Q3 2020 Preferred Apartment Communities Inc Earnings Call
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After todays presentation, there will be an opportunity to ask questions. Please note. This event is being recorded.
I would now like to turn the conference over to pull Cohen Executive Vice President Investor Relations. Please go ahead.
Thank you for joining us this morning, and welcome to preferred apartment communities third quarter 2020 earnings call.
We hope each of you have had an opportunity to review our third quarter earnings reports, which you released yesterday after the close of the market in a moment I will turn the call over to Joe Murphy, Our President and Chief Executive Officer to share. Some initial thoughts and then Jon Isaacson, our Chief Financial Officer will share some additional details about financial.
Metrics and capital markets.
And Joe will return to conclude our prepared remarks. Following Joes remarks, we'll be pleased to answer any questions you might have.
Also present this morning is Mike Cronin, our Chief Accounting Officer.
Jeff Sherman, Michael agent and boot <unk> business leaders of our multifamily grocery anchored retail and office verticals.
I'd like everyone to note that forward looking statements baby made during our call. These statements are not guarantees of future performance and involve various risks and uncertainties.
And actual results may differ materially.
These risks and uncertainties include but are not limited to the impact of COVID-19 pandemic on a business operations on the economic conditions in the markets in which we operate.
Our duty to mitigate the impacts arising from COVID-19.
The information about third quarter and October 2020 results excuse me rent collections in light of COVID-19.
For a discussion of these risks and uncertainties you should review the forward looking statements disclosure in Yesterdays earnings press release as.
As well as our FCC filings.
Press releases and other SEC filings can be found in our website asked P.A.C.A.P.T.S. dot com.
The press release also includes our supplemental financial data report for the third quarter Twentytwenty with definitions and reconciliations of non-GAAP financial measures and other terms that may be used in today's discussion and the reasons management uses these non-GAAP measures.
We encourage you to refer to this information during your review of our operating results and financial performance.
Lest we otherwise indicate all per share results that we discuss this morning are based on a basic weighted average shares of common stock and class a partnership units outstanding for the period.
I'd now like turn the call over to Joel Murphy Joel.
Thanks, Paul Good morning, everyone and thank you for joining our third quarter call. We hope that you and your families are well.
As we stand here in November we are eight months into this pandemic and we continue to execute on our strategic and tactical goals.
We've all learned to operate in this evolving cobot environment, that's at our corporate offices and across our portfolio and we remain focused on the health and safety of our associates, our residents and tenants as well as the communities we serve.
We expect because it will impact the economy and its future growth prospects in ways that may be unpredictable for quite some time.
All of this even with the very encouraging news announced yesterday as to the promise.
The Pfizer vaccine.
But we also believe that in many cases, because it has served to accelerate trends they were already there.
Magnifying the importance of high quality, well located and well run assets.
As we reported yesterday, our operational results have been outstanding relative to the current environment in every product type.
Cash rent collections, including deferrals for the third quarter were 99% for multifamily and 98% for student housing.
For grocery anchored retail, we collected 96% and for office, we collected 99%.
We believe this solid performance is driven by two key factors.
First as of today, our portfolio is comprised of 100 owned assets in key asset classes multifamily grocery anchored retail and class a office.
The quality of our portfolio and tenant base provides stability, particularly in times of economic uncertainty I.
Additionally, each product type is run by specialized management teams with deep sector experience.
Second our sunbelt suburban market focus allows us to benefit from positive economic drivers, including a diverse employment base high educational attainment strong population and employment growth and rising household incomes. These.
These broadly positive trends reflect the benefit of net migration to the sunbelt, which has been going on for many years and which has only been accelerated by the Cobi 19 pandemic.
There is an excellent discussion on these topics and emerging trends in real estate. The recently issued joint annual report of the urban Land Institute, and Pwc, which I urge you to read.
Next let me now provide an update on each of our business units.
For the third quarter multi housing comprised 57% of our revenues again, our third quarter collections of 99% and our core multi family business have been outstanding.
Collected 97.4% of multifamily rents for the month of October and expect that to continue to trend towards 99% as we've seen in previous months by the end of November.
Our portfolio consisting of high quality apartment assets in key sunbelt suburban markets continue to perform well, which we are quite proud of in this environment.
For the third quarter, our multifamily year over year same store NOI was slightly positive at 0.1%.
We are pleased to report that for the quarter, even in light of kind of in our same store average physical occupancy of 95.6% is identical to what we reported for the third quarter of 2019.
While our multifamily same store revenues were down 8.3% from a year ago, we still achieve top line growth is it just offset by additional bad daddys concessions, both of which we believe will moderate in the coming quarters.
As we look ahead, while we're always focused on managing our availability and maintaining a strong and steady occupancy throughout our portfolio. We now have a renewed focus on rent growth as the initial impact of Kobe 19 has passed.
In fact, our combined rent growth for September move ins and renewals turned positive for the first time since April and we expect this trend to continue.
Additionally, we are no longer needing to offer rent deferrals to residents and we're seeing those who have taken advantage of the program previously generally paying current under their new structure.
Turnover remains below 2019 levels and traffic has improved significantly since the onset of coated and remained steady and reliable across our portfolio.
Our strategy to newly constructed class eight communities in growing sunbelt suburban markets has certainly proven resilient during this economic slowdown.
We also believe that our strategy will benefit from net migration employment and housing trends as the economy recovers.
However, I'd be remiss not to mention and thank our associates as strategy alone can only take us so far.
Our associates across the entire company and all product types have worked diligently in an ever changing climate. This year and have not only cared for their own families, but our residents and our tenants.
Our results are certainly reflection of their dedication and I thank them.
Well operations are taking the spotlight. This year, we continue to actively invest in multifamily.
During the third quarter, we closed on a 20.7 million dollar real estate investment line in connection with an Atlanta multifamily development that includes the purchase right add completion with a well respected and well capitalized sponsor and we have done business with several times before that.
Additionally, subsequent to quarter end, we acquired a 281 unit newly constructed community in a growing suburb Orlando.
Earlier this year, we stated it was our intention to exit the student housing space to concentrate on our core sunbelt multifamily business.
As we announced on November 3rd we completed the sale of our student housing assets to TPG for approximately 478 million, which resulted in approximately 245 billion of net cash proceeds at closing after satisfaction of approximately $233 million of secured mortgage debt and other.
Closing adjustments and cost.
TPG is a very experienced institutional real estate owner and operator, and this sale confirms the scope and the diligence of the process, we ran with CB Ari.
Quality of the assets and the strength of their operational performance.
Next grocery anchored retail comprises approximately 21% of our revenues are 100% pure play grocery anchored centers are 92.5% leased. These centers are anchored by market, leading grocers, including Publix, Kroger and Harris Teeter, we continue to see strong.
Foot traffic at our centers and all of our shopping centers have remained open throughout the pandemic.
Our strong cash collections are continuing to trend positively with third quarter collections of 95% an increase of 400 basis points over our second quarter cash collections of 91%.
Adjusted for deferrals, our collections for the third quarter were over 96%.
This positive trend has continued in October and as of yesterday, our cash collected for October is 96%.
We credit this solid outperformance to our 100% focus on grocery anchored centers in sunbelt markets as well as our deeply experienced and engaged asset management team.
We do remain focused on collecting outstanding rent those current and deferred across our retail portfolio.
We worked with our tenants to come to mutually beneficial deferral agreements that approached the relationship Holistically and for the long term.
Examples include obtaining extended term release of certain lease restrictions on use and creating outparcel opportunities in our common areas that had previously been leased restricted.
In the aggregate these deferral agreements totaled 1.5 million for the second and third quarters with repayment primarily over the course of 20 and 21.
The specific details of our actions on reserves in connection with our grocery anchored retail portfolio are contained in our supplemental financial data released last night.
We believe the headline is the low amount of these reserves on an absolute basis and on a relative basis when compared to the total revenues in our grocery anchored segment when compared to our total company wide revenues and when compared to similar disclosures by other public retail owners. This.
This supports our view the grocery anchored retail located in suburban sunbelt markets has significantly outperformed.
This solid performance has allowed us to focus on revenue growth on the leasing front, we continued to be successful with both retaining current tenants and signing new leases.
During the third quarter, we signed 185000 square feet of new leases and renewals an increase of approximately 66000 square feet over our second quarter activity we.
We continue to be pleased with our leasing volume and momentum and our ability to retain tenants and the rental rates we are achieving.
Finally office comprises 22% of our revenues we continue to enjoy the stability of our multi year office leases in stand, 96% leased as of quarter end across 3.2 million square feet, and sunbelt markets, such as Atlanta, Charlotte and Raleigh there.
There is no doubt uncertainty related to the future of office, while so many continue to work from home, but we have collected 99% of our office rents year to date and only 11% of our office portfolio is expiring in 21 and 22.
Keep in mind that these are high quality class a suburban office properties in sunbelt markets.
We believe a more likely consequence of code rather than the demise of the office building is to have accelerated migration trends to the Sun belt, particularly from coastal urban markets that were already underway.
Now onto some governance and capital strategy comments.
Recently, we announced two important proposals recommended by our board to enhance our governance and improve our capital flexibility.
First was that approval to give common stockholders the ability to amend our company's bylaws and second approval to reduce the company's call option on its series a redeemable preferred stock from 10 years to five years.
We believe both of these proposals are stockholder friendly measures and both ISS and glass Lewis have recommended for votes for both proposals.
We issued a press release on November 5th announcing that we adjourned our special stockholders meeting until November 19 to allow stockholders more time to vote on these proposals.
As a reminder, we need two thirds outstanding of our outstanding shares to vote in favor of these proposals.
As of yesterday November nine approximately 65.4% of shares outstanding had voted.
Of the shares 97.9% and 95.7% had voted in favor on the first and second proposals respectively.
We're very encouraged with the overwhelming support from our stockholders that we have received today.
Now, let me turn the call over to Jon Isaacson to walk you through more details about our financial performance John.
Thanks, Joel to begin I Echo Joe's sentiments for the safety and health of everyone. On this call all my best to you and your families.
Turning to our results for the third quarter 2020 Pac generated revenues of approximately 126 million. That's AFFO of approximately 17 cents a share core FFO of 26 cents, a share and AFFO seven cents a share.
You will note our property revenues are up over 9.3% compared to the third quarter of 2019, owing to the continued growth in all of our property verticals. Our results also reflect lower revenues from a reduced balance in our real estate investment loan program and lower income from purchase option amortization associated with these loans.
Additionally, the company has incurred a variety of covert related operational costs at the property and corporate level.
Finally, as we have transitioned to paying our preferred stock redemptions and cash the deemed dividends from these redemptions grew significantly which largely contributed to our preferred dividend increase of $6 million.
All of these factors combined to drive the reduction in net income your view.
Our core AFFO result of 26 cents a share was an improvement from our second quarter results. This year of 22 cents a share an increase of 22.1%.
This increase was primarily driven by a general improvement in our revenue streams and a reduction in interest expense.
Turning to AFFO.
In addition to several of the factors just mentioned our AFFO result was also impacted by the performance of our investment loan program. We have noted multiple times that as these loans are repaid accrued interest gets paid and recognized in our AFFO number making it lumpy from quarter to quarter.
In the third quarter, we received full repayment, including interest totaling $18.7 million on our Palisades loan investment the payoffs on our loan investment program are difficult to predict due to the timing of the sales of these assets whether it be to pack with third parties and that's somewhat exacerbated by the COVID-19 environment.
The third quarter ending balance in our investment loan program stands at over $380 million in commitments.
Over 320 million drawn at quarter said.
The investment loan book, which was 125% of our asset base is now less than 7%.
It is important to mention that on a year over year basis. Our per share metrics were also impacted by increased share count. This is primarily due to redemptions being paid in common stock free coated and to a lesser extent executive and board compensation class a share conversion and ATM issuance, we did issue a small amount of common stock Earl.
In the third quarter through our ATM program and have paid for redemptions in common stock pretty coated.
In the current environment, our ample liquidity and undervalued common stock price have let us to paying all of our most recent redemptions in cash.
We believe our liquidity will allow us to really meet redemptions in cash going forward until we reach a point, where the stock price is more attractive and that opens up additional liquidity options for us.
Turning to our balance sheet.
In the third quarter, we continue to work to enhance our capital structure and free up liquidity, having refinanced seven assets in the second quarter, we completed an additional refinancing in early July.
As previously mentioned these financings totaled almost $290 million removed over half of our multifamily debt maturities over the next three years and reduced our average interest rate on those assets over 70 basis points to two point.
Yes.
Due to these efforts and other transactions, we have been able to reduce amounts outstanding on a lot of credit for the balance of which was $33 million at the end of the third quarter versus $93 million at the end of the second quarter.
Subsequent to quarter end, we reduced the balance on our line of credit as era.
In addition to the performance of our portfolio and our financing efforts improving our liquidity the trends and redemptions for our preferred stock continue to be reasonable in July we had approximately $9 million in reductions 13 million in August and $15 million in September all manageable and permits for the quarter, we redeemed a total of 37.
1391 shares across all of our preferred stock series combined.
For the same period, we issued a total of 42465 shares between the series a one an M preferred stocks in summary, we had a net issuance of approximately 5000 shares when all the classes of preferred stock.
As we look ahead, we remain focused on long term value creation and growth we see the most attractive opportunities in our multifamily acquisition and investment loan program. The pipeline for both has been increasing.
We continue to see positive metrics at the market level and sub market level and most of the markets, we target for both multifamily acquisitions and loan investments many.
Many of the properties and our acquisition pipeline have recent operations that mirror, our phone from an occupancy occupancy a collection standpoint.
Further reinforcing the notion that these markets are healthy and where the pandemic relatively well.
The debt market for multifamily acquisitions remains robust the gses continue to operate normally with pricing and capital availability that has been consistent with pre coated levels.
Companies have been more active in the multifamily space in recent months and we're seeing some of our larger life copartners offering terms and rates equivalent to the gses.
We believe debt capital for the multifamily sector will continue to be readily available and on terms attractive to us as a buyer.
In our investment pipeline, we continue to see attractive risk adjusted returns on proposed developed under.
Underwriting continues to be thoughtful and appropriate for the current environment. Our borrowers are providing more equity and proposed deals and construction financing continues to be available at attractive levels and rates.
As always we will continue to balance opportunities in the market both for investment loans and acquisitions in the multifamily space to try to create the optimal risk adjusted returns I'd like to now turn the call back over to Joe for some closing comments Joel.
Thank you John.
You know I.
Note that both Johns comments and my earlier comments contain a lot of references to important company numerical metrics.
These are no doubt and for sure are important as you assess us and in how we assess ourselves.
Let me step back away from these measures just for a minute and speak to you more broadly about our governance, our strategy and our broader objectives for the balance of 20 and on into 21.
You know due to our operational success over these past months, we've been able to sharpen our focus on furthering key strategic goals for our company for our assets and for our balance sheet.
The student housing sale was an important early step in this process.
With a clear focus on this strategic objective combined with the execution of a well designed and well led process, we were able to dramatically simplify our business model, while harvesting significant capital for balance sheet enhancement and for growth through select multifamily acquisitions and multifamily real estate.
Eight investment lines and suburban Sunbelt markets.
Next the initiation by our management team and our board of the two proposals. We now have in front of our common stockholders and which I described previously has allowed us the opportunity to proactively engage with our shareholder base.
We are gratified with the warm reception. These two proposals have met with.
Evidenced by the overwhelmingly high percentages of affirmative four boats obtained thus far.
These two proposals upon passage will not only enhance our corporate governance, but would also allow us the flexibility to strategically redeem our series a preferred stock much earlier, so as to provide pack with greater balance sheet and expense control flexibility.
We look forward to continuing to keep you updated as these initiatives take further shape, we will always continue to keep our focus on the performance of our underlying real estate assets.
Now, let me turn the call back over to Paul Paul.
Thank you Joe now I'd like to ask the operator to open the floor for any questions you may have operator.
Thank you we will now begin the question and answer session to ask a question you May Press Star then one on your telephone keypad.
If you are using a speakerphone please pick up your handset before pressing the keys.
To withdraw your question. Please press Star then too.
At this time, we will pause momentarily to assemble our roster.
And the first question will be from Aaron Hecht with JMP Securities. Please go ahead.
Hey, guys good morning.
Joel you talked about.
The sale of the mall.
Student housing portfolio.
In corporate governance changes that you guys are attempting to make.
Is the idea here to.
Allow yourselves to repurchase preferred stock with the proceeds from the student housing sale.
And what do you expect the balance sheet to look like.
Near term and longer term after.
After you execute on gold.
And is there any other plans to dispose of other assets.
But fundamentally change the balance sheet in the future.
Hey, Aaron Thanks, Thanks for that question as usual you go to the heart of the matter.
So so look on redeployment and you know right now and I know you know this until we had the final results of a shareholder vote, we can't discuss any specifics with respect to our use of net proceeds other than what we've really said, which you touched on and that's that.
That does capital can be used to enhance our balance sheet accretively and be used to grow our core multifamily business suit accretive acquisitions and real estate investment lines.
You know and grow further earnings from there so until we get to that point and then really looking at it and those decisions are made with all this in mind, what we do know and what we do like.
Is that this creates great optionality.
For the best the best path forward and the creation of long term value for our shareholders. Now you also raised because really on this it's not only just capital proceeds on student housing, but you did also raised does this open the door for sale of.
Of additional assets an answer that sure.
If market conditions Merit.
No need to absolutely do it but.
We'll make every decision we made based on where we are at that particular moment with what that trade looks like.
With the primary focus on it being accretive both in the short term and the long term.
Got you that makes sense and then on the retail side occupancy has obviously been strong and pretty constant most of the year collections trending up since bottoming out in a a little drop here month over month in October. So wondering is there an issue maybe with cares act money for 10.
Really running out for tenants here near term that caused a little downward movers, there's nothing else going on and I guess in general are you seeing an increase or decrease for your retail space at this point in time by what degree.
Yes.
Aaron I would I would attribute all of those.
Completely just as to timing, we're not feeling any trend of like Oh My goodness.
Anything on funds certainly a lot of our tenants did take advantage of that and we help them do that.
It's really just more about timing in particular situations, there's nothing directionally or trend other than its positive and I think and where you really see this is the increase in leasing activity, both as renewals and end and on new leases and really some pricing strength there.
Net debt the are they are having on the retail team see and so.
Yeah, I don't I don't view anything other than feeling really good about where we are on that.
Gotcha.
One more if I may you talked about.
The migration in your prepared remarks, our year leasing agents your multifamily communities in that area.
And would you be able to.
With us at this time.
Yes, you know and we probably do I'm sure that is somewhere in there.
And we could provide that directionally and it probably does vary by.
By asset so when you kind of mix. It all together I think what we would say is the same trend that that you. All had a report talked about is just the net migration and the interesting thing about it.
It's not like we all just kind of sat or add in March and said Wow look at this I mean this has been the basis of the strategy for the company really since inception.
Across all the product types.
Gotcha. Thanks for your time.
Thank you Aaron.
And the next question will come from Michael Lewis with true Securities. Please go ahead.
Great. Thank you.
This is similar.
But I wanted to ask about balancing the uses of capital.
Yeah, and an acquisition you've been kind of redeeming Uh huh.
We're getting redemptions on preferred and issuing some preferred now you're it.
Sounds like you're close to have an authorization to buy some of those back.
Which again may be the conversation tracee, if the approval, but how do you look at the.
The acquisition yields, especially our multifamily, which I imagine or there's still a lot of competition for those assets versus other potential uses and you know as you think about that of course your balance on the balance sheet you have a target net debt to EBITDA, our target leverage metric that you kind of high as side.
What capital to put to work in acquisitions and other other places.
Yes, Michael and thanks for that I'd add.
And knowing that and appreciate the respective know until we get to that shareholders vote, but yes look we've got we've got every different piece and metric that we look at across the piece and it really is a balancing act because we understand the value of looking at a dollar and saying okay.
Put that against a preferred what kind of accretion does that give you over the short and long term you also take or capital a dollar in say put that against the multifamily acquisition or a real estate investment line and you can see that and obviously that piece has also different components.
You can also create higher return.
But it can also create an asset that its growth and that's been the good as well so we not only want to realign the balance sheet.
In that context, but we also want to show that we are growing inactive company that has a good earnings stream ahead. So it's a balance between the Delevering. If you will aspects of using that capital versus earnings for growth.
Okay, Great and then.
The other one for me.
The portfolio is obviously the whole holding up well in the cash collections are strong.
How do you think about do you think that your earnings maybe weve kind of bottomed.
You know I would it.
If I ask this question six months ago, maybe I would have expected you know the cove it impacts to be longer.
Longer but do you think now you know we got the news about the vaccine. The other day you think.
Earnings are may be bottoming, and then you know a similar thing with cash flow, where I realize you know it will be lumpy because of the accrued interest, but maybe putting that aside I know is kind of your your base portfolio cash flow and earnings per kind of bottoming here, we may have a little grow 30%.
Too early in the pandemic and then the economic recovery.
I call.
Hey, Michael its John.
That's a great question and something that we spend a good bit of time thinking about a couple of things to consider since we really haven't seen.
As much of a drop since our portfolio performance has been relatively consistent I think that that idea of the bottom is less important than when can we start to really see more growth.
Yeah, Joel noted that in September we saw in multifamily the first renewal and new lease positive rent growth and we're looking for that to continue I do think it's a little too early to say exactly when and how much we're going to see that I still think it's going to be a little sporadic here for the next few years.
I just mean the news of the vaccine is great, but how come.
Likely they can produce it and how fast they can distributed I think is still a big question.
But overall I think we're in a good position that I think the trend is going to be good I think it's just a matter of what the slope of that line is going forward I do think it's a little too early to tell on that.
Okay, and then just one last one from me kind of a point of clarification.
The authorization seeking from shareholders.
The preferred is that or is that a retroactive authorization in other words, you know centers that are already out there.
Hi back it shifts from 10 to five or is that just on.
Is that just on future issues I would imagine attractive, but I just want to be clear.
Yes, no that's a good point and it is retroactive so it will affect all of the shares that have been issued today.
And just as a point the new shares that are being issued only have a two year call.
Okay got it thanks a lot.
Yes, Sir Thank you Michael.
And the next question comes from Gaurav Mehta with National Securities. Please go ahead.
Hi, good morning.
Following up on the on the preferred stock.
Yes, maybe I'll provide some color on the increase in redemption of the preferred stock.
Driving that and what kind of.
Feedback are you getting on redemption depressed.
Hey, Bob its John Thanks for the question you know one of the things to keep in mind. When you think about redemptions is what the pattern of issuance was the preferred stock.
It was about five years ago actually about six that we really started ramping up the issuance and so we are now getting into the window, where the stock is redeemable at par and what we found is that as that stock comes into that car window, which opens up after five years, that's when we get more.
Redemption request, so I think going forward, it's just going to be a natural extension of the pattern of issuance. We're just going to start to see more redemption request as the stock has to a par.
We haven't seen any particular pattern with regards to the market or the company outside of just.
Not having redemption fee anymore.
Hi, guys.
Yeah, if the call option proposal is approved by the shareholders, but one question to adopt your outstanding for the quarter ended that callable.
Callable option category now and maybe like over the next 12 months.
And then what's your what's your target goal as far as how much stock.
Thank you guys want to have on your balance sheet going forward.
Sure so.
Assuming we get the shareholder vote, we would immediately have about $250 million available to be called.
And through the end of 2021 that number grows by another 430 million plus or minus.
Obviously, we can't comment directly on exactly how much we.
Would redeem that will be dependent on capital availability the market and.
Companies options, but that's what would be available to be called at a maximum.
Okay.
And lastly in the transaction market I was wondering if you could just go look and accounted for its part of the student housing portfolio and then when you do that it's been our Orlando acquisition.
Yes, Thank you got it.
We don't know we don't disclose cap rates are going forward I love that you ask us all the time and but we just don't is company policy, but specifically here on the student housing there's other reasons as this portfolio.
And that transaction for because it included multiple assets across multiple markets, because some are free and clear and somewhere loan assumptions in.
An aggregated cap rate would not really be a meaningful data point, what we do know is in this transaction. The way it was structured debt assumptions of those loans saved us significant defeasance and breakage fees that would have otherwise reduced our net cash proceeds.
Well. We also know is that you know, we ran a really well run and widely marketed process.
We achieved a pricing point higher than our transaction that didnt close before and we believe resulted in solid pre coding pre coated pricing.
That many parties in many analysts and others have acknowledged.
Okay. Thank you that's all I had.
Thanks Scott.
Ladies and gentlemen, this concludes our question and answer session I would like to turn the conference back over to Joel Murphy for any closing remarks.
Hey, listen I, just I would like to say, thank you for taking the time to listen to our little bit more fulsome description of the release. We appreciate very sincerely your interest in our company have a good day.
Thank you Sir the conference has now concluded. Thank you for attending today's presentation you may now disconnect.
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