PORTFOLIO INVESTMENT MARKET Spring 2017
International Property Consultants
Gerald Eve
INTRODUCTION This annual publication provides an overview of portfolio investment activity within the UK commercial real estate market. As well as analysing the key trends, we provide a review of the key portfolio transactions across sectors, a breakdown of the buyers and sellers and a 2017 outlook. During 2016, we advised on £2.2 billion of real estate investments. Three-quarters of this total was transacted either ‘off-market’ or with restricted marketing campaigns. In an uncertain environment, the portfolio investment market is becoming more opaque and trusted advisers make all the difference. This is where we come in. We know the portfolio investment market better than anyone.
Portfolio Investment Market Spring 2017
ANNUAL REVIEW £7.9bn
46%
£7.9bn UK direct real estate portfolio transactions recorded in 2016
46% decrease compared to the exceptional levels transacted during 2015
Alternatives account for 46% of portfolio transactions
£86m average lot size in line with 10 year average
Portfolio Volumes (2006-2016) £ billion 16
14
12
10 10 year average 8
6
4
2
0 2006
2007
2008
2009
2010
2011
2012
We define a portfolio as an investment containing three or more separate properties which are geographically distinct
2013
2014
2015
2016
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Gerald Eve
KEY THEMES Volumes down, but in line with 10 year average
–– In 2016 direct real estate portfolio transaction volumes totalled £7.9bn across 91 deals which represents a 46% decrease from 2015, which saw a record £14.4bn transacted across 130 deals. This trend was reflective of the wider UK investment market with CoStar reporting a 27% decrease in total UK investment volumes. –– D espite this drop in volumes, portfolio transactions in 2016 were still in line with the 10 year average, emphasising just how impressive 2015 was in terms of activity.
Prevalence of restricted marketing and off-market transactions
–– Nearly half of all business space portfolio transactions had either restricted marketing campaigns or were off-market deals, representing 65% by value. This compares to 1 in 4 portfolios in 2015. –– This trend will continue in 2017 as the overall capital markets become more opaque in the light of economic and political uncertainty. –– Of the £2.2bn Gerald Eve Capital Markets have advised on in the last 12 months, ¾ was through off-market or restricted marketing opportunities.
Proven liquidity for sub £50m portfolios
–– There were no portfolio deals over £500m across the office, retail, industrial or mixed sectors with only the alternative sector seeing portfolios of this scale transact – a key shift in the market compared to previous years. –– W hilst demand for critical mass is still strong we have seen an increase in demand for smaller and more diverse portfolios. –– T he £20-£50m size range across office, industrial and mixed portfolios demonstrated the highest number of deals in the year with 18 deals transacting – equal to 2015 levels. –– T here is increased appetite by property companies and some private equity vehicles to focus in this area. Our sale of the £51.5m Meteor Portfolio in January 2017 comprising 23 assets across office, industrial and retail sectors received over 12 bids from investors.
The importance of portfolio composition
–– During 2016, 1 in 5 business space portfolios were either withdrawn, broken up or cherry-picked of which 45% were office (by value), 40% industrial and 15% mixed. –– Therefore the dark art of portfolio composition has become increasingly important to create a liquid selection of assets. Investor appetite for portfolios can be very strong with competitive tension proven on a number of portfolio offerings, but equally can be limited for specific composition types. –– Portfolio demand remains strong for core and value-add opportunities. Demand for core plus opportunities, where target returns are broadly 10-12% (geared), has been relatively thin (albeit investor appetite growing). This area of the market was typically fulfilled by property company requirements in previous cycles and arguably represents a great buy opportunity with fewer active investors, but prevalent pricing mis-matches.
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Portfolio Investment Market 2017 Portfolio Investment Market Spring 2017
Portfolio premium or discount?
–– Portfolios are generally trading at fair value compared to likely individual asset receipts, but remain an efficient and effective route to exit assets. Typically portfolio transactions involve a sophisticated buyer universe with proven track records minimising transaction risk compared to managing a high number of individual asset sale contracts. –– We would argue that some single sector portfolios of scale (over £250m) of good quality assets have secured premium prices (c. 5%) following significant competitive tension. Portfolio premiums peaked at around 10% in Q4 2015.
Transaction timescales extended
–– Typical portfolio transaction timings from agreeing heads of terms to exchange are around 6-8 weeks, with longer timeframes for SPV transactions. This is generally twice as long compared to 12 months earlier. –– Private equity fund raising was approximately half that of previous years and therefore there is a reluctance to execute deals quickly with 100% cash, instead stretching their equity through debt and/or co-investment / side car arrangements. –– Transaction diligence has become rigorous with no stone left unturned, as investors seek to minimise risk. A well prepared sale is critical to a successful and smooth execution.
Private equity still dominant, but for how long?
–– Private equity remained the dominant buyer of portfolios accounting for half the buyer market. Whilst the referendum created significant buy opportunities through redemption pressures, this distress ended relatively quickly. –– We are aware of over 50 active investors currently seeking portfolio opportunities with c.£20bn of live requirements – two thirds from PE vehicles. –– Conversely, some PE vehicles have started to crystallise returns through sales in earlier vintage funds – accounting for 20% of sales last year. –– UK funds accounted for 55% of portfolio sales in 2016. Despite improved market conditions, they will remain selective for portfolio acquisitions in H1 2017 although we expect a pick-up in activity in H2. –– 2 016 saw some small cap listed entities seeking to grow GAV through securing portfolios conditional on a successful equity raise or issuance of shares. Gerald Eve have advised on a number of leading transactions via this route most recently Regional REIT’s conditional acquisition of c.£129m of property assets from the Conygar Investment Company.
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Gerald Eve
SECTOR BREAKDOWN The 2016 portfolio investment market saw the alternative sector dominating activity, accounting for almost half of total volumes. Alternative sector portfolios accounted for all big ticket deals over ÂŁ500 million with no other sector hitting this threshold. 2016 volumes for the traditional sectors were robust albeit volumes were down on 2015. The alternative sector saw a diverse buyer pool ranging from sovereign wealth to owner-operating platforms, whilst portfolio transactions within the traditional sectors were dominated by private equity vehicles.
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Portfolio Investment Market 2017
Alternative Portfolio
46%
Retail Portfolio Industrial Portfolio
Office Portfolio
16%
Mixed Portfolio
20%
12%
6% 10
24
14
18
25
£485m
£981m
£1.3bn
£1.5bn
£3.6bn
48%
32%
28%
40%
54%
office portfolios
transacted in 2016
annual decrease
industrial portfolios
transacted in 2016
annual decrease
retail portfolios
transacted in 2016
annual decrease
mixed portfolios
transacted in 2016
annual decrease
alternative portfolios
transacted in 2016
annual decrease
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OFFICE Highlights
£485m
1
£485 million total office portfolio volumes
6% of the portfolio market
2
3
4
5
6
7
8
9 10
10 office portfolio transactions
48% 48% decrease compared to 2015 levels of £926m
9 separate investors
£48m average lot size
Office Portfolio Volumes (2006-2016) 1,600
£ million
1,400 1,200 1,000
1
800
2
3
2014
2015
600 400 200 0 2006
1 White Tower 2 Hyperion Tower 3 SEO Portfolio
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2007
£671m £557m £211m
2008
2009
2010
2011
2012
2013
2016
Portfolio Investment Market 2017 Portfolio Investment Market Spring 2017
Office Portfolios 8% PROPERTY COMPANIES
14% UNKNOWN
8% LISTED VEHICLE 20% INSTITUTION
Buyers
10% PROPERTY COMPANIES
12% UNKNOWN
20% LISTED VEHICLES
Sellers
50% OPPORTUNITY FUND /PRIVATE EQUITY
58% INSTITUTION
Key Office Portfolio Transactions Portfolio
Properties
Price (£m)
Yield (%)
Vendor
Purchaser
Arlington Business Parks
6
£475.0m (Q)
The Jamaica Portfolio •
5
London Collection
Date
6.00%
Arlington Business Parks Partnership
Under Offer
Current
£30.5m
7.75%
Kingston Estates
CLS Holdings
Dec-16
7
£118.0m
4.70%
BlackRock Workspace Property Trust (BWPT)
Westbrook Partners
Jun-16
Slate Portfolio
5
£100.3m
6.50%
Kennedy Wilson
Equitix
Mar-16
Carbon Portfolio
6
£29.0m
9.35%
Aviva
Ares Management
Mar-16
Wing Portfolio
5
£37.5m
8.50%
LaSalle IM
Regional REIT
Feb-16
Science Park Portfolio
5
£95.0m
8.00%
Mars Pension Fund
Angelo Gordon & Trinity Investment Management
Jan-16
• Gerald Eve advised
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INDUSTRIAL Highlights
£981m
1
2
3
4
5
6
7
8
9 10 11 12
13 14 15 16 17 18 19 20 21 22 23 24
£981million total industrial portfolio volumes
12% of the portfolio market
24 industrial portfolio transactions
32% 32% decrease compared to 2015 levels of £1.5bn
23 separate investors
£41m average lot size
Industrial Portfolio Volumes (2006-2016) and 2016 sector breakdown £ million 2,500
2,000
1,500
1,000
500
0 2006
33% Multi-let
2007
63%
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Single-let
2008
2009
4% Mixed
2010
2011
2012
2013
2014
2015
2016
Portfolio Investment Market Spring 2017
Industrial Portfolios 1% UNKNOWN
4% COUNCIL 33% PROPERTY COMPANIES
5% PRIVATE INVESTORS
1% ADMINISTRATORS/ RECEIVERS/BANKS
1% UNKNOWN
14% PROPERTY COMPANIES 6% PRIVATE INVESTORS
46% INSTITUTION
Buyers
2% OPPORTUNITY FUND/ PRIVATE EQUITY
9% LISTED VEHICLE
6% LISTED VEHICLES
Sellers 48% INSTITUTION
24% OPPORTUNITY FUND/ PRIVATE EQUITY
Key Industrial Portfolio Transactions Portfolio
Properties
Price (£m)
Yield (%)
Vendor
Purchaser
9
£280.0m
6.50%
Lone star
Oxenwood
Cara Portfolio
14
£31.8m
8.50%
Rockspring
Clearbell
Project Apple
25
£310.0m
5.55%
Prologis
CBRE GIP
Feb-17
Oak Portfolio
4
£27.4m
6.15%
Kennedy Wilson
Hermes
Dec-16
Nevado Portfolio
8
£125.0m
6.14%
Clearbell
Blackstone
Nov-16
3 x Logistics Portfolio •
3
£27.0m
7.00%
M&G
Moorfield
Oct-16
Gravity Portfolio
4
£34.3m
6.48%
TH Real Estate
Duchy of Lancaster
Sep-16
ESN Portfolio
4
£46.6m
5.70%
ESN Ltd (c/o CBRE GI)
ARGO Real Estate
Jun-16
Project Crusader
25
£100.0m
7.67%
Brockton
InfraRed Capital Partners
Feb-16
Fix UK
47
£176.5m
6.10%
L&G
L&G IPIF
Jan-16
4
£82.5m
6.40%
Columbia Threadneedle
DTZIM
Jan-16
Ultrabox Portfolio
Wellington Portfolio (part)
Date Mar-17 Mar-17 (exchanged)
• Gerald Eve advised
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MIXED Highlights
£1.5bn
1
2
3
4
5
6
7
8
9
10 11 12 13 14 15 16 17 18
£1.5 billion total mixed portfolio volumes
20% of the portfolio market
18 mixed portfolio transactions
40% 40% decrease compared to 2015 levels of £2.5bn
17 separate investors
£83m average lot size
Mixed Portfolio Volumes (2006-2016) £ million 6,000
1
5,000
2 4,000
3 3,000
4 5
2,000
6
1,000
0 2006
1 Project Bridgett 2 Project Warwick 3 Project Laser
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2007
£503m £635m £1bn
2008
2009
4 Pearl Tower 5 Gemini Portfolio 6 Alecta Portfolio
2010
£165m £511m £350m
2011
2012
2013
2014
2015
2016
Portfolio Investment Market Spring 2017
Mixed Portfolios 22% OVERSEAS
2% INSTITUTION
3% ADMINISTRATORS/ RECEIVERS/BANKS
15% PROPERTY COMPANIES 2% PRIVATE INVESTORS
5% PROPERTY COMPANIES
Sellers
Buyers
58% INSTITUTION
1% PRIVATE INVESTORS 60% OPPORTUNITY FUND/ PRIVATE EQUITY
10% LISTED VEHICLES
22% OPPORTUNITY FUNDS/ PRIVATE EQUITY
Key Mixed Portfolio Transactions Portfolio
Properties
Price (£m)
Yield (%)
Vendor
Purchaser
Date
The Apex Portfolio (split/part sold)
17
£143.8m (Q)
7.25
Columbia Threadneedle
Various
Project Sea •
31
£129.0m
7.00
Conygar Investment Company
Regional REIT
Mar-17
Meteor Portfolio •
23
£51.5m
9.90
Columbia Threadneedle
Catalyst Capital
Dec-16
Rio Portfolio
11
£82.5m
9.00
Blackrock
Westbrook Partners
Dec-16
Project Nexus
16
£120.0m
7.00
L&G
Varde Partners
Dec-16
Alecta Portfolio •
26
£350.0m
6.14
Alecta Fund (Aberdeen)
Goldman Sachs / Square Metre
Oct-16
Project Phoenix
18
£200.0m
5.25
IM Properties
CBREGI
Mar-16
Project Press •
4
£13.2m
8.00
TH Real Estate
Catalyst Capital
Mar-16
Webb Portfolio
46
£215.0m
7.95
Blackstone
Harbert / XLB
Feb-16
Rainbow Portfolio •
12
£80.0m
10.10
Northwood Investors
Regional REIT
Feb-16
Omega Portfolio
26
£127.8m
9.21
Goldman Sachs / Square Metre
M7 / Kwok
Jan-16
Mar-17 (split/part sold)
• Gerald Eve advised
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RETAIL Highlights
£1.3bn
1
£1.3 billion total retail portfolio volumes
16% of the portfolio market
2
3
4
5
6
7
8
9 10 11 12 13 14
14 retail portfolio transactions
28% 28% decrease compared to 2015 levels of £1.8bn
14 separate investors
£92m average lot size
Retail Portfolio Volumes (2006-2016) including 2016 sector breakdown £ million 4,000 3,500 3,000 2,500 2,000
1
1,500
2
1,000
3
500 0 2006
1 Elmo Portfolio 2 Tesco Aqua 3 Cyrus Portfolio
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2007
£274m £352m £410m
2008
2009
71%
High Street Retail
2010
25%
Supermarkets
2011
4%
2012
Retail Warehouse
2013
2014
2015
2016
Portfolio Investment Market Spring 2017
Retail Portfolios 4% INSTITUTION 24% TENANT/OCCUPIER
6% ADMINISTRATORS/ RECEIVERS/BANKS 2% TENANT/OCCUPIER 32% INSTITUTION 32% PROPERTY COMPANIES
Buyers 35% PROPERTY COMPANIES
Sellers
37% OPPORTUNITY FUND/ PRIVATE EQUITY
11% OPPORTUNITY FUND/ PRIVATE EQUITY 17% LISTED VEHICLES
Key Retail Portfolio Transactions Portfolio
Sector
Properties
Price (£m)
Yield (%)
Vendor
Purchaser
Brockton Retail Park Portfolio
Retail Warehouse
9
£245.0m
Alexis Portfolio
Mixed Retail
8
Project Frankel
High Street Retail
M&S London Portfolio
Date
7.50%
Brockton Capital
Tristan Capital Partners
Mar-17
£86.3m
5.45%
Private
L&G
Mar-17
44
£39.5m
5.80%
Lloyds Banking Group
Aprirose
Dec-16
High Street Retail
11
£122.5m
3.80%
Fortress Investment Group
Marlborough Property Company
Oct-16
The Cyrus Portfolio (M&S)
High Street Retail
76
£410.0m
6.60%
Topland Group Plc
Fortress Investment Group
Sep-16
Jura Portfolio
High Street Retail
3
£191.0m
6.25%
British Land Plc
BMO Real Estate Partners
Sep-16
EOS Portfolio
High Street Retail
9
£27.9m
5.69%
L&G
KFIM Long Income PUT
Aug-16
The Red Portfolio
Supermarket
51
£310.0m
N/A
BA Pension Fund
Tesco Plc
Mar-16
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ALTERNATIVE Highlights
£3.6bn
1
2
3
4
5
6
7
8
9 10
11 12 13 14 15 16 17 18 19 20 21 22 23 24 25
£3.6 billion
46% of the portfolio market
25 mixed portfolio transactions
54% 54% decrease compared to 2015 levels of £7.7bn
25 separate investors
£143m average lot size
Alternative Portfolio Volumes (2006-2016) including 2016 sector breakdown £ million 9,000 8,000
1
7,000 6,000 5,000 4,000
2 3 4
3,000 2,000 1,000 0 2006
1 2 3 4
2007
Liberty Living Portfolio £1.1bn Project Chariot £500m Threesixty Portfolio £450m Atlas Portfolio £575m
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2008
2009
26% Hotel
2010
50%
Student Housing
2011
14%
Motor Trade
2012
2013
5%
Healthcare
2014
3%
Self Storage
2015
2016
2% Leisure
Portfolio Investment Market Spring 2017
Alternative Portfolios 4% INSTITUTION 26% OPPORTUNITY FUND /PRIVATE EQUITY
20% OVERSEAS
Buyers
8% TENANT/OPERATOR
9% LISTED VEHICLE 3% PRIVATE INVESTORS
30% PROPERTY COMPANIES
14% ADMINISTRATORS /RECEIVERS/BANKS
3% INSTITUTION
12% OVERSEAS 12% TENANT/OPERATOR
Sellers
46% OPPORTUNITY FUND /PRIVATE EQUITY
10% PROPERTY COMPANIES
3% LISTED VEHICLES
Key Alternative Portfolio Transactions Portfolio
Sector
Properties
Price (£m)
Vendor
Purchaser
Date
Unite Portfolio
Student Accommodation
7
£295.0m
Unite Student
Brookfield
Feb-17
Nido Collection
Student Accommodation
6
£120.0m
Undisclosed
Starwood Capital/Round Hill Capital
Jan-17
Project Chariot (NCP Portfolio)
Car Parks
88
£500.0m
Royal Bank of Scotland
Davidson Kempner Capital Management
Sep-16
Atlas Portfolio
Hotel
45
£575.0m
Lone Star
London and Regional
Apr-16
Ardent Portfolio
Student Accommodation
25
£417.0m
Mansion Student Accommodation Fund
Mapletree Investments
Mar-16
Threesixty Portfolio
Student Accommodation
11
£430.0m
Oaktree Capital Management
GSA/GIC
Sep-16
Travelodge Portfolio
Hotel
55
£196.2m
Golden Tree/Avenue Capital/Goldman Sachs
Secure Income REIT
Sep-16
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Gerald Eve Gerald Eve
OUTLOOK In a challenging year, punctuated by the EU Referendum, we have had one of our strongest performances and have successfully advised our clients on acquisitions and disposals across on and off-market transactions. Our 2017 predictions are as follows… Appetite for portfolios still strong We are expecting a busy H2 2017. Over £2bn of portfolios have transacted already in 2017 with over c.£3bn of further portfolio stock mooted for sale – 66% of 2016 total volumes. Investor appetite is still strong and we are aware of over 50 active investors seeking portfolio opportunities with c.£20bn of live requirements – two thirds from PE vehicles. Off-market and restricted marketing campaigns remain prevalent, and deals will continue to take longer to execute compared to the 2014/15 bull run.
2017 could see a major drive by the government to raise capital by selling real estate holdings The government / public bodies may seek to unlock capital held in real estate to plug funding gaps to help drive efficiency. This includes non-core / surplus asset sell-offs or core assets via innovative sale structures such as Prop Cos & JVs. Taxpayers still own more than £300bn of UK land and buildings.
Listed vehicles
2017 will see the consolidation and expansion of listed real estate vehicles as investors seek cost savings with efficient management platforms and increased asset diversity. This will be particularly prevalent with non sectorspecialist entities. We expect to see more mergers and acquisitions or public to private deals, especially with those entities where stock is trading at significant discounts to NAV.
Scarcity of stock – unpicking PE assets PE vehicles transacted a staggering £40bn of assets over the last three years in both non-performing loan and direct portfolio markets. There are a number of barriers to overcome to access this stock including currency repatriation given the weak pound against the Dollar and the Euro, but this will undoubtedly be a happy hunting ground for investors with conviction to invest.
Continued growth in alternatives 2017 will see continued growth in alternative asset investments particularly healthcare (care homes and senior housing) student housing and hotels. The portfolio sector will continue to benefit from the increase in alternative investment trades given the sector/ asset compatibility and the unrelenting demand for secure income real estate.
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Alternative senior debt lenders to increase market share The traditional high street lenders have eased and we are seeing alternative lenders, such as institutions and specific debt funds taking more market share. Debt coming from non-traditional sources will be a continuing trend throughout 2017.
Geopolitical risk
There will be further political uncertainty both in the UK and further afield, with Article 50, impending European Elections and a Trump presidency adding to widespread geopolitical uncertainty. Amongst this UK real estate will still be seen by investors as a safe haven, particularly for overseas investors aiming to capitalise on currency arbitrage.
Portfolio Investment Market Spring 2017
CONTACTS
John Rodgers
Leo Zielinski
Nick Ogden
Tel. +44 (0)20 3486 3467 Mobile +44 (0)7810 307422 jrodgers@geraldeve.com
Tel. +44 (0)20 3486 3468 Mobile +44 (0)7980 809031 lzielinski@geraldeve.com
Tel. +44 (0)20 3486 3469 Mobile +44 (0)7825 106681 nogden@geraldeve.com
Will Strachan
Vicky Smith
Charles Chell
Tel. +44 (0)20 3486 3474 Mobile +44 (0)7929 885859 wstrachan@geraldeve.com
Tel. +44 (0)20 3486 3476 Mobile +44 (0)7740 862511 vsmith@geraldeve.com
Tel. +44 (0)20 3486 3480 Mobile +44 (0)7920 275614 cchell@geraldeve.com
19
London (West End) 72 Welbeck Street London W1G 0AY Tel. +44 (0)20 7493 3338
Leeds 1 York Place Leeds LS1 2DR Tel. +44 (0)113 244 0708
London (City) 46 Bow Lane London EC4M 9DL Tel. +44 (0)20 7489 8900
Manchester No 1 Marsden Street Manchester M2 1HW Tel. +44 (0)161 830 7070
Birmingham Bank House 8 Cherry Street Birmingham B2 5AL Tel. +44 (0)121 616 4800
Milton Keynes Avebury House 201-249 Avebury Boulevard Milton Keynes MK9 1AU Tel. +44 (0)1908 685950
Cardiff 32 Windsor Place Cardiff CF10 3BZ Tel. +44 (0)29 2038 8044
West Malling 35 Kings Hill Avenue West Malling Kent ME19 4DN Tel. +44 (0)1732 229420
Glasgow 140 West George Street Glasgow G2 2HG Tel. +44 (0)141 221 6397
Disclaimer & copyright Portfolio Investment Market is a short summary and is not intended to be definitive advice. No responsibility can be accepted for loss or damage caused by reliance on it. Š All rights reserved The reproduction of the whole or part of this publication is strictly prohibited without permission from Gerald Eve LLP.
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