Q2 2023 National Health Investors Inc Earnings Call
Greetings and welcome to the National Health investors second quarter 2023 earnings call.
It started the presentation all lines will be in a listen only mode. Afterwards, we will conduct a question and answer session.
At that time, if you have a question. Please press the one followed by the four on your telephone.
If at any time during the conference you need to reach an operator, Please press star zero.
As a reminder, today's call is being recorded Wednesday August nine 2023.
I'd now like turn the conference over to Dana Hambly. Please go ahead.
Thank you and welcome to the National Health Investors Conference call to review the company's results for the second quarter of 2023 on the call today are Eric Mendelsohn, President and CEO , Kevin Pascoe, Chief Investment Officer, John Spaid, Chief Financial Officer, and David <unk>, Chief Accounting Officer, the results as well as notice of the accessibility of this call.
<unk> call on a listen only basis were released after the market closed yesterday in a press release thats been covered by the financial media.
As a reminder, any statements in this conference call, which are not historical facts are forward looking statements NHI cautions investors that any forward looking statements may involve risks or uncertainties and are not guarantees of future performance.
All forward looking statements represent nhi's judgment as of the date of this conference call investors are urged to carefully review various disclosures made by NHI and its periodic reports filed with the Securities and Exchange Commission, including the risk factors and other information disclosed in Nhi's Form 10-Q for the quarter ended June 32023.
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Copies of these findings are available on the SEC's website at SEC Gov or on Nhi's website at NHI REIT Dot Com. In addition, certain terms used in this call are non-GAAP financial measures reconciliations of which are provided in nhi's earnings release and related tables and schedules, which have been filed on form 8-K with the SEC.
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Listeners are encouraged to review those reconciliations provided in the earnings release together with all other information provided in that release.
I'll now turn the call over to our CEO Eric Mendelsohn.
Thank you Hello, and thanks to everyone for joining us today.
We're making progress on our return to growth through our portfolio optimization improvements and shop operations and strategic positioning of the balance sheet.
Our second quarter results generally experienced stable cash collections as well as increased deferral repayments. However, the quarter was impacted by onetime concessions specific to two senior housing operators totaling approximately $1 9 million or <unk> <unk> per share when can.
Impaired to the first quarter of 2023.
As we often discuss some of our senior housing tenants are struggling in this post pandemic era, which introduces variability to our quarterly results.
Our long term outlook has not changed as fundamentals improve and the need driven senior housing and shop portfolios, while our CRC and sniff platforms remain pillars of stability.
Since the end of the first quarter, we completed the sale of seven properties, including one property for $23 7 million that was not previously held for sale and were sold for a substantial gain.
This was an opportunistic disposition of a property that needed significant capex and was cash flow negative to our tenant which would have likely lead to future rent concessions.
We currently have just four properties held for sale, which allows us to shift more of our attention and energy to growth initiatives.
We see the benefits from the dispositions and other portfolio optimization efforts through significantly improved EBITDAR coverage. This is particularly evident for our need driven senior housing tenants, where coverage, which reflects the impact of our portfolio optimization improved year over year.
Year by 37% and sequentially by 10% to one to two times. This is the highest ever reported since separately breaking out this category.
Favorable occupancy trends and moderating wage inflation give us optimism that coverage will continue to move higher.
The shop portfolio improved NOI to $2 1 million from $1 9 million in the first quarter of 2023 <unk>.
While still performing below initial expectations. The move in trends have improved recently generating a sizable 170 basis point gain in July occupancy.
And we are midway through our Capex campaign with encouraging results.
Kevin will provide more details in just a moment, we anticipate improving shop NOI in the second half of 2023, and our longer term view of the upside potential remains unchanged.
The balance sheet and our financial profile are in great shape with leverage at just four six times and more than $500 million of revolver capacity.
We're very focused on external growth opportunities, which are starting to look more attractive as capital becomes increasingly scarce.
We are seeing the direct impact of higher interest rates in the form of more financing opportunities and second tries at deals that fell through for lack of equity financing.
As outlined in last Night's press release, we adjusted our guidance, which reflects this quarters higher than expected concessions.
John will discuss the updated guidance in more detail during his prepared remarks.
I want to assure investors that we have taken immediate action to address this quarter's shortfall and therefore expect better results in the third and fourth quarters. Our long term view of the industry remains incredibly optimistic and we have plenty of dry powder to support our internal and external.
Growth opportunities.
Now I'll turn the call over to Kevin to provide more details on our operations Kevin.
Thank you Eric I'll concentrate my comments on investment and disposition activity as well as the performance of our major asset classes and operators.
We closed on the sale of seven properties for net proceeds of $42 million since the end of the first quarter, leaving just four properties held for sale.
It's the second quarter of 2021, we completed the sale of 48 senior housing and skilled nursing properties for net proceeds of $392 million. These.
These properties generated low single digit NOI yields with very fair lease coverage.
With this process effectively complete we are in a great position to supply capital given our low leverage and acquisition environment that seems to be moving towards a buyer's market.
So the pipeline is starting to reflect the changes in our cost of capital. We have multiple LOI is in process. So we are confident we will announce new investment activity before the end of the year.
Shifting to asset management.
Overall second quarter contractual cash collections were approximately 97% relative to the first quarter and excluding the impact of discrete items, we collected approximately $1 9 million less from two senior housing tenants.
This included approximately 800000 of rent concessions to one operator, and approximately $1 1 million and lower collections from a tenant on cash basis accounting.
As Eric noted, we have taken action to address this shortfall, including allocating additional asset management resources and selling negative cash flow properties.
We are already benefiting from these actions, which gives us confidence that our third and fourth quarters results will improve.
EBITDAR coverage for the company increased sequentially to 175 times from one seven times driven by gains in senior housing.
Remember that the coverage metrics represent trailing 12 month results and do not reflect better occupancy and margin trends, we generally experienced in the second quarter of 2023.
Total occupancy improved year over year by 280 basis points to 81, 7% on a 240 basis point increase in senior housing and a 330 basis point increase in skilled nursing.
Reviewing the knee driven platform, which is 26% of annualized cash NOI. We again saw positive trends with coverage at one to two times, representing the fifth straight quarter of sequential growth.
The increase was driven in large part by Bickford at 141 times, which now reflects the full impact of the April 2022 rent reset.
Victor its second quarter occupancy improved by 40% 40 basis points.
To 82% compared to first quarter of 2023 and average monthly occupancy improved throughout the quarter with June at 82, 7%.
The strong net move ins continued into the third quarter and spot occupancy at the end of last week was 83, 7%.
Bickford repaid over 350000 deferrals during the second quarter with a similar amount or higher expected in the third quarter.
Aside from Bickford coverage is increasing across the other 40 need driven properties, which account for approximately 13% of annualized NOI.
We reported coverage at one seven times, which is the second.
Which is the highest reported coverage since the second quarter of 2020, and the sixth straight quarter of sequential improvement.
While the trend is encouraging at just over one times coverage the environment for these operators remains difficult even with reported occupancy at 87%.
This asset classes, where most of our optimization efforts have been focused.
The progress has been slow, but steady and we think improving financial.
Proving industry fundamentals, coupled with our direct actions will result in fewer rent concessions.
Continuing with our discretionary senior housing portfolio. This group accounts for 30% of adjusted NOI, including 27% from entrance fee communities.
<unk>, our largest tenant improved covered sequentially to $1 two eight times from 117 times driven by excellent entrance fee sales in the first quarter, which continued into the second.
Our senior housing discretionary coverage, excluding SLC, which largely reflects the performance of our other entrance fee communities declined sequentially to 134 times from 175 times.
This was driven by higher entrance fee refunds at a couple of properties in the first quarter.
We know this business can be bumpy from quarter to quarter due to the variable nature of entrance fee sales in refunds, but this is certainly not on our worry list.
Yes.
The sniff and specialty hospital portfolio, which represents 37% of annualized adjusted NOI reported solid coverage at 248 times, which is unchanged sequentially.
Snip occupancy improved 330 basis points year over year to 79%.
Since the start of the pandemic NHI has provided a rent deferral to only one sniff operator in late 2021 in early 2022.
This operator started repaying the balance in the second half of 2022, and thus far has repaid more than 50% of the deferral amount.
And HCN Ensign, obviously anchor our sniff portfolio, but we've been happy with the performance of all the operators, which gives us confidence in their ability to adapt to any new rule change, including a potential staffing mandate.
Lastly, in our shop portfolio, which represents 3% of adjusted NOI, we are still experiencing margin pressure and the performance is below our initial projections.
But we are making progress in the portfolio did generate a $200000 sequential NOI improvement.
The margin improved 170 basis points from the first quarter to 17, 9% and monthly occupancy increase for a push.
Fourth straight months through June to 75, 6%.
The sales pipeline has been building gradually throughout the year and June proved to easily be our strongest move added net move in month of the year.
This bodes well for July as preliminary results indicate that monthly occupancy increased another 170 basis points to 77, 3%.
The recent trends give us conviction in our longer term view that this portfolio can generate NOI dollars in the high teens and margins in the mid 30% range.
This provides an excellent source of internal growth while building a platform with a long runway for external growth.
I'll now turn the call over to John to discuss our financial results and guidance.
Yes.
Thank you Kevin.
Hello, everyone.
For the quarter ended July June 32023, our net income NAREIT <unk> and normalized <unk> per diluted common share of <unk> 90 to $1 five and $1 six per share respectively.
In the second quarter, our <unk> was $44 $6 million, our second quarter results were mixed with both improving shop performance and better deferral collections are higher than forecasted concessions.
Our second quarter declined by $3 2 million compared to the first quarter of 2023, but recall as we noted in our Q1 remarks first quarter results for our real estate investments segment included two discrete beneficial items totaling approximately $1 $3 million when.
When compared to the first quarter of 2023 second quarter F&D was further impacted by approximately $1 9 million and lower cash collections and higher rent concessions to two operators.
The sequential impacts.
Were partially offset by an increase of approximately $200000 in the collection of rent deferrals from five operators.
Our current <unk> capital expenditures and rent increases from annual rent escalators.
As Eric mentioned, the Sharp's portfolio NOI improved modestly to $2 $1 million in the second quarter from $1 $9 million in the first quarter of 2023.
During the second quarter, we sold six properties five of which were previously in assets held for sale for $39 1 million in proceeds and net gains of $11 $3 million.
Subsequent to the end of the second quarter, we closed on one additional property for $2 $9 million in net proceeds leading four properties and assets held for sale was approximately $10 $9 million net book value.
Interest expense in the second quarter compared to the first quarter was flat largely attributable to lower total debt offset by higher average interest rates.
Last night, we updated our full year 2023 guidance.
Our guidance reflects additional improvement in repayment prior deferral balances consistent with levels experienced in the first and second quarters.
It includes continuing asset dispositions and loan repayments additional rent concessions higher lease incentive amortization expense attributable to the timber ridge earn out paid in February .
And higher interest rates for the remainder of 2023.
Our guidance includes $60 $6 million from recently announced investments plus continuing fulfillment of our commitments, but it does not include any additional unidentified investments.
We adjusted our guidance to a range of 185 to $186 $8 million.
The slight reduction is driven primarily by higher than expected second quarter concessions, which includes lower than expected cash basis cash basis customer collections and the incremental asset sold in Q2, not previously in our guidance and higher interest expense offset by better than guided default collections.
We also adjusted the range for our normalized <unk>, which on a range of 107, one to $188 $8 million.
On a per share basis. This equates to a midpoint of $4 33 down one 4% from $4 39.
The updated normalized <unk> guidance reflects the changes to the FHA.
As well as changes to our noncash rental revenue, which includes straight line rent and amortization of lease incentives.
For the second quarter, our leverage ratio was unchanged from the first quarter at four six times net debt to adjusted EBITDA.
At the end of July we had $186 million outstanding on our $700 million revolver, providing ample liquidity of over $500 million in cash and revolver availability.
We also have a full $500 million available under our ATM program.
As previously announced we entered into a new 200, new two year $200 million term loan during the second quarter.
The proceeds were used to pay off a term loan maturing in September 2023.
The new term loan bears a variable interest at the same credit spread over sofa I'll now paid off term loan.
We're grateful to the participating syndicate of nine banks with a strong show of support at the time of increasingly scarce capital.
We believe this validates our decision early in the pandemic to optimize our real estate portfolio, while preserving a strong balance sheet, which now creates a strategic advantage as we execute on external growth.
Finally, our second quarter Fad payout ratio was 87, 6%.
As we announced last night, our board of directors declared a <unk> 90 per share dividend for shareholders of record September 29, 2023 and payable on November three 2023.
Once again, thank you all for joining the call today. This concludes our prepared remarks operator, please open the lines for questions.
Thank you.
Do you like to register a question. Please press the one oh by the four on your telephone you.
You had three home pump technology requests.
If a question has been answered I'd like to draw your reputation is the one you won.
Vegetarian once again on the follow up that is the one part for any questions or comments.
One moment, please our first question.
And we'll get to our first question on the line from one side, where you have of BMO capital markets go right ahead.
Hi, good morning.
Just a question on deferrals.
Recognize brooks.
You guys talked about it being a bumpy road, but generally trending upwards. So just curious kind of what happened to surprise.
Sequentially.
And Eric I think you mentioned that an incremental asset was sold that had negative.
Average debt.
Improvement in.
The situation going forward I guess are there any other assets like Jack that arent held for sale.
May be looked at as a disposition candidate going forward.
Given there's still kind of choppy recovery.
Hey, Juan it's Eric you had a couple of questions. There one was lumpy about lumpy deferrals and then any other assets.
The answer is no we've got four smallish assets and assets held for sale I think the total value, we estimated slightly over $10 million.
And in so far as deferrals are concerned.
We're very.
Over granting deferrals, we don't want to do it.
In this case there was a building that had a negative cash flow and was heading towards more deferrals and we had an opportunity to sell it at a gain and frankly lowering our exposure to this tenant seemed very prudent.
Since they were a major.
User of deferrals.
So we took advantage of that.
I guess why wasn't that one building already.
On the target disposition list.
Sure.
Because it was a good building in a good market that if it was run well.
Make money I really we hated to sell that building, but we didn't have an operator in that market and the operator, we had.
Wasn't running it well so.
And.
A well funded operator presented themselves at just the right time. So it was an opportunistic transaction that helped us.
Lower our exposure to this one tenant.
And then thank you and then just as a follow up.
Hoping you could maybe expand on the investment pipeline.
The mix of.
Asset.
Looking at or the mix between traditional fee simple inbound.
As well as kind of just the <unk>.
Overall of the opportunity set.
Sure Juan this is Kevin.
Looking at kind of anything and everything right now that said, it's more focused on the needs driven senior housing side.
Skilled nursing is absolutely still in play as well as our other asset classes that we have in the portfolio.
But we have seen a little more action.
<unk>.
On the senior housing side.
More basis type plays, which traditionally hasn't been a fit for us, but with the right operator rate market.
And the REIT structure is.
That's interesting on the structure side.
We absolutely still want to own the real estate so.
The.
What we've been working towards is to develop that pipeline and you will see more likely than not some element of lending where we can have a pipeline.
To be able to acquire assets that may not always be true. There is some some instances out there where we think there is some good lending opportunities to afford us good yield that we may not want to have as assets long term, but for now.
It's a good opportunity for the portfolio. So it's going to be a mix, which is kind of what you've seen from us before but still with an eye towards acquisitions as much as possible. It's just finding the right opportunity and then again it kind of rebuilding mode. The.
The pipeline for us to be able to execute whether thats to buy the real estate today or set it up for <unk>.
For a future acquisition.
Thank you.
Okay.
Thank you very much.
Once again on the phones, if you would like to ask any questions or have any comments you may do so now by pressing the one four on your telephone keypad.
We will get to our next question on the line from Austin, where Smith with Keybanc capital markets.
Great. Thanks.
Perfect. Thank you.
So based on July results.
Some of the sales you've completed do you expect deferrals going forward to return to a <unk> run rate or even improve based on the additional sales that you have in the pipeline can you just give some direction around that.
Your expectation for that figure moving forward.
Allison This is Josh Bae.
I'll do my best concessions are still in guidance.
But.
We're trying to move as quickly as we can to put an end to them.
And that was part of our.
Strategy in the second quarter.
So.
One of the things that is happening to us as we have cash basis tenants.
At.
Slow pay offs during the quarter and we're trying to recover those rents in subsequent quarters, and we're trying to get them back on it.
<unk> payment stream as quickly as we can.
So thats the upside to our guidance that we can recover the rent owed to us and weren't paid in the second quarter that were part of our I'm missing.
NOI.
And then.
Get them to pay what they owe us consistently on time moving forward and then the risk is that the <unk>.
Senior housing industry continues to have some bumps and they are not able to do that so we're working as hard as we Canada to achieve that.
Got it that's helpful and then I wanted to hit on Bickford for a moment occupancy.
Occupancy I think was stable coverage continues to improve and now been over a year since you added the language about.
And they can remain a going concern, but I guess do you feel like there are through the worst of it at this point or are there other hurdles that they still need decline, what's sort of the latest update.
Ladies update there.
Sure Austin this is Kevin.
NHI is through what it needed to do what you are seeing the portfolio continue to heal occupancy improving coverage improving.
So we've done the work that we needed to I think as any good steward of the portfolio. There's always some element of reviewing and seeing if there is some property that makes sense to continue to hold.
For now.
<unk> it is.
And.
<unk>.
We think that theres still some opportunity for them to maximize their business.
And they can work with their other financial partners on that whether it makes sense for them too.
Sell some properties or or maybe move some sub debt around so they are not there.
Wouldn't couch them as completely done with what theyre doing as a business, but as it relates to NHI, our structure and our relationship I feel like we're on pretty good footing and as I said, you continue to see them improve quarter over quarter.
I appreciate the comments thank you.
Thanks Austin.
Thank you very much appreciate whether next question on the line another follow up from Juan Sanabria with BMO capital markets go right ahead.
Alright taxi.
Tag team I guess.
Please yes.
Eric I was just curious if you could expand a little bit on those big for comments.
It sounded a little bit more cautious about.
Their ability to.
No.
Okay solvent that gas given other yes. It is.
That now.
Those risks are those waning.
Curious on.
Whether or not there it may eventually be.
And al and then transition because the operators no longer profitable.
They lose other assets outside of your relationship with them.
Yeah.
That's a fair question one.
Look our portfolio is doing great.
It would be.
It would be very simple for them, if they only had our buildings and their home health and their their pharmacy.
Would be a moneymaking venture they do have other buildings that have variable rate debt.
And through no fault of their own that debt has ratcheted up so they have unforeseen expenses due to that debt.
And they are working with their banks to either refinance them to HUD or sell them.
Or run them better so all of that is ongoing and we're monitoring that closely.
And.
I would say that based on what they're doing with our portfolio things are getting slightly better.
Okay. Thank you for that and then just you.
You mentioned dispositions.
We're higher than you had expected and that drove a little bit of a tweak down in the guidance or that was one of the drivers just curious on the yields on those dispositions in terms of rent that flowed through the P&L associated with those those dispositions in the second quarter.
One I think in our business update.
Dana.
Table that you can refer to give you that that information regarding yield.
But remember.
One reason why we're making these dispositions as they are leading to concessions so that yield isn't really a true yield considering concessions that are resulting from them.
And so that's been a big part of our strategy is to make sure we maintain a strong balance sheet.
When things are when we have invested capital that isn't delivering the returns and we need.
Okay.
I would say that one property.
Got accelerated a little bit this year.
Because there were some changes in the law and one of the states in the state that it was operating.
And it became more problematic to move the license if we waited too long so we sort of weighed the risk of that disposition against the changes in law in that state and move that along a little bit faster.
Because we're really working hard one to put an end to all of this noise. This year right now as soon as we possibly can.
And.
There was some element of this particular asset.
Moving our guidance down a little bit because we were thinking it had.
Had some opportunity to be a contributor this year, but that operator just became.
There's just too much risk associated with that operator.
And not move it out to not move it out.
That's helpful. And then just a final comment or question I should say.
What are you guys seeing broadly between independent living and assisted.
Topics obviously.
Earning season, and as part of that or more broadly I guess are you seeing any.
Price competition, either discounting waiving of fees et cetera, given some of the distressed <unk> and seniors housing more broadly either with your operators or the competitor set.
Sure. This is Kevin again.
I would say that we've seen the more need driven side rebound faster I think we've both seen that in macro but also within our portfolio as we've talked about.
Our independent communities have been slower to respond on.
Occupancy.
Also think that's associated with having a couple manager changes over the last.
12 months to 24 months, which is.
There has not been helpful for them rebuilding their pipeline more recently, we've seen some gains in independent living as we noted in our prepared comments and feel like the operating partners have done a good job of.
Rebuilding the teams in those sales funnel. So we're thinking that we believe that that should continue.
A new.
I do think that there is an element of.
Concessions going on on both the assisted and independent.
I think as we look at some of the Nic map data would suggest that there is increases in street.
Street rates, but then or at least and in addition to the customers that are already in the communities, but we know full well through.
Looking at the markets in our buildings and looking at some of the other data that they are absolutely are concessions going on and even as it relates to our independent building.
I'm trying to get occupancy has been the priority. So there is there.
Concessions going on there to make sure that we're getting net move outs, which again starting to happen. So we've been pleased with that.
But it is challenging to increase rates as youre trying to fill.
<unk>.
Thank you very helpful. Appreciate it.
Thank you.
Our next question a question on the line another follow up from Austin, <unk> with Keybanc capital markets go right ahead.
Great. Thanks for taking the follow up and get it get around the horn here twice.
You've kind of commented on the big for debt refinancing. So I had a follow up I mean, it's been in the works now for a little while now it feels like and I'm. Just wondering are we talking about a significant amount of debt.
And is there any sense around the timeline of when they could receive the HUD financing.
So this is Kevin again.
They're I think they're working with our banks to extend the current debt that they have trying to get better to a better capital environment.
The ability to source debt right now.
We can all agree is very difficult.
The.
HUD HUD take outs as it relates to those specific buildings.
<unk> got to be stable on their operations for the hub to be able to take it out at a level that makes sense, which is what they put us very focused on they've had several executions on it so far.
Got a couple more that are underway.
<unk>.
It's my belief that they can get that done, but there is some execution that they need to accomplish to ultimately get those close once it does that will help them be in a much better.
Stable.
Positioned as it relates to their debt so.
I think it's something that their plan is something thats executable, but it's going to take a little bit more time.
Got it that's helpful. And then just last one for me I mean, Eric is there anything you can share as far as.
The negotiations and plan to renew early renewal.
I believe it's 2026 and HC leases.
Okay.
Just that there are discussions are ongoing.
Would you expect anything it could get announced or completed before the end of this year.
Probably not by the end of the year.
And next year type of thing.
I appreciate the time thank you.
Thank you very much we'll get to our next question on the line.
Conor for rescue with Wells Fargo, Great ahead.
Hey, good afternoon, Hey, Suzanne for time today, Thanks for taking the question.
And apologies in advance if you guys touched on some of these topics.
Got it from a portion of the Q&A here. So in the midst of some of the weakness we've seen in independent living throughout this earning cycle and some of the commentary from NAREIT is this an area of senior housing where any time I would like to allocate capital toward the present are there better opportunities that exist within assisted living and skilled nursing from your perspective.
This is Kevin as it currently stands I think be the yields are going to be slightly better on the more of the needs driven product, which is where a lot of our.
Attention has been as of late.
Think there could be some opportunities on the independent side first and foremost, though we want to make sure we get our portfolio.
Something closer to stable before we do a lot more investment there that set of whether it's with our current operating partners or with an existing operating partner.
Sorry, a new operating partner that could bring some communities and a new relationship to us we would absolutely explore that to date, though we haven't seen the yields be.
Very enticing on independent living it's probably.
Closer to where we see.
Some implied cost of capital is still so if theres not accretive margin.
Turning to focus our efforts elsewhere.
That's great, Kevin and sticking with capital allocation.
Talk a little bit more about your plans for two H 'twenty three you'll be hearing specifically do you anticipate paying down any additional debt or any activity on the equity side.
So right now.
We're in great shape in terms of our leverage so that we could deploy.
A little more leveraged towards acquisitions that would be our initial plan.
And I think what we're trying to do is get back to that growth.
And demonstrate that the noise has eliminated from our name the growth is back that would then improve the equity.
And Laura our total cost of capital.
And then once we get into a steady stream of investments. We would then start to entertain tapping equity again.
And I would remind you that we do have a $160 million authorization to repurchase our stock.
So that's always on the table, particularly given since we have some leverage to be able to do just that.
Okay.
Fantastic color thanks, guys.
Thank you very much and we have no further questions on the line. Please continue with the presentation or any closing remarks.
Thanks, everyone for your time and interest today, and we will see many of you at NAREIT.
Okay.
Thank you very much and thank you everyone that does conclude the conference call for today. We thank you for your participation and ask to disconnect. Your lines have a good data point.
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