Q2 2022 National Health Investors Inc Earnings Call
Yeah.
Greetings and welcome to the National Health Investors second quarter 2022 conference call. During the presentation, all participants will be in a listen only mode. Afterwards, we will conduct a question and answer session at that time. If you have a question. Please press the one.
But the four on your telephone should you require operator assistance at any time. Please press star Zero as a reminder, this conference is being recorded today Tuesday August nine 2022, I would now like to turn the conference over to Dana Hambly. Please go ahead.
Thank you and welcome to the National Health Investors Conference call to review the company's results for the second quarter of 2022 on the call today are Eric Mendelsohn, President and CEO , Kevin Pascoe, Chief Investment Officer, John Spaid, Chief Financial Officer, and David <unk>, Chief Accounting Officer.
The results as well as the notice of the accessibility of this conference call on a listen only basis were released after the market closed yesterday in a press release, that's been covered by the financial media and as a reminder, any statements in this conference call, which are not historical facts are forward looking statements NHI cautions investors that any forward looking statements may involve risks.
Or uncertainties and are not guarantees of future performance. All forward looking statements represent nhi's judgment as of the date of this conference call investors are urged to carefully review various disclosures made by NHI in its periodic reports filed with the Securities and Exchange Commission.
Including the risk factors and other information disclosed in Nhi's Form 10-Q for the quarter ended June 32022.
Copies of these filings are available on the SEC's website at SEC Gov or at Nhi's website at NHI REIT Dot Com. In addition, certain terms used in this call are non-GAAP financial measures reconciliations of which are provided in nhi's earnings release and related tables and schedules, which have been filed on form 8-K with the.
SEC listeners are encouraged to review those reconciliations provided in the earnings release together with all other information provided in that release.
Now I'll turn the call over to our CEO Eric Mendelson.
Hello, and thanks for joining us today.
As we communicated on our last quarterly conference call. The portfolio optimization, we commenced just over a year ago is largely complete and we are now starting to see some of the benefits. The bickford lease was reset on April one and we're happy to see that their EBITDAR coverage for the second quarter was one three.
Times, and then occupancy improved through the quarter, including another 100 basis point monthly increase in July .
We know that we're not out of the woods, yet as Vic for like the rest of the industry continues to deal with elevated operating costs. So we will continue to monitor this relationship closely.
That said, our bickford dispositions and rent restructuring put their company and much better operational and financial health.
With our significant deferral balance outstanding and the fair market value reset of the lease in two years, we're providing all the resources necessary to accelerate the recovery and we're pleased with the early outcomes.
While our portfolio is in better shape and Siloed. There are other components in the Bickford organization unrelated to nhi's portfolio that still need attention and as a result, and with an abundance of caution we have put them on a cash accounting basis.
John will cover more of the details in his comments.
We're encouraged by the quarter of our new shop operations, which contributed over $3 million of NOI, excluding nonrecurring transition cost, which is in line with our forecast for the year.
Recall that these properties have transitioned to operator, it's twice in less than 12 months.
And we had limited visibility in the months, leading up to our shop transition due to our litigation with well tower, which was settled effective April one of this quarter.
This is difficult on residents and employees. So we've been impressed with the diligence of our partners Merrill Gardens and discovery.
In coordination with Nhi's internal operations team and stabilizing these properties.
We know this will be a lengthy recovery and see significant upside for internal growth.
As we gain more confidence in this platform. We see shop is another avenue for long term external growth as well.
In addition to the Bickford and shop transactions, we've completed many other optimization efforts, which has touched well over half the properties in our portfolio since announcing our intention to sell between 250 and $400 million in assets, we've completed over 356.
Including $288 2 million in senior housing sales that had EBITDAR coverage of just five times.
We're starting to see the fruits of this labor while it is a lagging measure we're encouraged by the direction the EBITDAR coverages moving.
Our senior housing coverage improved to one.
11 times in the first quarter of 2022 versus <unk> 98 times in the fourth quarter of 2021, and total company coverage improved to 168 times from 154 times over the same timeframe see our progress report, which was published.
Along with this 10-Q.
The balance sheet is in great shape, as we reduced debt by over $330 million in the last 12 months and leverage for the quarter at 4.0 times is at the low end of our targeted range.
We've repurchased $70 million under the share buyback program and still have an excess of $250 million of.
Of incremental capital to deploy without the need for issuing additional equity.
I'll now turn the call over to John to discuss our financial results and guidance in more detail John .
Thank you, Eric and Hello, everyone.
As Eric mentioned, our second quarter was eventful for NHI.
We're pleased with our progress, but I do need to walk you through some of the significant items impacting our results.
I'll update you on some items then walk you through how our updated guidance reflects those changes in our view for the rest of the year.
Beginning with our net income per diluted common share for the second quarter ended June 32022, we achieved 47.
Compared to 85.
The same periods in 2021 and.
And sequentially up 29 from the first quarter in 2022.
For the six months ended June 30, we achieved 66 compared to $1 63 for the same period in 2021.
The combined write offs this quarter of the Bickford straight line rents receivable and lease intangibles, representing approximately 55 per diluted share are negatively impacting our reported net income and NAREIT <unk> per share metrics.
Going forward, we will be recognizing rental income associated with bickford.
To the extent of the cash we received from them.
For the second quarter Bickford met its obligations to us under their master leases and mortgage notes receivable.
Our pandemic related concessions were $22 $9 million this quarter compared to $7 8 million last quarter.
This is primarily the result of the Bedford lease restructuring efforts, we have discussed last quarter, we do see a transition away from the pandemic related rent concession lease accounting expedient back to normal lease modification accounting, we're attempting to execute longer lasting lease modifications with tenants where applicable.
That incorporate formal repayment terms for any prior deferrals.
The accounting rules would that require we include these deferrals into our accounting for newly restructured leases, which can increase the amount of straight line rent revenue recognized.
The cash collection of those deferrals is still in the future and in some cases distant future and may be more tied to the deferrals maturity date, rather than an eminent cash repayment.
Pandemic lease modification guidance may still be applicable in the future depending on the facts and circumstances of any given deferral. However, the pandemic impact on our results are much less meaningful and our results of operations are more significantly impacted by occupancy inflation labor constraints and other factors.
The next two significant items, our senior housing operating portfolio or shop results and segment financial statements.
This quarter, we are providing you with results for our 15 shop 15 property shop portfolio and.
And beginning with the second quarter, we're now accounting for shop as a new segment.
As a result of these significant items revenues on a GAAP basis for the second quarter were down $14 4 million as compared to the prior year quarter.
Excluding any effects from the Bickford straight line rents and intangible lease incentive write offs revenues for the second quarter are up $10 8 million from the prior year second quarter.
The increase was primarily due to the inclusion of shop segment resident revenues additional revenue attributable to the <unk> settlement of past for pass through holiday rents plus revenues from new investments offset by reductions attributable to dispositions lease restructurings and other tenant concessions.
In our provided results you'll note we are transitioning many of our performance metrics to NOI based metrics net.
Net operating income or NOI net total revenue was sharp operating expenses and eliminates revenues from Reimbursable expenses, which we believe will be more comparable to our prior results and more in keeping with how we manage our business.
NOI for the six months ended June 30 includes the impacts of the previously described significant items and were down approximately $34 million from.
For the same period in 2021 adjust.
Adjusted NOI in the second quarter was $70 million sequentially up $2 7 million.
From the first quarter in 2022.
For a more detailed discussion of NOI and adjusted NOI. Please see our 10-Q and supplemental information filed last night.
In the second quarter, we acquired 50 353 unit assisted living facility in Oshkosh, Wisconsin for approximately $13 3 million at an initial cash yield of seven 5%, which also resulted in the retirement of our $9 million first mortgage loan to that same customer.
Also during the second quarter, we received repayment of 111 million $3 million.
More H&R sage with first mortgage loan.
Together with our earnings press release, and supplemental information, you'll find our updated report detailing our progress on disposition.
During the second quarter, we placed an additional four properties in held for sale and we recorded a $4 million related impairment charge.
Further details on our dispositions year to date and assets held for sale may be found in note three of our 10-Q for the quarter ended June 30.
Our <unk> metrics per diluted common share for the second quarter ended June 32022 sequentially compared to the first quarter NAREIT <unk> decreased 34 to 71 from $1 five which.
Which includes the impact the Vicksburg graphs.
Normalized <unk>, which does not include the impact of the deferred write offs increased 16 to $1 26 from $1 10.
Sequentially for the second quarter, our normalized funds available for distribution increased $3 6 million to $56 3 million for the first quarter from the first quarter.
The sequential quarterly increase in Fad was largely driven by the sharp contribution of approximately $2 9 million.
Which excludes transition expenses and is net of Noncontrolling interests.
The <unk> settlement and also the wildfire settlement of $6 $9 million higher interest primarily from the $900000.
Exit fee earned on the stage with no pay off and $1 5 million and lower legal expenses.
This was offset by additional rent concessions higher interest expense and higher general administrative administrative expenses, excluding noncash share based compensation expense.
Reconciliations for our pro forma performance metrics can be found in our earnings release, and 10-Q filed yesterday at SEC Gov.
Our second quarter dividend of 90 per share was paid on August five 2022 and represents normalized <unk> and.
Total dollar payout ratios were 59, 5% and 71, 4% respectively.
As announced yesterday.
Our board declared our third quarter dividend of <unk> 90 per share for shareholders of record on September 30 payable on November 4th.
Turning to the balance sheet for the quarter ended June 30, our net debt to annualized EBITDA leverage leverage ratio was four times, which is at the low end of our targeted range of 4% to five times.
The sequential improvement from the first quarter of four nine times was driven by $2 9 million NOI.
NOI contribution from shop that.
Ignition of that well tower settlement and excluded noncash write off of straight line and lease incentive impacts.
Also contributing to the improvement was lower noncash share based compensation expense.
On July 31, we had no amount outstanding under the revolver and $51 million in corporate cash.
Did not issue any equity through the ATM program during the second quarter and do not expect to issue equity during the third quarter.
We continue to have approximately $416 million available to us under our ATM program.
During the second quarter, we purchased approximately $1 2 million.
Sure So about $1 2 million shares of our stock for approximately $70 million at an average price of $58 52, including commissions.
At our current dividend per share this repurchase reduces our annual dividends by approximately $4 3 million.
Our remaining authorization for additional share repurchases is $170 million and expires April 2023.
Together with our second quarter earnings press release, we are updating you on our annual guidance for 2022.
Our guidance for the year reflects the significant items mentioned previously and includes NAREIT <unk> per diluted common share in the range of $3 86 to $3 92.
Normalized <unk> range per share in the range of $4 48.
To $4 43.
$4 53, excuse me and F&B in a range of $200 million to $203 million.
Compared to our April guidance.
<unk> NAREIT <unk> guidance is primarily due to the effects from the straight line and lease incentive intangible write offs.
Our guidance includes fulfilling approximately $52 6 million in investment commitments. This year, which is a decrease in our April from our April expectations due to the expected lower mezzanine investments to Montecito.
As previously mentioned.
<unk> continues to be in line with our expectations are.
Our guidance does reflect a modest increase in interest expense this year as compared to our earlier guidance.
We continue to not include any future unannounced acquisitions.
Any repayment on outstanding deferral balances or any additional share repurchase activity and our guidance.
Other assumptions may be found in the guidance portion of our second quarter's earnings press release.
With that I'll now turn the call over to Kevin Pascoe to discuss our portfolio cap. Thank you John .
I'll concentrate my comments on our major asset classes and operators as well as business development and pipeline activity.
Starting with our senior housing needs driven portfolio.
This group accounts for approximately 26% of adjusted NOI is where most of our <unk> optimization efforts have been focused as our second quarter total deferrals of $3 9 million were all related to five needs driven operators.
Since the second quarter of 2021, we have completed the disposition of 31 buildings for $288 2 million, including $73 3 million in the second quarter of this year.
As Eric noted, we are starting to see the benefits from the dispositions and our coverage ratios.
Specifically the needs driven coverage, excluding Bedford improved by eight basis points sequentially to <unk> eight seven times through the first quarter of 2022.
We have continued to execute our plan with bickford and their trailing 12 month EBITDAR coverage improved by 10 basis points sequentially to <unk> 92 times through the first quarter of this year, which was calculated using the legacy lease.
Adjusting for the rent payments under the new lease.
The pro forma coverage was 131 times through the first quarter and is one three times on a trailing three month basis for the second quarter of 2022.
On page seven of our progress report, we detail the significant occupancy improvements and R.
Our current portfolio of 38 properties by selling just three underperforming buildings.
Portfolio has grown average occupancy by 190 basis points to 84, 5% since the most recent asset sales in May which we attribute in part to greater Bickford focus on the core portfolio.
We're still working on the sale of a few more bickford properties, which should also improve the portfolio's health and has no impact on in place rent.
We have a $26 million deferral balance.
With Bickford and continue to target a minimum deferral repayment of $3 million annually with reductions of up to 6 million in contingent on Bickford meeting specific performance targets and completing certain property dispositions.
First quarter of operations with the 15 shop properties, which represents 5% of adjusted NOI included expected disruptions from the operator transition, which was the second transition in less than 12 months that said the $3 2 million in NOI for the quarter excluding transition costs.
<unk> is in line with our forecast and we continue to expect the first year annualized NOI contribution will be in the low to mid teens.
With future incremental upside of $6 million to $8 million.
The detail in the supplemental and in the progress report for the second quarter margin in the mid 20% well below historical performance.
Our operational priority right now is to rebuild the sales funnel to drive occupancy.
July average occupancy improved at both Merrill Gardens, and discovery with the combined portfolio up 90 basis points from June to 77, 1%.
Okay.
13 entrance fee communities, which account for 27% of our annualized adjusted NOI continue to have exceptional performance.
<unk>, our largest tenant had EBITDAR coverage of one to two times.
Occupancy improved 60 basis points from the second quarter to 82, 3%. This is 200 basis points higher than <unk> pre pandemic occupancy and the momentum continued into July as occupancy increased by another 130 basis points compared to June .
Senior housing discretionary coverage, which largely reflects the performance of the entrance fee communities improved to 139 times through the first quarter from 106 times in the fourth quarter due to strong operating performance as well as the transition of the legacy holiday portfolio to shop.
Sure.
Skilled nursing portfolio, which represents 34% of annualized adjusted NOI continued to have solid EBITDA and coverage at two seven times, including $3 five one times at NMC and approximately 198 times for other operators.
This resilience is primarily attributable to NFC and enzyme which represent approximately 77% of the portfolio.
Our other five sniff operators under leases have received minimal rent concessions since the pandemic began and we did not provide any sniff related deferrals in the second quarter.
Yes.
The second quarter was quiet from an investment standpoint.
The pipeline is definitely more active than it had been in recent quarters, which is encouraging but we're not seeing pricing changed materially at this point. Despite the significant increase in financing cost this year.
On a positive note we have seen several deals that we have previously passed on come back to the market, which suggests that balance may be tipping back towards buyers.
We continue to prioritize deals with immediate real estate ownership or short term financing structures with a path to ownership.
As I noted on our last conference call. We are seeing more RIDEA type opportunities in the pipeline and believe this is a tool for longer term external growth, but our focus is now on driving operational improvements and the current ventures before looking to expand the platform.
Yes.
With that I'll hand, the call back over to Eric.
Thank you Kevin.
Our second quarter GAAP results were impacted by our conversion of bickford to cash basis.
But were otherwise in line with expectations, we have updated our guidance, which includes a modest revision to D. As our visibility continues to improve with the portfolio optimization efforts largely concluded.
Our focus now is very much on returning to growth.
We're in excellent financial health with leverage at the lower end of our targeted range, which gives us significant capital to deploy without the need to issue equity in the immediate future.
Operator, we will now open the line for questions.
Okay.
Thank you.
I would like to register a question. Please press the one four on your telephone you will hear it III palm toward knowledge or request.
Thanks for your question has been answered and you would like to withdraw your registration. Please press. The one followed by the <unk> III once again to register a question. Please press the one four on your telephone keypad.
One moment please for the first question.
Our first question comes from Austin, <unk> with Keybanc capital markets. Please proceed.
Great. Thanks, and good afternoon everybody.
I guess, Eric given given the challenges that you've endured and sort of the recent lease restructuring with Bickford why wait until now to move them to a cash basis and maybe what more specifically did you see in their financials that.
Cause you to cashed out on that ability to remain a going concern.
Hey, Austin It was a number of factors one is.
They have other loans and other.
Creditors that we have no control over.
Yeah.
They have they have debt, that's coming due that will probably be rolled over and refinanced but.
Our our auditors here are very focused on that so rather than fight that battle.
We just decided that it was the right time to.
To convert them to cash accounting.
I see.
All that we've done a good job, creating a silo around our portfolio. We've got a master lease we've got good coverage if.
If you look at our progress report you can see that the.
Alas coverages.
Quarters coverage was really strong based on the new modified lease payments. So we feel good about our properties in our portfolio.
Okay, That's fair and I guess, you've mentioned sort of out of an abundance of caution.
To the extent I guess.
Bickford didn't remain a going concern I guess, what sort of options are you left with.
Do you have any replacement operators that debt.
You're in the back of your mind, I guess trying to line up in the event that.
There is a change that needs to be made and do you think you can sort of keep the terms that you recently restructured under the bickford lease with any new perspective operator.
That's a great question and one that we.
Certainly consider a lot around here.
We recently did a transition of properties from holiday to RIDEA.
Using different managers when you have a larger portfolio that is geographically diverse the way holiday was on the way Bickford is that.
That may be something to consider.
Meaning that different managers and different geographies would take.
Some properties, but not all of them.
The other likelihood is that if bickford word or restructure they would just be leaner and meaner and probably want to keep this portfolio.
It's a well performing portfolio of newer buildings in better markets. Its taken us three years to get this portfolio, where we want it.
And it would be an easy sell to either.
Retooled bickford or another operator that wanted to take over a portfolio that had good cash flow.
And then what would that mean for the $26 million of deferred rent under that scenario and then separately just last one for me I'm curious if you believe that youre going to be able to sell these three assets that I believe are held for sale kind of in light of this news around bank Frick.
Yes.
Yes, So let me take the first part of it is this is John Austin, So in terms of the $26 million.
Remember, we've never said, we leave but that that deferral on our balance sheet.
And then as I mentioned in my call, where we feel confident.
Straight line revenues will begin to.
Paul in those deferral balances elsewhere onto our balance sheet in the case of Bedford because they are on on a cash basis now.
Through straight line receivables or other means.
We won't initially be doing that but we'll always be evaluating.
Bickford situation and in the future that doesn't mean to say that we couldnt.
Change the accounting on Bickford at a later date.
And then Austin to your point about.
The properties held for sale the properties, we've been selling have been older underperforming properties. So.
Some accounting treatment.
<unk> by Us here.
And Tennessee isn't going to affect our buyer feels about a building that is of a certain age and of a certain level of performance.
That usually isn't something that.
As.
Our concern to a new buyer thats going to be.
Putting on their own operating platform and capital structure onto whatever building or buying.
No that's fair I appreciate the time thank you.
Sure. Thank you.
As a reminder to register a question. Please press the one four on your telephone keypad.
Our next question comes from Connor <unk> with Bahrenburg capital markets. Please proceed.
Hi out there and thank you for taking the questions just wanted to move on to your Bergen and shop portfolio.
What's the expectations will as it relates to guidance I'm curious what the expectations are for Revpar growth through the end of the year.
How does that compare to unoccupied rooms that are being leased in real time.
Sure Hey, its Kevin.
<unk> kind of talked about on the.
Okay.
Prepared comments, our focus right now is really to get the lease volume up rebuild the sales funnel and improve occupancy.
As you can see in the progress report, though historical margins were much better on this portfolio we would expect.
A fair amount of flow through to drop to the bottom line is.
As occupancy improves I would tell you that the goalposts have shifted a bit and we don't expect to get back to a 45% margin, but we do expect margins to improve over time and then once occupancy gets to a more stabilized level. Then we can focus more on improving rep for which I do believe.
<unk> is going to be an opportunity, but thats secondary to the approach right now.
Okay.
Okay, and then just sticking to the margin outcome in terms of Opex for the shop portfolio.
Is the shop portfolio running at full head count in terms of employment and what is the use of agency labor looked like in real time.
Well I would say from a full head count standpoint no.
Yes, it's a challenging environment to hire and retain people right. Now so there is always going to be some level of turnover.
That said the good news is because we're not delivering care.
There isn't a.
<unk>.
A large need for.
For agency in this portfolio, so we're not seeing large.
Expense due to agency, but there may be some overtime.
And just things like that trying to hire people. So there is a little bit of wage pressure, but it's not like we're seeing in the needs driven side.
This is John .
Can I, let me let me also say this with respect to the guidance and the strategy that you're seeing play out here and there is some information now in our supplemental.
Regarding some historic shop information I think you'll find pretty interesting.
You got to remember that these are independent living communities.
They typically will have a lot of.
Flow through from that revenue line down to NOI, if we can build occupancy as opposed to other higher acuity product lines. So.
If you don't see a lot of Rev poor push right now.
We will have a lot more successful increases in our NOI. If we can just build occupancy in these portfolios at the moment.
And I think that's where we're focused.
Okay understood I'll leave it there for now thank you.
As a reminder to register a question. Please press the one four on your telephone keypad.
We have a question from Sam Choe with credit Suisse. Please proceed.
Hi, guys I'm on for Tayo today.
Just wanted to.
Just make sure that I guess in terms of the shop portfolio expectation that low to mid teens annualized NOI earnings profile still hold in the near term and then I guess just to kind of think about the incremental $6 million to $8 million.
Should we think about that in terms of timing.
Yes. So this is Kevin again, yes, we are still targeting getting kind of.
Low to mid teens run rate, which if you look at our numbers. We're on pace for that now as we look at what the opportunity is for the portfolio I would tell you that's going to unfold over the next.
Probably 18 to 24 months, we don't expect it all to show up next year. This is going to be a process for us to rebuild the occupancy get the operations stabilized. So it's going to be over time, but we do still see that opportunity for this portfolio.
Got it got it that's helpful color.
And then on the deferral balance I know its been growing but subsequent to Q have you guys announced anything and I mean, I know that you guys are still working with a smaller operators. So should we assume that the <unk> <unk>.
Number that we saw is the appropriate run rate until you guys are resolved something with these smaller operators.
So that's a that's a pretty difficult question for us to answer.
Because we're not giving you a lot of color on forward looking concessions that we might be looking at and it's one of the principal reasons why we felt very strongly to give you guidance.
So I don't want to I really don't want to answer that question to be honest with you.
But we will have some continuing deferrals through the end of the year.
May actually have some kind of flow into 2023, our mission here is to.
Minimize those so it feels more like.
Business as usual four or five years ago.
Eric has always referred to in the past as that 3% to 5% of our sort of worrying list and I think we're getting there in fact you were there so.
Thats the best way I want to answer that question today.
Got it and then I guess the takeaways based off of what you are saying is that I mean, you guys are getting close to resolving things with the smaller operators. So you're more optimistic than before is that what I should take away right now.
Yes.
Absolutely.
So you can see that in our our EBITDAR coverage chart.
Progress report you can see how things are improving.
It's a combination of selling underperforming buildings and the remaining buildings gaining occupancy and margin.
Got it I appreciate the color guys.
We have a follow up from Austin <unk> with Keybanc capital markets. Please proceed.
But what was the collection figure for July .
So.
We didn't publish that and we're not going to publish that what I would say to you is we did talk about $2 $9 million.
Rent.
<unk> in the second quarter.
Alright, I'm, sorry, $3 9 million in rent deferrals in the second quarter and.
But obviously as we restructure things collections are are very high.
Very different than they were during the pandemic.
Yes, that's what I was just trying to get a sense with some of these restructuring if we should expect that to migrate higher and then separately.
<unk>.
April run rate on the deferrals that you gave kind of held steady through the quarter, but it looked like it expanded from three operators to five operators.
Any reason we should expect.
That to drive a higher deferrals.
And sort of the months ahead.
So this is Kevin I would tell you that we continue to work with our operators on a case by case basis, we had a couple that popped up this quarter.
We'll continue to monitor it.
We've given the guidance in terms of where we think thats about it comes in for this year and Thats incorporated with them and we're still working through the portfolio. We've talked about a few other buildings that we're evaluating for sale in may.
Go into that bucket, where once we havent sold we're no longer looking at deferrals. So that's a continued refinement of the portfolio. We've gotten rid of the big drivers. We have a few more a few more to continue to evaluate and decide if theyre going to be one that we stick with or if we dispose of.
That'll be kind of the work for the left for the rest of this year.
That's helpful. I appreciate the detail. Thank you.
There are no further questions at this time.
Thank you everyone for joining us and your time and attention and we'll look forward to seeing you at Nic or one of the many conferences we attend.
Okay.
That does conclude the conference call for today, we thank you for your participation and ask that you. Please disconnect your lines have a great day everyone.
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