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Edited Transcript of DEQ.DE earnings conference call or presentation 14-Nov-19 8:00am GMT

Q3 2019 Deutsche Euroshop AG Earnings Call

Hamburg Nov 25, 2019 (Thomson StreetEvents) -- Edited Transcript of Deutsche Euroshop AG earnings conference call or presentation Thursday, November 14, 2019 at 8:00:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Olaf G. Borkers

Deutsche EuroShop AG - CFO & Member of Executive Board

* Wilhelm Wellner

Deutsche EuroShop AG - CEO & Member of Executive Board

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Conference Call Participants

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* Kai Malte Klose

Joh. Berenberg, Gossler & Co. KG, Research Division - Analyst

* Michael Browne

Martin Currie Investment Management Limited - Fund Manager of Europe

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Presentation

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Operator [1]

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Ladies and gentlemen, thank you for standing by. I'm Stuart, your Chorus Call operator. Welcome, and thank you for joining the 9-month quarterly statement as of 30th of September 2019. (Operator Instructions) I would now like to turn the conference over to Mr. Wilhelm Wellner. Please go ahead.

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Wilhelm Wellner, Deutsche EuroShop AG - CEO & Member of Executive Board [2]

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Ladies and gentlemen, good morning from Hamburg and the team of Deutsche EuroShop. This is Wilhelm speaking, and today I present to you our results for the first 9 months of the year 2019. I'm together on the call with my colleagues Olaf Borkers and Patrick Kiss.

As usually, I would like to start with the operations and here beginning with the retail turnover of our tenants. On Slide 2 of the presentation, you'll find the overall number and the breakdown by retail segment.

The numbers overall have visibly improved since the first half year 2019 on the basis of a positive Q3, and most of the segments show positive growth numbers. On a like-for-like basis, our German retailers turnover improved by 1.8%, and the absolute retail turnover increased by 0.5%. In the first half of the year, these numbers were flat.

Looking at the different retail segments, we see a spread between the performances of the various segments. And again, on a like-for-like basis, food catering improved by an impressive 11.2%, followed by health, beauty, which improved by 5.9%.

Shoes and leather goods ended up with plus 2.9%. Fashion, which accounts approximately for 40% of our space and 30% of our sales, came out with a plus of 1.7% after slight minus of 0.1%, still up the first 6 months of this year. Sports, plus 2.3%. General Retail, this segment includes book stores, toys, household goods and jewelries for example, increased by 1%. Food, plus 0.8% and electronics, plus 0.6%. All those segments showed also a positive turnover development.

Department stores and hypermarkets, minus 1.1%, and services, minus 4.3%, were the only segments which showed negative numbers. But again, overall, a positive picture. Our interest sales ratio in Germany now stands at 5.5%. While the retail turnover improved, customers' footfall decreased slightly in the first 9 months. We saw a minus of 1% in Germany and a plus of 1.4% for our international centers. This shows again the general trend that the customers seem to shop less often, but not necessarily less in volume.

So and to show -- So it should also be mentioned that footfall numbers are again influenced by extraordinary effects. Some centers are currently impacted by special heavy construction works in the surroundings of our centers here Magdeburg and Wetzlar may be mentioned. And it also -- and in Poland also the defects from the increasing number of Sunday closings is included.

Coming from the operation to the financials and starting with the revenues on Page 3. The numbers over 9 months are in line with our expectations. Revenues increased slightly by 0.3% year-on-year to now $167.6 million, with centers abroad growing stronger than the ones in Germany.

As mentioned before, the leasing market in Germany continues to be demanding. We have seen some insolvencies of more sizable retail chains in 2019, some of which are, of course, also present in our centers. The most prominent being (inaudible) and (inaudible). While there is an understanding with such retailers to continue the leasing relationship for many shops, in some cases, at adjusted terms, some other shops have or will be returned to us and will then have to be released in due course. While the overall effect for the revenues for 2019 were very limited, the situation is to be addressed when we are looking in 2020, and I will come to that later. For your further information, our share of domestic and international sales stays unchanged, as you can see on this slide.

On the next slide, we show you the development of our EBIT, and the EBIT increased slightly to now EUR 146.9 million, which corresponds to plus of 0.3%. While maintenance costs were lower than last year, write-downs on rents were a bit higher, but still on a very reasonable low level that is approximately 0.75% -- sorry it's 0.75% of rent. The cost ratio stands now at 10.4%, well within the budgeted range. And just for your information, the further components of the center operational costs comprise the management fees and the non-allocatable ancillary costs.

Next is our financial result, and here you can track the changes on Page 5. Such results improved by EUR 3.1 million to minus EUR 25.3 million. The major influence factors were the following: Interest expenses decreased by EUR 2.5 million due to regular loan repayments and due to a favorable refinancing for the Altmarkt-Galerie

Dresden and the Neckar-Zentrum. And additionally, as a one-off other financial income improved substantially. As reported before, the effect came from a special interest income in relation to the trade tax refund. We have described this extraordinary effect in more detail in our annual report 2018.

The overall change of the financial results of EUR 3.1 million is visible following the financial bridge from the left, we could start, and you see the effect of the EUR 2.5 million lower interest costs. The operational and equity profit was slightly up by EUR 0.2 million. This is also driven by slightly higher rents and lower interest costs and the valuation of the swap contributed minus EUR 2.4 million and plus EUR 2.7 million came from the one-off interest income, as just explained. The minority profit share remained almost unchanged on the prior year level.

This leads us to the EBT adjusted for valuation on Page 6. The EBT rose from EUR 118.1 million to EUR 121.6 million, which is a plus of 3%. Here the standing assets contributed EUR 3.2 million and other extraordinary financial income plus 2.7%, and this was neutralized by the swap accounted for -- accounting for minus EUR 2.4 million. Excluding one-offs, EBT would have improved by 1.4%.

Looking at EPRA earnings on Page 7, that means the following. Operating profit, excluding valuation increased from EUR 107.8 million per to EUR 120.5 million, again, in particular, due to the expected trade tax reimbursement of EUR 9 million, but also because of the overall positive factors just mentioned before. And on a per share basis, EPRA earnings increased from EUR 1.74 to EUR 1.95. Excluding the nonrecurring effects, the EPRA earnings would have improved by EUR 3.7 million, that's a plus of 3.4%, ownership per share basis on effect of EUR 0.07 and the EPRA earnings now stands at -- would have been EUR 180 -- EUR 1.81. Now I'd like to come to the consolidated profit of the group on the next page.

The consolidated profit increased by EUR 11.1 million to EUR 93.9 million. Again, you see the same effects. The one-off rate reimbursement contributed EUR 9 million and the profit after tax of other spending assets improved the result by a further EUR 3.6 million. The valuation results accounted for plus EUR 1.7 million of the change. And the changes resulting from interest contributed minus EUR 2 million. Other effects, another minus EUR 1.2 million, such as steeper taxes. Earnings per share increased from EUR 1.33 to EUR 1.51. Excluding the one-offs, EPS would have increased by EUR 0.04 to EUR 1.70 -- EUR 0.37.

On Page 9, we have outlined the development of the FFO. And for the first 9 months of the year, the FFO, which excludes valuation results and the one-offs increased slightly from EUR 110.7 million to now EUR 111.7 million or on a per share basis from EUR 1.82, EUR 1.81. This is mainly due to the further interest savings on the existing financings. Please find the detailed FFO calculation on the right side of this slide.

Coming from the P&L to our balance sheet on the next page, our total assets were slightly higher, now standing at EUR 4.63 billion. That's an increase of EUR 14.9 million compared to end of 2018. And as of end of September 2019, current and noncurrent financial liabilities stood at EUR 1.5 billion, which was EUR 2.5 million lower than at the end of 2018, following scheduled repayments.

Noncurrency for tax liabilities increased by EUR 14.3 million to EUR 467 million, resulting from the regular tax depreciation. And as just reported, through planned tax restructuring of the group, we shall be able to reduce the deferred tax liabilities substantially by approximately EUR 73 million. Also, for the purpose of completeness, other current, noncurrent liabilities and provisions remained rather unchanged.

Total equity, including minorities, increased slightly by EUR 2.2 million. As you can see, our equity ratio remains at a very strong 55.7%, and the consolidated LTV now stands at 31.6%. On a look-through basis, that is the LTV calculated fully proportionally according to the group share in all assets, the LTV now stands at 33.7%, also a very reasonable and low level, especially in the light of the market discussions about potential visible negative value adjustments in the shopping center industry in various markets.

Now let's come to the financial debt on Page 11 and 12, and we give you some further information. Around EUR 691 million of our consolidated bank debt mature in the next 5 years, and we still see, as in the past, potential for some reductions of our interest cost over the next years. Currently, our consolidated debt yields an average interest rate of around 2.5%. And given the current interest rate environment and quotations from banks, we could refinance our debt below 1.5% per annum for 10 years in Germany.

Our weighted maturity of our loan portfolio now stands at 5.5 years. And on the right side of Page 12, you will find some details for such loans that we have already extended. As an example, we have a fixed loan of close to EUR 140 million at a rate of 1.68% interest rate. That rate includes already forward fees also. And another one has been extended for another 9 years, some EUR 59 million at a rate of 1.09% that was for Saarpark-Center.

After the detailed information for the Q3 numbers of 2019, let's now come to our company guidance has just updated and released, we have confirmed our guidance for 2019, and for 2020 we have adjusted our guidance slightly. You will find the numbers on Slide 13.

For 2019, we expect that the revenues are within the range of EUR 222 million to EUR 226 million. We are forecasting our EBIT between EUR 194 million and EUR 198 million and then EBT, excluding valuation, between EUR 159 million and EUR 162 million.

For the FFO, our forecast is $2.40 to EUR 2.44 per share. Taking into account the positive tax effects that we expect from a planned restructuring of the Deutsche EuroShop Group from '22 onwards -- 2020 onwards, but also considering the noticeable slowdown of the economic growth, and in particular the continuing demanding situation in the rental market, which on average leads to more lengthy re-letting process and also to certain rent adjustments, we have revised and in some cases slightly adjusted our forecast for the coming year.

For 2020, we now expect revenues between EUR 221 million and EUR 225 million. Before that, range was EUR 222 million and EUR 226 million. Earnings before interest and tax, between EUR 191 million and EUR 195 million, before EUR 194 million, EUR 198 million and EBT, excluding valuation, between EUR 159 million and EUR 162 million. Before that range was EUR 161 million and EUR 164 million. And last but not least, the FFO between EUR 150 million and EUR 153 million or EUR 2.43 to EUR 2.47 per share. This range remain unchanged.

Our dividend forecast for both 2019 and 2020 is unchanged. For 2019, we plan to increase dividend by EUR 0.05 to EUR 1.55. And for 2020, we also intend to increase dividend to EUR 1.60. After the numbers, now we look out on Page 14.

One note to the transaction market at the beginning, while we are not very actively looking at the transaction market for the purpose of own acquisitions, we have not noticed many transactions that could be considered as direct comparables to our portfolio. The demand in the market remains rather dry now for already almost 2 years with as last year's supply exceeding demand for that asset class, we will observe the price impact going forward. Last year, the net initial yield for shopping centers, so-called prime yield, has increased already for the first time for many years.

And now coming back to the operations, we continue to roll out our mall beautification and At your Service programs after the completion of 4 centers. The programs are now in progress for the centers in Dresden, Hamm, Dessau and Neunkirchen.

We have appreciated that quite a number of analysts and investors attended our Investor Day in September this year. We convince themselves of what was accomplished with such programs at the Rhein-Neckar-Zentrum.

As mentioned before, also the qualitative service show that our customers and shoppers like the new services and atmosphere improvements very much. As important as the continued physical development of our centers, we further made progress with the Digital Mall that is our step forward to combine the on- and off-line shopping world. As of today, more than 1 million readily available products are already searchable on the new digital platform for the centers, as easy as in any other e-commerce platform. Once identified, our customers can reserve the product with a click of a button on their mobile device and pick it up later in the center or that is a plan in not-a-too-distant future to have it delivered from the center.

While the latest service is still to be developed, also the number of participating retailers has to increase further for the platform to become really relevant for our center customers, however, so far, the progress made is very positive. And in the midterm, we expect a lot from it. Up to date, more than half of our centers are already on the Digital Mall, the rest of the German centers shall join in the near future, presumably until end of the year or soon after.

So for the operations, on the debt side, we are currently working on the refinancing of a total amount of EUR 264 million of debt maturing 2020 and '21 and expect to sign them in the first half year of 2020. As before, the banking market is currently still positive for us while it becomes obvious that the negative market sentiment of the sectors also considered and evaluated by the banks. However, we are confident to agree on attractive terms with the banks for the current refinancings, and we continue to maintain and deepen our close banking relations, especially with our core bank.

Last but not least, and again, we look forward to the increases of our dividends that is EUR 1.55 for 2019 and EUR 1.60 for 2020 these numbers as our guidance. Thank you for listening, and I'm happy to take questions now.

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Questions and Answers

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Operator [1]

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(Operator Instructions) First question comes from the line of Kai Klose from Berenberg.

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Kai Malte Klose, Joh. Berenberg, Gossler & Co. KG, Research Division - Analyst [2]

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A couple of questions. The first one would be, could you indicate what was the letting volumes in the first 9 months? And how the new letting rents compare or the extended rents compared to the previous ones? Second question would be regarding your appropriate lease from Tuesday, could you indicate in which malls, particularly, you see pressure on rents or an extended negotiation on rents? Does it include malls where you have already spent additional CapEx or is it for those -- primarily for those malls, which haven't been modernized yet?

And the last question would be, I didn't understand your comment correctly regarding the financing banks that some financing banks have a cautious view or careful view on shopping centers, if you could elaborate a bit more on that and how that may affect your refinancing scheduled in 2019 and/or 2020.

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Wilhelm Wellner, Deutsche EuroShop AG - CEO & Member of Executive Board [3]

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Yes. Thank you for the questions. Yes. So far, it's probably around 7% to 8% of leasing volume. However, we have to include here the (inaudible) cases, which is mainly (inaudible) and (inaudible) to be considered. And as we have said before, they account for approximately 1.7% and 1.1% of overall rent, so it gives a little different picture. However, those effects have no big impact on the numbers or our forecast for this year, but they will for next year. I hope that answers the questions.

When you come on pressure on rents and the comparison to these centers where we have conducted already At Your Service, I think there's no so close direct relations that you can say when you do some improvements in the centers in one year, you have to see it on the -- in the next year already. What I can say so far -- so maybe they have developed more or less within, let's say, the overall development looking in 2019 and the guidance for 2020.

What we can say so far is that all the At your Service centers, when I -- I shall call them that way that are the centers where we have conducted the improvements already. We have elaborated on the good turnover and frequency -- or let's say, turnover development, frequency work quite a bit down. But looking at the turnovers, they are ahead of average, all of the 4 centers. Again, no scientific explanation, but a good sign that this has a positive impact. And then you were saying -- yes.

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Kai Malte Klose, Joh. Berenberg, Gossler & Co. KG, Research Division - Analyst [4]

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So if I may, just a quick one. If I understand you correctly, the improvements of[indiscernible] you indicated the main -- among the main reasons for the lower revenue guidance for next year?

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Wilhelm Wellner, Deutsche EuroShop AG - CEO & Member of Executive Board [5]

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No. It was just one inclusion, yes. I mean they have both closed their cases, more or less, at the end of the third quarter. We negotiated with some other or, let's say, on some shops whether they're closed or not on some rents, but they have an impact. I mean they both together have 2.8% of our rents. And if you just take away, let's say -- and if you consider a bit longer re-leasing -- re-leasing time for those spaces, they are midsize spaces and the leasing take-up is not that bright at the moment. So it's part of the impact. But also other impacts, and we won't deny it, let's say, the pressure on rents, especially in the textile and the electronics part is there already. So it's not just blaming those two, but it's also an additional impact, more -- let's say more uncommon as we had that before.

And with the pressure on rents, again, as said, the At your Service centers perform, let's say, within -- looking at the rent numbers, within the portfolio, but we don't have in our, let's say, portfolio, any center where there's tremendously outstanding of a positive or the negative side. So portfolio itself is going fine. We have some better ones, the flagships like Main-Taunus or the ones in Central Eastern Europe, like Olympia is doing very fine and Danzig. We have some other smaller ones like Hameln -- Hamelin in English, Hameln in German that is doing a bit harder, but no extraordinary effects that should be of major concern.

Yes. And then I think for the question of the banks, I would hand over to my colleague, Olaf Borkers, and I hope I'd covered the other questions.

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Olaf G. Borkers, Deutsche EuroShop AG - CFO & Member of Executive Board [6]

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What we spoke about, the bank is and what we want to say is that banks are generally more selective in the financing related to retail. But if shopping center is right, if the operator is right and the owner, then they are still very interested, and that is what we have presented to them. That is what we still do. So we are very -- are still very optimistic that we can put an attractive financings for those ones, which we now are negotiating and to which fall due in the year 2021. I guess that margins of the banks will slightly decrease, but that's not a wonder. If you calculate the last interest rate, which you've paid for (inaudible) interest rate of 1.09%, you can see that it is a margin, which is very, very low, and it can't be healthy for banks on a longer period.

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Kai Malte Klose, Joh. Berenberg, Gossler & Co. KG, Research Division - Analyst [7]

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Okay. Last question. If you say banks are more selective, does it include that number of your existing banks that rejected to extend or increase some of the loans, which you have already had in August?

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Olaf G. Borkers, Deutsche EuroShop AG - CFO & Member of Executive Board [8]

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Oh, clearly not. All -- also, in past, if -- you have to imagine, if we have refinancing or new financing, then we address to a double-digit number of banks. And we also, in part, always had some banks, which deny to give an offer, which is also a question of margins, which we ask for. We ask for loans with low margins, low interest rates, we ask for loans with low redemptions. And so not every bank is able or willing to give very good conditions for this. Look, for example, a bank which is favorably active in -- outside of Germany, they are not interested in doing business with us. Margins are by far too low for them. They can do much more better business, from their view, in other countries.

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Kai Malte Klose, Joh. Berenberg, Gossler & Co. KG, Research Division - Analyst [9]

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So you're optimistic that it's highly stable, will be extended as...

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Olaf G. Borkers, Deutsche EuroShop AG - CFO & Member of Executive Board [10]

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Yes.

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Operator [11]

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Next question comes from the line of Michael Browne from Martin Currie.

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Michael Browne, Martin Currie Investment Management Limited - Fund Manager of Europe [12]

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I'd like to actually just follow on that question about banks. You said, obviously, you've got a number of banks that are still willing to lend you at low rates and low redemptions, but you didn't mention covenants. I wonder if you could say whether or not you're seeing a tightening of covenants from the banks.

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Wilhelm Wellner, Deutsche EuroShop AG - CEO & Member of Executive Board [13]

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I can tell you that the last two agreements, which we signed, were absolutely without any financial covenants.

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Michael Browne, Martin Currie Investment Management Limited - Fund Manager of Europe [14]

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And the next 2?

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Wilhelm Wellner, Deutsche EuroShop AG - CEO & Member of Executive Board [15]

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And the next, we're still in the starting the process. And we signaled to banks that we are willing to accept financial covenants, but just based on cash flows. And we will see in the contest which bank will offer the best financial covenants for us. But it can't be better than having not any financial covenant in the loan agreement, as we had in the last 12 months.

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Olaf G. Borkers, Deutsche EuroShop AG - CFO & Member of Executive Board [16]

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We had also before some loans with financial covenants, but we look at them that we have extremely high headrooms, whether it's DCR, ICR or LTVs, to give you that, let's say, with comfort. Yes.

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Michael Browne, Martin Currie Investment Management Limited - Fund Manager of Europe [17]

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Sure. Can you give me an indication of the cash flow covenant that you are proposing?

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Wilhelm Wellner, Deutsche EuroShop AG - CEO & Member of Executive Board [18]

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It differs a lot. And also the individual calculation for the DCR differs, unfortunately, from bank to bank. So there is no standard.

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Michael Browne, Martin Currie Investment Management Limited - Fund Manager of Europe [19]

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And in terms of interest rates, do you expect to renegotiate too? Would the numbers that you've quoted in the presentation, that very low rate of sort of 1.09%, be indicative of the rates you expect to achieve?

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Wilhelm Wellner, Deutsche EuroShop AG - CEO & Member of Executive Board [20]

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Currently, as we are still at the beginning, I expect interest rates below 1.5%.

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Operator [21]

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There are no further questions at this time. And I would like to hand back to Mr. Wilhelm Wellner for closing comments.

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Wilhelm Wellner, Deutsche EuroShop AG - CEO & Member of Executive Board [22]

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So if there were no further questions, thank you for participating in the call. And yes, that's it from Hamburg so far. Bye-bye.

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Operator [23]

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Ladies and gentlemen, the conference has now concluded, and you may disconnect your telephone. Thank you for joining, and have a pleasant day. Goodbye.