Timbercreek Financial Corp
TSX:TF
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Timbercreek Financial Corp
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Good day, ladies and gentlemen. Welcome to Timbercreek Financial First Quarter Earnings call. [Operator Instructions] As a reminder, today's call is being recorded. I would now like to turn the meeting over to Blair Tamblyn. Please go ahead.
Thank you, operator. Good afternoon, everyone, and thank you for joining us today to discuss Timbercreek Financial's first quarter financial results. I'm joined today by Scott Rowland, CIO; Tracy Johnston, CFO; and Geoff McTait, our Head of Canadian Originations and Global Syndications. Like others, we have faced new challenges in 2020, and we have navigated these effectively to deliver on our investment objectives. After a successful conclusion to 2020, we are pleased to report a strong start to 2021. Our portfolio remains in very healthy condition and largely unaffected by COVID, reflecting our focus on income-producing assets and significant multifamily residential exposure. Overall, we were happy with the transaction activity in the quarter, when it was typically more challenging as other institutional lenders aggressively deployed capital, in particular, to the multi-residential space, which has fared very well through the pandemic. Timbercreek continues to demonstrate an ability to capitalize on our reputation, relationships and platform to provide attractive risk return opportunities for the company. In Q1, distributable income reached $15.3 million or $0.19 per share, representing a 91.2% dividend payout ratio. This is the highest DI per share over the past 5 quarters and reflects solid top line interest income as well as healthy lender fees on both new and renewal transactions. Over the past 17 quarters, we have maintained an average dividend payout ratio of 93.6% on distributable income despite the historically low interest rate environment, demonstrating our ability to maintain steady income for our shareholders. I'll pause here and turn it over to Scott to discuss the portfolio and market trends. Scott?
Thanks, and good afternoon. As Blair mentioned, the portfolio remains well positioned, interest and principal payments from our borrowers continues to be largely unaffected by COVID, and we collected approximately 98% of April 2021 interest payments, which is consistent with historical rates. At quarter end, we had only 2 mortgage investments of 117 loans in arrears and no COVID-related concessions. The key portfolio metrics remain consistent with prior quarters and reflect our conservative positioning. Close to 87% of our investments were secured by income-producing assets at quarter end with 51.2% comprising of multi-residential assets. Specializing in multifamily continues to be a positive aspect of our portfolio, especially given the challenges of the pandemic on other asset classes, such as hotels or certain retail properties that rely on physical activity to generate income. And finally, we remain almost entirely invested in urban markets, which provides both superior tenancy and asset liquidity. Now looking at some additional metrics. First, mortgages represented 90.3% of the portfolio, the same as in Q4. Our average loan-to-value was stable at 68.8%. The weighted average interest rate on our portfolio was 7.3% in Q1, up from 7.2% in Q4. Despite a reduction in the prime rate, our interest rate floors have been very effective in protecting portfolio wear. And fundamentally, our focus on mid-market, shorter-term loans tend to have somewhat sticky mortgage coupons, while our borrowers are actively engaged in value creation initiatives. Once stabilized, our borrowers then seek longer-term refinancing at what tends to be very competitive interest rates. Moving to slide -- the next slide. It was a decent period for capital deployment and consistent with our expectations for the first quarter. We invested roughly $158 million in new mortgage investments and additional advances on existing mortgages. And this was offset by repayments of $153 million. This resulted in a small increase in the aggregate portfolio and portfolio turnover of 13.7%. Looking now at portfolio diversification, we remain heavily weighted towards Canada's largest provinces, with approximately 97% invested in Ontario, B.C., Québec and Alberta, the majority of which are in urban markets that generally experience better liquidity and offer a better risk profile. Québec remains a focus area for us, and our investments there increased to just over 22% of the portfolio or 22 loans, up from 10.5% of the portfolio at the same time last year. To further support our activity in the province, we are opening an office in Montreal and have recently brought on a senior originator to cover Québec in Atlantic Canada. As we mentioned, the mortgage portfolio remains firmly weighted to multifamily residential assets at 51.2%. At quarter end, we had no hospitality exposure and the retail rate in the mortgage portfolio remained just over 16%. Within retail, as we have mentioned in the past, approximately 80% of our exposure is secured by well-located downtown assets in Vancouver, Toronto and Montreal that have performed well to the pandemic and have strong long-term value expectations. We talked at some length last quarter about a few specific challenging loans, which caused a reduction in the net mortgage portfolio measured at fair value, which is approximately 5% of net investments. We continue to monitor these assets in the period and did not identify any significant changes from Q4 2020. We will continue to look for opportunities to optimize these investments and we'll monetize when prudent to do so. At this point, I'll turn it over to Tracy to review the financials in more detail.
Thanks, Scott, and good afternoon, everyone. Our full filings are available online, so I'll just cover the main highlights of the first quarter. It was a strong start to 2021 across many key measures. First, let's start with the income statement highlights. Net investment income on financial assets measured at amortized cost was $22.4 million in Q1, which is down from the prior year, mainly due to lower weighted average net investments over the period. We recorded a modest gain of $479,000 on financial assets measured at fair value through profit and loss, resulting primarily from interest income earned on those assets. Net rental income was $348,000 in the period, reflecting stable occupancy levels, offset by a moderate operating cost increase. Lender fee income increased over the prior year to $2.6 million compared with $2.2 million in Q1 2020 as a result of higher renewal fees. Net income for Q1 increased to $15 million, up from $7.4 million last year. The significant increase quarter-over-quarter was primarily driven from a $5.8 million loss on a derivative contract recorded in Q1 2020, whereas the company recorded a gain of $1 million on the instrument in Q1 2021. This represents the highest quarterly net income in the past 8 quarters. After adjusting for fair value gains and losses on financial assets measured at fair value through profit and loss and the derivative contract, adjusted net income also increased to $14.1 million from $13.7 million in the prior year. Basic and diluted earnings per share were $0.19 and $0.18, respectively, for the quarter compared to $0.09 for both basic and diluted in Q1 2020. And the basic and diluted adjusted earnings per share was $0.17 versus $0.16 last year. Our ability to deliver higher profitability on lower top line results speaks to the impact of the 2 cost management initiatives we discussed on the Q4 call, specifically our NCIB program and the repayment of 1 of our convertible debentures. We are pleased to report higher distributable income of $0.19 per share this quarter, which is up from $0.17 per share last year and at the upper end of the range you see reflected in the chart. Our payout ratio in DI was also well within our desired range at 91.2% compared to 99.9% last year. Turning now to the balance sheet highlights at quarter end. Our financial position remains strong between syndications, repayments and the line availability, we remain very well capitalized with ample liquidity. The net value of the mortgage portfolio, excluding syndications, was $1.5 billion at the end of the quarter, an increase of $4.5 million from Q4 2020. The enhanced return portfolio was $87.4 million, which included $70.1 million of other investments and $17.3 million of net equity and investment properties. Our credit utilization rate was 87% at quarter end, consistent with Q4. With approximately $84 million available on the credit facility, we are in a strong liquidity position to take advantage of the opportunities Scott discussed. And with that, I'll turn it back to Scott for some closing comments.
Thanks, Tracy. Looking forward, the macroeconomic picture continues to rapidly change from pandemic lows. As an example, longer-term interest rate yields have quickly rebounded, and the price of oil and other production inputs is definitely increasing. While there is still some uncertainty with COVID, seeing these levels rebound is a sign of growth in the broader economy. One potential concern, of course, is inflation, and that has recently started to make its way into the headlines. On a positive note here, real estate has long been held as an inflation hedge as rents and therefore cash flows are reset to reflect higher price realities. As such, our portfolio should be well prepared to mitigate this potential risk. Finally, I'd like to talk about the competitive environment that we touched on in our last call. In Q1, we saw an increase in lending competitors in the multi-residential space, which presents a near-term headwind from a mortgage origination perspective, as these assets become that much more attractive for the relative performance. During the pandemic, we are seeing more bids and sharper market pricing. As I mentioned earlier, an advantage we have in this environment is our focus on shorter-term loans for borrowers, executing value-added plans where interest rates stay more consistent. Timbercreek is very fortunate to have a strong industry presence and deep borrower and broker relationships that continue to provide attractive risk return opportunities. These long-term relationships continue to provide a strong pipeline of new business as we look ahead into 2021. And with that, I think that completes our prepared remarks, and we will open the call to questions. Operator?
[Operator Instructions] Your first question comes from Graham Ryding with TD Securities.
I will start with maybe the -- just going through my questions here. Okay. Let's start on the arrears. So I don't think there was any change quarter-over-quarter. There's 3 mortgages in stage 3, I believe. There's the Monmouth Mall and then 2 multifamily assets. Could you maybe just give us an update on each of those and perhaps what the -- what your comfort level is and maybe loan-to-value from that?
Yes, we can talk -- certainly, we can talk about this. I can start with one of the smaller multifamily deal called Arsenal. We actually sold that asset, and that closed last week. So that will be coming out of stage 3 for Q2, Graham, which is positive. On [indiscernible], we had an asset sale. And Tracy, correct me if I'm wrong, I think that's going to be also reflected in Q2 as a lower balance or is that there now?
Yes. No, it will be reflected in Q2.
Yes, that also happened post quarter end. So that will be -- it's still on -- it's still there, Graham, but it's going to be a smaller balance. And then with Monmouth Mall, we are sort of actively engaged in that one, and that is -- that's the second mortgage that we took a specific reserve for last quarter. And right now, it's sort of status quo. But I expect to know more about that kind of in the coming couple of months.
Okay. So generally positive. Stage 3 at this point should be lower quarter-over-quarter, assuming nothing changes from here?
Yes, I agree.
Okay. And then any development on some of those fair value mortgages, Northumberland Mall and the manufactured housing project, any update on plans for redevelopment or just the status?
Yes. No, we can talk -- I mean, I guess, we hit it our last call, it doesn't feel like that long ago. I would say basically status quo right now and really just trying to move along the strategic strategy for those assets, right? So Northumberland, definitely status quo. We're getting deeper into thinking about just how we're going to optimize the site. I think we'll have more details -- concrete details probably at the end of Q2, Graham. So right now, I would say status quo and similar with that Mobile Home Park City as well, working through the strategy.
Okay. I noticed you increased your retail portfolio slightly by, I think, about $4 million quarter-over-quarter, 1 extra loan or 1 more loan than last quarter. Just interested in what type of sort of retail commercial volume you guys are comfortable with lending on?
Yes, Geoff, do you want to take that question?
Yes. No, sure, absolutely. I mean, I think -- again, I know we've referenced this a few times in the past, but certainly, the ability to reconcile retail, I think, in general, it is in these sort of downtown core locations. Typically, it's rarely pure retail, I would say, it's typically more on a mixed-use basis, which includes some retail exposure. And in general, the view is through to an underlying expectation, the ability to underwrite retail demand for that asset specifically today and going into the future as well as the ability to underwrite downside -- converted alternative route type scenarios to protect the downside is kind of how we look at these things. So that's sort of the general approach in terms of how we address and are willing to contemplate retail in the current environment. But it's typically mixed-use with retail and usually some sort of a residential use. And there's oftentimes a higher or alternative potential use as a residential alternative at some future point should retail go in the wrong direction.
Okay. So my last one, just the distributable income, I think, was up this quarter. So because it's higher than lender fees. Is that like a higher level of renewals or is that a higher lender fee rate on renewals?
Yes. It was a combination. So there is partially a higher rate driving that as well as slightly higher volume on that.
Yes. I was going to say the same thing. A bit of both. Decent fees on our new business and our renewal business. It was a strong quarter for fees.
Your next question comes from Jaeme Gloyn with National Bank Financial.
First question is just on the competitive backdrop right now. Where are you seeing most of the competition and from what type of lenders? Is it a specific asset or just specific type of lender? Give a little bit more color on the competitive environment.
Yes, sure. I'll take this one. It's Geoff. Yes, I mean, I think it's a combination of things. I mean, I think it's a number of the usual drummers that we would face historically in the private lending space as well. But candidly, I think where we're seeing, in particular, as was referenced as you sort of -- in the multi-residential space and the industrial space, I think what we're seeing of late is a little more -- I guess the banks, I think there was -- had announced something not too long ago as it related to -- continuing to limit the bank's abilities to buy back shares, increase dividends, et cetera. And so they are sitting on some cash. And I think that's evidently, I think, where we're seeing these groups are a little bit flushed with cash looking to deploy more money into the space given their restrictions on alternative uses. Again, I think from our standpoint, again, it still falls in, generally speaking, a different transactional profile. But occasionally, they do creep up into kind of the conventional plus space where we do the majority of our business. So again, not necessarily getting the risk-adjusted return that we would think makes sense in a normalized market. And I think, again, it's more of a moment in time, a focus very specifically on multi-res and industrial to some degree. And again, really, beginning of the year, a typical story you would have heard, I'm sure, from us in the past and continues to be true today. The broader institutional market as they are sitting on lots of money, they like to get their money out. And kind of go golfing in the summer or whatever they do. And so they put their money out quickly and they get aggressive about it in terms of how they price it. And so that's always going to be a bit of a headwind in the second quarter of the year.
So Geoff, how do you reconcile that with the fact that we had a very productive first quarter?
Yes. So I mean, I think, candidly, for us, and I think there was some discussion about this previously, you're right. I think the reality is, we do have a lot of broker relationships, but we also have a lot of direct relationships, right? And I think at this point in time, I'd say we are leveraging those direct relationships more so than those broker relationships, which do get -- tend to get shopped a bit more. So we intend to get priced a bit thinner. I think reputationally, again, for us and the ability and comfort that those direct relationships have and our ability to execute and deliver. We do a lot of work upfront to ensure that we've underwritten deals, and we do it very quickly. But we do it in a very fulsome and detailed way such that we can move with these borrowers and ensure they execute. I mean the reality from a borrower perspective, too, it's a competitive environment for them as well, right? So their ability to execute is critically important. And so the ability to pay a little bit more with the group like us, for similar terms, they could get cheaper and the broader market-based on our ability to execute those, does play into this, for sure.
Yes. And this is Scott. Just to add, like, I mean, we see these events over time, and I remember the credit crisis for sure. And obviously, things can get disrupted and coming out of the pandemic, things are a little bit better, but there's a wall of capital. But the relationships we're doing -- we do business with are people we're going to do business with 1 year from now, 5, 10 years from now. So the good news is for us they see the value in what we deliver. And so we'll continue to win our share of loans. I think from a macro perspective, I go into this quarter, knowing there was the sort of wall of capital looking to invest. And so are we worried about it? Yes. But again, I think it's a hats off to the originations team and staying focused on having good customers. That I think we sort of -- not only did we survive the storm, we had actually one of our stronger quarters in the last couple of years. So quite -- really quite pleased with that for the beginning of Q1. And I think as always, the case for us historically, as we get into the end of the year, second half of the year, that's where we sort of fight above our weight and tend to do better in the market. So really quite pleased with how this quarter turned out.
Okay. Great. That's a detailed answer. One follow-up, still on the same topic. Given the competition in multifamily and, I guess, your desire and also a requirement to hold the majority of multifamily assets. Is there any -- does that have any -- is that having any impact on your ability to lend elsewhere in the other asset classes?
Yes. No, it's -- listen, it's a good question. We do hold, obviously, north of 50% in multifamily and retirement as well. And frankly, it's an asset class we like, right? And we like the risk profile of it. And in times like pandemics, it's -- we're quite fortunate to be focused on that area. So pricing is tougher. But again, I think our relationships there are strong. If anything, I look at what -- if you look at the adjustments coming out of the circumstance, we're probably just much more risk off of retail and a couple of other asset classes that'd be sort of more pandemic sort of physical interaction required to drive income. And I think what we're liking is just where else can we play in multifamily. And I think we are doing a few more -- I know multifamily construction loans. We've always have -- we've always been involved in that space. And I like with the right locations and the right borrowers, we're really liking the dynamics of that and the pricing in that space. And when I say this, these are small movements in the portfolio. If we were doing 1%, 2% multifamily construction, maybe we'll do 5%. And if we were doing 10% of retail, maybe we'll reduce that to 5%. So it's not a major move in the portfolio I don't think we need to make. But we are making those subtle adjustments that really does make a difference in that final optimization.
Okay. Right. And the enhanced return portfolio. How are you looking at the enhanced return portfolio as a potential offset to maybe some of the competition that you're seeing in the core mortgage loan portfolio? Is there any appetite to increase the weighting there? Or I guess, maybe some background on that.
It's a good question and a few points, right? Because at the end of the day, we -- obviously, we have a dividend we want to maintain. And there are opportunities. And there are certainly opportunities coming out of something like a pandemic, right? Where we are actually -- we're not quite there yet, but there might even be maybe a hospitality deal we want to look at, or something elsewhere where you can look at a 10-year average, and you can really get very attractive risk parameters, risk off, right, relatively speaking, at an attractive yield. Or in the multifamily space, we can do a loan. Is there a second mortgage we do versus a first, that has a very attractive yield to it. And then maybe that helps us win a multifamily deal that's very safe, but at a pricing that's a little sharper than we would normally do, right, as you try to weigh back to that average. So I think we look at the enhanced return portfolio as a competitive advantage to drive a little alpha into the portfolio. And at the same time, I sit there and say, generally speaking as a mature product and how we see things, we like the allocation of our portfolio. And we'll continue to sort of maintain that diversity. But a few clicks to the left, a few clicks to the right, if there's a strong opportunity, we'll take advantage of it.
Your next question comes from Sid Rajeev with Fundamental Research.
I'm just trying to see -- kind of get an idea of what the portfolio size will be by the end of the year. I know you don't give guidance, but it seems like your appetite from syndication partners will be higher this year because the market is looking much better this year, obviously. Can you give some color on where you expect things to go, especially portfolio size?
I mean, yes, I don't -- you're right, we don't love to give guidance there. But I would agree with you, right? I think we are going to get into a more attractive standpoint. I think there are -- there's a lot of syndication activity and partners who are certainly interested in doing deals. And I think we're going to see a substantial rebound in overall commercial real estate activity through the year. So for us, right, we have -- in a dividend distribution vehicle, having that consistent debt-to-equity ratio is important. So for us, right, I think we'd have to sit there and say, as we see things get stronger like last year, we took that $20 million through the NCIB process off the table. Which was kind of with the unknowns of the pandemic, it put us into a position of safety, right? A little tighter on the top line, but to get the same dividend distribution. If we're in an environment where we start seeing more positive outcomes, we feel we're getting into the later innings on COVID. And we have interest in growing the portfolio and our partners on the debt side and on the equity side are interested in the paradigm, I could see room for growth. I don't know, Blair, if you have any further thoughts on that, Blair?
No, no, I think you hit it. I agree with you.
At what point do you consider doing equity financing? Because debt-to-cap is now at 45%, 46%, slightly lower than historic average. So you have some room there. Equity financing, how do you decide when it's appropriate? Obviously, share price is a metric, but anything you can add on that?
Yes. It's Blair, Sid. I mean, I think, obviously, we have a good dialogue with the Board about the strategic short and long-term objectives, and we've been on the record pretty much as long as this business has been running that if the opportunities to grow present themselves, we'll look to take advantage of them. You mentioned debt-to-equity or total debt to assets. I mean, it's important that we remain in our -- in that -- within that targeted range so that we can generate cash flow in excess of the payout ratio. But to pick up on what Geoff had commented on earlier, I mean there are opportunities to grow. There are borrowers looking to create value, and we'd love to have additional resources to interact with them. So yes, we're certainly thinking about it. There's no urgency, of course, but we're thinking about it. I mean we had the ATM in place previously, and we're a fan of that program. So that's 1 way to incrementally raise capital as well.
Got it. Just 1 more question. With oil prices looking good now, are you seeing more opportunities in Alberta? Is that a focus area this year?
Scott, do you want to take that?
Yes. No. I mean I don't know if we would necessarily say it's a focus area. I mean, I think, in general, for us, I think we've always -- we're keeping an open mind to opportunity. And certainly, Alberta has been a place that we have continue to lend into on an appropriate basis. And again, certainly continue to have an open mind. Again, I would suggest we continue and we'll always stay somewhat cautiously optimistic about that market, recognizing the historical volatility that exist there and that will exist again. But we definitely -- we see opportunities there, I think, and we'll continue to look at opportunities there. And if we can find the right -- again, right location, right sponsor, right level exposure and pricing, et cetera. It's certainly something that we're open to. But I do think we're probably still looking for a little bit of an incremental yield and/or again, taking a little bit of a more conservative approach in terms of how we think about opportunities in that market still, but definitely open-minded.
Okay. And congratulations on the strong quarter.
Thanks, Sid. Appreciate it.
[Operator Instructions] Your next question comes from [ Lee Chen ] with IA Capital Markets.
Yes. So congrats on the solid quarter, solid payout ratio. So I was just wondering, what do you think we can expect in terms of the payout ratio for the rest of the year, given how things are improving now. And as you mentioned, you guys are actually much better weigh later during the year. Do you think it's sustainable? So basically, what can we expect?
Yes, I mean, obviously, we don't -- I don't like to predict payout ratios. But -- and I'll say this, I do think the economy is improving, I do think the portfolio is well positioned to take advantage of situations. We do remain as a transactionally important business. We need to continue to see repayments that provide liquidity to do new deals and fee is an important part of that model. So the summer quarter is always slower, though the fourth quarter is always busier. I'd say I feel good about the year. But I wouldn't want to predict payout ratios as that would probably somehow work against me from a karma perspective. But I think so far, so good.
That's good. Fair enough. I guess my second question is kind of a follow-up on the competitive landscape. You've spoken extensively about it. But I'm just wondering, as there's higher -- there's increased competition, right? And then there's high pricing. So how do you find that going forward, you're going to kind of balance funding attractive -- and funding appealing assets getting attractive yields, strategy always has been focused on shorter loans. But have you found that become also more challenging to execute on strategy? And what's the plan in order to kind of keep that competitive advantage? Is it to kind of shift your relationships more towards like direct and less towards like broker relationships?
Geoff can answer this too. But I think 1 comment I would like to make about this is I do think, and again, having seen similar disruptions before a few different times in my career. It really is a bit of -- like the window on what we were facing kind of in the December, January, February market, which is where there's confidence back in the market. So those institutional large pocketed lenders have confidence to deploy. But you have 0% interest rates. It creates a pocket, almost like a real window in time. And all of a sudden is there's this trap where interest rates are incredibly low. And there's a ton of capital to deploy. But that's a tough environment, right? But even since then, right, interest rates have gone up 75 basis points. So it's a bit of a -- even now we're starting to see that -- when we say there was sharp pricing, we're already starting to see it mellow a bit. Because what happen as that interest rate yield, that 5-year curve goes up, you start to see the banks price higher. And what that does is as that goes higher for conventional product, when you get to the sort of the alternative lenders. In turn, there's less pressure on that pricing. So it is one of those things that sit there and say, do I think on a longer-term basis, do I think that the business model has permanently shifted? I don't. I think we now sort of -- we strive sort of now towards -- we start to see a return to normalcy. And then having said that, again, really that pressure is on the people who want 5- to 10-year stabilized loans. If you're looking for that bridge loan -- if you're -- you've acquired a property, it has some vacancy or you want to invest some capital to make it shinier to go get a new tenant at a higher interest rate that's kind of the business model of our clients. And our clients know that in those transitional loans, they come to a person like a Timbercreek, and we tend to get -- here's a coupon that we need to make it work, frankly, for our investors. And they understand that, and that's part of an input cost for them, right? And then when they -- and then when they're finished, when they stabilize, they take us out with more traditional financing. So I sit there and say, listen, this business model has been around for a very long time, and it is a key part of the real estate game. And [ $1 billion ] that was shiny 4 years ago, now needs some work, and someone is going to sell it and someone's going to acquire it, right? So I actually really do think, I do believe in the business model and think that these opportunities continue to exist for us. And having said that, we need to have really strong originators and people like Geoff and the new [indiscernible] we're bringing in to make sure they can build those relationships and win their fair share of opportunities.
And last question for me. Just regarding origination. So the expansion and opening of the Québec office. So is the initial office operational as of now? Is the originators starting to like doing -- looking for deals like as of now or it's...
Yes, sir. Yes, sir, there is. Geoff, do you want to add anything to that?
Yes. No, 100%. So I mean, he's obviously getting up to speed and engaging with his relationships and clients and making sure he has a fulsome understanding of the ins and outs of the program. But yes, we're already starting to see good opportunities in flow there. I think it is a very unique market with great certainty. And the ability to have boots on the ground there, I think is going to result in good new prospective relationships there and incremental business. We're very excited about it.
At this time, I'm showing there are no further questions. I will now turn the call back to Mr. Blair Tamblyn.
Thank you. Okay. Well, again, I'd like to thank everyone for taking the time to participate on the call today. If any do -- any questions do come up, please feel to reach out to any of us directly. And we hope everyone has a great afternoon. That concludes the call. Thank you.
Ladies and gentlemen, this does conclude today's conference call. Thank you for participating. You may now disconnect.