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Edited Transcript of GZT.TA earnings conference call or presentation 21-Aug-19 2:00pm GMT

Q2 2019 Gazit Globe Ltd Earnings Call

Tel Aviv Sep 9, 2019 (Thomson StreetEvents) -- Edited Transcript of Gazit Globe Ltd earnings conference call or presentation Wednesday, August 21, 2019 at 2:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Adi Jemini

Gazit Globe Ltd - Deputy CEO, EVP & CFO

* Chaim K. Katzman

Gazit Globe Ltd - Founder, Vice Chairman & CEO

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Conference Call Participants

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* Chris Reimer

Barclays Bank PLC, Research Division - Analyst

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Presentation

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Operator [1]

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Ladies and gentlemen, thank you for standing by. Welcome to the Gazit Globe Second Quarter 2019 Results Conference Call. (Operator Instructions) I advise you that this conference is being recorded today, Wednesday, August 21, 2019. The presentation that will be used in today's call and the financial statements can be found on Gazit Globe's website at www.gazitglobe.com.

Before we get started, I would like to remind everyone that some of the statements today may be forward-looking in nature. Although we believe that such statements are based upon reasonable assumptions, you should assume that these statements are subject to risks and uncertainties, and actual results may differ materially from those expressed or implied in these forward-looking statements. Additional information about the risks and uncertainties could cause actual results to differ may be found in our latest financial statements and our filings with the Israel Securities Authority, the U.S. Securities and Exchange Commission and on SEDAR, operated by the Canadian Securities Administrators.

Statements made during the call are made as of the date of this call. Facts and circumstances may subsequently change, which may limit the relevance and accuracy of certain information discussed. Except as required by applicable law, we undertake no obligation to update any forward-looking or other statements made herein, whether as a result of new information, future events or otherwise.

I would now like to hand the conference over to Mr. Chaim Katzman, Founder and CEO of Gazit Globe. Please go ahead.

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Chaim K. Katzman, Gazit Globe Ltd - Founder, Vice Chairman & CEO [2]

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Thank you very much, and good day, everybody. Thank you for joining our conference call to summarize the results of second quarter and the first half of 2019. I will start with a short review of the business and the results of the private subsidiaries and will then say a few words regarding the Atrium [rent] transaction, and there, Adi will elaborate on the results and review our financial aspects.

So if you're following us on our slide show on Slide #3, our proportionate NOI increased by 7% in the period compared to same period in 2018. Our same-property NOI grew 4.1%, excluding Russia, and 3.7% while giving effect to Russia, all compared to the same period in 2018. We are continuing to see strong growth in properties in Brazil to the tune of 23.2% of all of our properties, mainly Internacional and Mais, which we recently completed its expansion. We see consistent growth in our Israeli portfolio of 1.3%; in Central Europe, where we see same-property NOI excluding Russia, growing by 1.5%; Czech Republic grew by 3.1%; and Poland by 1%. In Northern Europe, we see positive same-property NOI of 0.1%. And -- we're very happy to at last you see positive growth in Finland.

Our FFO per share in the current portfolio, excluding the stock of Regency and FCR that were sold between the periods, grew by 26.2% from ILS 1.22 per share to ILS 1.54 per share in the period. And actually, if you're looking at this portfolio, disregarding the noise from FCR and Regency, it is our real portfolio going forward. And this kind of FFO is very much representing the FFO going forward, of course, with the growth and subject to financing and what have you. And later on, we'll talk about our forecast guidance, and I believe that it's now coming together. But the right way to look at our portfolio going forward is disregarding Regency and FCR since this [historically] belongs to the past, and now we're fully operational.

Our operating cash flow in the period grew by 14% compared to the same period in 2018, in total, ILS 1.06 per share. The company -- just another reminder, the company is distributing an annual dividend of ILS 1.62 per share, and that works to a very healthy payout ratio of 52% of our FFO and 76% from the operating cash flow. So these are very healthy numbers to consider when you look at our dividend. The growth in cash flow is the result that is the clearest evidence of the success of our strategic brand, the increase of the private real estate component while bringing down our leverage.

And I'm moving to Slide 4, and I'm talking about summary results of our private subsidiaries. So NOI from private subsidiaries to the group grew by ILS 47 million compared with the same period in 2018. And it hit 28.1% growth, and it's about ILS 214 million. The growth in -- is primarily due to acquisitions in our private subsidiaries, development and expansion projects coming online and growth in same-property NOI in all territories: in Brazil, in Israel and in the U.S. We expect our NOI for the private subsidiaries will continue to grow, thanks to completion of development of the properties in Israel, in Rishon Lezion and Kochav Hazafon in 2019, as I will describe later on; also thanks to the growth in same-property NOI in Brazil and Israel. And here are few examples in Israel in Kfar Saba, for instance, contract for 5,200 square meters, about 15% of the properties were renewed this month with a leasing spread of 15%, also, the acquisition of properties in Israel and U.S. Central properties that we acquired and will be coming online fully -- in full in 2020. In the U.S., Ceasar's Bay, pursuant to signing the lease with Target, occupancy of the offices at Newbury Street in Boston, Marketplace in -- also in Boston, we're upgrading the properties according to the planned outline for each property, which results in NOI growth; in Israel, Urban Outfitters in Dizengoff Center, Savyon and almost 100% occupancy in Horev Center in Haifa. Following the completion of the Rishon Lezion G Fashion expansion and Kochav Hazafon properties in the north, in the fourth quarter of 2019, Gazit Israel will exceed the ILS 200 million mark of NOI by the fourth quarter of 2020. That's going to be our run rate by the fourth quarter of 2020, in excess of ILS 200 million.

Our operating profit has proved the quality of the properties. The average rent per square meter as of June 30, 2019, grew 25.4% in Brazil and 2.8% in Israel compared to June 30, 2018. Some more figures that may be of interest to you. The number of same-property visitors in the period grew 10% in Brazil and 4.9% in Israel, We're talking footfall, compared to the same period 2018. The same-property sales in the period grew 10.7% in Brazil and 1.2% in Israel compared with the same period 2018. And give you some more anecdotal figures in Israel, the numbers of moviegoers at Cinema City Rishon Lezion increased 27% in July this year compared to July of last year. Kfar Saba did even better, was more impressive, increased 46% over July of last year, though it's a smaller period.

I'm moving to Slide 5, and we talk a little bit about the Atrium deal. Nothing new, but let me just reiterate. So first of all, we are now in the process we are waiting the court hearing in Jersey on September 25, which in all likelihood with holder -- holding a general meeting to vote on the approval of the deal, which a special majority of the minority interest would be required. This meeting, we guess, will be held somewhere around October 25, 2019. And of course, the deal started to be -- and other approvals, and the figures that we are presenting are forward-looking statements.

Again, just to recap on the advantage of the deal for Gazit, one of the advantages. So it increases our investment of the original price in quality properties portfolio, which the company is looking to own long term and with which it has extensive experience. We've been a 60% owner for the last almost 12 years now, acquisition of a platform with best-in-class management team with a proven track record that we know very well. 85% of the portfolio value is concentrating in 2 growing European countries, Poland and Czech Republic, and more importantly to us, 50% is concentrated in the central cities of Warsaw and Prague. From Gazit perspective, if the deal goes through, our company's FFO is expected to grow by ILS 86 million, meaning ILS 0.46 per share to ILS 671 million. It's about ILS 3.60 per share, and it's a 15% growth. And those Atrium properties, which amount to ILS 2.2 billion, are unencumbered (inaudible). And last, but not least, it will be -- it remain an increase of ILS 308 million to the company shareholders' equity due to the -- due to actually volume purchasing.

On Slide 6, we really show you the progress of our strategic plan. And if you look at it, at the end of 2015, 80% of Gazit's portfolio was held through public subsidiaries. Today, the share of our private real estate component represents 51% of the value of the company -- of the company's properties. And if the Atrium deal will close, the share of our private real estate component will increase to 78%. Gazit today is a full-blown operational real estate company, which we believe should be evaluated using the same parameters and metrics as other real estate peers, meaning by its NOI, by its FFO multiple, by its leverage and, of course, by the quality of its assets. Speaking of leverage, our leverage rate as of June 30 was 47.1%. And if the Atrium deal will get done, it will increase to 48.9%. And we said it many, many times before, we are committed to maintaining our leverage at below [58%] Another note here, the company's reviewing offers to sell up to 8% of Atrium shares to another institutional -- Israeli institutional investor at the same price [it does] at which the company acquired the shares, which will further reduce our leverage by about 100 basis points.

I'm moving to Slide 7, projects under construction. As part of the strategy to increase the private real estate component, we continue to increase our investments in the U.S. and in Israel, and the expansion projects in Israel represents a significant growth engine for the company. I will talk about it in a minute, but just remember that most of the expansion is taking place in -- on assets that we already own. So we have almost 0 base in the land that is needed for those expansions because that base is already embedded in the assets that we own and owned for many, many years. So the projects are -- currently being completed and handed to our tenants is: our Kochav Hazafon and Tel Aviv. It's about 2,200 square meters for a total investment of ILS 105 million; the expansion of G City Rishon Lezion by 13,000 square meters for total investment of ILS 170 million. And both projects will increase the NOI in Israel by ILS 22 million annually.

We have a project under construction in Kfar Saba. This is the construction of a Decathlon store and the headquarters adjacent to the Kfar Saba property actually to be connected. The total GLA underdevelopment is 13,600 square meters, and this project, of course, will make G Kfar Saba a more dominant asset in its trade area by adding another major anchor to the asset. Decathlon, for those of you who don't know, is a sporting goods retailer.

Three projects are in advance planning stages in Israel: an office tower in Rishon Lezion in G City with total GLA of 60,000 square meters. The zoning plan has been approved, and the company is acting to obtain a permit. Excavation and shoring works are expected to start in Q3, 2020; G Kfar Saba, in addition to the development we talked about, expansion of the existing property by another 40,000 square meters of mixed-use commercial and -- I mean retail, office tower. And the zoning plan has been approved, subject to certain conditions. A building permit application for the expansion of the commercial part has been already submitted; Savyon, which is a neighborhood of Tel Aviv, expansion of retail and offices on an area of 4,500 square meters. Building permit application was submitted. Works are expected to start at the end of 2019. These projects in Israel are for the construction of total 105,000 square meters, of in -- of which Gazit share is about 82,000 square meter and an overall investment of 220 -- I'm sorry, ILS 920 million to ILS 975 million, our share, and is expected to increase the company's NOI by ILS 81 million to ILS 88 million, again, our share.

And just a word about G City, on Slide 8. The property sits on a piece of land that is approximately 20 acres, 80 dunams or 8 hectares. It's privately land, and it's covered by GLA of 95,000 square meters and, together with the office tower project, totaling 155,000 square meter. So if you think about it in other terms that we have an FAR of somewhere below 2. We believe that this land should be better utilized. And therefore, the company has started preparation of an urban construction plan with the district's authority to add building rights for 3 additional office towers and other potential uses.

I'm going to Slide 9, Gazit Horizons. We have a very lucrative development project in the Brickell neighborhood of Miami. We're in the planning stages of a 48-floor tower, mixed use, in one of the strongest locations of Miami across from a new mall. Several major U.S. [business] interest in joining us in the project to provide us with added value in the residential, lodging sector, and we are reviewing the best use of this asset. In general, we've been reviewing apartment rentals in the various territories where we operate and consider this segment an opportunity to expand our holdings in the areas where we operate, both as part of mixed-use and stand-alone projects. Through these projects, we create value by utilizing additional building rights as well as increasing building rights due to strong demand, strengthen existing properties and diversifying our sources of income from another asset class as well.

Also on Slide 9 and on this regarding a new acquisition, a property in Philadelphia. We signed an agreement to purchase (inaudible), to purchase 10-storey, 7,100 square meters commercial and office building on one of the major streets in Philadelphia with daily pedestrian traffic of 32,000 people for $30.8 million. The property is adjacent to other major retailers like UNIQLO, Target and Nordstrom Rack. The first 2 floors of the property is leased to Old Navy with a lease term up to 2026. The other floors are vacant offices after bankruptcy of the art school that occupied them. With the current occupancy of 30%, the property generates $850,000 worth of NOI, which is a 2.7 entry return and believe that the Old Navy is a bit below market rent, but we believe that we'll be able to reach the region of 6.5% unlevered after renovation and leasing the office space.

Few words for those of you who don't know Philadelphia. It is the sixth largest city in the U.S. and the second largest of the East Coast with population of over 1.5 million. It is an hour ride by train from New York and has more than 20 universities and 2 of the top U.S. hospital operates in the city center and over [250,000] people work there. And that's the populated area full of mixed-use projects. The average household income in downtown Philadelphia is about $117,000.

We shall continue to purchase properties in the U.S. in densely populated areas with strong demographics, in markets we know and where we have experience of literally dozens of years. We believe in our ability to create value, specifically in properties in such locations. And in the next couple of years, we hope to invest about $200 million to $300 million per year in the U.S. so that it will represent 35% of the company's portfolio.

Slide 10. Let's move to São Paulo, and let's talk about Internacional. The property was acquired in April of 2018. Since then, in a period of 15 month, we have added 116 contracts, 24 kiosks, 22 stores and 70 media contracts. We increased the number and locations of multinational retailers. We renewed leases with leasing spread of almost 16%, and the rental income increased in the property by BRL 6.8 million for the second quarter. This is -- amounts to a same-store NOI growth of 46%. And in addition, let's not forget that in this property, there are additional approved rights for 200,000 square meters that has now been accounted for in the value, so much for asset management.

Let's talk about Mais. Following the expansion of the shopping center and opening of the offices of the government authority, the Poupatempo. The sales of the tenancy of the property increased by 20.5%, and the number of visitors in the property grew by 22%. The car traffic count in the property increased by 28.6%, which is ultimately being expressed in the same-store NOI increase of 38% compared to the same quarter of 2018.

A word about our plans in Brazil. We are currently asking to move building rights between the properties, serve part of the rights and take other steps as we continue to add significant value to the company, including the sale of properties that we have improved and which we believe there won't be any further outside growth.

And let me add with Slide #11. That will be a look from 10,000 feet. Currently, 78% of the value of our portfolio is located in growing, dense, metropolitan area, like New York, Tel Aviv, Stockholm, Warsaw, São Paulo and others. As you can see, we continue in all territories to purchase in major cities and secondary cities, which is ultimately expressed in the growth and quality of our cash flow.

And just anecdotally, during the quarter, Atrium sold 2 shopping centers in Koszalin and in Lublin for EUR 298 million, which, by the way, was 3% higher than its IFRS value in Atrium's books. And we purchased the King's Cross property in Warsaw. So in a nutshell, that's the entire story, selling secondary cities, buying the major densely populated cities. This is our entire strategy.

And with that, let me hand over the call to Adi. Adi?

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Adi Jemini, Gazit Globe Ltd - Deputy CEO, EVP & CFO [3]

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Thank you, Chaim, and again, thank you all for joining us. Today, I'd like to focus on our FFO, our guidance, our ongoing increase in cash flows and our financial strength.

I'm starting with Slide 13, our FFO. To better reflect the performance of our portfolio, we're excluding Regency and FCR in platform to FFO. FFO per share for the quarter excluding Regency and FCR increased by 20%, in total ILS 0.77 of growth per share compared to ILS 0.64 growth per share in same quarter of 2018. FFO per share for the 6-month period excluding Regency and FCR increased by 26%, in total ILS 1.54 per share compared to ILS 1.22 per share in the prior year. Again, it's noteworthy to mention that we disposed about ILS 7 billion of Regency and FCR shares while, at the same time, we showed an organic growth that is coming from our private portfolio, mainly from Brazil, Israel and the U.S. Our financial expenses reduced significantly in the last couple of years, and I'll discuss that in further detail in the upcoming slides. Finally, our FFO per share in the quarter totaled ILS 0.80 per share, and I'd like to note this is not our run rate going forward. And therefore, we provide the guidance of FFO.

With that, I'm moving to Slide 14. Our FFO guidance reported ILS 3.14 per share, which represents an 8.6% increase compared with 2018. Our FFO per share in the quarter excluding Regency and FCR totaled ILS 0.77 per share, which is slightly lower than our guidance rate. And the main reason is that we don't have any debt to repay since the disposal of FCR shares. In September of this year, series 10 of our bond will mature, carrying a 6.5% coupon, which will increase the FFO rate. We expect to see further growth in FFO due to the financing expense decrease with the repayments of bond series 4 and series 11 in year 2020. We also provided pro forma guidance, including the impact of ATR transaction, assuming that the transaction will be approved, FFO will increase by 15%, ILS 3.15 per share.

Moving on to Slide 15. Our current operating cash flow increased by 9% to 11.5% annually -- a year on average from 2016 to 2018. Of course, part of this growth is due to the organic growth of our private subs, but also deepened a significant reduction in - our financing costs. Our financing costs in 2016 total approximately ILS 650 million compared to ILS 522 million in 2018, a reduction of ILS 130 million a year. In the first 6 months of 2019, our financial cost totaled ILS 211 million, and these savings are going straight to our FFO and operating cash flow. Our operating cash flow per share in the period totaled ILS 1.06 per share, same pace as in the same period of 2018. However, in the second half of 2019, a principal of ILS 222 million of our bond series 10 will be repaid, which carries an annual interest of 6.5%. So we expect the run rate to accelerate.

In this slide, I also wanted to present our bond payment schedule for the following 3 years and how it will affect our FFO. In 2020, we will repay more than ILS 1 billion principal bond, carrying an average interest rate of 5.1%. We can choose whether to refinance or not. But just to get a sense of the potential savings, we present a range. In 2020, we expect to save between ILS 36 million to ILS 53 million in interest expense, which will increase our operating cash flow by 6% to 9%. In the same way, our FFO is expected to increase in 2021 and 2022 by ILS 27 million to ILS 44 million annually just by waiting, if you will, for the bond repayments. We have additional tools to reduce our financial costs, including ILS 2.2 billion of unencumbered assets in Israel as well as direct real estate financing, which will also reduce our hedging costs. Overall, our financial cost expected to decrease while our operating cash flow will increase accordingly. Again, to Chaim's point, we distribute the annual dividend in the amount of ILS 1.62 per share, which is a very healthy payout ratio of 76% to our operating cash flow.

Moving to Slide 6 (sic) [Slide 17]. I'd like again to represent our progress in our business plan over the last 3 years in terms of strengthening our balance sheet and deleveraging. In 2015, our LTV was 63%. And as the date of the financial statement, our LTV is 47.1%. The provided pro forma for the -- our LTV on a solo level, in case of the Atrium transaction will complete, we're going to increase our LTV to 48.9%. Of course, on the other side, we'll -- statement] will increase to 88%. As we said in the past, we are committed to maintaining our LTV below 50%. In addition to our coinvestor Menora, we are proceeding to sell up to 8% of Atrium shares to additional Israeli institutional investor in the same pricing term subject to the closing.

Overall, we reduced our net debt by ILS 6.4 billion since we started our strategic plan back in 2015, where our debt levels were ILS 14 billion. And today, our net debt is ILS 7.7 billion. As of the date of the financial statement, Gazit has about ILS 4.5 billion of liquidity, of which ILS 2 billion is in cash and cash equivalent. We are also expected to receive ILS 340 million of the installments from the sold shares of FCR. The company and its wholly owned subsidiaries have unencumbered real estate assets in the amount of ILS 6.7 billion, which compromise about approximately 78% of the company's properties. Again, this too, serve as another financial flexibility in further considering our ability to reduce our financing costs.

Moving on to Slide 7 (sic) [Slide 18] . Our debt schedule is well staggered. Our absolute net debt level decreased to ILS 7.7 billion while, at the same time, our duration increased to 5 years and our average annual interest reduced to 3.97%. I'd like to echo my note on our repayment schedule, series 10 will be matured in 2019 and another ILS 1 billion will mature in 2020. Our average cost of debt will be reduced while on the -- at the same time, our duration will increase. Our current level of liquidity supports our financial needs for the next 3 years, and we expect the installment proceeds from the sold shares of FCR to be paid to the company no later than April 16, 2020, which will be another ILS 340 million. Just to remind everyone, we also own 9.9% of FCR shares which approximately has a value of ILS 1.3 billion, which provide us with further flexibility. Overall, our balance sheet is much stronger, our LTV decreased, our liquidity increased and our cost of debt reduced.

To summarize Chaim's notes and mine, Gazit is in a great and much better position today with prime location portfolio, lower number of assets but much more dominant in urban with a strong balance sheet and flexibility we haven't had for years. At the end of the day, the cash flow is growing continuously, and our leverage has been reduced significantly.

And with that, we can now move on to the Q&A session.

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Questions and Answers

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Operator [1]

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(Operator Instructions) The first question is from Tavy Rosner with Barclays.

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Chris Reimer, Barclays Bank PLC, Research Division - Analyst [2]

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This is Chris Reimer on for Tavy. You mentioned the strong NOI performance in Brazil with a high growth in rent and in visitors. Can you help us understand what's driving this growth and if you see this pace as sustainable?

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Chaim K. Katzman, Gazit Globe Ltd - Founder, Vice Chairman & CEO [3]

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I think that the #1 reason is the quality of our management team, both by identifying opportunities with what I would say under-managed assets, where management source and identify the opportunity to achieve outside growth by implementing a very aggressive and innovating retenanting expansion programs.

I believe that São Paulo is a very tight market. If you look at the ratios of square foot per capita in Brazil, that far, far below anything we know, this is on the U.S., but also in Europe or any other place where we are active.

The density -- look, we have more than 30 million visitors in Internacional. The expansion in Mais, where we managed to get the government agency that is responsible for the issuance of everything from [caskets] to driver license, licenses and so on, was a major, major success for us, getting them to come into our shopping center and by doing that, so we were able to expand it and get some more tenants to relocate to our shopping center.

So it's a very strong city, and I believe that the growth has to do with very, very strong asset management, paying attention to the details and seizing opportunities that were available to us also because we entered the market at the lowest point in 2015 and '16, a little bit in '17 and actually capitalizing on that.

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Operator [4]

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(Operator Instructions) There are no further questions at this time. Mr. Chaim Katzman, would you like to make your concluding statement?

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Chaim K. Katzman, Gazit Globe Ltd - Founder, Vice Chairman & CEO [5]

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Thank you all very much for joining us for our second quarter call. We are quite happy with our results, not as happy as we would be, hopefully, in the next quarter. And we look forward to talk to you again on our next call or whenever you need us. You know where you can reach us.

Thank you all for joining us, and have a great morning or afternoon wherever you are. Thank you again.

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Operator [6]

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Thank you. This concludes the Gazit Globe Second Quarter 2019 Results Conference Call. Thank you for your participation. You may go ahead and disconnect.