Equity One (EQY) Regency Centers and Equity One Merger Conference Call (Transcript)

| About: Equity One (EQY)

Equity One Inc. (NYSE:EQY)

Regency Centers and Equity One Merger Conference Call

November 14, 2016 08:00 AM ET

Executives

Michael Mas - SVP of Capital Markets Regency Centers

Hap Stein - Regency's Chairman & CEO

Lisa Palmer - Regency's President & CFO

David Lukes - Equity One's CEO

Matt Ostrower - Equity One's EVP & CFO

Analysts

Michael Bilerman - Citi

Vincent Chao - Deutsche Bank

Craig Schmidt - Bank of America

R.J. Milligan - Baird

Ki Bin Kim - Suntrust

Chris Lucas - Capital One Securities

George Hoglund - Jefferies

Tayo Okusanya - Jefferies

Operator

Good day, and welcome to the Regency and Equity One merger conference call. Today's call is being recorded, and at this time, I would like to turn the conference over to Michael Mas, Senior Vice President of Capital Markets Regency Centers. Please go ahead.

Michael Mas

Good evening, and welcome to the joint conference call to discuss the combination of Regency Centers and Equity One which was announced today. Joining me on the call today are Hap Stein, Regency's Chairman & CEO; Lisa Palmer, Regency's President & CFO; David Lukes, Equity One's CEO; and Matt Ostrower, Equity One's Executive Vice President & CFO.

Before we begin, I would like to address forward-looking statements that may be discussed on the call. Forward-looking statements involve risks and uncertainties, actual future performance, outcomes; and results may differ materially from those expressed in forward-looking statements.

Please refer to the documents filed by Regency with the SEC, specifically the most recent reports on forms 10-K and 10-Q which identify important risk factors that could cause actual results to differ from those contained in the forward-looking statements.

Further, on today's call, we may reference certain non-GAAP financial measures. More information regarding these non-GAAP financial measures can be found in Company documents filed with the SEC. In addition, we have posted an investor presentation on both Company websites, regencycenters.com and equityone.com, with further details regarding this transaction.

Given that the transaction has just been announced, we may not be able to answer all questions. More information about the transaction will be included in our proxy materials that will be filed with the SEC.

Finally, we request that callers observe a two-question limit during the Q&A portion of our call to allow everyone a chance to participate. If you have additional questions, please rejoin the queue. I will now turn the call over to Hap Stein, Chairman & CEO of Regency. Hap?

Hap Stein

Thanks, Mike. Good evening, everyone, and thanks for joining us today to discuss this very exciting merger between Regency Centers and Equity One. We appreciate everyone's time this evening, as we know it's getting late on the East Coast.

As announced today, the Board of Directors of both companies have unanimously approved this compelling strategic combination. We believe the merger is a unique opportunity that cannot be replicated given that Equity One and Regency are two extremely complementary companies.

This absolutely perfect fit creates the preeminent shopping center, owner operator and developer, with an exceptional portfolio, enhanced organic growth, a value-add development and redevelopment program, strong balance sheet, and best-in-class team that will drive superior returns for all shareholders for many years to come.

Let me begin by outlining the compelling strategic rationale for this transaction. The merger between Regency and Equity One will clearly establish our position as the leading national shopping center company, combining two high-quality platforms with a focus on grocery anchors. The result is an unparalleled national portfolio of 429 high-quality centers, representing more than 57 million square feet, and located in affluent and infill trade areas.

As we all know, demographics drive retail sales, and in turn attract the leading retailers and restaurants to our centers, and drive occupancy and rents that we can charge our tenants. The impressive population density and very high average household incomes surrounding our combined portfolio stand up to those of any other national portfolio, positioning the Company to produce sustainable industry-leading organic growth well into the future. The breadth of the combined portfolio provides us with powerful economies of scale. The two portfolios, as I've indicated, are very complementary, increasing our presence in key areas with substantial purchasing power and supplier constraints.

On a combined basis, our top five markets are Southern and Northern California, South East Florida, New York Metro and the Washington DC-Baltimore corridor which together represent roughly 50% of the portfolio. And we'll continue to stick with our strategy to grow our presence in other attractive target metro areas, including Seattle, Denver, Chicago, Houston, Dallas, Austin, Raleigh and Boston. 79% of the portfolio will be anchored by highly productive grocers. The combination provides clear advantages offering a more diversified cash-flow stream and meaningful opportunities for better near-term and long-term NOI and earnings growth. Also, Equity One's active and potential redevelopment opportunities will augment our robust pipeline of projects. On a combined basis, we'll have almost $500 million of projects underway in addition to a robust pipeline of future development and redevelopment opportunities.

With our extensive development and leasing expertise, we can execute on these opportunities to create meaningful value for all shareholders over both the near and long term, while adhering to our prudent and disciplined capital deployment approach. Structured as a 100% stock acquisition, this merger preserves our balance sheet strength and flexibility, maintaining our access to multiple sources of capital at the lowest cost.

And finally, this transaction is accretive to core FFO per share on a pro-forma basis, inclusive of expected annual cost savings of approximately $27 million and after planned dispositions. In addition, the merger is expected to enhance our NOI growth profile to drive sustainable growing NAV per share over time for all shareholders.

Before I turn the call over to David, Equity One's Chief Executive Officer, I would like to express my overwhelming admiration for the exceptional portfolio, the impressive redevelopment pipeline, and the excellent company that he and his team have built. David?

David Lukes

Thank you, Hap; and thank you, everyone, for joining our call today. As I've said many times before, Equity One has the right assets, the right people, and the right strategy to produce meaningful and sustainable growth for shareholders. At this time, we have an opportunity to be part of something truly unique.

Without a doubt, I believe this combination between Regency and Equity One is in the best interests of all shareholders as it combines the two leading shopping center owners, and together makes us even stronger, with meaningful opportunities to enhance long-term value. Let me provide some thoughts and echo what Hap said.

Our portfolios are complementary and almost perfectly aligned to provide greater efficiencies. Geographic and asset overlap, however, are only a starting point. I also believe our organizations are culturally similar, and they're certainly complementary. Like us, Regency focuses on their key relationships across the business, from employees to tenants, local communities, the environment, and of course, investors. A special culture and enduring relationships combined with the right portfolio should ensure strong, sustainable organic growth for a long time to come. I also believe that Regency's extensive development and asset management track record should help ensure realization of the enormous value embedded in Equity One's redevelopment pipeline. I believe the combined redevelopment and development pipeline amount to the most compelling and diversified investment opportunity possessed in any shopping center REIT today.

Finally, in a capital-intensive business like ours, cost of capital itself is an important driver of returns, and this transaction will undoubtedly help the combined organization remain as competitive as possible in that realm. We both start with very strong balance sheets, but together, we'll be measurably stronger.

I've known and admired the Regency culture and their commitment to success for many years. Regency's strong performance is a testament to the expertise and the commitment of its people.

I'd like to acknowledge the incredible efforts of the Equity One team as well. And speaking for all of us, I look forward to working with Hap and his team to achieve a seamless integration and a merger that premier owner and operator of grocery-anchored shopping centers in the country.

And I'd like to turn it back to Hap.

Hap Stein

Thanks very much, David. In closing, our mission at Regency is and always has been quite simple; to be a great shopping center company through exceptional performance of our high-quality portfolio with a focus on grocery-anchored centers; astute capital allocation and value creation through disciplined development and redevelopment and intense asset management.

A focused balance sheet to withstand and profit from all seasons; a best-in-class team guided by our special culture and executed on a tried and true plan; and a superior long-term growth in earnings, NAV and shareholder returns.

The merger announced today aligns perfectly with this mission, which is why we are so, so excited to move forward together. We expect the transaction to close in the first quarter or early in the second quarter of 2017. So over the next quarters, we'll be working diligently with the Equity One team to complete the merger seamlessly and hit the ground running. We will keep you updated as necessary through filings and various other documents to assist you in reviewing this merger.

That concludes our prepared remarks and we'll now open to your questions. Operator?

Question-and-Answer Session

Operator

[Operator Instructions] And we'll take our first question at this time, we'll go to Michael Bilerman with Citi.

Michael Bilerman

Good evening. I was wondering, either for David or for Hap, can you just talk through the process that led to this combination; whether there's a [go shop], what the break fee is, just to understand how you got to this point together?

Hap Stein

Number 1, I just want to go back over -- the transaction is compelling from a strategy standpoint. The economics are very attractive from that standpoint, and there will be more to come as it relates to the -- in the proxy, and we're not able to comment on that at this point in time. David, is there anything you want to add?

David Lukes

No.

Michael Bilerman

So does that mean I get two more questions? Well, let's go through it this way. Hap, you said the transaction would be accretive to core FFO, and I just wondered if you can walk through that

methodology, because based on where consensus earnings is for Equity One, their implied multiple at the exchange ratio would be in excess of where yours is. And so maybe just walk through those -- I don't know if you're talking about it on a mark-to-market basis with a lot of funky accounting, or if there's other things going on. Can you walk through the accretion math?

Hap Stein

Just real simple. It comes from NOI growth, from their portfolio; $27 million of synergies that should be achieved by -- that we expect to achieve by 2018. And I want to add that we did that based upon a ground-up analysis of what it takes to operate the combined portfolios. And that accretion we're talking about is also after a reasonably robust sales program in line with what we've done in the past; and it's before any additional mark to market from a rent standpoint. Anything that I missed, Lisa?

Lisa Palmer

No, I think you hit it all. And the other thing too is, you'll see it in the Investor Day, we are assuming that we are going to -- obviously, the Equity One bank debt is not assumable by us and we are going to term some of that out. So we are assuming even higher interest expense than what the merged companies would have had together. So that's actually dilutive to it and we are still seeing accretion. So it is coming from the synergies of the -- really the significant economies of scale that we're going to be able to achieve.

Michael Bilerman

Right. And what's the date on the proxy? Because I think everyone would be curious whether this was a negotiated one-to-one deal or whether there was others involved that have led to it. So at what point will you actually be able to talk about process and go shop? When should we expect that?

Hap Stein

I think we're expecting something probably the middle of next month.

Operator

At this time we will move to Vincent Chao with Deutsche Bank.

Vincent Chao

Just want to stick with the synergies discussion here. The 27 million that you outlined just curious, so it sounds like that's a roll-up of a very bottom-up process, so I'm assuming a lot of that is corporate overhead. But can you maybe just talk about how much of that is maybe cost savings on development because of the scale or other scale-type of benefits, you could just maybe break that down a little bit.

Hap Stein

It primarily comes from corporate overhead synergies there, and also from a property management standpoint given the amount of overlap there. Those are the two primary drivers of the cost savings.

Vincent Chao

And as we think about the synergies beyond that, you talked about NOI growth and again some scale advantages, how should we be thinking about that? The size of the pipelines I would assume are the same as before, just combined, but then you achieve some construction savings and labor savings maybe. And on the NOI profile, obviously, both companies had very strong profiles already, very high-quality portfolios. I'm just curious how the combination of the two will really add no additional value. Do you think you'll get greater pricing power as a result of this merger?

Hap Stein

We're not dialing any of that into our projections, but I think that having a platform of this scale there should be advantages. Also, we didn't dial in any future from a cost-of-capital standpoint that may be potential. So I think that that could be some gravy that occurs over time and we would expect that. So I think that Equity One has an -- David and the team have done an exceptional job. They have got a great portfolio. There's a meaningful amount of embedded NOI growth on -- take aside the mark-to-market from a GAAP standpoint, but there's a meaningful amount of mark-to-market that's in that portfolio. They've put together a very impressive redevelopment pipeline. I think Regency is extremely well positioned to help harvest that, whether that's through redevelopment, whether that's through densification, or pure intense asset management.

Operator

Now we'll move to Craig Schmidt with Bank of America.

Craig Schmidt

Yes. You mentioned dispositions in the merger. Could you elaborate what you're thinking of disposing of?

Hap Stein

In the weeks and months ahead, we'll get more specific with that. But I think the key point here is Regency has a history of having a reasonably robust disposition program of selling assets that have lower quality. It's part of our capital recycling and recycling that into developments with

higher returns and/or higher-growth acquisitions. And we would continue that with a larger portfolio to sell from. But we have assumed in the numbers, as I said, a reasonably robust disposition program that we'll implement in the years ahead, and starting in this year, but even after those sales, the transaction would be accretive to a core FFO; and once again, before any additional mark-to-market on a GAAP basis there.

Craig Schmidt

And when I think about the annual run rate of Regency's G&A line, how much will that increase once the merger is completed, roughly?

Lisa Palmer

Again, I think that we should probably stay away from something that's not actually in the investor presentation Craig, but I'd point you to page 15 in the investor deck where we do identify just the $27 million of annual run-rate operational cost-saving benefits coming from property-level operating costs and corporate overheads. And our plan is, as in past years, we will be coming to the market in January to give guidance on Regency as a standalone company, and then more to come with the merged company after that.

Hap Stein

And I'll reiterate also that we believe that we can achieve these synergies without compromising the effectiveness of growing NOI, of harvesting the value in the development program and redevelopments, and without compromising Regency's very special culture.

Operator

At this time we'll take a question from R.J. Milligan with Baird.

R.J. Milligan

Hey guys thanks for taking my question. Just a follow-up on the planned dispositions. I'm curious if the merger would still be accretive without the dispositions, and if it's fair to get maybe a volume number or expected disposition cap rate to work our models into getting to that accretion.

Hap Stein

The dispositions you -- the merger -- or let me just say, whether it be Regency, Equity One or -- from our perspective, our numbers and our earnings growth would be higher if we didn't dispose of properties, but we think that it makes -- I think as we indicated before and what our track record is, and I think it's also the track record of Equity One, so there's a very complementary vision, mission and strategy here of selling properties and reinvesting those lower-growth properties into developments, into acquisitions with a higher-growth profile, and we will continue to do so.

R.J. Milligan

Okay. And my second question is, you'll have about $500 million of redevelopment projects underway; obviously Equity One, a portfolio with some bigger redevelopment projects. How do you get comfortable getting back or essentially doubling down on redevelopment, as we are later in the cycle?

Hap Stein

We're obviously very mindful of where we are in the cycle. We've indicated that the $500 million are underway, and that includes our developments. We're going to be very disciplined. We recognize where we are. We're doing these transactions on a -- with the right anchor tenants, with the -- in the right locations. And I think it's also, if you look at the Equity One slide deck], I think it shows this is a multi-year process, both from our developments and their redevelopments. It's going to go -- move through cycles.

Lisa Palmer

And I think it's important to point out, and again I'm just going to keep referring to the investor deck that we've posted on the website. I think it's got some great information in there. But if you look at page 11 in that investor deck, the percent basically of the redevelopment pipeline versus peers as a percent of enterprise value, you'll see that on a merged Company basis, we're still only going to be at approximately 3%which is on the low end of the peer group.

Hap Stein

And that includes developments also.

Operator

At this time we will move to Ki Bin Kim with Suntrust.

Ki Bin Kim

So maybe first for David. David, one of the things that -- or the many things I think investors were drawn to you on Equity One was that it wasn't just internal growth profile but a development per the Company size was actually very meaningful, meaning the earnings per share growth profile for your Company, I thought it would have been better for -- compared to many other REITs out there. So how did you balance doing -- pursuing a merger like this where you had this unique, high-quality company that was potentially able to grow earnings at a rapid pace versus pursuing a merger like this where maybe you -- on a combined basis, you as an investor we lose some of that? So what was the overriding factor that you and the Board were looking at to pursue this merger?

David Lukes

Sure. I'd be happy to, Ki Bin. The proxy statement is going to give a lot more background as far as the pursuit or the history goes, but if I think if I answer your question as to how we thought about it, the growth that we've had over the past few years has been somewhat large, and I would say a lot of that is due to operational focus; and another component of it was starting off on the redevelopment pipeline and getting some projects into the ground. I think you have to acknowledge that the present value of -- value creation for those projects is nothing more than deciding the execution risk and looking at what the value is today. And as we got into looking at Regency and a potential merger I think it became pretty clear to us pretty fast that there are a lot of synergies not just with respect to G&A, but also our cultures, their focus on operations.

For as long as I've known their company, which is a long time, they have always been top tier in operations; always been. The more time that I've spend with their development staff, which is about six to eight times the size of our development staff, they've got a bench, and they've got a bench that is a proven executor of projects. And so I think the comfort level that the execution for our shareholders went down in risk and up in likelihood, and so that was an important consideration for us.

Ki Bin Kim

Okay. And maybe for Hap. The last major M&A deal I can remember with Regency was when you guys pursued AmREIT. And if I remember correctly, the value there was with your balance sheet, with your size of the Company and the development expertise that you can make, AmREIT's projects are much more valuable under Regency's hands versus AmREIT's hands. And if I think about this deal, is there some similarities where with the different capabilities from Regency, perhaps could we see you guys take more ownership in the development properties, or actually just structuring a different or bigger dollar projects? Is there any major changes that could -- that were contemplated as you thought about this merger?

Hap Stein

I think the opportunities are -- once again, as David indicated and I reiterate, I think the companies are very complementary. I think the development pipeline is very similar. Yes, there are some opportunities that may be mixed use in some urban locations, but our primary focus is going to be harvesting the retail value into the extent that there are other non-retail uses where we think that, we'll bring in the right expertise to help us harvest that value. But our focus will continue to be on shopping centers. And let me say, we've started and completed a number of I guess it's nine-figure projects, and successfully, several of those -- and feel like we have the capabilities. And I appreciate, it's a highly complementary comment that David made about that, but I do have a tremendous amount of confidence in our approach, in our discipline, and in the depth and strength of our development team.

Operator

We will now move to Chris Lucas with Capital One Securities.

Chris Lucas

A couple of questions. On the accretion timeframe, given some of the caveats that you laid out in the half, when is the accretion actually likely to be measurable? Is it 2018, 2019? What are you looking at there?

Lisa Palmer

Hap is pointing to me, so I think that means, Chris, that he'd like for me to answer it.

Hap Stein

Very much so.

Unidentified Company Representative

We will have transaction cost and shareholder short-term transition cost if you will. Excluding those, and obviously, it will depend on when timing is as well, but we would expect to close it potentially by the end of the first quarter, early second quarter. But excluding those one-time transaction costs and transition costs, we would expect it to be accretive immediately.

Chris Lucas

Okay. Even though the actual costs savings that you're talking about I think you described as being resolved by the end of 2017 [multiple speakers].

Hap Stein

That's because of some of the transition cost.

Lisa Palmer

Yes. Again, that's because some of the transition costs will happen in 2017, and our current plan is that we would be excluding those transition costs and transaction costs from core FFO. So on a core FFO basis in 2017, we would expect immediate accretion.

Chris Lucas

In the asset sales as well?

Lisa Palmer

Correct.

Chris Lucas

And then just as you're thinking about your accretion and just the balance sheet in general, is there an expectation, given the size of the new company, that a credit upgrade is something that will be achieved? Or how are you thinking about balance sheet longer term? I know [multiple

Speakers].

Hap Stein

We're going to manage the balance sheet as we have in the past on a very conservative basis. And a credit upgrade might be an outcome that does occur, but that's not going to be in and of itself for us. The key thing is having, as we said before, a strong balance sheet that's going to withstand the next crisis, and also maybe allow us to profit from the next crisis and take advantage cost effectively of opportunities that are out there. And I think we're very, very well positioned to do that. And I think the fact that David and Matt and the team at Equity One have -- also have a pristine balance sheet, one of the strongest balance sheets in the sector and have done a great job with that. And the fact that it's an all-cash merger combines to put us in a great -- the combined Company in a really, really good position for the future.

Chris Lucas

And then last question from me. On the asset sales, just color. As it relates to the makeup of that, I'm assuming that it comes from both the Equity One and Regency portfolios. Is that what you're saying?

Hap Stein

Yes.

Operator

[Operator Instructions] At this time we will go to a follow from Michael Bilerman with Citi.

Michael Bilerman

Great, Hap, I was wondering if you can talk about how you came to the exchange ratio of 0.45. If you were to look at consensus NAV, your NAV is about 75, Equity One was about 30. So that would be a 0.4 exchange ratio. So how did you think about effectively putting in a 0.45? And just talk about that negotiation.

And you've talked about the strength of your balance sheet, how you thought about a potential cash component to the deal, and whether that was important to the sellers at all.

Hap Stein

I'll let the proxy speak to the process here, but let me just tell you -- respond how we view the transaction. We view the transaction as there's a significant amount of added growth in the Equity One portfolio, number 1. So we think that it's going to enhance our NOI growth profile. That's critical long term and it's very, very consistent with our strategic objectives.

Number 2, they've got a number of projects that they've put in a -- they've moved forward and put in a great position, some of them which are underway, some of which are in the pipeline stages. But there's a significant amount of value that we feel that we're in a position to harvest from -- once again, whether it's redevelopment, whether it's densification, whether it's intensification of retail uses, and whether it's just plain old ordinary asset management. And so I think that's -- secondly, I think that's critically important.

Thirdly, the synergies are an important factor in how we looked at the economics. And as I said before, these synergies were assembled from a ground-up basis, and we think that they're not going to -- we think we can be extremely effective in executing our plan because we think that's the key thing, NOI growth doing the redevelopments.

Fourth, this transaction, as I've just said, allows us to maintain a conservative balance sheet which we think is critically important, especially in today's environment.

And David alluded to some other potential synergies. There may be cost of capital advantages that come about from the future. I think there's going to be some leasing advantages that come from the scale that's there. I think that we may be able to on a discipline basis grow our development and redevelopment program in both portfolios as a result of this combination.

Michael Bilerman

And then can you just talk a little bit about Gazit? Gazit will own about 13% of the combined company. It appears from the presentation that [Haim] will be non-exec vice chair but be a part of Regency's investment committee. I guess are those -- is that as long he maintains a certain ownership level, or is that ever-greened even if they go down to 1%? So just talk about how that's done. Is there a lock up on those shares for a period of time? And just talk about the potential conflict of interest given Gazit's other shopping center holdings.

Hap Stein

There is -- there will be a customary standstill that will be in place. But once again, the specifics of that we'll leave to the proxy. But I will say that we are really looking forward to Haim joining the Board. He's an extremely -- obviously, look at the, without taking anything away from what David and the team have done, but Haim is a very astute investor, I think he's a terrific individual. And the more that I've met with him through this process, the more excited I am about him being a part of Regency and the Regency family. So we're looking forward to that, and the specifics of a standstill, etc., will be outlined in the proxy.

Michael Bilerman


In terms of going down a certain level and whether they get the Board seat and maintain from the investment committee, that will be in there too?

Hap Stein


The specifics will be in the standstill agreement.

Operator

We'll now take a question from George Hoglund with Jefferies.

George Hoglund

Will any of the senior management team from Equity One stay at the combined entity? And, if not, will there be a certain transition period post-closing that they'll stay around for?

Hap Stein

Yes. Right now, the Regency executive team will be operating the combined company. Obviously, David and the team's role in this integration, in the transition to closing, there may be one or two of the executives that may work with the company on a transition basis past the closing date. More to come.

Operator

At this time we'll take a question from Tayo Okusanya with Jefferies. Please go ahead.

Tayo Okusanya

Good afternoon, everyone. Congrats on the deal. Just as you think over the next 12 to 18 months, what do you see as the biggest risks or challenges to effectively pulling off the transaction?

Hap Stein


Yes. I think obviously keeping the teams focused on both sides of the ball, talking about Equity One and Regency through closing is going to be important. I think integration is going to be important. I think the fact though that you have complementary cultures is going to help with that. But it's the same; it's continuing to execute and growing that operating income. It's continuing to stay focused and moving forward the redevelopment and development projects. Finding some new opportunities that still make sense in today's world. Keeping a strong balance sheet; I think that becomes even more critical. We're starting to see a little bit more uncertainty in the capital markets.

So we've got our eyes on all those balls and I think that we're going to control those things that we can control and do as good a job as we can and work as closely with David and Matt and team during the months ahead. And they have been great throughout this whole process to work with and we're looking forward to working even closer with them to get this expanded Regency off on the right foot.

Operator

We have no further questions in the queue at this time. I will turn things back over to Mr. Stein for any additional remarks.

Hap Stein

We appreciate your time. We realize it's late. We got the press release out, and as soon as everything was documented, and scheduled the call as quickly as we possibly can but we appreciate your indulgence in taking the time to be on the call. And I know that we'll be talking one way or the other with many of you on a call in the days to come. And I can't tell you how excited we are to have this fabulous opportunity of the combined companies.

Operator

And again, that does conclude today's conference call. Thank you all for your participation.

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