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Edited Transcript of GTC.WA earnings conference call or presentation 22-Aug-19 2:00pm GMT

Half Year 2019 Globe Trade Centre SA Earnings Call

Warsaw Sep 9, 2019 (Thomson StreetEvents) -- Edited Transcript of Globe Trade Centre SA earnings conference call or presentation Thursday, August 22, 2019 at 2:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Erez Boniel

Globe Trade Centre S.A. - CFO & Member of Management Board

* Malgorzata Czaplicka

Globe Trade Centre S.A. - IR Director

* Thomas Kurzmann

Globe Trade Centre S.A. - Chairman of the Management Board & CEO

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Conference Call Participants

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* Jakub Caithaml

Wood & Company Financial Services, a.s., Research Division - Equity Analyst

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Presentation

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Operator [1]

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Ladies and gentlemen, thank you for standing by, and welcome to the GTC H1 2019 Results Conference Call. (Operator Instructions) I must advise you that this conference is being recorded today, Thursday, 22nd of August, 2019.

I would now like to hand the conference over to your first speaker today, Malgorzata Czaplicka. Thank you. Please go ahead.

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Malgorzata Czaplicka, Globe Trade Centre S.A. - IR Director [2]

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Thank you very much. Good afternoon, ladies and gentlemen. It's our pleasure to welcome you to our quarterly call. As usually, the presentation will be given by Thomas Kurzmann, the CEO; and Erez Boniel, the CFO. Let me hand over to Thomas.

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Thomas Kurzmann, Globe Trade Centre S.A. - Chairman of the Management Board & CEO [3]

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Good afternoon, ladies and gentlemen. It's a big pleasure, again, to report about a new quarter very successfully completed. The second quarter of 2019 was driven by a lot of construction works to be completed, properties to be delivered to the market, to our tenants. The biggest one, of course, Ada Mall in Belgrade, which is a very successful scheme and several office buildings in other big cities in CEE and SEE.

So the activity of GTC is growing in terms of recurring cash flow. The FFO I has increased substantially, 28% up to EUR 37 million. The in-place rent increased also 14% to EUR 142 million, and the gross margin is up from rental activity by 13% to EUR 61 million.

High occupancy could be kept in the whole portfolio, and this is despite of a lot of completions, completions of new developments, which as we can see in the vacancy rate here, were on a very high prelease at completion, which is giving a good mirror of a very healthy supply and demand situation in all our markets we are active.

FFO I increased, as we had on the headline, to EUR 37 million and this made the operating profit to increase 17% before tax and before fair value adjustment compared to last year, which was only EUR 32 million.

Profit after tax for the first half of the year is EUR 43 million, and the EPRA NAV is increased by 1% to EUR 1.179 billion. And this is after a big dividend payment, which was done in the second quarter of 2019.

We still have and could keep solid financial metrics. The LTV is at 46% versus 45% at the end of the year. This is mainly driven by the dividend payment, which reduced free cash in our balance sheet and therefore, the LTV was slightly up.

Weighted average interest rate is on a historic low, and Erez will elaborate on that metric later on in the financial section.

The office portfolio summary on Page 4 gives a good overview on the performance. We have here 64,700 square meters of new leases and renewals were done in the first half of the year. The occupancy on the office was slightly improved to 94%, but we see still strong leasing activity in each country, in each market we are active. And this is, of course, also supporting our growth strategy and supporting our development projects to get them into cash flow and to be able to open them after completion with high occupancy and lease them up afterwards according to business plan or even better.

We have almost 22,000 square meters of high-quality office space to be completed in the first half of 2019. This was Green Heart N2 building in Belgrade and Advance Business Centre I in Sofia. This completion is related, of course, to occupancy permits. The tenants in these properties are still -- some are already in and some are still moving in, but the information is that the completion is done, but the cash flow of these properties will also only come in, in the second half of this year.

We also can report that we commenced construction of our new flagship development called Pillar in Budapest. This is a 29,000-square meter office building in a very prime location close to subway station, a very important intersection in Budapest, and the completion is scheduled for Q1 2021.

Important information on the site is that we are negotiating, we are basically on final negotiations with a very big international blue-chip tenant for 27,000 square meters for this asset. So basically, we are still on the excavation and foundation works, but having a very good visibility about leasing this property out to a high extent before even starting the real structure work.

So altogether, 86,600 square meters of high-quality office space under construction. Completions are scheduled between Q3 this year and Q1 next year. And of course, this portfolio is diversified through capitals in the CEE region, where we see strong, high demand and sometimes much higher demand than the supply in the market.

The additional expected rent from all these completions is EUR 16.7 million, which will, again, boost FFO and operational results forward for the next couple of quarters to come.

Sustainability, of course, is a great value in our company and also financially something we cannot let behind. Since big tenants usually want to see Green Building certification in each property they are looking at, so we increased the certification rate up to 67% (sic) [76%] of all the office space, and we have another 13% of offices under certification.

The retail operations is also very strong. We could complete in the last quarter Ada Mall in Belgrade with 34,200 square meters of very high-quality shopping space. The presentation shows also a nice picture made by a drone on a day with a nice sunset. So we could see that the illumination of the property is really making a good impression to anybody passing by this very heavy road. And more important, in the back of the picture, everybody can see that the high-density residential area is providing the shopping mall with a lot of customers, which will boost turnovers.

In Poland, Galeria Jurajska, again, surprised us positively because we could in our third year in a row record improved turnovers year-on-year, and this is despite having almost no Sundays open per month. There is only one Sunday per month still open. And last year, in the first half of the year, that was still a different situation with this Sunday opening ban.

We also see that footfall is increasing on a lower piece -- pace, but this is also showing that our conversion rate per visitor is gaining much higher, and this is also giving a good picture about the growing purchase power in Poland and especially also in Czestochowa.

Galeria Pólnocna, our big flagship shopping mall in Warsaw, also showed very good progress. We could record in Q2 2019 a turnover increase versus the same period last year from 24% up. And on a sidenote, we could also record, this is the data from yesterday, that July was also giving a 20% higher turnover than last year, which gives us a very good proof that the property is well located, has a good tenant mix and will be in future, for sure, growing further into a very stabilized environment.

Mall of Sofia, very strong from the very beginning and from acquisition, but we still see some increased rent income in this property. Some renegotiations and change of tenant mix is ongoing, but of course, in a relative small amount of square meters because the rent lease agreements are still running and we need to wait until we can act after having the lease agreements running out, and we have very good visibility that rents should continue to grow in this shopping mall.

Avenue Mall Zagreb is a stable, well-performing mall with no big up and downs, high occupancy is, since many years, a rule, and we will just continue to manage it in a proper way.

Ada Mall, again, we discussed it at the beginning. 97% lease agreement signed. Not all the shops are open yet because the opening was just in May, and we will work very hard to get it completed through the end of this year. And of course, in the last quarter of 2019, there will be Christmas shopping involved. Tenant turnovers should start to fly high and then also some other rents will come in and the ERV will be reached.

The allocation of properties and the split of properties into functional and regional sections on Page 7 shows that our retail portfolio is now 41% versus 59% office on the income-producing asset gross asset value, which is EUR 2.062 billion. The regional split is still very heavy on Poland. Belgrade is now temporarily the second biggest county, but this will be changed if Budapest The Pillar will go full on land, which will contribute to much more than the EUR 100 million to the Budapest portfolio.

The projects under construction cake is now pure office, the gross asset value of this, and this is mostly at cost EUR 97 million. But also this cake is about to grow when Pillar and a couple of other office buildings in Sofia and Zagreb and Bucharest will come online and construction will progress as it should be.

The office portfolio overview page is showing that out of our total gross asset value of assets, EUR 1.213 billion are locked in office portfolio. This is producing EUR 92 million annualized in-place rent at the moment, and this is spread over 41 buildings with 545,000 square meters GLA.

Also here, again, we have a graph about Green certification. You see that we have now 67% (sic) 76% done. We have another 13% under certification, which will be completed in the next couple of weeks and months and 11% are still under investigation and design work how to be able to change also these building into a quality to achieve Green Building certificate.

Retail portfolio overview. The gross asset value of all our retail assets are EUR 849 million versus an annual in-place rent of EUR 51 million in 5 buildings and 215,000 square meters GLA. Occupancy is rather high here, 95%, and of course, Warsaw with Galeria Pólnocna has the biggest share on this portfolio.

Page 10, there's a lot of statistics on yields, WALT and whatsoever. If there is any question, we can elaborate on that in the Q&A session.

And we move to Page 12, which is the property under development investment chart, which is showing the future potential of GTC's portfolio under development.

We have on the block on top buildings under construction. This is Green Heart 1 and Green Heart #3. These buildings are located in Belgrade. #1 will be completed as we speak, and tenants will move in in the next quarter. And Green Heart #3 is to be completed in Q1 2020. This is not because of the demand of tenants was not high enough. This was more a technical issue to phase the construction and construction of the underground parking.

The demand on Green Heart is very high, and it is more or less leasing by invitation.

ABC II Sofia is full under construction. We have LOIs with significant anchor tenants signed. So we also have a very good visibility about leasing success. The construction costs are under control with the general contractor and the building itself is with a construction in time. So we expect to be completed Q2 2020 with this building.

Matrix A is completed in the meantime, and tenants are moving in and starting to use the building. Matrix B is full under construction. Also for Matrix B, we have a very good visibility on tenants because we could sign LOIs with major anchor tenants for almost half of the building, which is giving us also good security to be successful on leasing and on top allows us to start drawdown of construction loans.

Pillar, as we discussed before, our flagship development in Budapest

(technical difficulty)

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Operator [4]

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Excuse me, this is the operator. Your speaker's currently experiencing some technical difficulties with their line. Please stand by while we address the situation. Your conference will resume shortly.

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Malgorzata Czaplicka, Globe Trade Centre S.A. - IR Director [5]

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Is there anyone who can tell me where we stopped because otherwise we will have to start from the very beginning.

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Operator [6]

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For the participants over the phone line, your lines are now open.

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Unidentified Analyst, [7]

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(foreign language)

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Thomas Kurzmann, Globe Trade Centre S.A. - Chairman of the Management Board & CEO [8]

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It's a different conference call.

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Malgorzata Czaplicka, Globe Trade Centre S.A. - IR Director [9]

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I think it's a different conference call. Hello?

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Thomas Kurzmann, Globe Trade Centre S.A. - Chairman of the Management Board & CEO [10]

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Operator?

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Malgorzata Czaplicka, Globe Trade Centre S.A. - IR Director [11]

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Hello?

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Operator [12]

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Yes, hello, this is the operator.

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Malgorzata Czaplicka, Globe Trade Centre S.A. - IR Director [13]

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I think it was a different conference call because the guy answered in Lithuanian or some other language.

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Operator [14]

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No ma'am. It's your conference call.

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Malgorzata Czaplicka, Globe Trade Centre S.A. - IR Director [15]

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Okay, so who that was?

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Operator [16]

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I'm not sure. I think Jakub Caithaml.

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Malgorzata Czaplicka, Globe Trade Centre S.A. - IR Director [17]

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No. Okay, can you put just one person on the phone, just anyone who can -- who we can talk to?

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Operator [18]

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It's (inaudible).

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Unidentified Analyst, [19]

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I think we were on Page 12 when we lost the connection.

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Malgorzata Czaplicka, Globe Trade Centre S.A. - IR Director [20]

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Okay, great. Thank you very much. You're right.

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Operator [21]

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And with that, would you like me to mute all the participants' lines, again?

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Malgorzata Czaplicka, Globe Trade Centre S.A. - IR Director [22]

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Yes, please.

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Operator [23]

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Okay. I will mute it now. Thank you.

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Malgorzata Czaplicka, Globe Trade Centre S.A. - IR Director [24]

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Right. Thank you.

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Erez Boniel, Globe Trade Centre S.A. - CFO & Member of Management Board [25]

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(foreign language) Okay. I apologize to everyone. We had a technical problem. The line was disconnected. So we will -- I will take it from Page 16. Page 16, this is the balance sheet, and we'll take it from there.

If anyone later on would have any question, feel free to contact Malgorzata and we will answer the questions.

So Page 16, balance sheet. Investment property is the biggest amount. Although the most significant item when combined with asset held-for-sale, we can see that the increase in the half year -- first half year of '19 was around EUR 90 million. This stems from investment of around EUR 70 million whereas the revaluation was EUR 16 million.

Another large item on the balance sheet is the cash and cash equivalents, EUR 69 million. Thomas already mentioned the growth in FFO that we are witnessing, thanks to the improvement of several assets as well as completion of a number of assets. That generated altogether a better NOI.

Of the assets held-for-sale that currently are presented at EUR 121 million, we expect around EUR 80 million cash upon completion of the sales, which means during H2.

Going down the balance sheet, short and long-term financial debt, this -- the increase is mostly due to the fact that we finance construction as well as refinance of 2 projects. Block FortyOne was refinanced by EUR 40 million free cash, meaning the loan was EUR 26 million and we refinanced it up to EUR 40 million as well as decreased the margin. And we drew down around of -- to finance -- to refinance, in fact, Artico building. At the end of the year, it stood at 0 and then just beginning of the year, we drew down EUR 14.6 million.

Continuing on Page 17 with the income statement. It is visible that the revenue from rental activity has been increased. This is due to the completion of White House in Budapest, Green Heart and the Ada Mall. Ada Mall, in fact, contributed only 1 month, the month of June. Therefore, going forward, in H2, we will see much more significant contribution of Ada and an increase of the revenue on a like-for-like basis.

When look -- also Mall of Sofia contributed to that. Mall of Sofia was bought a year ago.

When looking at the financial expenses, the increase is relatively small. First of all, there is an increase due to the fact that we adopted the IFRS 16. So around EUR 1 million moved from cost of operation into cost of finance. And then there is increase due to the increase of loan amounts.

But on overall basis, the interest rate, the total cost per year is at the rate of 2.6%, which is the lowest we had on our books.

On Page 18, we present the strength of the debt metrics. First of all, our strategy is reflected by the fact that we have unsecured debt 12% that has been over the -- the case in the last periods, and we have secured debt of 88%.

Interest rate, floating rate is 6% whereas 94% is hedged. We hedged through interest rate swap or through CUP. And wherever we hedged through CUP, we continue to enjoy the low interest rate, meaning if the rate is going down, we still benefit from that like it's happening in the last few weeks.

Regarding the debt maturity, we have almost EUR 200 million to refinance EUR 95 million, the top part on Page 18. Top part is mostly referring to Galeria Jurajska. This is where we are working now on refinancing with good terms, which will, once completed, also will bring significant amount of free cash to the company.

At the same time, there is an amount of EUR 103 million bonds that will mature in the coming 12 months, and we are in the process of considering raising bonds to refinance these bonds at least partially or alternatively to use our cash. It really depends on the whole resources and uses that we will allocate and will have on the agenda, and we will consider our steps in the next few months.

Page 19 details the net loan-to-value ratio, 46%, adequate as always, we kept it in the last 5 years or 6 years. Weighted average interest rate, I mentioned, 2.6% and very strong interest cover of 4.4x. The weighted average debt maturity, 3.9. As I mentioned, we still work on some refinances. Once these are done, the average maturity will increase, of course.

Finally, cash flow statement. The cash flow statement reflects the increase of FFO. Strong FFO increase from EUR 28 million to EUR 38 million, if we compare the first half of this year versus last year.

Investment activity follows in fact the demand and the permitting that we have. Thomas elaborated a lot on -- already on Page 12, the construction in progress and the plans to achieve permits, which will come in the next 12 months and intensify a little bit the investment. Alongside with completion of assets that, once again, based on the cycle, will contribute FFO and will allow us refinancing and the cycle that we always talked about, this self-propelling growth will continue if everything goes according to the plan. Financing activity was quite strong, I would say, in the first half of the year with refinancing and still some big actions is in front of us.

So net change in cash, EUR 69 million, and I believe that the company continue to performs very well.

That ends our presentation, and I open the line for Q&A, if any, if there are any.

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Questions and Answers

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Operator [1]

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(Operator Instructions) We have one question on the line, and it comes from the line of Jakub Caithaml.

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Jakub Caithaml, Wood & Company Financial Services, a.s., Research Division - Equity Analyst [2]

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It's Jakub from Wood & Co. Two questions from my side, please. First, if you could elaborate a bit what would you plan to do with proceeds from the disposals that are currently underway in Poland and in Hungary? And related to that, how do you see the leverage evolving there? There has been a headline on Bloomberg today mentioning a prospective bond issuance. So just as a sidenote, I was wondering if you would be considering to issue zloty bonds or if you would be financing yourself a euro-denominated debt. So that would be one question. And the other related to the Ada Mall. Not sure if Thomas or Erez were mentioning that, of course, the shopping mall is now opened, almost fully occupied. And do you expect the rents will be increasing substantially as the mall starts to stabilize? So if you could just explain perhaps how -- what is the mechanism for the rent increases if there is a turnover rent and perhaps some built-in step-ups? Or if there would be a different mechanism for the rent to grow from the current levels?

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Erez Boniel, Globe Trade Centre S.A. - CFO & Member of Management Board [3]

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Okay. I will answer the 2 questions. First of all, regarding what do we intend to do with the sales proceeds. Look, we have several sources. We have the sales proceeds, as I mentioned, around EUR 80 million. We have potentially the bonds that we can raise. The bonds are -- that we plan and we consider right now are zloty-denominated. However, it is our intention immediately to hedge them with cross-currency hedge. So we would see effectively Eurobonds, thereby also decreasing significantly their margin compared to zloty bonds. And we have sources also from loans that will pay the construction trade payables. All these are the resources.

On the other hand, we have uses such as repayment of bonds. We have construction. We have equity investment in Pillar for the purpose of construction before we draw down the loan. So we have uses. What we will do when time comes, we will map the sources and uses of the company. Based on that, we will make allocation and decide if we want and if we can to distribute some cash either through dividend, maybe share buyback. I'm just raising theoretical possibilities. It is not that we have any decision. Maybe share buyback or maybe repayment of other expensive loans, relatively expensive, because right now, they're not expensive, but relatively. So this will be the decision.

What seems to happen is that the balance between the sources and the uses will be positive. So some cash, we will need to decide. Of course, as you know, we mentioned, it goes without saying, maybe further investment. And so there is no clear decision right now. It's a bit too early.

Regarding the second question about Ada. Ada performed only 1 month, and this is the opening month where some of the shops still did not perform, did not yield the turnover. Yes, we benefit from turnover in the shopping center and as the shopping will gain momentum, we expect also to have rent. Plus, there are some tenants who signed lease agreements, but did not open their activity. One of the big one -- the biggest tenants is the cinema, that is still not open. And therefore, we expect rental income to follow. And parking, the parking there is under big demand, and we expect to generate money from parking, from advertisement. All these type of auxiliary income should follow in H2.

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Jakub Caithaml, Wood & Company Financial Services, a.s., Research Division - Equity Analyst [4]

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Understood. Perhaps to follow up on the first question. If you think about the leverage, what would be some sort of net LTV, if this is a preferred metric, that you would be comfortable, some range that you think is worth following for GTC?

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Erez Boniel, Globe Trade Centre S.A. - CFO & Member of Management Board [5]

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Our policy remain unchanged, to be between 40% to 50%.

Any other questions?

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Operator [6]

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We have no further questions at this time. You may continue.

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Malgorzata Czaplicka, Globe Trade Centre S.A. - IR Director [7]

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Thank you very much, everybody, for the participation. And sorry, again, for the technical issue. Thank you. Goodbye.

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Operator [8]

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And this concludes your conference for today. Thank you all for participating. You may all disconnect.