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Edited Transcript of ADJ.DE earnings conference call or presentation 13-Nov-19 10:00am GMT

Q3 2019 ADO Properties SA Earnings Call

LUXEMBOURG Dec 2, 2019 (Thomson StreetEvents) -- Edited Transcript of ADO Properties SA earnings conference call or presentation Wednesday, November 13, 2019 at 10:00:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Eran Amir

ADO Properties S.A. - COO

* Eyal Merdler;Chief Financial Officer

* Ran Laufer

ADO Properties S.A. - CEO

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Presentation

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Operator [1]

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Dear ladies and gentlemen, welcome to the conference call of ADO Properties. At our customer's request, this conference will be recorded. (Operator Instructions) May I now hand you over to Ran Laufer, who will start the meeting today. Please go ahead, sir.

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Ran Laufer, ADO Properties S.A. - CEO [2]

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Thank you, Ulya. Dear all, on behalf of ADO Properties and the entire management team, I would like to welcome you to today's combined third quarter results and analyst call. Together with me today are, for the first time, Eyal Merdler, our CFO; and Eran Amir, COO, who joined us on October 1.

Today, we would like to provide you with an update on the new management team, the third quarter figures, our stance on the Berlin Mietendeckel, the recent disposal to Gewobag and our guidance for the remainder of the year. As usual, the presentation will be followed by a Q&A session.

Since October 1, Eyal joined us from ADO Group as CFO, where he brings with him years of financial experience. His last position as the CFO of ADO Group brings load of ADO property-specific experience to the table. Eran has an engineering background and brings a wide range of operation and project management experience that contributes extremely to the company. Recently, he also gained further real estate experience within Germany, making him very capable for future improve of our platform.

At the end of Q3, ADO Properties had an EUR 4.5 billion portfolio, of which the vast majority are residential portfolios in Berlin. Only a mere 14% are resi-anchored commercial units. When adjusting for the recent disposal to Gewobag, the portfolio value at the end of Q3 would have amounted up to EUR 3.5 billion. As reported before, we have recently sold approximately 5,900 residential units to Gewobag, a transaction which we anticipate to close and receive funds for by the end of November or early December. Given the strong commercial rental market in Berlin, our modest commercial portfolio will become a more important driver for our like-for-like rental growth going forward. As a result of the Mietendeckel, we do expect that the CapEx investments required to bring back apartments to the modern standards will be declined given the rent caps provided. Moreover, we expect an increase in interest for condominiums, driven by the mismatch for increasing migration of middle to higher income households to Berlin.

Over the last 4 years, ADO has successfully engaged in privatization, and expects to continue a similar pace with these activities going forward.

Moving to Slide #5. As you can see, income from rental activities has grown by 8% year-to-year, amounting up to EUR 107.5 million year-to-date. It is important to note that we have accelerate the lease-up in our portfolio on the back of the Mietendeckel. Whereas we had invested significantly CapEx before, improving unit quality as demanded by tenants willing to pay market rents, we have now decided to limit CapEx and lease out the apartments within the potential new adjusted framework. We continue to realize good results on privatization, concluding the most recent transactions at prices of more than EUR 4,000 per square meter.

Since the beginning of the year, our EPRA NAV per share has increased by more than 13% to EUR 62.47, even after a EUR 0.70 per share dividend payment. When accounting for disposal to Gewobag, our LTV at the end of Q3 stood on 21%, well below our 40% maximum target and providing ample flexibility for future growth.

Turning to Slide #7. After the disposal of Gewobag, the core of our portfolio is with 46% heavily concentrated in the central part of Berlin and still consists out of around 16,300 units. The disposal has hardly an effect on occupancy, which remains strong at 97.4%.

Now I will turn over to Eran for more clarification on operational numbers.

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Eran Amir, ADO Properties S.A. - COO [3]

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Thank you, Rob. During Q3, like-for-like rental growth remained strong at 4.4% over the quarter. As you can see in the bars at the left, vacancy reduction contributed strongly to these figures. On the other hand, rent increasing are slowly coming down, which we also anticipate for the unit CapEx going forward. With 2.5% vacancy at Q3 2019, we expect to maintain this level or even lower as we will reduce unit CapEx because of the ramp-up under the Mietendeckel. In addition, we will also reduce the void period as it would mainly require time for repair and maintenance, turning the units swiftly back to the market, therefore allowing us to push down vacancy further. For your models, you can include lower maintenance and CapEx per square meter going forward. In Q3 2019, we are at annualized run rate of EUR 32.20 per square meter, and those already been close at our 2017 levels. Back to Ran.

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Ran Laufer, ADO Properties S.A. - CEO [4]

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Thanks, Eran. In Slide #9, we can see that since the middle of June, it has been a regulatory rollercoaster in Berlin. The Senate accepted the draft bill on Berlin Specific Rent Regulation with the aim of freezing rent for a 5-year period. Since important details on the Mietendeckel are still unclear, we are not in a position at this time to provide any reliable estimates of the bill's impact, if and when adopted, on ADO's financial performance. What we can say is that, if a new regulation were to become effective, it would very likely impact our business in the short term and will put marginal pressure on AFFO. However, we believe that the proposed new regulation will, in the medium to long term, result in a widening of the demand-supply imbalance, which should strengthen the position of our portfolio in the long run. In addition, we agree with the view of most market participants that the proposed new regulation is unconstitutional and will not help to solve Berlin's housing shortage.

Switching to Slide #10. When it comes to our privatization activities, to date, we have sold 49 units at price level exceeding EUR 4,000 per square meter. The sales reflect a value difference of 24% compared to the average book value in our central locations, with 46% of the portfolio performing the largest district in our portfolio after the disposal to Gewobag. We will continue our privatization efforts and remain focused on price maximization, whilst looking to replenish our active prioritization portfolio, tapping from our large pool of potential privatization units.

Now I'll turn it over to Eyal for information on our financing on Page #12.

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Eyal Merdler;Chief Financial Officer, [5]

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Thank you, Ran. When looking at our balance sheet, the most interesting figure on this page is a EUR 62.47 EPRA NAV per share, which is significantly higher than today's share price. The discount might reflect a degree of uncertainty surrounding the Mietendeckel. But as of today, we do not foresee that the Mietendeckel will have an impact on our valuation in the short term. After accounting for the disposal to Gewobag, we have split the portfolio to investment properties and assets held for sale, as closing is planned for the end of November. The EUR 929 million of assets held for sale is higher than the EUR 920 million sales price, as the entities contain some cash and receivables. When looking at the investment properties at the end of Q3, we had a portfolio worth of EUR 4.5 billion. Adjusting for the sale of Gewobag, EUR 3.5 billion will remain.

Now turning to Slide #13. At the end of Q3, our average debt maturity stood at 4.1 years. When adjusting the numbers for the disposal to Gewobag, we will have an average debt maturity of 4.5 years. The average cost of debt is at 1.6% at the end of Q3, and will remain the same after the disposal. We anticipate to stick with our 40% LTV target, and given the ongoing regulatory uncertainty, we feel very comfortable where we currently are.

Looking at it from another perspective, the situation could also offer opportunities on which we are able to act given our significant headroom. Given the current interest rate environment, there is still room for improvement as our marginal cost of debt is at least 50 basis points lower than the current average. Recently, we secured a 1.07% interest rate on a EUR 80 million loan with a 8-years maturity, almost twice as long as our current average.

Following the disposal to Gewobag, our LTV dropped to 21%, in a very comfortable compliance with our bond covenants, and hoping that the rating agency will return our outlook back to stable.

Now I will turn over back to Ran for some more information about the disposal to Gewobag on Page 14.

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Ran Laufer, ADO Properties S.A. - CEO [6]

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Many thanks, Eyal. As a result of the sale to Gewobag and our maximum 40% LTV, we have headroom allowing for up to EUR 1.1 billion of investments. We are already proactively looking how to allocate those proceeds and are considering various opportunities, including repaying existing loans as well as new portfolio acquisitions.

Looking at the dividend, and despite of the backdrop of the Gewobag disposal, we will continue to pay out at least 50% of FFO 1, with the current minimum of at least EUR 0.75 dividend per share over 2019.

Now I will turn back to Eyal for some more financial information.

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Eyal Merdler;Chief Financial Officer, [7]

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Thank you, Ran. Looking at the P&L, we continue to focus on becoming more cost-aware and increase operational efficients further. During Q3, our NOI margin has come down slightly on the back of intensive letting effort in an attempt to fill up vacancies, as letting cost increases. Moreover, on the back of signing the new EUR 80 million loan, our net cash interest expenses changed, and we foresee this to decrease going forward as the proceeds from the recent disposal will be used to pay down part of the debt.

Now further to the FFO in Slide #16. Our FFO 1 stands up to EUR 17 million for the third quarter, arriving at EUR 50.4 million year-to-date. In order to drive the cash going forward, and as indicated on the previous slide, we are aware that we will have to further optimize the platform and cost structure throughout the company. Looking at the AFFO, we have been able to lower maintenance CapEx significantly by Q3 to EUR 32.20 per square meter, which is closely in line with our 2017 level. We are focused, especially with the discussion on the Mietendeckel in mind, to remain critical on our maintenance CapEx and expect it to be able to offset part of the potential drop in top line with lower total CapEx.

Finally, coming to our guidance for the rest of the year in Slide #17. Unfortunately, we currently do not provide a forward-looking like-for-like rental growth guidance, given the upcoming discussion of potential implication of the Mietendeckel. We can confirm that, excluding the disposal to Gewobag, our FFO 1 run rate should come out at EUR 65 million. We currently are at an average cost of debt of 1.6%, and continue to feel comfortable having a 21% LTV with our maximum LTV target of 40%. We continue to target a 50% dividend payout ratio over FFO 1, and we will pay out at least EUR 0.75 for 2019.

Herewith, also on behalf of Ran and Eran, I would like to thank you for joining our Q3 results presentation today. And as such, I would like to open up the floor for the Q&A session.

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Questions and Answers

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Operator [1]

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We've received the first question from [Fili Navine], Barclays.

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Unidentified Analyst, [2]

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I appreciate you don't give a like-for-like rental guidance, but I was wondering if you could provide a range for your like-for-like from, say, a worst-case to best-case scenario?

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Unidentified Company Representative, [3]

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Thank you, [Fili], for this question. Well, we do expect an annual CapEx in maintenance to be reduced by double-digit million figure as a consequence of the Mietendeckel. The impact on rents is still uncertain since we have not been provided with all inputs in order to calculate the rents. As soon as we have more clarity on the impact of the rents, we will give you a total figure on the impact on the FFO.

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Operator [4]

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(Operator Instructions)

And the next question is from [Alain Magem at Sywater Capital].

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Unidentified Analyst, [5]

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Ran, could you and the team address the ongoing relationship with ADO Group and how the current developments are perceived within ADO Properties. And how you are managing for these developments?

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Eyal Merdler;Chief Financial Officer, [6]

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Hey, it's Eyal. I will take this answer. According to the public information that we have published in Israel after the [EGM] in Israel approved in the 7th of November, the transaction, the merger, it will take around of 30 to 50 days for the Israeli Justice Department to approve this kind of merger. The second thing that we know is a public information that ADO Group needs to sell around 5% of ADO Properties' share in order to prevent [adler] from mandatory takeover. This is the public information that we have currently. Assuming that it will end mid-December, then the closing will occur.

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Unidentified Analyst, [7]

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And with a new major shareholder and a slightly different shareholder structure, how will that affect the plans of ADO Properties over the foreseeable future?

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Ran Laufer, ADO Properties S.A. - CEO [8]

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I would like to thank you for this clarification. We are not in a position that we are able to answer in behalf of a third-party...

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Unidentified Analyst, [9]

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I'm sorry, I'm just asking in terms of ADO Properties, not in terms of Group. I'm just trying to understand how these developments are perceived within ADO Properties and how your strategy is developing? And I suppose, maybe addressing the point of will you consider repurchasing the 5% from ADO Group? And obviously, the 3 of you have a very intimate knowledge of ADO Group, so you're in a very good position to give us clarity on that relationship.

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Ran Laufer, ADO Properties S.A. - CEO [10]

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What we are constantly doing is managing the ADO platform as the best of our possibilities. In our side, nothing has been changed, and the day-to-day is continuous of this operational financial optimization. And strategic planning is underway and will be presented in the coming months.

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Unidentified Analyst, [11]

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Sure. But considering the success, and as you rightfully pointed out, the significant discount to NAV that is currently in the market, and the opportunity you have with the sale of Carlos, would that not be a high priority as a way of optimizing the capital structure of the company that you are currently managing, to prioritize that acquisition? Or at least helping us understand how you'd consider that possibility?

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Ran Laufer, ADO Properties S.A. - CEO [12]

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Well, I can mention, again, some of the points that have been raised already in the presentation that, operationally, we're making significant improvements in the results and financial, we are reducing cost of debt. CapEx, as we see, it is significantly reduced from EUR 46 per square meter to EUR 32. We do expect that privatization will continue. We're actively exploring acquisitions in Berlin and exploring opportunities in other locations. We are aware that we have headroom because of the target 40% LTV. And we have mentioned also what we will continue to do on the FFO 1 in dividends. So we are aware about this complete status, and we are continuing to work on a daily basis.

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Unidentified Analyst, [13]

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Sure. But for investors, it's obviously -- and obviously, with your experience with ADO group, and also with your connections with TLG, we can't -- no investor in this asset class in the shares or even in the bonds can ignore the corporate consolidation and the changes going on. So it has to be a big part of our investment thesis to understand the way that each of the companies is approaching. And obviously, you have a very -- you've had a fantastic track record of growth in Berlin and you now have a very low leverage. If anything, we're seeing ongoing demand for assets in Berlin, so it wouldn't be totally unusual to see you expanding out into broader Germany. But that -- we'd obviously be looking for clear signs of that change in strategy. So I think it's fair and helpful to ask about -- as much of this is strategy -- we're all watching the operations very clearly, but the strategy and the activity within the consolidation is clearly important.

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Ran Laufer, ADO Properties S.A. - CEO [14]

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Yes, again, thanks for that. And it's a completely fair question. The only issue is the time frame. So we are working very hardly with advisers and internally to evaluate the market and the possibilities. This has not been concluded yet, and we are also in the phase of receiving the funds from (technical difficulty)

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Operator [15]

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Okay, so the speakers of ADO Properties, I don't know if you muted your line by accident, or if you have to just confab but we can't hear you at the moment.

(technical difficulty)

I think there may be a technical issue. I think we're going to pause this conference for a moment. Please stay on the line, ladies and gentlemen. We will resume the conference shortly. Ladies and gentlemen, thank you for your patience. Yes, we will resume now.

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Ran Laufer, ADO Properties S.A. - CEO [16]

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Have I answered the question?

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Unidentified Analyst, [17]

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I'm at a little bit of a loss. So I'm very much trying to get insight into what is clearly a very dynamic situation and where I can't see how any investor will be able to make a decision around how to approach the equity or the debt without some further insight into how you are thinking about corporate consolidation and the strategy of your own company. We can't pretend that the activity at ADO group or the selling of Carlos or the deleveraging of the company or even changes going on at TLG and around town and the implication for Grand City can be ignored. They are a central part of the investment thesis. So any insight that you can share with us on your thinking would certainly be helpful.

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Ran Laufer, ADO Properties S.A. - CEO [18]

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Well, I don't know when we have dropped down, but what I've answered before, is that we are now evaluating all those actions strategically that will be presented in the short term. So only patience can be the one that will answer and will give the opportunities. And it's a fair question. I would not involve the parties that you have mentioned a minute ago, but we are making our own evaluation of the market, of the possibilities, and of course, we have to receive the consent of our Board. And once we have it, we will present it out.

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Operator [19]

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And the next question is from [Kevin Southbry from Sywater Capital].

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Unidentified Analyst, [20]

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I just wanted a little clarification. You mentioned the -- I think it's about a little over 6,000 units that you've got up for privatization. I'm aware of the fact that only, what was it, about 140 or so are immediately on the block. And I'm just wondering, so you've got a huge chunk of cash from Carlos, you've got headroom under your -- under the LTV target that you've just mentioned. And I'm just wondering, how many -- what's the time frame for the disposal of those flats? And have you signed any letter of intents? Are you in advanced discussions to pick up new properties? Because the amount of money you have is indicative of you're going to do something with it. But doing more disposals just adds to that pile without any real clarity.

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Ran Laufer, ADO Properties S.A. - CEO [21]

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Thanks a lot for this question. We're currently considering buying a number of smaller assets in Berlin, and we will invest in Berlin market and exploring other cities to use those proceeds. As you are mentioning, the amount should be transferred at the -- after closure at the end of November or beginning of December. So you might be assuming that we are working on using of those proceeds efficiently.

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Unidentified Analyst, [22]

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And just the time frame on the, shall we say, the more medium-term disposals, that 5,000 to 5,500 units that are not on the immediate sales list? It's a slide you had earlier in the presentation.

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Ran Laufer, ADO Properties S.A. - CEO [23]

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You are mentioning the privatization activities?

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Unidentified Analyst, [24]

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Correct.

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Ran Laufer, ADO Properties S.A. - CEO [25]

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All right. So maybe we will clear this issue again. We are continuing at the same pace. We have this ability to proceed faster with privatization as we will decide, which allows a lot of power and flexibility to the company. But in the meantime, we don't see any reason to go faster and increase the rate of condo sales.

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Operator [26]

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And we've received another question. If you could briefly introduce yourself, your line is now open.

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Unidentified Analyst, [27]

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Just want to ask one question, you're talking about further acquisitions, like when you're trading now in a big, very large discount to the NAV, so every acquisition will be less accretive than buying your own stock. So maybe you can elaborate about this if you considered it?

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Ran Laufer, ADO Properties S.A. - CEO [28]

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I will let Eyal answer that. Who am I speaking with?

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Unidentified Analyst, [29]

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With [Pershar Azal from Acel Fund].

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Eyal Merdler;Chief Financial Officer, [30]

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Okay. We are looking on a number of options. However, we will not commit to any of them prior to having received the proceeds from the sale. One of the options that we are considering eventually is also a modest buyback, but we are not in the situation right now to announce something like that. We will get the money, and then we will present a full package of strategic plan to the company.

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Operator [31]

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There are no further questions at this time. So I hand back to the speakers.

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Ran Laufer, ADO Properties S.A. - CEO [32]

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Again, many thanks to all of you that joined us here today. We will be back with the presentation of our full year results on the 18th of March 2020. If you have any further questions in the meantime, please feel free to reach out. For now, thank you, and goodbye.