AMERICAN REALTY INVESTORS INC MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (form 10-Q)

The following discussion and analysis by management should be read in
conjunction with the unaudited Condensed Consolidated Financial Statements and
Notes included in this Quarterly Report on Form 10-Q (the "Quarterly Report")
and in our Form 10-K for the year ended December 31, 2021 (the "Annual Report").

This Report on Form 10-Q contains forward-looking statements within the meaning
of the federal securities laws, principally, but not only, under the captions
"Business", "Risk Factors" and "Management's Discussion and Analysis of
Financial Condition and Results of Operations". We caution investors that any
forward-looking statements in this report, or which management may make orally
or in writing from time to time, are based on management's beliefs and on
assumptions made by, and information currently available to, management. When
used, the words "anticipate", "believe", "expect", "intend", "may", "might",
"plan", "estimate", "project", "should", "will", "result" and similar
expressions which do not relate solely to historical matters are intended to
identify forward-looking statements. These statements are subject to risks,
uncertainties, and assumptions and are not guarantees of future performance,
which may be affected by known and unknown risks, trends, uncertainties and
factors that are beyond our control. Should one or more of these risks or
uncertainties materialize, or should underlying assumptions prove incorrect,
actual results may vary materially from those anticipated, estimated or
projected. We caution you that, while forward-looking statements reflect our
good faith beliefs when we make them, they are not guarantees of future
performance and are impacted by actual events when they occur after we make such
statements. We expressly disclaim any responsibility to update our
forward-looking statements, whether as a result of new information, future
events or otherwise. Accordingly, investors should use caution in relying on
past forward-looking statements, which are based on results and trends at the
time they are made, to anticipate future results or trends.

Some of the risks and uncertainties that may cause our actual results,
performance or achievements to differ materially from those expressed or implied
by forward-looking statements include, among others, the following:


•general risks affecting the real estate industry (including, without
limitation, the inability to enter into or renew leases, dependence on tenants'
financial condition, and competition from other developers, owners and operators
of real estate);

•risks associated with the availability and terms of construction and mortgage
financing and the use of debt to fund acquisitions and developments;

•demand for apartments and commercial properties in our markets and the effect
on occupancy and rental rates;

•our ability to obtain financing, enter into joint venture arrangements in
relation to or self-fund the development or acquisition of properties;

•risks associated with the timing and amount of property sales and the resulting
gains/losses associated with such sales;

•failure to manage effectively our growth and expansion into new markets or to
integrate acquisitions successfully

•risks and uncertainties affecting property development and construction
(including, without limitation, construction delays, cost overruns, inability to
obtain necessary permits and public opposition to such activities);

•risks associated with downturns in the national and local economies, increases
in interest rates, and volatility in the securities markets;

•costs of compliance with the Americans with Disabilities Act and other similar
laws and regulations;

•potential liability for uninsured losses and environmental contamination;

•risks associated with our dependence on key personnel whose continued service
is not guaranteed; and

•the other risk factors identified in this Form 10-Q, including those described
under the caption “Risk Factors.”


The risks included here are not exhaustive. Some of the risks and uncertainties
that may cause our actual results, performance, or achievements to differ
materially from those expressed or implied by forward-looking statements,
include among others, the factors listed and described at Part I, Item 1A. "Risk
Factors" Annual Report on Form 10-K, which investors should review.
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We continue to closely monitor the impact of the COVID-19 pandemic on all
aspects of our business and our property portfolio. While we did not incur
significant disruptions during the nine months ended September 30, 2022 from the
COVID-19 pandemic, our commercial properties have experienced a decline in
occupancy. We believe this decline to be temporary and do not expect a
significant decrease in rental revenue.


We are unable to predict the impact that the COVID-19 pandemic will have on our
financial condition, results of operations and cash flows due to numerous
uncertainties. These uncertainties include the scope, severity and duration of
the pandemic, the actions taken to contain the pandemic or mitigate its impact
and the direct and indirect economic effects of the pandemic and containment
measures, among others. The pandemic continues to have an impact on the U.S.
economy and on the local markets in which our properties are located. Nearly
every industry has been impacted directly or indirectly, and the commercial real
estate market has come under pressure due to numerous factors, including
preventative measures taken by local, state and federal authorities to alleviate
the public health crisis such as mandatory business closures, quarantines, and
restrictions on travel and "shelter-in-place" or "stay-at-home" orders.

Management’s Overview


We are an externally advised and managed real estate investment company that
owns a diverse portfolio of income-producing properties and land held for
development throughout the Southern United States. Our portfolio of
income-producing properties includes residential apartment communities
("multifamily properties"), office buildings and retail properties ("commercial
properties"). Our investment strategy includes acquiring existing
income-producing properties as well as developing new properties on land already
owned or acquired for a specific development project.

Our operations are managed by Pillar Income Asset Management, Inc. ("Pillar") in
accordance with an Advisory Agreement. Pillar's duties include, but are not
limited to, locating, evaluating and recommending real estate and real
estate-related investment opportunities. Pillar also arranges our debt and
equity financing with third party lenders and investors. We have no employees.
Employees of Pillar render services to us in accordance with the terms of the
Advisory Agreement. Pillar is considered to be a related party due to its common
ownership with Realty Advisors, Inc. ("RAI"), who is our controlling
shareholder.

The following is a summary of our recent acquisition, disposition, financing and
development activities:


Dispositions

•On March 30, 2021, we sold a 50% ownership interest in Overlook at Allensville
Phase II, a 144 unit multifamily property in Sevierville, Tennessee to Macquarie
for $2.6 million resulting in a gain on sale of $1.4 million. Concurrent with
the sale, we each contributed our 50% ownership interests in Overlook at
Allensville Phase II into VAA.

•On August 26, 2021, we sold 600 Las Colinas, a 512,173 square foot office
building in Irving, Texas for $74.8 million, resulting in a gain on sale of
$27.3 million. We used the proceeds to pay off the mortgage note payable on the
property (See "Financing Activities") and for general corporate purposes.

•During the year ended December 31, 2021, we sold a total of 134.7 acres of land
from our holdings in Windmill Farms for $20.2 million, in aggregate, resulting
in gains on sale of $10.3 million. In addition, we sold 14.09 acres of land from
our holdings in Mercer Crossing for $9.0 million, resulting in a gain on sale of
$6.4 million.

•On January 14, 2022, we sold Toulon, a 240 unit multifamily property in
Gautier, Mississippi for $26.8 million, resulting in a gain on sale of $9.4
million
. We used the proceeds to pay off the $14.7 million mortgage note payable
on the property and for general corporate purposes.

•On May 17, 2022, we sold Fruitland Park, a 6,722 square foot commercial
building in Fruitland Park, Florida for $0.8 million, resulting in a gain on
sale of $0.7 million. We used the proceeds for general corporate purposes.


•On September 16, 2022, in connection with a sale of properties by VAA (See
"Other Developments"), we sold Sugar Mill Phase III, a 72 unit multifamily
property in Baton Rouge, Louisiana for $11.8 million, resulting in a gain on
sale of $1.9 million. We used the proceeds to pay off the $9.6 million mortgage
note payable on the property and for general corporate purposes.

•During the nine months ended September 30, 2022, we sold a total of 26.9 acres
of land from our holdings in Windmill Farms for $5.1 million in aggregate,
resulting in gains on sale of $4.2 million.

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Financing Activities

•On March 2, 2021, we extended our $1.2 million loan on Athens to August 28,
2022
.

•On March 4, 2021, we extended the maturity of our loan on Windmill Farms until
February 28, 2023 at a reduced interest rate of 5%.

•On August 25, 2021, we replaced the existing loan on Villas at Bon Secour with
a new $20.0 million loan that bears interest at 3.08% and matures on
September 1, 2031.

•On August 26, 2021, we paid off the $35.9 million loan on 600 Las Colinas in
connection with the sale of the underlying property (See “Dispositions”).

•On January 14, 2022, the loan on Toulon was paid off in connection with the
sale of the underlying property (See “Dispositions”).

•On March 3, 2022, the loan on Stanford Center was extended to February 26, 2023
and was subsequently paid off on October 21, 2022.

•On September 1, 2022, we extended our $1.2 million loan on Athens to August 28,
2023
.

•On September 16, 2022, the $9.6 million loan on Sugar Mill Phase III was paid
off in connection with the sale of the underlying property (See “Dispositions”).

Development Activities


During 2021, we spent $15.7 million on our ongoing development of Windmill
Farms. Our expenditure includes $2.8 million on the development of land lots for
sale to single family home developers and $13.0 million on reimbursable
infrastructure investments. During the nine months ended September 30, 2022, we
spent $3.7 million on our ongoing development of Windmill Farms. Our expenditure
includes $1.2 million on the development of land lots for sale to single family
home developers and $2.5 million on reimbursable infrastructure investments.

In 2021, Landing Bayou, a 240 unit multifamily property in Houma, Louisiana
suffered extensive damage from Hurricane IDA. As a result, the property required
extensive renovation. In 2022, we incurred $5.0 million in capital expenditures,
which were funded by insurance proceeds. We expect to complete the renovation by
the end of this year.

We have investment in nine notes receivable that were issued to fund the
development of multifamily properties . As of September 30, 2022, one of the
projects was in construction, one was in lease-up and seven were stabilized. In
2022, we advanced $2.1 million on these development notes. Each of these notes
are convertible, at our option, into a 100% ownership interest in the underlying
property.

Other Developments:

During 2021, we recorded a loss of $29.6 million on the remeasurements of
certain assets (“Earn Out Obligation”) that were sold in connection with our
investment in VAA.

On June 17, 2022, we entered into an agreement to sell 45 properties (“VAA Sale
Portfolio”) held by VAA and one property held by our SPC subsidiary.


On September 15, 2022, VAA, SPC, Macquarie and Pillar entered a Distribution and
Holdback Property Agreement ("Distribution Agreement"), which provides the
timing and ordering of the distribution of the net proceeds from the sale of the
VAA Sale Portfolio, the repayment of the Mezzanine Loans, and the distribution
of the remaining seven properties of VAA ("Holdback Portfolio").

On September 16, 2022, VAA completed the sale of the VAA Sale Portfolio for $1.8
billion, resulting in gain on sale of $738.7 million. In connection with sale,
we received $182.8 million, which consisted of a payoff of our $113.0 million
Mezzanine Loan, $2.6 million of accrued interest on the Mezzanine Loan and $84.2
million of contributed capital offset in part by the $17.0 million remaining
balance on our Earn Out Obligation.

On November 1, 2022, in connection with the sale of the VAA Sale Portfolio, we
received an additional distribution from VAA, which included the full
operational control of the Holdback Portfolio and a cash payment of $203.9
million
. We are in the process of assuming the mortgage notes payable on
Holdback Portfolio.

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We plan to use our share of the proceeds from the sale of the VAA Sale Portfolio
for additional investment in income-producing real estate, pay down debt and for
general corporate purposes. Our ownership interest in VAA is held by SPC, and is
therefore subject to the bond covenants of the three series of bonds that have
been issued by SPC. These provisions include restrictions on the distribution of
cash from SPC (See Note 12 - Bonds Payable in our consolidated financial
statements).

Critical Accounting Policies


The preparation of our consolidated financial statements in conformity with
United States generally accepted accounting principles ("GAAP") requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates.

Some of these estimates and assumptions include judgments on revenue
recognition, estimates for common area maintenance and real estate tax accruals,
provisions for uncollectible accounts, impairment of long-lived assets, the
allocation of purchase price between tangible and intangible assets,
capitalization of costs and fair value measurements. Our significant accounting
policies are described in more detail in Note 2-Summary of Significant
Accounting Policies in our notes to the consolidated financial statements in the
Annual Report. However, the following policies are deemed to be critical.

Fair Value of Financial Instruments


We apply the guidance in ASC Topic 820, "Fair Value Measurements and
Disclosures", to the valuation of real estate assets. These provisions define
fair value as the price that would be received to sell an asset or paid to
transfer a liability in a transaction between market participants at the
measurement date, establish a hierarchy that prioritizes the information used in
developing fair value estimates and require disclosure of fair value
measurements by level within the fair value hierarchy. The hierarchy gives the
highest priority to quoted prices in active markets (Level 1 measurements) and
the lowest priority to unobservable data (Level 3 measurements), such as the
reporting entity's own data.

The valuation hierarchy is based upon the transparency of inputs to the
valuation of an asset or liability as of the measurement date and includes three
levels defined as follows:

Level 1 – Unadjusted quoted prices for identical and unrestricted assets or
liabilities in active markets.


Level 2 - Quoted prices for similar assets and liabilities in active markets,
and inputs that are observable for the asset or liability, either directly or
indirectly, for substantially the full term of the financial instrument.

Level 3 – Unobservable inputs that are significant to the fair value
measurement.

A financial instrument’s categorization within the valuation hierarchy is based
upon the lowest level of input that is significant to the fair value
measurement.

Related Parties


We apply ASC Topic 805, "Business Combinations", to evaluate business
relationships. Related parties are persons or entities who have one or more of
the following characteristics, which include entities for which investments in
their equity securities would be required, trust for the benefit of persons
including principal owners of the entities and members of their immediate
families, management personnel of the entity and members of their immediate
families and other parties with which the entity may deal if one party controls
or can significantly influence the decision making of the other to an extent
that one of the transacting parties might be prevented from fully pursuing our
own separate interests, or affiliates of the entity.

Results of Operations


Many of the variations in the results of operations, discussed below, occurred
because of the transactions affecting our properties described above, including
those related to the Lease-Up Properties and the Disposition Properties (each as
defined below).

For purposes of the discussion below, we define "Same Properties" as those
properties that are substantially leased-up and in operation for the entirety of
both periods of the comparison. Non-Same Properties for comparison purposes
include those properties that have been recently constructed or leased-up
("Lease-up Properties") and properties that have been disposed of ("Disposition
Properties"). A developed property is considered leased-up, when it achieves
occupancy of 80% or more. We move a property in and out of Same Properties based
on whether the property is substantially leased-up and in operation for the
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entirety of both periods of the comparison. Accordingly, the Same Properties
consist of all properties, excluding the Lease-up Properties and the Disposition
Properties for the periods of comparison.

For the comparison of the three and nine months ended September 30, 2022 to the
three and nine months ended September 30, 2021, the Lease-up Properties are
Forest Grove, Parc at Denham Springs Phase II and the Disposition Properties are
Overlook at Allensville Phase II, 600 Las Colinas, Toulon and Sugar Mill Phase
III.

The following table summarizes our results of operations for the three and nine
months ended September 30, 2022 and 2021:

                                                        Three Months Ended September 30,                    Nine Months Ended September 30,
                                                    2022                  2021             Variance             2022               2021             Variance
Multifamily Segment
  Revenue                                   $      2,850               $  3,703          $    (853)         $    9,024          $ 11,068          $  (2,044)
  Operating expenses                              (1,966)                (2,072)               106              (5,395)           (6,306)               911
                                                     884                  1,631               (747)              3,629             4,762             (1,133)
Commercial Segment
  Revenue                                          4,720                  5,925             (1,205)             13,286            19,115             (5,829)
  Operating expenses                              (2,735)                (3,538)               803              (7,146)          (10,194)             3,048
                                                   1,985                  2,387               (402)              6,140             8,921             (2,781)
Segment profit                                     2,869                  4,018             (1,149)              9,769            13,683             (3,914)
Other non-segment items of income
(expense)
  Depreciation and amortization                   (2,193)                (2,935)               742              (6,840)           (9,473)            

2,633

  General, administrative and
advisory                                          (4,613)                (7,117)             2,504             (15,570)          (24,393)             8,823
  Interest, net                                    2,991                   (929)             3,920               6,636            (5,088)            11,724
  Loss on early extinguishment of
debt                                              (1,166)                (1,451)               285              (2,805)           (1,451)            

(1,354)

Gain (loss) on foreign currency
transactions                                       1,533                 (1,639)             3,172              19,437             1,185             

18,252

Gain on sale or write down of assets               1,539                 31,312            (29,773)             16,580            24,265             

(7,685)

  Income from joint ventures                     464,143                  3,543            460,600             471,385            11,451            459,934
  Other (expense) income                         (80,799)                   261            (81,060)            (79,691)            4,438            (84,129)
Net income                                  $    384,304               $ 25,063          $ 359,241          $  418,901          $ 14,617          $ 404,284

Comparison of the three months ended September 30, 2022 to the three months
ended September 30, 2021:

Our $359.2 million increase in net income during the three months ended
September 30, 2022 is primarily attributed to the following:

•The decrease in profit from the multifamily and commercial segments is due to
the Disposition Properties.


•The change in interest expense, net is primarily due a reduction in reserve for
uncollectable notes receivable and a decrease in interest from mortgage notes
payables on the Disposition Properties.

•The increase in gains on foreign currency transactions is due to favorable
changes in the U.S. Dollar and the New Israeli Shekel conversion rate.


•The decrease in gain on sale or write down of assets is primarily due to the
$27.3 million gain on the sale of 600 Las Colinas in 2021 (See "Dispositions" in
Management's Overview).

•The increase in income from joint ventures is primarily due our share of the
gain on the sale of the VAA Sale Portfolio in 2022 (See "Other Developments" in
Management's Overview).

•The change in other (expense) income is primarily due to the $87.9 million
increase in our tax provision as a result of the sale of the VAA Sale Portfolio
in 2022.
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Comparison of the nine months ended September 30, 2022 to the nine months ended
September 30, 2021:

Our $404.3 million increase in net income during the nine months ended
September 30, 2022 is primarily attributed to the following:

•The decrease in profit from the multifamily and commercial segments is due to
the Disposition Properties.


•The decrease in general, administrative and advisory expenses is primarily due
to the decrease legal costs from the Clapper and the arbitration settlements in
2021 (See "Other Developments" in Management's Overview).

•The change in interest expense, net is primarily due a reduction in reserve for
uncollectable notes receivable and a decrease in interest from mortgage notes
payables on the Disposition Properties and interest on the bonds payable.

•The increase in gain on foreign currency transactions is due to favorable
changes in the U.S. Dollar and the New Israeli Shekel conversion rate.


•The decrease in gain on sale or write down of assets is primarily due to the
$27.3 million gain on the sale of 600 Las Colinas in 2021 (See "Dispositions" in
Management's Overview) and a $10.4 million decrease in gain on sales of land
parcels, offset in part by the $29.6 million loss on remeasurement of the Earn
Out Obligation in 2021 (See "Other Developments" in Management's Overview).

•The increase in income from joint ventures is primarily due our share of the
gain on the sale of the VAA Sale Portfolio in 2022 (See "Other Developments" in
Management's Overview).

•The change in other (expense) income is primarily due to the $89.1 million
increase in the tax provision as a result of the sale of the VAA Sale Portfolio
in 2022.

Liquidity and Capital Resources


Our principal sources of cash have been, and will continue to be, property
operations; proceeds from land and income-producing property sales; collection
of notes receivable; refinancing of existing mortgage notes payable; and
additional borrowings, including mortgage notes and bonds payable, and lines of
credit.

Our principal liquidity needs are to fund normal recurring expenses; meet debt
service and principal repayment obligations including balloon payments on
maturing debt; fund capital expenditures, including tenant improvements and
leasing costs; fund development costs not covered under construction loans; and
fund possible property acquisitions.

We anticipate that our cash and cash equivalents as of September 30, 2022, along
with cash that will be generated from notes and interest receivables, will be
sufficient to meet all of our cash requirements. We may selectively sell land
and income-producing assets, refinance or extend real estate debt and seek
additional borrowings secured by real estate to meet our liquidity requirements.
Although history cannot predict the future, historically, we have been
successful at refinancing and extending a portion of our current maturity
obligations.

The following summary discussion of our cash flows is based on the consolidated
statements of cash flows in our consolidated financial statements, and is not
meant to be an all-inclusive discussion of the changes in our cash flows for the
periods presented below (dollars in thousands):

                                                        Nine Months Ended 

September 30,

                                                           2022                2021              Variance
Net cash used in operating activities                  $   (6,874)         $   (7,723)         $     849
Net cash provided by investing activities              $  154,850          $  106,536          $  48,314
Net cash used in financing activities                  $  (71,524)         

$ (101,870) $ 30,346



The increase in cash provided by investing activities is primarily due the
$172.8 million increase in distribution from joint venture and the $40.3 million
redemption of short term investments in 2022 offset in part by the $99.4 million
purchase of short term investments in 2022, the $59.1 million decrease in
proceeds from the sale of real estate and the $6.1 million decrease in
collection of notes receivable in 2022. The increase in distribution from joint
venture is due to the sale of the VAA Sale Portfolio in 2022 (See "Other
Developments" in Management's Overview).
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The decrease in cash used in financing activities is primarily due to the $47.0
million decrease in payments of mortgages, notes and bonds payable offset in
part by the $20.0 million in proceeds on the mortgage notes payable in 2021.

Funds From Operations (“FFO”)


We use FFO in addition to net income to report our operating and financial
results and consider FFO and FFO-diluted as supplemental measures for the real
estate industry and a supplement to GAAP measures. The National Association of
Real Estate Investment Trusts ("Nareit") defines FFO as net income (loss)
(computed in accordance with GAAP), excluding gains (or losses) from sales of
properties, plus real estate related depreciation and amortization, impairment
write-downs of real estate and write-downs of investments in an affiliate where
the write-downs have been driven by a decrease in the value of real estate held
by the affiliate and after adjustments for unconsolidated joint ventures.
Adjustments for unconsolidated joint ventures are calculated to reflect FFO on
the same basis. We also present FFO excluding the impact of the effects of
foreign currency transactions.

FFO and FFO on a diluted basis are useful to investors in comparing operating
and financial results between periods. This is especially true since FFO
excludes real estate depreciation and amortization, as we believe real estate
values fluctuate based on market conditions rather than depreciating in value
ratably on a straight-line basis over time. We believe that such a presentation
also provides investors with a meaningful measure of our operating results in
comparison to the operating results of other real estate companies. In addition,
we believe that FFO excluding gain (loss) from foreign currency transactions
provide useful supplemental information regarding our performance as they show a
more meaningful and consistent comparison of our operating performance and
allows investors to more easily compare our results.

We believe that FFO does not represent cash flow from operations as defined by
GAAP, should not be considered as an alternative to net income as defined by
GAAP, and is not indicative of cash available to fund all cash flow needs. We
also caution that FFO, as presented, may not be comparable to similarly titled
measures reported by other real estate companies.

We compensate for the limitations of FFO by providing investors with financial
statements prepared according to GAAP, along with this detailed discussion of
FFO and a reconciliation of net income to FFO and FFO-diluted. We believe that
to further understand our performance, FFO should be compared with our reported
net income and considered in addition to cash flows in accordance with GAAP, as
presented in our consolidated financial statements.

The following table reconciles net income attributable to the Company to FFO and
FFO adjusted for the three and nine months ended September 30, 2022 and 2021
(dollars and shares in thousands):

                                                    Three Months Ended 

September

                                                                 30,                     Nine Months Ended September 30,
                                                       2022               2021               2022               2021
Net income attributable to the Company             $  302,289          $ 19,411          $  329,915          $ 10,151
Depreciation and amortization                           2,193             2,935               6,840             9,473
Gain on sale or write down of assets                   (1,539)          (31,312)            (16,580)          (24,265)
Gain on sale of land                                        -             4,042               4,752            15,153
Gain on sale of assets from unconsolidated joint
ventures at our pro rata share                       (307,300)                -            (307,300)                -
Depreciation and amortization on unconsolidated
joint ventures at our pro rata share                    4,394             2,984               8,424             7,016
FFO-Basic and Diluted                                      37            (1,940)             26,051            17,528
Loss on extinguishment of debt                          1,166             1,451               2,805             1,451
Loss on early extinguishment of debt from
unconsolidated joint venture at our pro rata share     15,254                 -              15,254                 -
(Gain) loss on foreign currency transactions           (1,533)            1,639             (19,437)           (1,185)
FFO-adjusted                                       $   14,924          $  1,150          $   24,673          $ 17,794


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