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Edited Transcript of TEG.DE earnings conference call or presentation 30-Oct-19 9:00am GMT

Q3 2019 TAG Immobilien AG Earnings Call

tegernsee Nov 8, 2019 (Thomson StreetEvents) -- Edited Transcript of TAG Immobilien AG earnings conference call or presentation Wednesday, October 30, 2019 at 9:00:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Martin Thiel

TAG Immobilien AG - CFO & Member of Management Board

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Conference Call Participants

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* Kai Malte Klose

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

* Mihail Tonchev

Kempen & Co. N.V., Research Division - Analyst

* Shaza Hamed

- Analyst

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Presentation

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Operator [1]

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Good morning, ladies and gentlemen, and welcome to the TAG Immobilien AG Conference Call Interim Statement on the Third Quarter of 2019. (Operator Instructions) Let me now turn the floor over to your host, Martin Thiel.

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Martin Thiel, TAG Immobilien AG - CFO & Member of Management Board [2]

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Yes. Many thanks, and good morning, everyone. This is Martin from TAG, and many thanks for dialing in to our Q3 earnings call. And today we will discuss not only the figures for the first 9 months of 2019 but also the new FFO and dividend guidance that we published together with this Q3 results.

And as always, we will go through the presentation that is also available on our website and visible also via the webcast, and of course, afterwards, we have enough time to answer your questions.

So let's start with Page #4. That's the highlights slide showing the main developments in the third quarter of 2019. Looking at vacancy and like-for-like rental growth and the development is definitely positive, especially on the vacancy side, we had good progress since third quarter, a reduction by 30 basis points from 5.2% in the previous quarter to 4.9%. Now we see clearly kicking in the results from our CapEx programs. I will come back to this a little bit later.

In the total portfolio, that means, including the commercial units and also the acquisitions that already closed this year. If we compare development for the financial year 2019, with the beginning of the year, we had a slight reduction as well from 5.3% to 5.2%. Total like-for-like rental growth, including the vacancy reduction effect, ended up at 2.7%. Excluding vacancy reduction, we're at 2.0%, so quite good and, for us let's say, very normal values.

FFO I increased again by EUR 400,000 to EUR 41.2 million, after EUR 40.8 million in the previous quarter. Looking at the EPRA NAV and LTV, due to the fact that we had no portfolio valuation at the end of third quarter, the developments are, let's call it, quite normal, slight increase in EPRA NAV per share, which stands now at EUR 18.82 and a further reduction in LTV, which is now at 45.5%.

Quick comments on our new guidance. I will come back to that later in more details. The new FFO guidance for 2020 stands at EUR 169 million at the midpoint, that's a 9% increase year-on-year. The guidance of 2019 is unchanged.

Looking at acquisitions and disposals, we acquired so far in the first 9 months of 2019, 1,331 units. We will see more details later in the presentation. Looking at disposals, so far, we disposed approximately 300 units at a total selling price of EUR 10 million, and that's led to a book profit from this disposals of EUR 600,000.

That's one comment on planned and realized disposals. If you remember our guidance from last year, we assumed for purpose of the guidance for 2019 that we sold all in all or we will sell all in all 2,100 units, out of which 1,600 units were so-called noncore assets and approximately 500 units was what we called ongoing disposals.

What we already did regarding the noncore assets is that we sold already last year or signed already last year with closing this year, approximately 900 units, plus the additional nearly 300 units so far this year. So on the noncore asset program, which comprised all in all, as we announced last year 1,600 units, we sold until now 1,200 units. So that's basically done. So there are 400 units left on the noncore side. And this will be done in the future, as we already said in the last calls, now in smaller steps, but I think the main message should be that this is basically done.

And the 500 ongoing disposals, that's something where we decided to slow down the disposals. Why? Not because we saw a different development in the market. Simply, we have a lot of cash in the balance sheet. So therefore, it was not necessary to sell asset to finance new acquisitions, as we did in the past. But this is something that is, of course, clearly, to continue in the future.

Then we should move to Page #6 where you see the income statements. Some comments on the development of the third quarter in comparison to the previous quarter. Net rent was stable or even slightly reduced, but that's not a negative effect from rental development or from vacancy development. The only reason was that we had a closing of disposals in the third quarter.

This was one of the portfolios or some of the portfolios that I mentioned signed last year, but closing then took place in the third quarter. So therefore, we had an offsetting effect or offsetting effects. On one side, of course, the positive like-for-like rental growth and on the other side the closing of disposals. So therefore, net rent was, let's call it, broadly stable.

Even though net rent was broadly stable, the net rental income improved slightly. We had lower property managing costs, mainly resulting from lower vacancy costs. So therefore, we had an improvement quarter-on-quarter by EUR 500,000.

Good development in the net income from services that increased quarter-on-quarter by EUR 1 million. If we compare the 9-month period 2019 and 2018, and look at the net income from services that even increased by EUR 3 million. So that shows you that our service business that preliminary is coming from multimedia, energy services and caretaker service is still growing.

Valuation results in Q3 was basically nil. As I said, the next valuation will follow at year-end 2019. So therefore, no effects in the third quarter.

On a cost basis, personnel expenses in quarter-on-quarter broadly stable. If you compare the first 9 months 2019 with the first 9 months of 2018, you see an increase, but this is then more or less corresponding with the fact that we have more internal services, mainly from caretaker, that then leads to higher revenues on one side and to higher personnel expenses on the other side.

Looking at the net financial results, the net financial results contains also to a larger part noncash effects from valuation of financial derivatives, and this is mainly due to the equity component of our convertible bond.

Looking at FFO relevant financial result, cash after one-offs, we had a slight increase quarter-on-quarter, but not because of higher refinancing costs or higher average cost of debt. The simple reason was that we issued a promissory note at the end of the third quarter and so the EUR 400,000 increase was mainly due to the effect that we simply had a little bit more cash on the balance sheet compared to quarter-on-quarter and that led to higher interest costs.

The income tax expense in the third quarter was EUR 6 million. This is, to a very large part, deferred taxes. The cash tax expense or really current tax in the third quarter was basically stable at approximately EUR 1.4 million after EUR 1.2 million and EUR 1.3 million in the previous quarters. So we think this is a good message that we are still able to present you with a very tax-efficient structure and not a strong increase in income taxes.

Looking at the next page, you see the development of EBITDA, FFO and AFFO. I already commented on the FFO development quarter-on-quarter, a slight increase, of course, a much stronger increase if you compare the first 9 months 2019 with the first 9 months of 2018, here the increase in FFO was 12%, so that should be a good development. And it's not only the FFO that increases, also the AFFO showed a very nice development.

Looking at the AFFO before modernization CapEx, there was a strong increase by more than EUR 12 million, now ending up with EUR 110 million already for the first month -- the first 9 months. And looking at the AFFO in our definition, that means really after all CapEx including the deduction of modernization CapEx, we ended up with EUR 74.6 million. This is an improvement year-on-year by more than 13%.

On Page #8, you see the development of the balance sheet. That's just one comment here on the development of LTV, you see this in the right side, we had a development -- or a reduction in LTV by 180 basis points. Of course, the main driver of this is the portfolio valuation. But in other words, if you really want to keep it simple and even in a year without any valuation results, we were able to keep the LTV stable.

So what we pay out for our dividends, that leads to a reduction in this year, for example, 230 basis points, and all other effects is mainly the ongoing results, that in the first 9 months are already to an improvement of LTV of 200 basis points fourth quarter that follow. So that shows you that we are well -- very well balanced, we are able to keep the LTV in line and don't beat any valuation gains to do this.

On Page #9, you see the development of the NAV. As I said, no valuation in the third quarter. So we will have that at year-end but still a strong increase in NAV. If we exclude the dividend payment of EUR 0.75 that we did in May to our shareholders, the NAV growth already in the first 9 months without the valuation effect in the fourth quarter that we expect was already at 13%.

Coming to Page #10, some comments on the financing structure. We achieved another -- an additional reduction in our average cost of debt that is now at 1.76%, still combined with a very long maturity of more than 7 years for the total financial debt. And there is still refinancing potential left, EUR 331 million bank loans that are maturing over the interest terms ending with coupons still north of 2% or even 3%.

We already did some refinancings in the third quarter and we're also working on the refinancings already to maturing bank loans clearly for 2019, but also for 2020. So perhaps at year-end 2019 or in the first quarter of 2020, we can present you some refinancings that we already did. And of course, the conditions that we achieved for new bank loans are much lower than the 2.1% to 3.5% from the maturing bank loans. Currently, perhaps a 10-year bank financing is achievable at around 100 or 110 basis points all in.

I will jump over the next slides on Page #11 and #12. You see here the very positive development of cost of debt, LTV, ICR and net financial debt to EBITDA. That's something that we discussed in the last quarters very much. And you see that the development is still very positive.

So then we should look at Page #15, where we give you an overview of the rental growth development and also our investments. Perhaps starting with the investments on the top right of Page #15, total investments are still stable. So annualized -- if you annualize Q3 figures, you end up if you include really everything that means maintenance and total CapEx at EUR 19.80 that compares with the EUR 19.20 for the financial year 2018.

And looking at the CapEx and maintenance allocation on the bottom right of Page #15, you see that the largest part of our CapEx is and was in the Chemnitz region, but we can clearly here now demonstrate the success of that CapEx program.

For example, we've now achieved in the first 9 months of 2019 in this region a vacancy reduction by 120 basis points. If you look at the last presentation from the second quarter, this reduction was just 40 basis points, so an additional 80 basis points reduction in the third quarter. So that's what we already announced. I mean you remember the calls that we had for the first and second quarter, that we're doing a lot of CapEx programs, especially in the Chemnitz region, and this clearly shows now a very positive effect.

Some comments on like-for-like rental growth. That's on the left side. I already mentioned that 2.7% total like-for-like rental growth, 2% like-for-like rental growth excluding vacancy reduction, so that should be very normal for us. But important to mention and that's shown in the small chart above these numbers. Just 0.1% from the total like-for-like rental growth is coming from the modernization surcharge, which basically means modernization programs for existing tenants.

So that means that we are still able to achieve effective like-for-like rental growth without big modernization programs for existing tenants, which is, as you know, heavily discussed in Germany and also then leads to a very disciplined and very effective CapEx approach because this means on the other side, that the largest part of our CapEx is still and also will in the future go to vacancy reduction.

Vacancy reduction is also shown on Page #16. Very positive trend in the third quarter, a reduction by 30 basis points, now to 4.9% after 5.2%. And also, if you look in our internal numbers for the month October, we clearly see that the positive trend is continuing. So therefore we should have also a good development in the fourth quarter.

Then I'm now on Page #18, on the acquisition slide for 2019. 359 units have been acquired or signed in the third quarter. That's what we are announcing today. New locations Stralsund, Greifswald, and Stadtilm. All locations where we already are. Average vacancy of these newly acquired portfolios are 14.4%.

If you look at the total numbers for 2019, for the total 1,300 units, the average vacancy rate of the acquired portfolios was at 11.1%. So that definitely provides us a further upside potential. And we are quite proud that the acquisition multiple is still very attractive at 12.1x the current rent, so that means including the current vacancy reduction and that leads to a 8.3% gross yield.

Then finally, but important, on Pages #20 and #21, the new FFO and dividend guidance. First of all, technically, clear comment to FFO guidance for 2020 is based on the current portfolio as showed to you today. So for purpose of the guidance, no further acquisitions, no further disposals are included, so just the portfolio as it is.

We're announcing today a new FFO guidance of EUR 168 million to EUR 170 million, that translate into EUR 1.15 FFO per share. If you compare that with the guidance for the financial year 2019, that's a 9% increase, and consequently, we pay out 75% of FFO, that means at least to a dividend per share of EUR 0.87 for the financial year 2020 then paid in 2021. That's also then a 9% increase.

What are the main drivers for the guidance as presented on Page #21? So all in all, a EUR 14 million increase in guidance. And the main driver is the expected improvement in net rental income. That's mainly driven by our like-for-like rental growth that we already have and that we expect and also from the closing of the already signed acquisitions that means of the already announced acquisitions.

Further positive impacts come from the net income from services, so a little bit more than EUR 2.5 million. Also, the net financial results will contribute to the positive development of FFO by EUR 2.3 million, offsetting higher personnel expenses, that is on the one side and cost effect through the expected wage growth that we had penciled in and also what I already mentioned, the increasing part of our own services.

One thing is important to mention. We have a EUR 2.4 million positive effect from our redefinition of the FFO. We want to bring that in line with the largest part of our peer group, that means, if you look at the FFO calculation in 2019 so far, we eliminated any new effects from the new accounting standard IFRS 16. We will change that from 2020 on. So that leads to a EUR 2.4 million improvement in the FFO number by changing that definition.

And there are some slightly other effects. We think good news is that the tax income is just slightly higher or the tax expense is slightly higher than in the years before. So we can keep that in a, let's say, moderate level. So all in all, a EUR 14 million increase in FFO, 9% compared year-on-year, that should be a good news for the guidance for 2020.

That's it from my side so far. Many thanks for listening to the call. But of course, now, we're very open to take your questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) The first question comes from Kai Klose.

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

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It's Kai Klose from Berenberg. I've got 2 questions, if I may -- actually, 3 questions. The first one is on Page 6 of the presentation. Could you indicate the -- or could you indicate what was the reasons for this decrease in the expenses for property management in Q3 compared to Q2? I assume it might be a bit more regarding maintenance, but if there was anything special which could lead to or was leading to the decrease?

Secondly, on Page 23, the increase in vacancy rates for Leipzig, Salzgitter and Rostock. I mean it's not significant, but how much is -- that's coming from maintenance or CapEx spendings?

And then the third question would be on the full year guidance. Then if I look into your full guidance for FFO compared to the 9 months, this would imply quite a strong fall in the Q4 FFO, maybe you could elaborate a bit more, is there any higher costs you would expect to occur in Q4? Or what might be the reasons for the lower quarterly FFO compared to Q3?

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Martin Thiel, TAG Immobilien AG - CFO & Member of Management Board [3]

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Many thanks for the questions, Kai. First of all, your question regarding the reason for the reduction in expenses from property management. That's on the one side, also a slight effect from lower maintenance costs. But the main [effect is] coming here from reduced vacancy costs.

So as we have reduced vacancy rates, not only in the third quarter but also in the second quarter, we are simply able to hand over a larger part of the service charges to tenants and this, what we call, vacancy cost is, of course, an important part of our expenses from property management. So reduced vacancy cost was the main driver.

Then it's correct. On Page #24, you can see there are already -- also regions, where we have increased vacancy rates. And I would say in perhaps regions like -- or in all regions, that's more a temporary effect, but we have also individual reasons.

For example, in Rostock, we had larger acquisitions last year in Schwerin, and this is -- and also part of the Rostock region. And this is nothing unusual that in the first year when after an acquisition, the vacancy rate even increases because we have to take over the property management. We have to really implement our processes. So therefore it takes some time and we are definitely convinced that we'll achieve further vacancy reduction also in the Rostock region, but that's mainly from 2020 onwards.

In the Hamburg region, that's a little bit difficult. That's nothing from, let's say, a market perspective, a simple reason that we have, especially in the Hamburg regions, problems with getting craftsman for even basic things, like doing modernization for the reletting and to get them quickly to work.

This is something where we're, of course, working on. We don't expect a material effect. But in the Hamburg region, we had now for some months, simply the problem to, let's say, have a quick reletting process because this work from external craftsman was -- lead to some delays, but this is also nothing where we expect a material trend to come out.

In Salzgitter, and yes, we had an increase in the vacancy rate, but this is also nothing that is really surprising for us. You know that we had a strong success in Salzgitter in the last years and it's been already below 5%. That's really a good level for Salzgitter. So we will -- should expect some swing in vacancy rates in 2019, 2020, but also here we are convinced that this is not a trend in Salzgitter. And to the contrary, when we look in our current report, you'll be already seeing here positive effects.

And then your last question referred to the full year guidance 2019, you're right. If you put on top of the first 9 months results, the Q3 results, you end up above our guidance. And that's nothing that we will be concretely expect strong increase in cost positions, but some positions are simply difficult to predict and this is mainly maintenance, which is to some part manageable, but this is also sometimes a timing effect.

And secondly, income taxes is also hard to forecast as precisely. So a swing in both positions of EUR 1 million or EUR 2 million is always possible. So therefore we decided, as we're also not percentage-wise talking about material amounts, to stay with the current guidance for 2019 where it is.

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

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I understand that. But the guidance now implies for Q4 implicitly a 20% fall in the quarterly FFO. And then you mentioned, you have just some smaller items, EUR 1 million or EUR 2 million, and I just was curious if there's anything special which could fall or which could lead to such a strong fall in Q4 FFO?

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Martin Thiel, TAG Immobilien AG - CFO & Member of Management Board [5]

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No, as I said, nothing special, of course. If we have a better view, for example, on income taxes, which is always something that we do during the year, let's say, in a detail, but it is an estimate if we have more visibility on that, of course. And this would then lead to the fact that we have in 2020 also a better starting point for the guidance. So again, there's nothing today...

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Operator [6]

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The next question comes from Mihail Tonchev.

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Mihail Tonchev, Kempen & Co. N.V., Research Division - Analyst [7]

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Two questions for me. First off, the Thuringia elections saw a very interesting polarized outcome. Can you maybe -- so given the 21% of your portfolio is in the region, can you maybe share any risks on your mind? Would you perhaps see the pace of yield compressions slowing due to less transactions as people get a little cautious along the region potentially? Or perhaps in the medium term, some talked on rent freezes as we saw in Berlin?

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Martin Thiel, TAG Immobilien AG - CFO & Member of Management Board [8]

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Mihail, thanks for this question. And first of all, it's completely correct. The -- our highest exposure with approximately 20% is in Thuringia. And we know it's absolutely normal thought that one looks at governments that are similar to the Berlin government. And it was corrected. We had in placed until the election -- in place the same government or same coalition as in Berlin. So that means a coalition consisting of the party called the Left and the Social Democratic party ended reigns.

What is changed now after the election is that this coalition lost its majority. So if you follow that thought, that could be good news. But on the other side, we have stated clearly, I mean, we saw absolutely no reaction on investment markets or no really concrete discussions in a material size of important voices regarding things like adapting a similar rental freeze.

And to the contrary, just to give an example, our contacts with the local politicians are quite good. I think they completely understand what is necessary in Thuringia regarding good property asset management.

So therefore, the Minister-President or the President of the Federal Republic -- of the Federal State of Thuringia also visited 2 times in the last 2 or 3 years, our properties in Gera to inform himself about what we do regarding quarterly -- quota management, regarding property management. So therefore, even before the elections, we have been not concerned if we see a similar development as in Berlin. And after election, just looking at the outcome, perhaps this risk is even lower.

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Mihail Tonchev, Kempen & Co. N.V., Research Division - Analyst [9]

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Well, that's encouraging. Second question, really a clean-up one, the dispositions. I know [they're] only EUR 10 million in value. But did you disclose the yield that these were done at/multiple?

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Martin Thiel, TAG Immobilien AG - CFO & Member of Management Board [10]

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Yes, the multiple is quite high, that's comparable to our acquisitions, so that's around 13x rent. And this is -- that's not surprising as we're talking here about noncore assets. And so what we sell is definitely less from less quality than what we buy, especially looking at allocations. So noncore assets, which is, as I said, basically done, that means we are selling assets in smaller cities, where we think for the long term, property management will be difficult.

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Operator [11]

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One question comes from [Shaza Hamed].

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Shaza Hamed, - Analyst [12]

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Yes. This is Shaza Hamed speaking. I would like to touch on the Berlin rental freeze again. As I understand, your rents in Berlin are so far below the ceiling, that you will not have any impacts from that policy development. Is that correct? Or did you do any impact calculations? And second part is, do you think it will hold up legally, the rental freeze?

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Martin Thiel, TAG Immobilien AG - CFO & Member of Management Board [13]

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Thanks for the question. First of all, it's absolutely correct that we are not affected by the Berlin rental freeze. But the main reason is that in the city of Berlin, we just own a little bit more than 300 units. So if you look into our Berlin portfolio, which is approximately 10,000 units, the very largest part is in the federal state of Brandenburg around the city of Berlin.

So we talk about locations like Brandenburg an der Havel or like Strausberg or Eschweiler or Nauen. And the current rental freeze will be implemented in the federal state of Berlin. So therefore from -- also from a legal perspective or technically, that's just nothing that will hit us.

And then your second question, will it legally hold? It's difficult to answer and actually not really affected from this Berlin rent freeze. And we, let's say, we'll be more conservative with any comments on that.

But just one thought. Yes, I think that we have good argument that it's legally not possible to do this. But the question is, will this discussion stop in Berlin if it's legally not possible. Perhaps not. But as I said, important for us is this Berlin rent freeze does not apply to our portfolio.

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Operator [14]

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There are no further questions yet. (Operator Instructions) Mr. Thiel, it seems there are no more questions.

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Martin Thiel, TAG Immobilien AG - CFO & Member of Management Board [15]

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So, thank you very much for dialing in, into our call. As always, if you have any further questions left, please feel free to contact us. Happy to answer that any time. Thank you very much, and have a good day.