bumps look like coming to you you know in the past you would get these one per cent annual bumps for boxes.
You clearly talk about destroying demand, there's not a lot of supply out there right. So I guess what is that economics look like you know.
This point thanks.
Hey, Samir good morning, it's Jeff them awhile them. Yeah. So we're we're obviously that's a focal point of all the new leases, we're executing and we are seeing better increases now than we were historically, our our our our rent growth in general on the new leases were signing now is north of 2%. That's a combination of shop inbox deals. So in the in the ones that we did this quarter I think we're about <unk>.
<unk>, two two and a quarter in 2.5% it was a small quarter for us leasing wise volumize, but our pipeline is pretty extensive and we expect to be able to you know extract a lot new leases in the third quarter.
Okay got it and then and then you talked about the transaction market. That's opening up I know there was an article yesterday about the industrial property needs to Hanover.
I don't know how much you can provide a bit more color on that and maybe just sort of maybe what has been sort of like initial interest.
Let's see the assets in the market, we can't get into too many details on it but we are certainly excited about this this concept of selling low cap right assets and redeploying capital more creative leg. It's early in the process for that <unk>.
But the interest level is very strong I Wanna say, there are 100 C. As that have been signed that upset 125, yeah. Yeah. So and that's increasing it was 100 just a couple of days ago and in addition to the industrial acid as Jeff mentioned, Yeah. We also have excess land at Bergen, we've excess land.
Other assets, we own a couple of self storage facilities that we developed several years ago that has now been stabilised. We owned a number of single 10, an asset anchor by credit Retailer's that would include home depot, who happens to be our largest retailer that could be up for consideration. So we're evaluating our entire pool.
<unk> to see where we might be able to make some trades.
Got it and then my last one it is for Mark Uhm. Similarly, your expense recoveries were up again in the second quarter.
Maybe talk around that and and how we should be thinking about that kind of what's that stable number to think about it maybe.
For the remainder of the year ended at 24. Thanks.
Sure as I think I've messaged previously, we did expect and message that we expected the recovery ratio to improve as we were bringing this S. N O pipeline I'm in to income producing and so recoveries went from 83.5% on the same property basis to 85.5% this quarter.
And while this quarter did benefit from some lower levels of expenses I would say that because of the continuation of how we see the S. N O pipeline I think our run rate can be around this 85% you know elevated level and then picking up next year modestly.
That's it for me. Thanks, so much alright, thank you Samantha.
The next question.
<unk> <unk> <unk> <unk> point.
Hi, Florida.
Hey, guys. Thanks, good morning, So I I I I think it's actually really interesting this idea of selling low cap right assets and buying.
Hire yielding retail assets that presumably I had some some attractive growth here as well maybe.
Maybe if you could I know, it's a little early and you've got at least one acid in the market right now you've got two big.
New Jersey, industrial and obviously, you've got your your potential industrial development and.
Long island at Sunrise as well, maybe if you can touch upon does this impact you know your plans with Sunrise and maybe getting out of that and also what kind of spreads on on sales versus acquisitions do you expect to get on.
Yeah on some of the recycling.
Yeah, I mean, it's it's a little early to talk about the spreads, but it's sizeable so I mean, I I I I think on many of these assets.
As it was reported and it's some 5% cap rates and you can buy shopping centers.
At a much larger spread than that.
I'll, let you have to answer the the Sunrise question, Yeah, I mean Flores good morning, you know.
Just like our east Hanover property, where there's just such great demand for space in these in these real infill Metro New York locations, you know Sunrise shares many of those same qualities and and that obviously it makes it a very attractive site for the industrial development community. So the the the pick up in demand that we see across the area is going a bit benefit us.
Too early to really tell you whether that project gets built as an industrial project a retail project a residential some combination and are rollin' that we're actively working through the the plan with the with the town of Oyster Bay, we're actively working through it with our existing retailers and it's it's it's definitely moving in the right direction. Both in terms of numbers and in terms of you know.
Getting clarity on what we're gonna do but I would say that the the metrics. We're seeing an industrial today that that led us to put east Hanover on the market are also gonna help us at Sunrise, if we move forward with an industrial project there.
Thanks, I I saw that.
You bought a the the ground branch at part of the Sunrise properties as that just simplify the ownership and and and the structure of that yeah.
Yeah. There there was an estate state sale acid Bath declared that's been in the works for Awhile and we had to wait for something to pass through probate to get that done, but yeah. That's just a way of simplifying and consolidating our holdings into one entity.
So, Florida, let me just add one thank you of course, let me just add one thing here because because as I as I fought this morning about some of the unique characteristics of you. We are sort of put them into three different pockets. The first is is is what we've clearly communicated in terms of R. N O y trajectory, which leads to.
F F O growth getting to this dollar 35 in 2025 and that's all rooted in this S. N O pipeline, which is about $28 million and our 200 million dollar redevelopment pipeline, that's yielding around 12%. So that's sort of one number two is this <unk>.
<unk> of ours to trade out of some low cap right assets into higher cap right assets, which were beginning to test the market and then the third point really has more to do with the unique structure of our balance sheet, which as you know is is is all centered around <unk>.
<unk> mortgage debt and we do have an ability to remove about $110 million of debt between the D. P O at Las Catalina, which is about $40 million and the foreclosure at Kingswood, which is around $70 million. So I think those three things are unique to you <unk>.
<unk>.
Thanks, but no and I I you know I.
My My next question I guess the follow up question on your balance sheet, because I I do think that it's one of the other things that set you guys apart your.
Your mortgage structure.
I I founded unique in some ways that you're actually able to save money and buy refinancing assets today, obviously, the bruckner loan with with pretty cheap and maybe Mark if you could comment a little bit on the you know what you're seeing in the financing markets, 6% appears even pretending your money.
<unk> you know.
Is very attractive for for six your money or Bruckner appears attractive than you're paying down debt actually that's you know at eight and a three quarter. So that's if you can walk walk through that a little bit more and give us a little more market color.
Sure floors, I think one thing just as Jeff and you both pointed out and that is if you step back and look among our public peers. We are unique in that this is kind of our soul mortgage <unk> are sold that strategy and so when we go out and talk to lenders, having a well capitalised public read like us.
We're kind of differentiate it from the get go because of these times sponsorship really does matter and when you look at the three primary sources that we go to starting with C. M. B S. I would actually say that market has been more volatile recently and the retail pricing for assets that we have actually has been inefficient.
And so when you go to the next prong of the regional banks clearly there's been a bifurcation given all the headline noise and some of the restructuring that they've done. They are we we found many of our regional relationships actually we're still open for business. It is a relationship driven type of transaction. They in turn want deposits they play in.
Smaller you know tears of loan size, which is fine for many of our centers, but where we've seen the most traction and where myself and and and a ton and other than our team really spent time is with a life companies high quality product like we have still highly desired grocery still remains of <unk>.
Interest, but even outside a grocery or just really well located well anchored high credit tendency that we have has enabled us to get the debt rates, you mentioned of 6% with real duration and you know, 60% Ltvs and higher so in terms of the last part of your question what I would say is the the rates that.
We're seeing today spreads are probably the 200 to 225 range, but really asset quality and the type of of Senator matters. So I would tell you that all in those rates are you know by 6% to 6.5%. We're doing everything we can to push the low end, but we've been very pleased with the appetite among life company.
He's for our product.
Thanks, <unk> one one final meal follow up on the on the depth side I know you have an asset in Brooklyn, an office asset that I think you were thinking about handing back the keys on can you give us an update on that.
Sure. We did we did announced to disclose last quarter neat and again this quarter floors that asked that has been transferred to special serving servicing was transferred in May I think you guys. All know the volume of activity that special services are dealing with his quite large so we all have having said that.
We are making very good progress we're in very active discussions with our lender and lender's counsel going through the foreclosure process, but it is just too early and hard to predict when that would be completed but we do expect that's where it's headed and Florence. When it's done it again, it should remove about $70 million of that for.
From our balance sheet and it should be accretive to earnings by a penny to two pennies a sure.
Perfect. Thanks, Thanks, <unk>. Thank you yep.
Our next question is from Roanoke Camden.
Stanley.
Hey, just two quick ones, one going back to Puerto Rico, if you've touched on it alrighty, just maybe thoughts on what's happening on the ground, there and maybe you're thinking of potentially selling that asset or getting a sale down there. Thanks.
Good morning, <unk>, Yeah look we've said at last quarter and what Red reiterating at this quarter, Puerto Rico is hot the the market has really come back we're seeing it in our leasing a lot of the spaces that we have down there that our interior mall spaces that over the last several years, we've just been temping, we've been gradually converting its affirm.
Imminent leases as tenants are willing to make a longer commitment to the island, one big 10, and in particular, who told US. They only had two stores on the island and about six months ago were thinking that they were gonna just exit because it was very hard to service only two stores and all the Puerto Rico came.
Came back to us in the last month and said they were gonna exercise their option and stay longer and they were gonna commit to building more stores on the island and that's one of the best softwood retailers in the world. So so we feel very good about where Puerto Rico sits from a leasing standpoint, we're opening a.
Good restaurant at our last Catalina property next week and then our sector 66 entertainment user should follow within 30 days after that as far as sale, it's not something that's on the table right now Mark talked a little bit about the refinancing that we're working through and we're excited about that and as as values continue to increase their an occupancy continues to go.
Up and we can push around a little bit more it's obviously something will continue to look at but not in the short term.
<unk> do you want to talk a little bit about the financing market in Puerto Rico, just yeah, I I would just add Ron you know, Jeff Olson mentioned, the fact that we have this discounted payoff option, that's exercisable now for Las Colinas.
Which would be April which would enable us to purchase the existing debt for 72, and a half million dollars. So based on that we are in the market. Puerto Rico. We find is best finance through the local market. We have had great success as you may remember it and getting permanent financing at Monta Hydra, we're talking to the same three <unk>.
Nimeiri lenders that are in Puerto Rico, and trying to negotiate a new mortgage now so stay tuned, but two Japanese islands point I would just say fundamentals and both leasing activity have enabled the financing market to also remain.
And increasingly more attractive opportunity for us. So we are pursuing that right now.
Great and then just for the guidance can you remind us how much bad debt is is baked into it for this year and how much have you went through year to date would be one.
And that the the second part of that question is is your sort of thinking about the 20th 2025 target.
A dollar and 35 of F F L I.
I think you've talked about you know the the spy not open pipeline off about the $200 million redevelopment at a 12 yield maybe can you remind us what are the biggest sort of moving pieces to getting to that number right. Because those first two are pretty clear, but is it is it bad that is.
You know sales just what could make you overshoot undershoot that 135.
Your mind right now thanks.
Sure. So in terms of the first question in Baghdad, we'd message that right now and guidance, we're assuming 100 basis points of general credit loss reserve.
For the portfolio overall, we added and commented on the additional.
$1 million for bed Bath, but included in our guidance is also you know the all fall out for bed Bath that we've had that Jeff mentioned, so we fully provisioned and guidance or bed bath exposure and on top of that 100 basis points General credit laws. We've got about a million seven to answer your question of how much we have deemed the uncollectible.
For the first six months.
So some of that is lumpy because of one off tenant situations, but that's the general guidance in terms of your question on the dollar 35 target I think the biggest components to you know that we're focused on is while that is another pipeline is executed we gotta get those are C DS and those tenants opened.
And not face any fallout or delays there is a small level of normal spec lease up so that needs to come to fruition and then really because we have very modest expectations on acquisitions and dispositions. That's not an element that I would say is moving the needle that much. So it's really just the fundamental pillars to N O y.
Hi that are gonna have I think the biggest impact on that <unk> and Ron Ron I would add in addition to the side not open pipeline, you know, which which as Mark said, we're focused on converting into rent commencement dates you know there's a different pipeline that sits behind it of deals that were negotiating I mentioned, we had 400000 square feet in our pipeline roughly 40% spread.
About 70% of that square footage is L. O Y executed. So if we just get that 70% that's under L. O I executed.
And to sign leases and convert that into the new signed but not open pipeline. That's a big lift combined with the existing signed by not open to getting to that dollars 35.
Excellent Super helpful. Thank you.
Thank you.
Oh and the next question is from <unk> Green Street.
Ooh.
Good morning.
Oh <unk>.
Okay, Ooh awesome, along with me too.
Can you provide.
This topic based on your conversation.
Yeah, I mean, clearly there is more institutional interests around retail I think in part because many.
Many of these institutional investors have reduced their office allocation and they're looking to put it into other product types and also in part. It's one of the few sectors, where you can obtain positive leverage so it's not like you're buying in the fours and hoping for rent growth that'll get you above your financing costs.
Day, you can actually buy properties and financed it with non recourse dead and get some type of spread so and given the resilience that you've seen in the shopping center space over the last several years I think institutions have taken interests. So no question about it there's there is institutional interest.
In retail today, and and it is proving to be.
A group of investors, that's providing some competition for us as we're going out and looking at assets.
Thank you and then my last question have you done with extra <unk>.
Oh.
Mark to market <unk> today.
I'm sorry.
Did you say that one more time pollyanna and broke up.
Yeah Yeah.
I'm, saying that given you didn't how.
<unk> have you done the insurance policy is.
<unk> <unk> <unk> <unk> <unk>.
Fulfilling it today.
<unk> breath.
Order.
Yeah, we we think it's pretty significant we have not gone lease by least by lease we're going through that right. Now is part of our budgeting exercise, but I think the biggest indicator of what of where mark to market is is just based on what what leases are under negotiation and what does that spread and we have a <unk>.
400000 square feet of leases under negotiation and the Mark to market. There is about 40% now there's some capital required for that too, but nonetheless, it's still a very high number on the highest number we've had in years yeah.
Mmk. Thank you that's fine.
Okay. Thank you Paulina.
Ladies and gentlemen, as a reminder.
Like to pose a question. Please press start one.
That I know.
Further questions at this time I would like to turn to flower back over to Mister Jeff Olson Foreclosing comments. Please <unk>.
We appreciate everyone's interest in you, we and please call us if you have any questions. Thank you so much.
This concludes today's teleconference. You may disconnect your lines at this time. Thank you very much for your participation.
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