New York Mortgage Trust's (NYMT) CEO Steven Mumma on Q2 2016 Results - Earnings Call Transcript

| About: New York (NYMT)

New York Mortgage Trust Inc. (NASDAQ:NYMT)

Q2 2016 Earnings Conference Call

August 3, 2016 9:00 AM ET

Executives

Steven Mumma - Chairman, CEO and President

Kevin Donlon - President

Analysts

Eric Hagen - Keefe, Bruyette & Woods, Inc.

Sam Choe - Credit Suisse

Steve DeLaney - JMP Securities

David Walrod - Ladenburg Thalmann Financial Services Inc.

Operator

Good morning, ladies and gentlemen, and thank you for standing by. Welcome to the New York Mortgage Trust Second Quarter 2016 Results Conference Call. During today’s presentation, all parties will be in a listen-only mode. Following the presentation, the conference will be open for questions. [Operator Instructions] This conference is being recorded on Wednesday, August 3, 2016.

A press release with New York Mortgage Trust’s second quarter 2016 results was released yesterday. The press release is available on the Company’s website at www.nymtrust.com. Additionally, we are hosting a live webcast of today’s call, which you can access in the Events & Presentations section of the Company’s website.

At this time, management would like me to inform you that certain statements made during this conference call, which are not historically may be deemed forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Although, New York Mortgage Trust believes the expectations reflected in any forward-looking statements are based on reasonable assumptions, they can give no assurance that its expectations will be attained. Factors and risks that could cause actual results to differ materially from expectations are detailed in yesterday’s press release and from time-to-time in the Company’s filings with the Securities and Exchange Commission.

Now at this time, I would like to introduce Steve Mumma, Chairman and CEO. Steve, please go ahead.

Steven Mumma

Thank you, operator. Good morning everyone and thanks for being on the call. Kevin Donlon our newly appointed President and Former Founder of RiverBanc is on the call and will be available to answer questions at the end of this presentation. Included in our 8-K filing yesterday was our second quarter earnings press release.

Before I go into specific details about the Company’s quarter, I would like to recap the second quarter market environment. Second quarter began with spreads across fixed income markets continuing to improve from the first quarter-wise. This tightening continued throughout most of the second quarter. In certain RMBS and CMBS markets that we invest in we saw spreads improve over a 100 basis points or 1% from the market-wise in the first quarter.

We also live through the Brexit vote, which apparently surprised everyone and led to a short-term global sell-off in stock markets and a global rally in interest rates with several countries seeing their 10-year rates hit all-time lows, including three countries that have negative 10-year rates today. In July we saw a massive rally in U.S. equities ultimately with the Dow Jones sitting an all-time high.

During this time, the U.S. 10-year Treasuries [maintained their historic] close putting pressure on prepayment sensitive securities in particular mortgage-backed securities. All this volatility has made the Fed more apprehensive on their next rate move, which may not come until sometime next year. Throughout this year's market volatility we have focused on credit exposure on real estate assets most in residential and multifamily.

Why because we think the dynamics of home ownership has changed where people will be renters longer both in the early parts of their lives and at the back end of their lives. For differing reasons but nonetheless it will impact the way we think about housing going forward. We expect this trend and our increased allocation of capital to multifamily will benefit our portfolio and our operating performance over the next several quarters. We continue to believe that our focus on credit exposure in both residential and multifamily sectors will provide better risk adjusted returns in these trying markets.

Now for some specific thoughts on our Company's second quarter performance. We took significant steps during the second quarter to accelerate the transition of our portfolio to one focus increasingly on residential and multifamily credit assets. Consistent with its approach to capital allocation we acquired an additional $98 million of distressed residential securities and $15 million of Freddie Mac K-Series CMBS during the quarter, while reducing our net capital allocated to agency RMBS by approximately 11%.

Part of our strategy to further capture, we expect continued growth opportunity in multifamily sector. We purchased and completed the internalization of RiverBanc during the second quarter. We anticipated growing pipeline of multifamily investments in the coming quarter as a result of the internalization of RiverBanc and our increased capital commitment to their efforts.

The second quarter was marked by a continued difficult investment environment as evidenced by diminished trading volumes in non-Treasury and Agency markets, due, in part, to reduced inventory positions and risk taking tolerances at Wall Street firms. This new trading paradigm has reduced the investment opportunities available to our Company while lengthening the time to become fully invested.

Our earnings for the second quarter were negatively impacted by a number of factors, including delays in redeploying capital into our target asset classes due to this challenging environment for new investments which has resulted in our operating at less than desired leverage levels.

In addition, the lengthening of time required to clear loan sales in our distressed residential loan portfolio caused a transaction expected to close in the second quarter to be delayed until the third quarter. Even though we did not generate the desired realized gains in the second quarter, we continue to believe that an annualized return of 15% for our distressed residential loan portfolio is achievable for this year.

The Company generated net income of $11.2 million or $0.10 per share for the second quarter. The portfolio generated net interest income of $17.2 million and net interest margin of 321 basis points, the decrease of 11 basis points as compared to the previous quarter.

During the quarter the Company completed distressed residential loans securitization resulting proceeds of the Company of $168 million. We completed the purchase of RiverBanc internalizing team with expected synergies to come in future period. As part of the transaction we also purchase remaining interest in two other entities giving us complete control over additional multifamily commercial asset. Company also declared a second quarter dividend of $0.24 per share which was paid in July.

I’ll now speak to our capital allocation table included in last night’s press release. We had approximately $162 million of capital committed to our agency strategy down from $180 million in the first quarter. We will continue to reduce its exposures we see opportunity to reinvest in our targeted asset classes. We increased our equity exposure multifamily to approximately 50% of our equity or approximately $47 million increase.

Most of which was related to the purchase of RiverBanc in the related companies. Over time the internalization of RiverBanc will give us better expense leverage and more financial flexibility with these assets. In addition, with the RiverBanc team. We will pursue managing third-party capital to invest alongside the Company that will drive non-capital intensive revenues to our bottom line over time.

Our distressed residential credit strategy where we currently have approximately 30% of our capital allocated or approximately $257 million saw a decrease of $94 million in capital which was largely attributable to the increase in leverage from our second quarter securitization without the corresponding increase in assets.

Company will continue to focus on is asset class and has accumulated approximately $109 million dollars in distressed securities to complement the existing distressed loan portfolio as they are backed by similar types of collateral. These securities were mostly add in the end of June and will have a greater impact on earnings going forward.

We continue to work with partners in co-investors around solutions for the upcoming 5% risk retention requirement for this sponsorship of securitization. We believe we will have an opportunity to participate as a permanent holder of risk as other traditional sponsors move away from being a direct issuer to avoid these risk tension requirements.

Our second lien origination program continues forward but had disappointing volumes. At quarter end portfolio reached $8.5 million. Record low interest rates in the first lien sector continues to be the biggest roadblock for decreased volumes. As cash out refi the first liens are more cost effective for most borrowers at these low rate. However the loans that we have accumulate our outperforming as expected and exhibit better credit attributes that original planned and carry an average coupon is 7.67%.

Our portfolio net interest margin was 321 basis points as I said before decrease of 11 basis points from the previous quarter. Our CPRCs were up across all categories with our agency portfolio experiencing the biggest impact. Our Agency ARMs increased to 17.6% this quarter from 13.5% the previous quarter.

Our Agency fixed-rates increased to 10.2% from 7.9% and our Agency IOs increased from 15.6% from 14.7%. We did see our Agency ARM and fixed rate portfolio net interest spreads improve. This was mostly due to a decrease in our funding cost that were elevated in the previous quarter from year-end pricing pressures.

Our Agency IO, net interest spread decreased by approximately 243 basis points as this asset class is most sensitive to changes in prepayment rate. Given the low rates at the end of June and into July, we expect elevated CPR speed through at least October. The distressed residential loan portfolio net margin was largely unchanged, while our multifamily strategy improved by approximately 82 basis points mostly due to reduced liability costs of 56 basis points.

Contributing to the decrease in our net interest income in terms of dollars with an increase in our average outstanding liabilities without the corresponding increase in average earning assets. We completed our distressed residential loan securitization with loan proceeds of approximately $168 million in early April, which much of those proceeds not being invested until late June. Match funding opportunities with asset purchases continues to be challenging for us and we will continue to find ways to try to improve those funding matches.

Distressed residential loan sales closing continue to be difficult to predict, but the current quarter impacted by overall - there was markets, buyer due diligence delays and increased buyer scrutiny. We are not happy with this outcome. We continue to believe this is the core strategy for the Company and we will continue to deliver longer-term results in the mid-teens that it has in the past. Total general, administrative and other expenses for the second quarter were approximately $9.9 million up from $9.4 million for the first quarter of 2016.

Total expenses included base management and incentive fees of $3 million and $2.7 million of expenses related to our direct operating costs of the distressed residential loan portfolio. There was an increase in the Company's salaries and benefits of $1.5 million which was due mostly to the internalization of RiverBanc into the Company, which was partially offset by a decrease of base management fees.

Going forward, we would expect an accretive impact from the internalization of RiverBanc to the Company’s overall earnings. And we will be more specific of the actual figures as we normalize over the coming quarters. We continue to focus our long term results while protecting the enterprise value of the Company, delivering a 2% second quarter economic return and a 9.8% annualized economic return for the first six months ended June 30, 2016.

We believe our focus on multifamily residential credit combined with the RiverBanc team and our strong balance sheet positions as well in these difficult markets as we head into the remainder of the year and thereafter. Thank you for your continued support. Our 10-Q will be filed on or about Friday, August 5th, with the SEC will be available on our website thereafter.

Operator, now if you would please open it up for Kevin and I to answer questions. Thank you.

Question-and-Answer Session

Operator

[Operator Instructions] And our first question comes from Eric Hagen with KBW. Your line is open.

Eric Hagen

Thanks. Good morning, Steve. How are you?

Steven Mumma

Good morning, Eric.

Eric Hagen

One of your peers announced last week that they're doing - they are sponsoring a securitization of RPL/NPL securities by that Freddie Mac auctioned off in an auction.

Steven Mumma

That’s right.

Eric Hagen

You guys have a securitization shelf and clearly understand how to work with the collateral, was that something you see yourself participating in?

Steven Mumma

I mean we're clearly interested in the loan sales that are coming out of both Fannie and Freddie Mac and we are monitoring the transaction to make sure it makes the right economic sense for us. We did not participate in the bidding on the first - on the first sale of these loans, but it's something that we will look at going forward, absolutely.

Eric Hagen

Okay. And then you alluded in your opening comments that there's been a delay in some of the process to clear the distressed loan sales, can you [indiscernible] some detail on that where you can?

Steven Mumma

I mean, look we put out sales on a periodic basis. We try to get the sales on a quarterly basis done. We did not get one done in the second quarter. We would anticipate getting the second quarter one done shortly and have another sale done in the third quarter. When you go through the sales process, it involves trying to maintain the maximum price, a lot of times you have bidders out there they bid on a pool of loans. And then when they go through due diligence they try to kick out half of the loans and maintain the same price.

So we're constantly managing our expectation of price execution, with the buyers expectation of closing on as much of the loans that we put in this loan sale. A coupled with that was several large bank sales that occurred in the second quarter and a couple of diligent firms that are typically use seem to get overwhelmed with volume and which the late some of their capabilities which we had to change or the buyer change diligence firms midstream which probably added three to four weeks to the process and been announced to us.

Eric Hagen

So you wouldn't characterize it as a structural market issue.

Steven Mumma

No not at all I mean I do think as we get more seasoning in these loans, people take more time at looking at the loans as we do ourselves when we're going out and buying loan packages. There's been additional scrutiny from regulatory around these loans and the servicing of these loans, so I think people have become more diligent in boarding loans that process takes longer. So all of those combined have delayed these processes which we know or which we do understand but they seem to be getting further extended every month.

Eric Hagen

I see and last question for me if you don't mind.

Steven Mumma

Sure.

Eric Hagen

What was the size of the credit reserve at the end of the quarter for both distressed loans and CMBS positions and how would say it will trend over the next year?

Steven Mumma

So when we in both cases you know what we look at our CMBS portfolio especially we have a large exposure in Freddie Mac case series. We are putting that credit analysis in the yield that we're creating those bonds. So we do we do a monthly and quarterly detail review of the underlying collateral and make an assessment of what we think the ultimate recovery of those loans are going to be.

That's in the K-Series bond, in the direct mezz that we're making loans on them. We are looking at those properties and managing them with an expectation of where we are going to have an outcome on that. I mean we don't currently have any active reserves against those positions but again they're built into the accounting yield.

Under distressed residential loan, we look at those the way we do those accounting mechanism is distressed credit accounting which makes you look at future expected cash receipt and it goes through an impairment analysis on a monthly basis. And so you may see in our line item and our income statement increase in losses or decreases in this quarter we had a recovery.

So that is a constant review of the forward expected cash flows that we're going to receive based on the current information of the servicing cloud that we get on these loans. So there's a lot of work done on analyzing future expected cash collection that impact our credit reserves which is either a specific in loan loss of embedded in the accounting yields in the interest income.

Eric Hagen

Right. So that's non-accretable discount to par what is that number?

Steven Mumma

The non-accretable discount the par you know we don't disclose that in the credit reserve. I think typically we have talked about that in previous phone conversations when we booked this K-Series bonds and when we did book them back in 2011, 2012 and 2013 our expectation was that you would ultimately have between 100 and 150 basis points of loss across the entire deal.

So if you think about a K-Series deal of $1 billion your expectation of between you know $10 million and $15 million and so we own the bottom granite piece which is 7.5% or $75 million. So if you think about you know we go into an investment, four years or five years ago with their expectation on the $75 billion investment we're going to collect $60.

That's sort of how we think about it creating the accounting yield. And as we go over time and we look at these assets and we see how what assets have improved and what assets have deteriorated we go back and analyze that future expected collection look reasonable and if we need to increase our accounting yield or decrease our accounting yield to account for that expectation.

In the distressed loans in the footnote there is a disclosure of what accretable and non-accretable which tries to and so when you look at that numbers, that accretable yield that is out there is a fairly large number that would assume that you hold these loans to maturity in most cases you know our average loan held is probably thirty six months. So while that is a number that theory you can collect over time. The reality is we're not going to hold it for 30 years, but that is way the accounting mechanism works.

Eric Hagen

That's very helpful, Steve. Thanks a lot.

Steven Mumma

Sure.

Operator

Thank you. And our next question comes from Douglas Harter with Credit Suisse. Your line is open.

Sam Choe

Hi, this is actually Sam Choe filling in. So my first question regards RiverBanc and so have you guys quantified the benefit from the synergies you are looking to achieve?

Steven Mumma

Look I mean when we purchased RiverBanc it was a combination of really several things. One, we felt like the purchase price of RiverBanc relative to the cash flows that the assets that they were managing for us. That would generate over time - opportunistic time to take that in-house and not continue to manage it externally. To bringing the team internally gave us some flexibility on financial management of those assets in terms of how we can finance those securities that have differing impacts on the way the incentive fees calculated. Now there is no longer an incentive fee being calculated.

And thirdly, and most importantly we want to contribute and put more capital towards this strategy which includes building out some type of external management, investment management that's going to drive we believe revenues over time away from capital to our company. And we didn't want to - we’re going to continue to build value for RiverBanc, we wanted to own RiverBanc and take 100% of the upside and not share that upside with other partners.

And we felt like you know it's the right time to do the transaction. We do think the assets that we've invested in and the incentive fees that we expect, we would have expected to pay in the future obviously when we make that purchase. We would expect to have a significant savings relative to the price that we discount as cash flows on…

Sam Choe

Got it. Okay. So once thing, yes go ahead.

Steven Mumma

I would say on an ongoing basis on a run rate of expenses. Because of the way the incentive fees are paid out and are largely paid on those sales. You obviously get bigger savings in quarters where we have sales of multifamily assets and then when we don't have sales in multifamily assets. So it won't be spread like peanut butter but it will be significant in quarters when we have sales.

Sam Choe

So there is more variability because of that.

Steven Mumma

Well I think now that we've taken out the incentive fee going forward. There is less variability in expenses because the expenses would jump in quarters where we have the sales. I think that the expenses will be far more predictable because now we're doing salary bonus for everybody as opposed to incentive fees which are driven by sales.

So I think those expense ratios and rates will be better defined going forward and we'll talk about that in the third quarter that will really be the first full quarter where we have everybody on board and we have a good run rate of expenses. We know we have a good projection where we think it's going to be. But I would rather talk after we experience a quarter at least

Sam Choe

Got it. Okay. So I noticed the leverage kind of picked up. Do you kind of have a sense of how that's going to trend over this year?

Steven Mumma

Sure. Look we've increased the leverage and we will continue to increase the leverage on some of these assets. We came out of the first quarter, we had called all the financial, all the leverage on the distressed loans and anticipation of the unit securitization in the early part of the second quarter. So that's why that leverage drop until it pop back up in the second quarter.

We would anticipate increasing leverage on our on our CMBS portfolio also. We have a financing coming due in the third quarter of CMBS securities that when we funded those securities at a 50% advance rate, those securities worth of $100 million, today they're worth about $300 million. So we think we can generate another $100 million of what we would consider.

Very manageable leverage at very low advance rates, at attractive rates that will give us some additional capital to invest without putting additional pressure on increased share count. So we have not gotten that invested yet, we're looking for opportunities and we hope to be fully invested in fully leveraged at the company level by the end of the year, which I would expect overall leverage for the company. As compared to our equity which is less than 2% today would be up around two half to two and three quarters.

Sam Choe

Okay. Thank you. That's it for me.

Operator

Thank you. And our next question comes from Steve DeLaney with JMP Securities. Your line is open.

Steve DeLaney

Good morning. Thanks for taking the question. I want to focus a little bit on the forward opportunity in multifamily now that RiverBanc has been internalized. So when you look at that Steve should we think about it is more a direct investment or lending activity involved in specific projects in contrast to your prior focus where you were approaching it through securitization investing in subordinate K-Series issue. So is this really could be more of a hands on specialty finance lending activity versus CUSIP investing?

Steven Mumma

Yes. Look, we intend Steve to participate in the entire capital stack of multifamily. Now, when I say that we will not be a first lien lender, but we hope to create an external fund that may participate in that first lien lending. So we would like to be able to provide to these multifamily investors a complete menu to satisfy their capital needs that starts with the first lien. But more importantly, what we have been - what RMI, so we bought RMI as part of this RiverBanc consolidation or combination and RMI head in it both JV equity investment and mezzanine debt financing.

We will focus on mezzanine debt financing. We will keep the JV equity investments that we have that were through RMI. I think going forward, we will do JV investing in an external fund and that really have JV investing in our Company. We will still focus on interest earning assets in ROE primarily.

Steve DeLaney

Got it.

Steven Mumma

That being said, if there's an opportunity out there that we think is just going to generate outsized returns. We may take that initiative.

Steve DeLaney

Okay.

Steven Mumma

So we will be especially lender. We will continue to look at CMBS. The CMBS we bought in the second quarter and we bought a little in the first quarter was really from the spread widening in the BBB’s, BB’s, but not in the bottom stack that we have traditionally invested in.

Steve DeLaney

Understood.

Steven Mumma

Yields have gotten tighter as they've backed up - it’s not other question that we won’t step back into that market.

Steve DeLaney

And those have obviously - those have tightened back in a great deal now, haven't they from your entry point?

Steven Mumma

That's right. But the new issue market is probably at about 150 basis points from the type, so it's still a place where - because where we think there is some opportunity, but we continue dialogue with all the agencies and hopes of finding some way to do other types of transactions that could be beneficial for our Company and our shareholders.

Steve DeLaney

Okay. So initially we should be - as capital gets allocated away from agency and you identified opportunities, we should think about you building a mezz loan portfolio secured by multifamily projects. And can you give us a sense of like just on an unlevered basis with the loan coupons the range kind of looks like for the type of mezz loans that you're looking to originate?

Steven Mumma

Sure. And actually if you go to our website, there's an actual guidelines on our website of what their programs are.

Steve DeLaney

Okay.

Steven Mumma

That’s probably the easiest place to look, but just in general we are trying to target a 10% to 12% unlevered return, some of that coupon will be cash, that will be accreted toward the back end and it will depend on the property type. Our size that we think that we are competitive in is probably less than $15 million as we get above $15 million and maybe even above $10 million in size. I think the price becomes a little bit more aggressive in this far more competitors in that space. We just are going to compete in the large lending platforms.

Steve DeLaney

I’ll check the website. Thanks for mentioning that. And just one final thing, it's definitely tied into the same theme. So we recently launched on a Company that I'm sure you or Kevin both know and it's called Bluerock Residential, the ticker is BRG. And that's an equity rate kind of Sunbelt-focused equity multifamily REIT.

But one of the things they did, they have a little pocket of quayside debt within their asset allocation and we know they're getting like 15% preferred returns on development financing. I call it development equity or whatever you want to refer to it and I'm just curious whether are you going to be considering development stage, projects or are you going to wait for and work with just on completed properties.

Steven Mumma

Kevin, you want to speak to that.

Kevin Donlon

Yes. I’d add two thoughts on that. I think the senior bank debt market is backed up that used to lend 75, so the room to do mezzanine up to 75 LTV. So the room to do mezzanine was very restricted. We've seen that back up to 60 or 65. So we could go in now and do mezzanine debt between from points of attachment of 60 to 80 or 85. I think those are good investments. We've looked a lot at those Bluerock structures and then I would just say they're all mezzanine preferred equity is not created equal and I’ve drilled down really hard on what the true point of attachment was on those deals.

Steve DeLaney

Got it.

Kevin Donlon

We think of it from senior lender to on a stabilized building maybe 88 on a construction deal 80 to 85 and we're seeing some people out there doing lots of different structures where I think the - it may be call preferred equity or mezzanine, but you're really deep, deep into the equity. And from a pure market standpoint, the market won't support 15% unless you are deep into the equity. So I think that something…

Steve DeLaney

It seemed a little too good to be true. So usually there's an angle there?

Steven Mumma

I would say just direct comparison. And you think about our portfolio if we’re going from like low 70's point of attachment to high 80's I think that's a true mezzanine portfolio. If you look at a Bluerock they're going from low 70's, by the time you buy a building 103. So your weighted average point of attachment is much higher. So I think I pointed that out - if you compare our returns to the other multifamily REIT returns, but you look at it on a relative point of attachment basis I think we're still hitting the pretty sweet spot.

Steve DeLaney

Well, guys appreciate the color this morning. Thank you.

Operator

Thank you. [Operator Instructions] And our next question comes from David Walrod with Ladenburg. Your line is open.

David Walrod

Hi, everyone.

Steven Mumma

Hey, Dave.

David Walrod

Hey. Just wanted to clarify Steve did you say that you expect the - loan sale that you would hope to close last quarter this quarter and then another one this in the third quarter as well?

Steven Mumma

Yes.

David Walrod

Okay. And then I wanted to get a little color. You briefly mentioned the risk retention has the format of that I guess kind of wins or do you going to be taking a bottom tranche or vertical tranche across all the classes? Can you talk a little bit about that?

Steven Mumma

Yes. I mean it's interesting there is two thoughts on that right. You’re required to retain 5%. Most attorneys will tell you that you need to retain a 5%, a vertical 5 which means do you have 5% of every single class. There is a couple of attorneys that have gotten comfort that you can remain - you can just take the horizontal bottom 5%. The deals that we've been involved with has been vertical. There was one deal that was put on to the market they initially were going to take a 5% horizontal but change at the last minute and took a 5% vertical just to be safe.

So I think until we get more clarity, most people are taking a 5% vertical, which requires you to buy obviously more - it requires you to buy more different types bonds still 5%, but you know most securitization that we've participate we're taking the entire credit piece of the bottom which is greater than 5% anyway. So we would prefer to do horizontal only, it’s just a matter of getting our legal comfort.

And if there's a lot of legalese around describing what exactly is 5%. If the confusion comes around what is the true market value of the 5% and who is calculating it. And how do you disclose that in a perspective where it meets the needs of the lawyers in the SEC and the investor base. It’s not about meeting the needs today it's meeting the needs tomorrow something that happens.

So their concern is it's much easier to say that you have 5% if you take the vertical stack because you've taken 5% of everything, then taking 5% of the bottom and then somebody questions. Was that really 5% or was that something less than 5%?

David Walrod

Okay. That’s helpful. Thanks very much.

Steven Mumma

Sure.

Operator

And I'm showing no further questions at this time. I'd like to turn the call back to Steve Mumma for any closing remarks.

Steven Mumma

Thank you, operator. Thank you everyone for being on the call. We look forward to speaking again in November. We will have much more information about this combination and I will be further along and redeploying our capital. Thank you so much.

Operator

Ladies and gentlemen, thank you for participating in today's conference. This does conclude today's program. You may all disconnect. Everyone have a great day.

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