Q2 2022 Phillips Edison & Co Inc Earnings Call
Okay.
Okay.
Welcome to the Phillips Edison and company's second quarter 2022 results presentation. My name is Tanya I will be your conference call operator today.
We begin I would like to remind our listeners that today's presentation is being recorded and simultaneously webcast.
The company's earnings release quarterly financial supplement supplement and 10-Q were issued yesterday August 4th after market close these documents and a replay of today's call can be accessed in the investors section of the Phillips Edison and company's web site at Phillips Edison Dot Com I would now like to turn the call over to Kimberley Green.
<unk> Vice President of Investor Relations with Phillips Edison and company. Please proceed.
Yeah.
Okay.
Thank you everyone for joining us today I'm joined on this call by our Chairman and Chief Executive Officer, Jeff Anderson, Our President Devin Murphy, and our Chief Financial Officer, John Caulfield During today's call, Jeff will highlight our strong second quarter performance Devin will discuss.
Our excellent operational results and John will review, our financial results, our recent capital markets activity and our increased guidance. Following our prepared remarks, we'll take questions before we begin I'd like to remind our audience that statements made during today's call maybe considered forward bookings, which are subject to.
Various risks and uncertainties as described in our SEC filings, we'll also refer to certain non-GAAP financial measures information regarding our use of these measures and reconciliations of these measures to our GAAP results are available in our earnings release and supplemental information package, which were issued yesterday participants should.
Refer to <unk> filings to learn more about these risks and other factors and for more information regarding our financial and operating results now I'd like to turn the call over to Jeff Anderson, Our Chief Executive Officer, Jeff.
Thank you Kim.
Good morning, everyone or good afternoon, everyone.
Our strong second quarter results confirm that <unk> differentiated strategy of owning and operating high quality small format grocery anchored centers is driving performance.
The Pico team's focused execution combined with the strength of our national and local neighbors are resulting in financial performance beyond our internal expectations.
Occupancy ended the quarter at an all time high of 96, 8%.
And we're using our position of strength to continue to drive our pricing power customers.
Customers are closer to peak goes grocery anchored centers throughout the entire day, that's driving retailers to our neighborhood centers to meet this increased demand.
We continue to benefit from the resiliency of <unk> grocery anchored portfolio with more than 70% of our rents coming from necessity based goods and services. We continue to see strong foot traffic to grocery anchored centers as business remain a part of customers' everyday routine.
Where do they shop for groceries or haircuts or business the local restaurants.
Medical beauty fitness and restaurants, all continued to exhibit increased leasing demand. This translates to strong rent growth for Pico.
While retailers continue to offer an omni channel presence in person services are essential.
Given these dynamics, we expect to continue to see strong tenant demand and strong rent spreads.
Higher Cogs and inflation headwinds are limiting new supply of grocery anchored centers as the barriers for new construction are higher than they've ever been.
We expect these trends will continue to positively impact existing shopping centers.
Fewer new builds coming online and existing nabors will be unlikely to relocate because of these costs and high occupancy levels.
While we're not currently seeing a slowdown in the strong demand for space at our grocery anchored centers, we remain cautiously optimistic interactions and continue to incorporate macroeconomic realities into our decision making.
We remain focused on managing our neighbor mix and credit quality as we prepare for market disruptions.
One place we're starting to see some movement is in the transactions market.
As such we are updating our acquisitions guidance for the year and John will provide more detail.
Pico is reassessing acquisitions based on our evolving cost of capital as interest costs and inflation headwinds impact the transaction market will remain cautious in our capital allocation decisions, including the timing and volume of acquisitions to ensure that we're acquiring assets that are accretive to our financial results.
And meet our return expectations.
We're excited to add Centennial lakes, a whole foods anchored center to our portfolio during the quarter.
Centennial Lakes Plaza is located in Minneapolis, Minnesota at the entrance to a 24 acre City park space that drives additional foot traffic through the grocery anchored center beyond the strong traffic generated by our neighbors.
We believe the lease up potential and below market rent in place at this center provide great opportunities for NOI growth.
We think movement in the transaction market will create opportunities for Pico, our national footprint experience and reputation gives us a unique advantage to be opportunistic we expect our unlevered IRR for future acquisitions to be in the range of eight 5% to 9% plus in this environment.
Our goal is to ensure we achieve these unlevered returns and that all acquisitions are accretive to our earnings we will continue to evaluate opportunities with the same diligence we've always exercise.
Although we are cautious about the transaction market and particularly the timing of transactions.
We remain optimistic about how our grocery anchored portfolio will perform and we're able to raise our guidance for same center NOI and core <unk> per share growth given the strong operating result that the <unk> team has delivered to date.
Now I will turn the call over to Devin who will speak in more detail about our strong operating results for the quarter Devin.
Thank you, Jeff and Hello, everyone. Thank you for joining our call.
I will now review, our operational and leasing highlights for the quarter and year to date.
At the end of the second quarter lease portfolio occupancy totaled 96, 8%.
Compared to 94, 7% at June 32021.
Up 210 basis points, reaching a historically high level.
<unk> leased occupancy increased 190 basis points from a year ago to 98, 7% and in line leased occupancy increased by 260 basis points over last year to 93, 2%.
We're excited about the record occupancy that we've achieved and as you can see these occupancy levels are driving immediate measurable growth in our financial results.
Our high occupancy levels are continuing we gave us pricing power and allow us to grow rents at attractive rates.
We believe that given the current operating environment.
We can increase in line occupancy to 95% and total occupancy to between 97 and 98%.
During the second quarter, we executed 105, new leases and 160 renewal leases and options totaling one 6 million square feet of space.
We continue to see robust demand from retailers.
Comparable new lease spreads were 39%.
And comparable renewal rent spreads were 14, 4%.
Our total combined rent spread for the quarter, including new renewal and options was 10, 7%.
This quarter, we're excited to bring to our centers national neighbors, including Autozone dollar tree five below <unk> T J Maxx and Wingstop.
And we also signed deals with many savvy small business operators, who can drive traffic to our centers to their unique offerings and operational excellence.
Taco Pros is one such operator is fast casual Mexican Street food concept started in business in 2019 and continues to expand.
They currently have four open locations in the Chicago land area and will be opening their fifth location in our Oak Mill station Center.
Effectively using social media campaigns and collaborations with up and coming brands.
<unk> is focused on attracting customers with their unique international foods, and healthier lifestyle options, including protein bowls and vegetarian alternatives.
Building on the Kraft coffee trend another one of our local tenants Srs coffee started out as a mobile coffee trucks.
When they're first brick and mortar location last year.
And signed a lease to open their second location in our neighborhood center in Ashburn, Virginia This quarter.
And Omnichannel, operator, Srs Ashburn location will provide a newly built full coffee bar featuring our signature blend coffee that seat and spring water for 22 hours and dining space for their locally sourced breakfast and lunch options.
Successful local operators prosper in our neighborhood centers and the proof can be found in our strong retention rates.
During the second quarter, we had a retention rate of 92, 1%.
Record occupancy strong leasing spreads high retention rates and an optimal merchandise mix our successful neighbors operating in our grocery anchored centers all point toward a portfolio that is well positioned to deliver solid operational results in.
All economic environments.
Okay.
I will now discuss our development and redevelopment activity.
Our development and redevelopment activities continue to be strong as we develop and expand our pipeline of ground up and repositioning projects.
We currently have 23 ground up and redevelopment projects under active construction.
Of these 19 are being developed on land we already own.
And four are being developed on adjacent land that we acquired.
Our total investment in these 23 projects.
Is estimated to be $60 million with an average estimated yield between 10% to 12%.
Six of these projects were stabilized during the quarter and we delivered over 45000 square feet of new space to our neighbors.
We continue to look hard for new capital projects, where we can achieve the attractive risk adjusted returns that we require.
I will now turn the call over to John .
Thank you Devin and good morning, and good afternoon, everyone.
Second quarter 2020 to NAREIT <unk> increased 18, 8% to $71 1 billion.
Or <unk> 55 per diluted share.
This result benefited from an increase in rental income reduced interest expense and the realization of the promote incentives and our necessity retail partners joint venture.
Our second quarter core SSO increased 11, 8% to $71 $8 million driven.
Driven by increased revenue at our properties from higher occupancy levels and strong leasing spreads as well as lower interest expense from our reduced leverage on a per share basis core <unk> decreased to <unk> 56 per diluted share as a result of the incremental shares we issued in our July .
2021 underwritten IPO.
Our second quarter same center NOI increased to $89 $7 million.
Up four 3% from a year ago.
This improvement was primarily driven by higher occupancy and a two 8% increase in average base rent per square foot, which was partially offset by lower Collectibility reserve reversals in the current period when compared to 2021.
Turning to the balance sheet.
Our leverage ratio continues to be one of the strongest in the sector. As a result of our continued earnings growth as well as our prudent balance sheet management with our net debt to adjusted EBITDAR of five five times as of June 30, compared to five six times at December 31 2021.
At June 32022, our debt had a weighted average interest rate of three 2% and a weighted average maturity of four nine years, approximately 87% of our debt was fixed rate.
At the end of the period, we had approximately $784 $4 million of total liquidity, including $741 million of borrowing capacity available on our $800 million credit facility.
We have no significant debt maturities until 2024.
Between the free cash flow generated by our portfolio and the significant capacity available on our revolver, we can be strategic in our timing when accessing the debt markets. This is a nice place to be given the current capital market environment.
In the second quarter, we utilized our ATM facility for the first time and have raised a total of $90 1 million in gross proceeds our weighted average share price was $34 23.
With the macro market concerns around recession inflation and rising interest rates. We believe the importance of a fortress balance sheet has increased this equity returns us to our IPO leverage, which gives us meaningful capacity and flexibility to pursue accretive acquisitions as they arise in the market and extend our.
Our acquisition runway beyond 2024.
We still have a target leverage level of low to mid six times net debt to EBITDAR, but this increases our capacity and flexibility.
In addition, the board recently authorized and approved a new $250 million share repurchase program.
The board and management team view this program as an important addition to our capital allocation decision, making process as we evaluate opportunities in the future. It's.
It's another tool in our toolbox, if you will.
Turning to guidance as Jeff mentioned, we're updating our net acquisition guidance to a range of $200 million to $300 million for 2022.
It reflects our current assessment of the transaction market, we continue to see assets that would allow us to meet and exceed our original target for the year, but with market volatility and uncertainty ahead, we don't want to force an acquisition plan to hit a number, particularly if patients could lead to even better opportunities in the future.
Acquisitions are a critical part of our long term growth strategy and will continue to participate in the market, but are exercising caution in the current.
Our strong internal growth allows us to raise our NAREIT <unk> and core <unk> per share guidance.
Our new range for core <unk> per share increased to $2 19.
The $2 25.
Additionally, we are increasing our same center NOI guidance to a range of 375% to four 5%.
These changes are a result of the continued strong demand for space in our grocery anchored centers the great leasing spreads generated by our renewals team as well as the health of our national and local neighbors, which are driving our high retention rates.
With that I would like to turn the call back over to Jeff to offer some additional remarks, Jeff.
Thanks, John now before we take your questions I'd like to quickly recap our quarter.
Our second quarter results highlight the strength of <unk> differentiated strategy of owning and operating small format neighborhood centers anchored by the number one or two grocer in the market.
This drives high recurring foot traffic and neighbor demand and resulted in strong financial and operating performance.
Our neighbors are thriving and our grocery anchored centers as evidenced by our strong retention rates and renewal spreads meaningfully above historical level.
Demand for space in grocery anchored centers remain solid and pickles leasing team continues to convert this demand into new leases with record occupancy at the end of the quarter.
<unk> is a growth company positioned to gain share as we identify by grocery anchored shopping centers from a target market of 5800 identified grocery anchored shopping centers across the United States.
Overall, we're in a great position to successfully execute our growth strategy.
<unk> operated through multiple cycles in the past 30 years, our experienced cycle tested team and integrated operating platform performed well in the first half of 2022 with.
With a fortress balance sheet and liquidity, we are prepared for changes.
Our opportunities as they arise.
With that we will begin the Q&A portion of our call.
Operator.
Certainly.
To maintain an efficient Q&A session. You may ask a question with an additional follow up if you have an additional question youre more than welcome to rejoin the queue to ask a question. Please press star one one on your telephone.
Our first question will come from.
Craig Schmidt.
Of Bank of America.
Your line is open.
Anyway. My question is on the <unk>.
Goal for occupancy it seems really high I mean would be structural.
Vacancy.
<unk> inhibits <unk> by getting as high as 98% of our.
And otherwise.
Greg This is Jeff thanks for.
Thanks for being on in your question.
You know.
I think probably.
Two years ago, we would have said yes.
That's a really high number.
When we look at our leasing backlog.
The strength of our.
Sort of backlog going into this quarter, we think we've got.
The ability to grow, particularly the small store space.
Occupancy of 100 to 200 basis points above where it is today so.
Yes, again, we're going to keep monitoring the environment, but in the current environment, whereas we believe we've got upside from where we are today I don't know Devin any other additions to that.
No Jeff.
Agree.
Great and then the barriers for the construction of new shopping centers with grocers, how long do you think that might last.
That is.
Can I get my Crystal ball out now and try and make a prediction but.
The.
In our conversations with the grocers.
There are select markets, where you will see some development but.
But it is really limited when you compare it to the overall footprint of the groceries.
The centers that are out there.
No.
I would say certainly you got to go you Gotta go retailer by retailer and market by market.
But.
Across the country, which obviously, we have the advantage of having a nationwide footprint.
Youre going to find most of the markets Theres very little new grocery anchored centers being built.
See that changing.
For the foreseeable future.
Youll get till last moves, but but in terms of any kind of percentage of it is going to be small and so when the retailers are looking to expand.
They have a limited amount of centers. They can go to and that is one of the things that's given us our pricing power and as to your first question. It's one of the things that allowed us to get occupancy numbers that are.
Sort of as good as they as they have been.
Great. Thank you.
Thanks, Craig.
One moment.
Our next question will come from Holly Yang Zheng of Jpmorgan. Your line is open.
Yes, Hi, So you you finished to keep a pretty tight spread between leased and.
Physical occupancy historically I guess, just looking forward as you continue to grow leased occupancy do you expect to keep the spread between the two less than 100 basis points.
Well. Thanks for your question John do you want to take that one.
Sure Hey, Hi.
How're you doing.
Yes that has been our historical level of being at about 60 basis points and we think that we can continue that and I think the advantage for US is comes back to the size of our centers.
And our our anchor occupancy as high as it is most of it.
And when you get to that 60 basis points is going to be in line and when you look at the average space that outside of the grocery at 'twenty 300 square feet. It allows us to to get them in and paying rent very quickly we have incentives in place for the operating teams to the operations team that every day is a day of lost rent. So they are working.
Actively to move them in and it's also an advantage.
Our local neighbors because they also move in and we get them paying very quickly even at times, a step or two faster than the national So we feel very good about that and really focus on both driving that total leased but then also driving the rent paying occupancy.
Got it thank you great quarter.
Greg It was a good quarter, but.
That really that spreads that youre talking about and.
And the consistency of it over time is one of the just the financial things that explains the difference in our strategy.
Between our big box sort of concept, where that where the leasing takes so much longer.
To get from lease to operate open versus our smaller format center.
Got it thanks.
Yes. Thanks.
And our next question will come from a handout at Mizuho. Your line is open.
Hi, Good morning. This is ravi behavior on the line behind those changes.
You guys are in law.
Your variables that exposure right now after accounting for the swap about 13%.
Is this the level that youre comfortable or are you trying to reduce exposure of additional swaps what is your target variable debt rates.
John do you want to take that one.
Sure Hey, Ravi.
Yes, we are at 87% fixed right now and we do utilize swaps on our term loans and from our perspective, an advantage of only being five five times debt to EBITDA and having a ladder maturity schedule is the ability to allow a greater percentage to float at 13%.
We are constantly evaluating with the right market is but believes that.
At this time, we're watching and we're being very patient thankfully, we have expanded our revolver to $800 million in the quarter that gives us.
Timing in terms of accessing financing in itself, but from a rate perspective, we're watching and.
At this point are very comfortable with the 13%.
And we'll be opportunistic on on rates, whether it be through issuing in the unsecured bond market or swapping from a term loan perspective as we go forward, but yes, we are comfortable with the 87% at this time.
Got it. Thanks, that's helpful. Just one more your leasing spreads were really strong. This quarter can you. Please comment on what sort of mark to market opportunities embedded across the portfolio given the elevated leasing demand.
Eric do you want to take that one.
Sure. Thanks for the question.
I think if you look at what our spreads have been.
This quarter you note that are inline spreads were over 14%, our new spreads were over 39%.
Our view is is that if we were to mark to market that on in line, there would probably be a 15% to 20%.
In line increase.
If we were to do that and there are a number of things that are driving our and this is all being driven by our pricing power and our pricing power as evidenced by the fact that we are enjoying increased occupancy our occupancy has increased over 200 basis point, we're enjoying higher retention.
Our retention rates have increased over 600 basis points, our lease spreads continue to increase.
And we're continuing to get attractive contractual rent bumps. So all of this pricing power is being driven by the fact that as Jeff articulated earlier, there is very limited supply being delivered in our sector and there is a simple fundamental reason for that which is that construction.
Costs are at a level, where rents would need to rise dramatically, 40% to 50% from where they are on average in order to get an attractive return on development. So limited supply and then demand is being driven by the macro trends that we've been talking about now for a number of quarters, which is super organization.
Work from home migration to the sunbelt et cetera that we benefit from.
It's a function of all the factors that we believe.
Two pretty attractive mark to market opportunities in our portfolio.
Thank you I appreciate the color.
One moment.
Our next question will come from Floris Van <unk> of Compass point Your line is open.
Hey, guys. Thank you for taking my question I guess I have two questions number one is sort of getting back to the the signed not open a spread of 60 basis points, obviously thats.
Significantly less than some of your sector peers, which indicate that a lot of your.
Earnings growth, presumably is going to come from your from your lease spreads and obviously you've been.
Average some very attractive lease spreads, but you have about call it 10% to 15%.
Of your leases come due each year, so youre looking at call.
Call it 10% to 15% spreads on that.
Nice growth are you also doing other things to boost your your your same store underlying growth in terms of increasing your fixed rent bumps and maybe you can give a little bit of color on that and how those negotiations are going.
And then and then touch upon the Redevelopments.
It gives you a redevelopment pipe maybe that's the other way.
Avenue inside your portfolio, where you can increase your returns on the development are pretty attractive how much more can you ramp up that that pipeline.
Yes of course.
Total view in one segment.
Our belief has always been that.
Being able to go from leased occupancy to economic occupancy in a shorter period of time is a huge benefit.
And that's where that's really what the 60 basis points I think that youre talking about.
Showing is that not only are we talking about it we're actually getting leases signed and getting rents paid in a much shorter period of time than than most of our peers.
That does give us a huge benefit in terms of.
As we lease the space, it's going to hit our results much more quickly.
These.
<unk> had a much bigger spread there and so.
That's sort of how we view it.
But Dave I don't know if you want to cover the debt anything else on the on the leasing side or the.
And the redevelopment.
Sure. Thanks, Jeff Hi, <unk>. Thanks for the question.
In Florida, our historical spread has been circa 60 basis points, which is where it is currently in our portfolio has a number of characteristics that allow us to enjoy this attractive metric relative to our peers.
One our level of retention at above 90% clearly is.
He is a factor number two our average tenant size is another factor because we're able to get the tenant into the space faster like if you look at the average amount of time that it takes us to get a small shop tenant in the space. It's five seven months.
And we're doing things currently that are allowing us to maintain this metric, which is we're now preordering certain types of components like HVAC equipment, because some of the delay in getting tenants into the space is being created by the supply chain and so we're trying to make.
That supply chain issue by pre ordering it and having it available and so we believe that this metric will we will be able to maintain over time and as Jeff indicated.
We it allows us to get the tenant paying the rent a lot faster, which obviously everyone benefits from.
And then your second question Floris I think turn to.
Our redevelopment pipeline is that correct.
Yes actually.
Devin maybe I wanted to maybe delve into the your occupancy is.
Among the highest in the sector.
Your rent spreads are very attractive and you've got.
You're indicating you got continued strong demands are you able to tweak your lease terms to get higher fixed rent bumps or other things that make.
Is that you can get in your lease terms that make it more attractive for for yourselves.
Got it so yes, if you look at what our CAGR has have been.
Over time like if you look at our renewal CAGR Florence for if you look at what it was in the second quarter of 'twenty. One it was two 2%. This quarter was 264%. So we are increasing our CAGR.
As well as getting these attractive spreads. So we are pushing hard to get as much rent growth as we possibly can and as we discussed on the call. There are so many factors that are giving us this increased pricing power that we intend to continue to take.
Any job and if you look at the the metrics you can see that we're able to get wider spreads and b get higher CAGR.
Great and then maybe on the on the redevelopment is there do you have opportunity your scope to increase that.
Because the returns are seen appear pretty attractive.
The returns are very attractive.
We've been able to maintain those attractive rates of return.
Would like to do as much of this as we possibly can do.
And we're actively looking.
For those opportunities as we indicated there is approximately $60 million of this currently under.
In the pipeline and as you know we're doing it on land, we currently own but we're also acquiring land that's adjacent to our centers to do it on so we believe that we can do circa $50 million of this year. Our current pipeline is slightly higher than what we've guided to on a go.
Forward basis, and we're going to work as hard as we can to find as many of those opportunities as we can because those returns as you note are highly attractive.
Thanks Devin.
Thank you.
Going forward.
Our next question comes from Tayo Okusanya of Credit Suisse. Your line is open.
Hi, yes, good afternoon, congrats on a strong quarter.
My question has to do with the stock repurchase program I mean, the stock is up.
15% over the past 12 months.
Basically flat year to date, it's only down maybe 3% the past three months I'm just kind of curious why the decision was made.
Have a program in place and when you may actually be buyback stock under what circumstances.
Yes.
Great question.
As John talked about in his prepared remarks.
This is just adding a tool to the toolbox, we have no intention.
At the current moment of using yet but markets change and we want to have that tool.
Some point in time that became.
A smart use of capital.
But.
I will.
It.
But we do want to be able to use that when it when it began.
<unk> opportunity came up.
Gotcha.
And Jeff I'm, sorry, I was going to just say too I think from our perspective as we had indicated as well like we think that theyre going to be acquisition opportunities and that's where we're focused is really using our capital for external growth and driving the business that way, but as we as we said this is something that our peers have in place.
And should.
Market.
Get out of line then that's something we'd look at but right now we're very focused on pursuing that external growth strategy.
Okay.
Clarification was very helpful. And then again the cautious optimism about the future kind of totally get it because of the uncertainty out there.
Can you just talk a little bit about within your portfolio or generally.
When he comments.
When you kind of think about inflection points are there any kind of retail categories that maybe you are.
Our starting to.
Soften up within your portfolio or even a bit particular market kind of irrespective of how strong our results were in the quarter.
Yes.
We are boots on the ground feedback from our agents and you look at the backlog of leases. We have you look at our retention rates. We just are not seeing anything right now and there are we are not finding any categories that would be.
Be sort of a canary in the coal mine that would say this is going to happen. So.
We are certainly watching as Tim looking and actually.
Trying to find it.
To date, we have not we're not seeing anything I don't know Devin if you had any additional thoughts on that one.
Jeff the only thing I would add <unk> is that when we look at our portfolio one of the things that we think we benefit from is the fact that our tenant base is extremely diverse.
And that allows us to.
Have a positive perspective on this issue as you know our centers are anchored by the one or two grocer in their markets and these growth as youre doing extremely well if you look at our our top tenants Kroger Publix Albertsons.
They are all enjoying high single digit same store growth and they're maintaining their margin. So our grocers, which are our largest component of our tenant base are all doing well and we have no concerns there and then the diversity comes in next where our largest non grocery tenant as T J maxx and they only represent.
Less than one 5% of our ABR and then when you look at our small shop tenants. They all the largest ones all represent circa 1% of our rent. So subways. One one Starbucks is one <unk> is 90 basis points. So we're highly diverse.
Which we think is a real benefit to our strategy and there are no categories in particular that we're concerned about at this point in time.
Thank you.
Okay.
Obama.
And I'm showing this concludes our question and answer session I would like to turn the call back to Mr. Edison for closing comments.
Well, thanks, everybody for being on the call and on behalf of the entire management team I'd like to express our appreciation for the continued support of our stockholders our associates our agents and importantly, our neighbors were in great position to successfully execute our differentiated strategy of owning and operating small format.
<unk> neighborhood centers anchored by the number one or two grocer in the market. We believe the best is yet to come for Pico, we're cautiously optimistic as we approach.
Well go potentially in a difficult environment, but but feel very good about the position. We're in today. So we look forward to updating you again in the near future and again, Thank you everybody for.
Being able to call.
Ladies and gentlemen, this concludes today's conference.
You may now disconnect.
I'm not sure.
When we disconnect.
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