From a small northwestern observatory…

Finance and economics generally focused on real estate

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Real Estate: 2023

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I’m regularly asked, “Is now a good time to buy real estate?” Throughout 2022, my pat answer was, “Now is a good time to have already owned real estate.” Indeed, with the possible sector exceptions of hospitality and retail, real estate was a pretty darned good hedge against the stock market doldrums over the past year. As soon as I say that fingers get pointed at the REIT market, which has had mixed results this year. Indeed, some REIT sectors were terribly over-bought, and some specific stocks (I’m looking at single family residential REITs) simply couldn’t deliver funds-from-operations to meet investor expectations. Nonetheless, and overall, having some real assets in your portfolio at the beginning of 2022 was a pretty good thing.

So where do we go from here? Obviously, forecaster expectations need to be taken with huge grains of salt, but to an extent these forecasts often drive the narrative. In other words, in a behaviorist market (which is is, you know), investors tend to be herd followers. So which way is the herd pointing?

On the housing front, over at the National Association of Realtors, Melissa Dittmann Tracey writes “2023 Real Estate Forecast: Market to Regain Normalcy“. By this, she forecasts that actual sales volumes (that is, number of homes sold) will decline by about 7% but with flat prices overall. Two things strike me about this. First, by our research at Greenfield, since World War II, home prices in America have increased on average by about 2% per year above the inflation rate. This is more-or-less baked into the expectations of market participants and, for that matter, even market intermediaries like mortgage lenders. Thus, when faced with 5% inflation, we expect home prices to rise about 7%. Second, though, this is an average over a very long time horizon, with wild fluctuations. Remember the market meltdown in 2010? Remember the market bubble that preceded that melt-down? Now, consider that according to NAR statistics, home prices rose an estimated 9.6% in 2022 (the exact figures are still out), a whopping 16.9% in 2021 and 9.1% in 2020, all during periods of low inflation. NAR estimates that in the year coming, 2024, inflation will be back to “normal” (and most forecasters agree with this) and home prices should get back to a healthy upward trend (NAR forecasts a 5% price rise in 2024). Thus, if they are right, then 2023 could be a good year to shop for bargains.

New home sales are factored into total home sales but are also a driver of land development activity. According to a U.S. Department of Housing and Urban Development report, released in December, new home sales cycled downward starting in early 2020, from a seasonally adjusted rate of just under 1 million per year to a low of about 600,000 in early 2022, with higher construction costs carrying the blame. Notably, the 2020 numbers were well above the intermediate term trend line. However, for most of 2022, this rate seems to stabilize, and this month the National Homebuilders will conduct their annual survey of builder sentiment. We’ll see how that turns out.

Image courtesy National Homebuilders Association

Al Brooks, head of commercial real estate at JP Morgan, suggests that “there may be challenges ahead“. Big macro-economic factors are at work, not the least being the obvious geopolitical problems (the War in Ukraine and sanctions against Russia), inflation coming in at 7.75% in October, and rising interest rates. He projects a mild-to-moderate recession this year, affecting all asset classes, with a full recovery spanning years rather than months. Notably, they find that the multifamily sector is doing well, with vacancies at a five-year low of 4.4%. Demand for affordable workforce housing “far outweighs supply.” He also sees good long-term trends in the industrial sector, which follows the growth of e-commerce. Retail is a mixed bag, according to Brooks, depending largely on location and category. For example, groceries and other neighborhood shopping are doing well, but city-center retail has been “slow to bounce back.”

Brooks goes on to note that the future of office buildings is “up in the air.” However, none of the regions in have seen vacancy rates dip below their pre-pandemic levels. He quotes his colleague Anthony Paolone, a JP Morgan senior analyst and co-head of U.S. real estate stock research, as saying, “we think cash flow growth will be challenged in the office sector.”

Conversely, in September, Deloitte released their 2023 commercial real estate outlook. They surveyed 450 CFOs of major commercial real estate owners or investors and found that while there are “near term performance reservations”, long-term optimism remains. North American respondents to the survey listed logistics and warehousing spaces as their top pick for Investment, while Europeans favored surburban offices and Asian-Pacific respondents favored properties tied to the digital economy.

Finally, one of the perennially most interesting sectors is self-storage. In recent years, there has been a fascinating growth in the niches of this market, with facilities specializing in art storage, wine storage, and even classic/collectable car storage. Self-storage in general enjoyed explosive demand during the pandemic as a result of the work-from-home trend. Going into 2022, it was expected that self-storage would stagnate in no small part due to rising costs. However, rents actually increased faster than costs in the past year, and sector prices now stand 65% higher than pre-pandemic levels, with occupancies averaging 95%. Green Street expects a downtrend in new offerings this year, facing continued labor and materials shortages, but new construction is expected to rebound in 2025.

Well, that’s all for now, folks. As always, if you have any questions on these or any other related topics, please let me know.

John A. Kilpatrick, Ph.D. —

Written by johnkilpatrick

January 2, 2023 at 12:20 pm

Posted in Uncategorized

Survey of Professional Economists

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Every quarter, the Philadelphia FED surveys a team of professional economists on the “headline” topics of the day — GDP Growth, Unemployment, and Core CPI change topping the list. Naturally, 2022 has brought some very real updates to every model out there.

For the 4th quarter 2022, which we’re now in, the consensus agreement is that REAL GDP should grow at about 1.0 percent on an annualized basis, which is not much but certainly not “recession”. The consensus opinion is that REAL GDP will be nearly flat in the first half of 2023, then rising slowly to an annualized rate of 2.1% by the end of next year. For the uninitiated, something between 2% and 4% is usually considered to be a healthy, stable rate for a mature economy. Emerging economies, like China, need growth rates double that or more. Two quarters of negative GDP growth signals a recession.

Unemployment is currently hovering around 3.7%, and the consensus opinion among professional economists is that unemployment will stay relatively stable for most of the coming year, inching up to about 4.4% by the end of next year. For context, back when I was a boy, we were taught that frictional unemployment (that is, people between jobs, job seekers, etc.) was somewhere between 3% and 6%. Unemployment under 3% was usually a signal of impending inflation, and above 6% was a sign of economic weakness. However, those rates may be completely disconnected from reality in current times.

Core CPI (this is better known as the “inflation rate”) should be growing by an annual rate of 5.7% at the end of this year, but you probably already knew that. Economists think this will slowly decline, back to a reasonably healthy 2.9% by the end of next year.

If and as these change, I’ll keep you posted. Otherwise, if I can answer any questions about this, please don’t hesitate to reach out.

John A. Kilpatrick, Ph.D. —

Written by johnkilpatrick

November 14, 2022 at 12:15 pm

Posted in Uncategorized

The upside of a little recession

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First, y’all miss me? It’s been a TERRIFICALLY busy summer, and I’m only beginning to catch back up on some important things, like this blog and my occasional newsletter. Mea culpa, all…

This morning, the Commerce Department reported that GDP grew at an annual rate of 2.6% in the 3rd quarter, shifting the down direction reported in the first two quarters of the year. Yes, folks, two down quarters constitutes a recession, and an up quarter marks the end. However, the apparent improvement is largely the result of fluctuations in things like international trade, and as Mark Zandi of Moody’s Analytics noted, “if you take a step back and look at GDP, it’s gone effectively nowhere over the last year… we’re kind of treading water.” Coupled with very real inflation numbers, and it’s no wonder there’s widespread concern.

I will note that I began my career in the stag-flation days of the late 1970’s. Double-digit inflation, interest rates in the teens, and flat-lined GDP were the norm. I don’t want to minimize the angst of today’s wage-earners and those just starting out on their careers, and acknowledge that the past 50 years have been hell on the working class. That said, though, our economy is generally pretty healthy and we’re in a good position to deal with the systemic underlying problems.

From a real estate investment perspective, though, recessions create opportunities. Many investments get over-leveraged in low-interest rate environments, and increasing interest rates may put before-tax-cash-flow under water. The owners may have little ability to re-capitalize, and new investors with the right amount of equity may find a bargain. Value-added deals may now be on the table, because tighter lending requirements may again call for a higher equity infusion.

Are these deals popping up yet? Not in my observation, and in fact there still seems to be a lot of dumb money chasing deals. I get an average of one cold-call per day asking if I’m interested in selling a given property. “Sure, what’s your offer?” That’s when the line goes dead, because all of these callers are reading off the same script, and all of them are bottom fishing for half-price sales from desperate sellers.

If the recession really is over, and the jury is still out on that, then sustained higher interest rates may still generate opportunistic deals for investors with cash. However, a sustained recession coupled with high interest rates will usually generate an assembly line of deals for investors with longer time horizons and staying power.

Written by johnkilpatrick

October 27, 2022 at 5:17 am

Posted in Uncategorized

Manufactured Housing

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A great report crossed my desk this morning from Marcus & MillichapManufactured Home Communities National Report. These communities generally occupy a niche below apartments and rental houses. Housing shortages and climbing costs have increased demand across all of the residential sectors, including this one. In recent years, there has been a very real stagnation in the supply manufactured home communities, and so rents have climbed accordingly, although not as fast as for apartments and houses. Regional vacancy rates range from the low-teens in the Great Lakes region to below 2% on the west coast. Accordingly, average rents range from $460 to $488 in the Great Lakes and Gulf Coast regions (up from about $439 last year) to nearly $1000 per month on the west coast. In some high-cost areas, for example Santa Cruz, rents are nearing $2000.

Many of these communities appeal to retirees, and there is a sub-sector of “age restricted communities” among manufactured home communities. Vacancies are even tighter in this subsector, but rents tend to be somewhat lower.

According to Marcus & Millichap, investor interest “continues to grow” with “robust property fundamentals.” I would note that several REITs invest in this sector, including UMH Properties (UMH), Equity Lifestyle (ELS), and Sun Communities (SUI). UMH has enjoyed a 1-year total return of 26.51% as of this writing, while Equity Lifestyle has returned 22.52% and Sun Communities 21.61%. Note that this is not a recommendation to invest but reported for informational purposes only.

As always, if you have any questions about this or real estate in general, please don’t hesitate to reach out. I look forward to hearing from you!

John A. Kilpatrick, Ph.D., MAI —

Written by johnkilpatrick

April 11, 2022 at 7:09 am

Posted in Uncategorized

ACCRE Report, March, 2022

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For you newcomers to my blog, ACCRE is Greenfield’s in-house REIT fund-of-funds. It’s a carefully curated fund, aiming for a 130-30 long-short strategy (although that’s a tough metric to meet in a generally upward trending market). Before I got bogged down in the winter, I generally reported on ACCRE monthly. I’ll see if I can get back in the swing of things again.

The last few moths have been great for ACCRE, and so-so for real estate in general. We benchmark ACCRE against the S&P500 as well as against S&P’s Global Real Estate Index. The question is how much would your dollar be worth today had you invested in each of these three indices. As you can see below, from the inception (March, 2017) until early 2021, ACCRE generally dominated all three indices. Then the S&P 500 took off on a tear and we’ve worked to keep up. Notably, the broad S&P real estate index has been positive, but with returns considerably lower than ACCRE. Why? Novice real estate investors often fail to appreciate the fact that different real estate sectors behave differently. The pandemic, for example, led to terrible returns in some areas (hospitality or campus housing, for example) but great returns in others (single family housing, data centers). As such, ACCRE has nearly erased about a year and a half of S&P advantage, and continued to outperform the broader real estate index.

We also track the SHARPE index for ACCRE and the S&P as well as the correlation coefficients between the two. The former gives a good measure of how much return an investor gets for a certain level of risk (measured as standard deviation of daily returns). The latter gives evidence of how a well constructed REIT portfolio can help attenuate risk by diversifying the overall investment portfolio.

S&P 500
Average Daily Excess Return0.0476%
Standard Deviation1.2424%
Sharpe Ratio3.8313%
Average Daily Excess Return0.0461%
Standard Deviation1.1724%
Sharpe Ratio3.9313%
Correlation Coefficient (life of the fund)48.5164%
Correlation Coefficient (month of March)11.6763%

Even though the S&P has enjoyed slightly higher returns over the life of the fund, the lower volatility in ACCRE makes it a more attractive investment on a risk-adjusted basis. Further, ACCRE has only been about 48% correlated with the broader market over the past 5 years, and almost totally uncorrelated this past month, boding well for portfolio diversification.

As always, if you have any questions about ACCRE, about REIT investing, or real estate in general, please drop me a note. I’d enjoy hearing from you!

John A. Kilpatrick, Ph.D., MAI —

Written by johnkilpatrick

April 1, 2022 at 9:59 am

Posted in Uncategorized

Dysfunction in the housing market

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Yes, inflation’s bad. I just bought two racks of ribs at my local grocery store. For that price, Chef Gordon Ramsey should bring them over to my house.

But I digress. This is about real estate, and Axios this morning had an excellent article by Neil Irwin with the opening line, “The U.S. housing market this spring selling season is looking like a multi-car collision…” Irwin’s focus is on mortgage rates, which “…have spiked more rapidly than they have in decades…” He’s right, but that only tells half of the story.

Let’s start with house prices, which are utterly on a tear. Since the troughs of the 2008-2011 period, house prices have rebounded amazingly. Indeed, annual price increases in the 2013 period were at nearly the same level as they were during the peak of the “bubble” (remember the bubble?). Fortunately, annual price increases settled out for most of the last decade, at the somewhat normal level of about 2% to 3% above CPI inflation. Then COVID came, and suddenly home ownership was a way to achieve social distancing, home schooling, working from home, and smart investing all at the same time. Seemingly, the urge to own a home hasn’t been so viscerally felt since the period immediately after WW-II. Supply simply couldn’t keep up with demand, and construction materials and labor prices went thru the roof as well, putting amazing price pressure on homes. If you had a $100,000 house in an average city in America in January, 1991, it was worth $382,700 at the end of 2021. Of course, that’s an a average. If that house was in Austin, Texas, it went up to $640,230. In Boise, ID, the price today would be $578,260. In Salt Lake City, it’s $625,720. These are high demand cities, folks, and people want to move there and pay whatever price it takes.

Now, add to that Irwin’s article, which is all about mortgage rates. Three weeks ago, a 30-year, fixed rate mortage was 3.76%. Today, it’s 4.42%. That means that a family which could afford a $2,000 per month house payment could have borrowed $424,000. Today, they can only borrow $375,000. Yet, prices continue to rise. We measure this with something called the Housing Affordability Index. If the HAI equals 100, then the median household in America has exactly enough income to buy the median house. Thanks to record low interest rates the past few years, the affordability index has been in positive territory (that is, above 100) since 2000, and indeed this positive affordability has fueled the run-up in house prices. However, that crashing sound you just heard was the index dropping remarkably from 169 to 151.9, the biggest year-over-year drop since the peak of the 2010-2012 recession (marked by the disappearance of extraordinarily favorable lending). While the raw numbers aren’t that bad, the trend direction, particularly coupled with all the other economic issues, does not bode well for the health of the housing market.

As always, if any of you would like to chat about this or have any comments, please reach out. I look forward to hearing from you!

John A. Kilpatrick, Ph.D., MAI —

Written by johnkilpatrick

March 28, 2022 at 8:45 am

Posted in Uncategorized

Long time gone…

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It’s been an extraordinarily busy winter! Yes, I’ve neglected this blog, my newsletter, and a host of other basic research. Why, you ask? Busy with that day-to-day “work” thing.

Whew, now that my mea culpa is out of the way, I wanted to comment on an article today by Derek Thomas in The Atlantic titled “Russia’s Economic Blackout Will Change the World.” It’s a great piece, and I encourage you to read it. However, it suggests some issues in the real estate sphere worth considering.

First, Thompson suggests that the world petroleum disruption results in the “green energy revolution goes into warp speed.” This will be particularly true in Europe, which is very much re-assessing their dependency on Russian oil. Europe has already been a lot more tolerant of nuclear than the US, despite the Chernobyl disaster, and its relatively stable energy demand (compared to Asia’s rapid demand growth) may give it the impetus to take a leading role in this transformation.

That leads a bit to his next point — Russia is about to become an economic dependency of China. China can certainly use Russia’s oil, and Russia can use just about everything China provides. Russia will rather quickly become a very large North Korea, and China will extract a steep price in terms of oil and natural gas from their new step-child. Unlike Korea, however, which shares certain cultural ties with China, this will be a tough relationship tied only by economic necessity. Further, Russia won’t be able to switch from Euro-centric oil deliveries to Chinese oil deliveries instantly. Putting in a pipeline infrastructure, particularly in the tough Asian terrain, will take years. Right now, all of Russia’s pipelines run in the opposite direction.

Map courtesy:, as of 2017

Thompson also notes that this war will significantly disrupt agriculture. Russia and Ukraine together produce about 30% of the world’s wheat and 20% of the corn. Russia and Belarus are also major fertilizer exporters. Thompson suggests that this isn’t entirely a bad thing in the long run for poor farmers in the world. About half of households in Sub-Saharan Africa are family farmers, living a subsistence existence. If this drives up crop commodity prices, a lot of the third could be lifted from poverty, albeit at the expense of consumers developed nations. However, this scenario suggests a long-term systemic disruption, and it is hard to imagine this war, or Ukraine’s disruption as a breadbasket, stretching out for the long-haul.

Anyway, I’ll try to be more attentive to my blog duties. See you again soon!

John A. Kilpatrick, Ph.D. —

Written by johnkilpatrick

March 10, 2022 at 8:11 am

Posted in Uncategorized

Some end of the year tax madness

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This is generally a fairly slow time around Greenfield Advisors, and I mostly use these last two weeks of the year to get ready for tax filings and just generally get my paperwork house in order. It’s been a great year for real estate investing, and as such you may want to give some thoughts to how to position yourself in these last few tax days of 2021.

First, are you a passive or active investor? For most of you, you’re “passive” which essentially means you can’t use real estate depreciation to shelter non-real estate income. (It’s a little more complicated that that, but you get the idea.) Probably the hardest hurdle to cross as an active investor is documenting that you spent 750 hours or more on your real estate portfolio. Unless you’re an active property manager, that’s probably not going to happen, but if this describes you, then be sure to spend any down time over the holidays documenting that 750 hours. The IRS may want to see the paperwork sometime down the road.

Oh, and if you’re a property “flipper”, then none of this probably matters. The IRS will generally treat your real estate as merchandise inventory, anyway.

By the way, if you ARE an active property manager, and need a new vehicle or such, consider the Section 179 deductions that are available for end-of-year purchases.

If you can accelerate any payments this week or defer any income into next month, now is the time to think about that. However, be careful of major repairs that may need to be capitalized and depreciated rather than expensed this year.

As always, I cannot stress too much that I’m NOT your tax or investment advisor. If you are active in the real estate investment arena, you really do need to have a good advisor helping you navigate the shoal waters of tax filings.

Early next month, I’ll do a year-end recap of the performance of various property sectors. Here’s a sneak peek — everything’s up, across the board, including laggards such as lodging and health care. Most sectors had a terrible 2020, and so the star performers this year were generally the ones that did the worst last year. The best two-year holds, however, have been industrial, self-storage, and data centers. More on this in January.

Finally, now is a great time to view your overall investment situation. I’ve always posited that real estate is an important component of a well-diversified portfolio, so how does that diversification mix change going forward? If you and your advisors think you need to make some changes, consider the tax implications of sales/swaps now versus January.

Best wishes for a great holiday season, and we’ll see you next year!

John A. Kilpatrick, Ph.D., MAI —

Written by johnkilpatrick

December 22, 2021 at 4:39 pm

Posted in Uncategorized

ACCRE Report, November 2021

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It was a rough month for the S&P 500, but a great month for ACCRE. This was exactly the sort of roiling market for which ACCRE was designed, and it paid off handsomely.

To be specific, the S&P 500 declined 0.83% in November. Don’t get me wrong, though, we hate to see that as much as anyone. Real estate in general also took a hit — the S&P Property Index was down 2.12%. However, ACCRE was up 8.44%, the second of two very solid months of returns. Thus, a dollar invested in ACCRE at the inception would be worth $1.85 today.

Overall, the S&P continues to best ACCRE for the life of the fund, stemming from a very powerful bull run in 2021. ACCRE continues to be only partially correlated, although the monthly correlation numbers have moved into positive territory again from last month’s aberration.

S&P 500
Average Daily Excess Return0.0513%
Standard Deviation1.2397%
Sharpe Ratio4.1377%
Average Daily Excess Return0.0468%
Standard Deviation1.1758%
Sharpe Ratio3.9817%
Correlation (life of the fund)49.6285%
Correlation (month of November)39.5733%

Best wishes to you all for a great holiday season! As always, if you have questions about this or any other real estate related topic, please don’t hesitate to reach out.

John A. Kilpatrick, Ph.D., MAI —

Written by johnkilpatrick

December 6, 2021 at 3:56 pm

Posted in Uncategorized

Economics — Following the Bouncing Ball

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We hope all of you had a great Thanksgiving, and any indigestion you felt Friday was from too much turkey rather than too much stock market.

The broader stock market indices had a terrible day Friday — the S&P 500 was down about 2%, although as of this writing it has re-gained about half of its loss. Our in-house REIT fund, ACCRE, was developed in no small part to attenuate such falls. We lost only 0.9% on Friday, and we’ve re-gained all of that and then some today.

More to the point, though, what’s happening? Consumers (and yes, the stock market, too) hears about “the Omicron variant” and “inflation” and not surprisingly reacts defensively to unsettling news. We’re no experts on the Covid virus (although we listen carefully to the folks who are legit experts!) but perhaps we can sort out some of the noise with the aid of some charts from CNN Business and some others.

First, let’s look at inflation. If you’re under, say, 55, for your entire adult life inflation has hovered around a very manageable 2% to 3%. In the 1970’s and early 80’s, of course, inflation was a big deal and double-digit annual price increases weren’t unusual. In the past few years, both pre- and post-COVID, inflation has actually been on a downward trend, getting very close to zero in early 2020. However, the flood of stimulus money in the economy, and the rebound after over a year of semi-lock-down, has triggered prices. On an annualized basis, prices in October were about 6.24% above a year earlier.

So, how big of a danger is this? In other words, is this inflation both real and permanent? A peek at the interest rate market may be insightful. Both the US Treasury long-bonds and the 30-year mortgage market have barely reacted. Both are up from their COVID-recession doldrums, but neither seem to have reacted to consumer prices.

10-year Treasuries and 30-Year Fixed Rate Mortgages

So, bottom line, is the economy healthy? In most respects, yes. As of October 1, the economy was adding about 148,000 jobs per month, which is near the high end of the “healthy” range (100,000 to 150,000). The unemployment rate stood at 4.6%, not quite at the pre-pandemic lows, but about where it was five years ago. Real gross domestic product stood at $19.5 Trillion (annualized) as of the end of the 3rd quarter, which is a new record high and nearly back on the pre-pandemic trend line. Consumer spending — which is driving the inflation fears — is also at a record high of $13.9 Trillion and has been back on its pre-pandemic trend line for most of 2021. All of these are healthy signs of a stable but growing economy.

That said, there are a few clouds on the horizon to be watched carefully. The S&P Case-Shiller home price index sets a new record high each month, but annualized housing starts are actually somewhat lower (1.6 million) than the peak of about 1.7 million set earlier this year. However, housing starts are still well above the 1.2 million level we saw for most of the past four years. It remains to be seen if accelerated housing starts will ameliorate housing prices. Retail inventories as a percentage of sales are lower than we’ve seen any time in the past five years, standing at about 126% (the pre-pandemic average was about 140%). This suggests more consumers chasing fewer goods with commensurate price pressure.

The stock market is a pretty good gauge of economic expectations. Looking at the trends for the past five years, the hic-cup on Friday appears to be nothing more than post-Thanksgiving indigestion. We hope that is the case.

As always, we enjoy hearing from you folks. If you have any questions about economic topics, particularly with a bent toward real estate, please let us know!

John A. Kilpatrick, Ph.D., MAI —

Written by johnkilpatrick

November 29, 2021 at 9:46 am

Posted in Uncategorized

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