Q1 2020 Earnings Call
Welcome to the work mortgage first quarter earnings conference call.
All participants will be any listen only mode should you need to systematically signal a corporate specialist Kristina Starkey followed by zero.
After todays presentation, there will be an opportunity to ask questions.
To ask a question you May press Star then one on your telephone keypad to withdraw your question. Please press Star then to.
Please note this call is being recorded.
Before we begin the call I would like to introduce Mr., John Ellman and works director of Investor Relations, who will make a brief introductory statement. Please go ahead Sir.
Thank you Chad.
Statements made on this earnings call may contain forward looking statements within the meaning of section 27 day of the Securities Act of 1933 as amended and section 21, each of the Securities Exchange Act approaching 34 as amended and we hear by claim the protection of the Safe Harbor provisions of the private secured.
These litigation Reform Act of 1995 with respect to any such forward looking statements.
Forward looking statements are those to predict could describe future events or trends that you're not relates solely to historical matters.
You should not rely on our forward looking statements because the matters. They describe are subject to assumptions known and unknown risks uncertainties and other and unpredictable factors many of which are beyond our control.
Statements regarding the following subjects are forward looking by their nature.
Our business in investment strategy market trends and risks.
Assumptions regarding interest rates and assumptions regarding prepayment rates on the mortgage loans, securing our mortgage backed securities.
Our actual results may differ materially and adversely from those expressed in any forward looking statements as a result of various factors and uncertainties.
Certain risks uncertainties and factors, including those discussed under the heading risk factors in our annual report on form 10-K in other reports that we file from time to time with the Securities Exchange Commission.
Could cause our actual results to differ materially and adversely from those projected in any forward looking statements that we make.
All forward looking statements speak only as of the date they are made.
New risks and uncertainties are rise over time and it is not possible to predict those events or how they may affect us.
Except as required by law, we do not intend to publicly update or revise any forward looking statements, whether as a result of new information or expectations futures or change in events conditions or circumstances or otherwise. Thank you.
I would now like to introduce Joe Mcadams, our Chief Executive Officer.
Thank you John and thank you for joining us on Edwards first quarter 2020 earnings call with me today on the call or be strip cash 'em over senior Vice President and portfolio manager, Brett Roth Senior Vice President and portfolio manager and Chuck Siegel Edwards Chief Financial Officer.
[noise] as I'm sure you're all aware the Corona virus pandemic had a swift severe and truly unprecedented impact on the U.S. and global economies financial markets and the U.S. residential mortgage market during the quarter.
Concerns over the potential effect on mortgage credit and indeed, all forms of private credit from the Pandemics economic impact drove prices lower on our non agency MBS.
This in turn led to further forced selling from fund redemptions margin calls and the like moving mortgage backed security prices sharply lower still and causing lenders to demand higher borrowing haircuts and rates and in some cases to withdraw borrowing capacity from the margin.
And where it's hybrid reallocation of capital across both agency and mortgage credit investments.
As well as our target leverage levels heading into the crisis provided us with the excess capital and flexibility to manage through the worst of the market volatility during the quarter, but the cost with severe with Edwards comic book value per share a declining 41% on the quarter.
While we were able to avoid selling significantly during the worst of the market. Their liquidity, we did sell a substantial amount of our portfolio securities in late March and subsequent to quarter end in particular, among our non agency MBS holdings.
While we didn't recognize in significant losses from me sales, we have been able to reduce repo borrowings and build backup the overcollateralization levels on our remaining borrowings.
And excess liquidity and cash to levels, which we believe are appropriate given the current lower market values and mortgage credit investments and the current and continuing market uncertainties and volatility.
As discussed in our earnings release due to the significant deterioration in both the non agency market as well as the financing market for those securities as well as our significant sales we have elected to classify our non agency MBS as trading securities at March 30, Onest, so unrealized gains or losses on those securities will be.
Reflected a net income for the current quarter as well as going forward.
Turning to the earnings core earnings were $8.7 million for the first quarter or nine cents per share up from seven cents in the fourth quarter of 29 team.
GAAP net income, which now reflects the unrealized losses on non agency MBS as well as mark to market changes on our interest rate swaps as customary was a loss of $188 million a $1.90 cents per share comprehensive income was a loss of $186 million on the quarter.
Looking at our portfolio composition at March 31st you'll see that non agency MBS declined to a market value of $282 million down from $644 billion at year end due to sales and price declines as previously discussed.
In addition agency MBS declined on a quarter as well from $3.8 billion to $2.6 billion at quarter end.
The fifth substantial purchases of agency MBS during the turmoil didn't succeed in stabilizing and then significantly improving valuations on agency MBS.
Our agency MBS sales were primarily done to improve excellent liquidity and provide a buffer against additional market volatility or deterioration, but its values of agency MBS became significantly fuller due to the thats actions and we had the belief that agency prepayments would increase significantly during the second quarter we.
Good focus our sales on securities with less attractive prepayment mitigating characteristics and did sell some additional agency MBS subsequent to quarter end, including our agency TBA positions, which stood at $157 billion at March 30 Onest.
We did not add significantly to our residential loans held for securitization portfolio.
Paydowns during the quarter the balance of those loans declined.
At this point I'd like to turn the call over to at least our passion of over to discuss the agency MBS portfolio.
Thank you Joe.
Make much the agency MBS market experienced volatility and disruptions in liquidity that was unprecedented in both magnitude and velocity.
Investor Deleveraging mutual fund redemptions, and constrain bank balance sheets combined led to an extreme spread widely across all agency MBS coupon.
Specified pools, Additionally impacted by dramatic decline in payout.
As Joe mentioned the launch of the fed aggressive open ended agency MBS purchase program profitability to the PVA market and the reversal of most of the price underperformance.
However, specified pool valuations remain at depressed levels.
As we move to reduce leverage and increased liquidity our agency MBS portfolio declined to abruptly mophie, two and a half billion at quarter end.
The reduction in portfolio size was driven primarily by the sale of safety and security.
As mentioned the majority of these were relatively generic newer production three entry and have coupon pool.
We view these as most exposed to the expected significant increases in prepayment income.
Given historically record low interest rate.
Our video fixed rate investments, including TJ position now constitute 63% of the agency MBS portfolio.
Yes, and 28 securities combined a 9% and adjustable rate MBS.
28%.
As you can see with this shift in our fixed rate allocation the average coupon available investment increased.
However that composition improved.
With loan balance and other characteristics that mitigate prepayment risk now constitute 88% of the Cts portfolio.
I had to 58% as previous quarter end.
On the other than the average coupon of our one year adjustable rate MBS degree.
And as these securities continue to reset to lower rates, we expect that will moderate prepayment fees going forward.
With regards to portfolio prepayments during the said well into the overall agency portfolio prepayment rate was 18 TPS.
And the adjustable rate securities repayment was 25.
As we expected given record high mortgage refinance applications, we have seen an increase in prepayment so far this quarter to 29 CPR for both the overall portfolio and.
Thank you be Sir at this point I'd like to turn the call over in a Brett Roth to discuss our mortgage credit investments.
Thank you Joe.
As we that have been discussing.
First quarter was the cobot crisis prior to the middle of March non agency market with continuing to trade at continuously tighter levels.
As we know that that quickly changed.
As liquidity began to evaporate the pricing in the non agency market quickly gap down with that lenders began to quickly reprice collateral and make margin call.
Because we had chosen a stress as a strategy to run our financing book concerted conservatively and had by design not taken full advantage of the amount of leverage offered to us by lenders, we had collateral available to us to meet initial margin call.
That gave us the flexibility stepped out of the way of the initial deep downdraft in prices and instead hold off sales a few days when we were able to sell assets in an orderly manner as market levels were recovery.
We believe this helped us to buffer the amount of loss, we realized on our portfolio.
As of March 31st market value of the assets, we sold was 191 million.
Okay.
We sold an additional 111 million in April for a total of 302.6 million.
As a result of these sale, we were able to reduce our repo balances by 255 million until that we were able to generate excess cash through these transactions to help us meat repo pair off and margin calls on the non agency portfolio.
At this point, we have successfully navigated a complete financing cycle postcode.
We believe we have reached a steady state and our position to proceed forward with our non agency portfolio.
Currently our portfolio is comprised of approximately 72.5% of legacy MPS and 20%, 27% of credit risk transfer asset.
Approximately 75% of our CRT investments are focused on agency re performing loans.
Since quarter end, we've seen a 5% increasing the value of the assets in our non agency portfolio.
Turning to our loan portfolios.
In general it is too soon to see any impact of the Corona virus on reported performance and the on these portfolios. We will begin to see data that shows possible effect of the Corona virus, starting with the May 25th Remittance report.
Looking at the residential loans held for investment portfolio.
The portfolio of high quality jumbo loans originated in 2014 2015.
Overall, the performance of the loans within this portfolio continues to be strong we did realize the default on alone in March was which was not coded related however, the severity was minimal and had little economic impact on the portfolio.
Voluntary prepayments remain elevated north of 30, CPR March and North of 20 CPR in April.
Our portfolio of loans held for securitization is our non QM loan portfolio.
Our current portfolio of assets has a weighted average FICO 742, LTV CLTV of 70% and VTI of 38.5%.
Approximately 84% of our part of our portfolio is comprised of hybrid arm of which the majority or seven one.
The credit performance of this portfolio continues to be strong with default remaining of the euro CDR.
This quarter, we did have one loan designated in 60, plus delinquency bucket.
With with unrelated to the cobot crisis.
We had been receiving calls related to forbearance requests by borrower.
Not all of these calls have resulted in bars ensing entering into forbearance agreement.
Currently by loan count approximately 13% of loans in this portfolio has entered into three month forbearance agreement.
On the funding side since the chronic crisis, we have seen our weighted average haircuts increase and funding spreads have widened significantly.
The increase to our cost of funds has been somewhat offset by the decline in rates.
We have also extended our financing term with 55% of our portfolio being financed in three months terms versus historically using one month financing terms.
That said, we are currently financing our positions with multiple financing partners.
Thanks, Jeff.
Thank you Brad turning now to the.
Additional details on portfolio financing.
In line with our asset sales repo borrowings declined similarly to a total of $2.5 billion at quarter end with an average rate of 1.86% overall and a head straight up 2.15% I.
I would point out than we had a limited amount of agency MBS repurposed maturing in the last few weeks of the quarter. So when combined with our sales of MBS Securities and the reduction and agency repo balances view any repos at quarter end has been initiated at the new post fed cut rates.
As we have been rolling our borrowings during April the current average agency repo rate now stands a full percentage point lower than its 1.76 average at March 31st.
Despite lower stockholder equity levels are calculated leverage was little changed at 6.1 times due to the reduction in repo balances.
Once outstanding trades settled and additional sales were made subsequent to quarter end. Our current leverage now stands at below five times total capital.
Our interest rate swaps declined in notional balance to 1.3 billion given the decline in mortgage rates and lower duration estimates on agency MBS are reduced swap position still leaves our agency hedge duration as negative with an estimated GAAP close to approximately minus one year.
At March 31st, albeit on a significantly lower leverage multiple.
As discussed previously our book value per share declined by $1.91 cents.
$2.69 at March 30 Onest.
As there was no dividend declared during the quarter. This resulted in a negative return on common book value of minus 41.5% for the three months ended March 31st.
Subsequent to quarter end, we declared a five cents dividend for the first quarter and plan to resume declaring a quarterly dividends on the customary schedule beginning in June.
This dividend would have represented 18% annualized yield based on the quarter end stock price.
Subjects quarter end, we have seen improvement and the values of both non agency MBS.
And the hedged values of our agency holdings, we would estimate common book value per share to be up approximately 5% in the month April.
Given the current price to book discount and dividend yield I have received some questions regarding share repurchases during the first quarter and indeed to date, our focus has been to generate and maintain excellent liquidity to preserve capital and maintain the continued financing of our investment portfolio.
Yes.
Well other companies are space of needed to defensively raise capital at these expensive and dilutive levels Anworth is not that said in light of the current continuing economic uncertainties related to that pandemic and potential for further volatility. We believe it would be premature to reduce our capital base and excess liquidity at this time, we do.
I understand are demonstrated over time ill share repurchases at substantial discounts to book and share issuance at higher prices and potentially significant premiums to book can enhance long term shareholder return and we will continue to evaluate all opportunities to improve shareholder return as we move forward.
With that I'd like to turn the call back over to check at our conference operator for any questions you might have.
Thank you Sir.
We'll now begin the question and answer session to ask a question you May Press Star then one on your telephone keypad, if you're using a speakerphone. Please pick up your handset before question Mickey.
To withdraw your question. Please press Star then to.
At this time, we will pause momentarily to assemble our roster.
Okay.
Oh My first question will come from Mikael Goberman with JMP Securities. Please go ahead.
Hi, good morning, or good afternoon out there I hope everyone is safe and doing well.
[noise] difficult quarter, obviously, but it seems like things are.
Getting a little better I guess I'll start with you mentioned the sold about a 111 million of non agencies in April forgive me if I missed that bottom you said a whole loan balances have declined as well since March 31st could you provide a ballpark figure on that.
Well the dose the value of the carrying value of our loan portfolio is.
On the table.
Page two of our earnings release.
Central mortgage loans held for securitization from went down from 153 million to 142 million.
Primarily driven by.
Repayments during the quarter.
No I was I was referring more to apologies for the misunderstanding since quarter end.
Oh, well, there's only so we get we get one remittance report a month. So we've we've had one additional month of pay Downs I don't do you have that Andy Brett.
We have not sold loans subsequent to quarter.
Okay.
I guess.
I appreciate the book value update for April.
I guess going forward.
Seems like it's pretty good environment for agency MBS investing in general based on your comments in some of the comments from your.
Your peers.
Trying to think about where the dividend is right now and I know you're going to announce.
Dividend next month.
Versus the sort of nine cents.
You reported in the first quarter.
What is sort of a core EPS run rate.
How can we think about that going forward.
It's a good question a bit of a difficult question at this point for the first thing I would point out is that the way. We report core earnings is to take into account the actual impact of agency prepayments during the quarter as opposed to indicated we did believe this was going to be a key.
Order with substantial prepayment increases, which would obviously decrease the sort of quarterly carry on our agency portfolio.
We had two prepayment reports subsequent to quarter end I believe the averages 29, and I believe the dis months, which came out yesterday is 35 33 to 35.
So clearly and this is on a portfolio that is booster pointed out consist almost entirely of.
Rules with prepayment characteristics. So we have viewed may as really the probably the.
The tightest month in terms of.
Requirements, our excess capital to meet margin calls for agency prepayments and then also maintain a significant prudent buffer preferred market volatility so.
As we move forward, we do expect prepayments to mitigate as we move into the summer and fall the.
Agency lead the we re Fi index, this fall and pretty significantly from its highest but still.
Almost twice, where it had been in the fall of last year. So I think the carry for agency MBS will be attractive once you speeds come down.
We are cautious given the high level evaluations and the wide spread between primary and secondary mortgage rates. So.
I I don't think we're going to be in a particular hurry to be taking our leverage back up on the agency side, but I do think we will see some opportunities.
In the coming quarters for potentially some better entry points in right now given the high level of prepayments.
Back to your original question.
Obviously, when we think about our dividend we declared a five cents dividend for the first quarter, we had nine cents of core earnings.
The second quarter has really been about capital preservation and maintaining liquidity and I think when we look to declare a dividend in June.
Takes three factors into account.
Obviously, our core earnings during the second quarter. The fact that we have some excess core earnings over our first quarter dividend and more importantly at that point, where we see the run rate moving into the third or fourth quarter.
Thank you very much has very helpful comments I'm just one last final one I think you mentioned repo repo rate is down to about 75 basis points is that right I just wanted to come from.
Between 75, an 80 currently on the agency side.
On the agency.
Okay. Thank you very much that's all from me.
Thank you.
The next question comes from Jonathan Capline with Caplan Capital Management. Please go ahead.
Hi, this up two questions for you number one is kind of a oh my high level question.
Based on the performance generally over the last decade 15 years over I kind of went back and look at different periods of time anything what happens at book value in various situations. They used to be that if interest rates are going up usually had more of a.
Problem or protecting book value now it seems like in most markets I'm. There is a very big issue in terms of protecting book value and adds to make sure you're aware of book value have gone down dramatically I'm. Just wondering if it's called into question about weather did business operating model makes any sense or has any.
Long term value in terms of a pre appreciation of book value and the second question is with regard to share repurchase.
The stock traded below a dollar for a good period of time and the company was pretty much silent about how you know the condition of the portfolio I'm, even if you're not in the position of.
Repurchasing stock I think it would be helpful, but what the shareholder is no kind of what the pro forma.
Book value is at any given time, so that you know when I when I looked at it trading under dollar I said I think there in trouble and they might not survive because we weren't getting information information for management. So I'm wondering if you can do a better job communicating estimated book value when markets are any dislocation.
Sure I'll take I appreciate your comments I'll take your second question first.
Be.
In terms of estimating book value.
You know.
We certainly you put out several communications.
During this period of time that.
We always want to have as much.
Hi quality information available to the shareholders as we can in fact.
On one of our press releases, which we put out on Friday, we noted that we.
Had an estimate of book value as of three days prior but given the tremendous illiquidity and dislocation in the market, we really could not make a good estimate where things were trading at that point. So I do hope you'll appreciate it was it was truly a stretch of us.
Few weeks that were particularly unprecedented and we've really tried to put our.
As much information as we put out there I think there was set several points since the last quarter, where we did provide updates as best we could so yes, I take a ticket the hard that the more information we can get out the better.
But.
He did release at the time several updates during the quarter.
In terms of with instead, but I do appreciate.
I Hope you can appreciate there's a trade off between wanting to always provide the best information. We can and also have it be correct and have an accurate quality.
Sometimes that's a tough topped off to have.
Your first question involving.
The decline in book value per share over time.
You are correct I mean, clearly given the last quarter.
I know that would have pulled our long term 20 year, but turned down significantly.
The mortgage Riet model.
We have had some episodes and over our long history weather was long term capital whether it was the.
Ed Taper Tantrum 2007 2008.
Mortgage crisis, and obviously this quarter as well where there have been.
Significant mark to market declines in the value of our leverage portfolio.
Our.
Our policy in the past, even though we would be allowed to not pay a dividend for a significant period of time because of those losses.
Has been that we thought it was best for total stockholder return.
To continue paying a dividend based on the go forward basis. So what you was obviously we've seen over time is a loss of book value during some of those periods.
But a distribution of dividends over that period of time that is.
Very substantial so even though we may have had a 10% dividend distribution over long period of time, we might have windup wound up within seven or 8% annualized return over that period. So.
That is a feature of how things have operated over the past decade, we've had two or three periods. Some significant price declines, but have continued and when you look at the book value per share declining over time, that's correct at the same time.
Amount of dividends, we have paid to contribute to the total stockholder return has also been very substantial over that time as well.
Okay. Thank you.
I appreciate it.
If I may next question.
Hi, just there had been a question about the.
Loans held for security they excuse me securitization balance between March and April.
All that information came into force yesterday. So we just have been putting through it looks like we are the balances have declined about $4 million to $5 million from March to April last month that.
Okay. Thank you Brett.
Thank you next question comes from Howard Henick with Scurlydog capital. Please go ahead.
Hey, guys and I apologize I missed the very beginning of the cost of this has been discussed just let me now.
Global question is how do you see needs going forward, you sold obviously more not agencies and agencies.
Do you want to become a pure agency bond like you more in the old days or restored the balance now that's going to settle Dan what are your thoughts in that regard.
Well, there's obviously a considerable amount of uncertainty still as to what the economic impact on residential mortgage credit over the next 612 months, maybe that said.
Our belief is given the current market values for the non agency securities We hope.
And the fact that as Bret mentioned, we are in relatively stable position.
We feel with the.
Much lower financing levels, we have on those balances that.
They have the potential to provide.
A very attractive returns going forward and the potential for continued capital appreciation. So we are not.
In a hurry to sell those securities that we think we'll continue to perform to improve their performance over time.
That said.
I think the funding market for mortgage credit is well stabilized is is certainly not strong and healthy I think we have oh, we would have a hard time at this point substantially increasing our repo balances on that sort of papers. So just kind of you kind of a whole is what you're saying right now.
We're all hoping until we see either a prices improved substantially in which case, we might look to sell securities were if we if prices continue to stay at these levels, we see some improvement in our ability.
To get to finance the yields on these securities are in.
High single digits, which is very attractive but.
Isn't really our shareholders return bogey when it comes to to yield. So we really realistically we need some level of leverage to provide an attractive return on those questions. So you were saying earlier, obviously prepayments have been pretty high where do you.
And at some point you want to stop paying down Republic theoretically overtime as.
You elaborate gets lower where our incremental investments going at this point in time.
Well.
As.
We have viewed that.
Given this the stabilization in the non agency market, but still obviously, a good deal of volatility potentially.
Andy.
Record low interest rates, we saw during the first quarter that really this period of time April May June were what was going to be the period, where agency prepayments were going to be very high we have to make a margin call.
When the factor comes out and we get the money from Fannie and Freddie two three weeks later, so we feel this period of time this quarter both on the agency side due to prepayments as well as on the non agency side, given the higher degree of volatility and lower liquidity was going to be sort of at the point, where we wanted to have the most potential.
Excess capital so we have not been deploying new capital into new investments.
Subsequent to quarter end.
As we move.
But that's fine, but when you get the point that you would ceteris paribus, assuming this situation where do you see the opportunities I guess, how might be clear I'm sorry.
So.
Right now the opportunities in the agency MBS market.
Would be would be driving.
Potential levered are always in sort of the low teens.
Where we're holding our non agency MBS would be in the high teens.
So right now.
When we get to that point, we're looking to deploy additional capital we'd have to evaluate whether.
The potential risk and agency MBS was.
And prepayment risk was was.
Worth a low teen are we.
Gotcha.
And my other questions little different.
What what given they once you shrank in I gap and I'm, assuming your expense ratio, even shrink as much what do you think your expense ratios, including the the outside manager could you pay them as a percentage of your.
Total equity and how does that compare to your appears at this point.
And if so given this amount of shrinkage does it make sense for you guys to remain a standalone entity.
Because as you get smaller and assuming you're cutting your expenses dramatically given what you're not I can't believe you can cut its people.
I'm not sure cutting your fees to the outside management company.
You have to be dramatically higher than your competitors.
Right well.
Two things are Howard I first I apologize I do not have a good estimate of a pro forma.
DNA expense, what I, what I will point out is that you look at the two major expenses.
That are not depreciation.
In the first quarter.
Yeah.
$1.5 million of management fee and.
$1.1 million other GSK expenses the management fee is based on stockholder equity. So it will continue to go down.
As the size of the portfolio goes down.
So there's a lot.
Now it.
It's based on.
Stockholder equity.
Excluding unrealized gains and losses, but obviously, we've had a substantial number of realized gains and losses. This quarter. So even though there was a relatively small decline on the quarter that was really only related to marches management fees. So the run rate would be lower going forward. It is correct that there can be some challenges relative to the other.
$1.1 million of quarterly Genie expenses auditors legal the like to try to ratchet that down in line with the smaller.
Smaller equity base, but yes for the most part that than the number one line item for expenses is something is the management fee. The external management fee, which is base as a percentage of stockholder equity.
Let's start dollar equity is probably.
Over stated given if you if you took based on what you just said because you're not take into account mark to market losses I assume the equity included to mark to market losses would be substantially lower is that correct.
Well, we again, we had some unrealized gains heading into this quarter. So it's.
In general in General Historic I wish I had the answer for Howard.
But and I'm happy to work on it look it up but.
In general it has tracked fairly closely there is nothing significant discrepancies between we don't have.
Got had large unrealized gains and losses that we have kept on the books for long periods of time.
I mean, we have lost over this last tend to have a relatively short.
Yes.
And my last question would be in light of this on the things that we just talked about have you or would you consider a sale at some point to a larger competitor to get the benefits of consolidation.
Yes, I think as I said in the in the comments and this was maybe more related to where I think in the same vein the idea that currently I.
Let me as do many of the mortgage rates now, but Anworth has has dealt with this in the past as well.
Trading when you're trading at a significant discount to book small don't have as much volume or liquidity as other larger competitors might.
Just as we have considered share repurchases in the past.
We're committed to doing what it takes two.
Proved shareholder return over the long run and we certainly will always consider all the avenues that are there.
Okay.
Thank you.
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Once again, if you'd like to ask a question. Please press Star then one.
Ladies and gentlemen, this concludes our question and answer session I would like to turn the conference back over to Joe Mcadams for any closing remarks.
Thank you I appreciate your participation and interest in today's call whether you're listening today are on a on a replay in the coming days.
We have.
I guess, maybe we have a shareholder meeting there will be virtual also and electronics so.
Absent that we look forward to talking to you again this time next quarter.
Thank you Sir the conference has now concluded. Thank you for attending todays presentation you may now disconnect.
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