Claros Mortgage Trust, Inc.

Hello and welcome to today's Clarish Mortgage Trust Incorporated fourth quarter 2021 earnings conference call. My name is Bailey and I will be the operator for today's call. All lines will be muted during the presentation portion of the call with an opportunity for questions and answers at the end. If you would like to ask a question, please press star followed by one on your telephone keypad. I would now like to pass the conference over to Arne Wynne, Vice President of Investor Relations.

Thank you. Good morning. I'm joined by Richard Mack, Chief Executive Officer and Chairman of Claris Mortgage Trust. Mike McGillis, President and Chief Financial Officer and Director of Claris Mortgage Trust. And Jay Agarwal, who will be CMTG's Chief Financial Officer, effective after the filing of Reform 10-K. We also have Kevin Cullinan, Executive Vice President, who leads MREX Origination and Priyanka Garg, Executive Vice President, who leads MREC portfolio and asset management. Prior to this call, we distributed CMPG's earnings supplement. We encourage you to reference these documents in conjunction with the information presented on today's call. If you have any questions following today's call, please contact me. I'd like to remind everyone that today's call may include forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Actual results may differ materially from those indicated by these forward-looking statements as a result of various important factors, including those discussed in our other filings with the SEC. Any forward-looking statements made on this call represents our views only as of today, and we undertake no obligation to update them. We will also be referring to certain non-GAAP financial measures on today's call, such as net distributed earnings. which we believe may be important to investors to assess our operating performance. For non-GAAP reconciliations, please refer to the earnings supplement. I would now like to turn the call over to Richard.

Thank you, Ann, and thank you, everyone, for joining us this morning. We are pleased to welcome you to our fourth quarter 2021 earnings call. I'm happy to say that we concluded the year with one of our strongest originations quarters, reporting $1.8 billion in total originations primarily composed of cash flowing, senior transitional, floating rate loans. As we continue to deploy capital during the quarter, we maintained our disciplined approach to investing. Moreover, the originations momentum we achieved during the fourth quarter has continued into 2022, and our pipeline remains very strong. Let me provide some more details on what was an opportunistic investment period for CMTG. At the end of the year, we observed a significant pullback in the securitization and CLO markets that resulted in some lenders being less active or temporarily exiting the market. The disruption presented an opportunity for us to deploy available capital, step in as an alternative financing source, and increase our multifamily and light transitional exposure while diversifying geographically. Total Q4 originations volume, $1.4 billion, or 80%, involved multifamily properties. And as a result, our multifamily capital allocation increased significantly to 30% of the portfolio at year-end 2021, from 17% at September 30th. In addition to increasing our multifamily allocation, we also enhanced our geographic diversification by originating loans in markets that have been exhibiting favorable demographic trends and job growth, such as Dallas, Nashville, and Las Vegas. Multifamily loans have been and will continue to be a strategic focus for us. Mac's experience in residential development, ownership, and property management provides us proprietary skills, market information, and a large network of industry relationships. This, in turn, gives us a competitive advantage in underwriting and managing these loans. A good example of this is the largest loan we originated during the quarter. a $405 million loan to refinance a newly constructed trophy multifamily asset in Santa Monica, California, where our West Coast development team is based. This loan was made to a repeat borrower and a well-respected institutional partner and is another illustration of the institutional nature of our borrowers, the strength of our relationships, and the quality of the underlying locations and collateral. Given recent disruption in the securitization market, the current macroeconomic environment, and industry dynamics, we anticipate an ongoing focus on originating loans in the residential sector. Multifamily tends to perform well during a rising rate environment, and there continues to be strong tailwinds supporting the residential asset classes. Recent housing demand has been outstripping low inventory levels, and rising costs as well as labor and material shortages are placing additional challenges on new supply. Therefore, we believe that the industry will continue to achieve strong rent growth and price appreciation. In addition to multifamily, we see favorable trends in the single-family for rent or SFR market, with demand driving rent growth. Subsequent to the fourth quarter, we originated several loans backed by portfolios of SFRs to take advantage of the opportunities we are seeing in this asset class. While we always try to be opportunistic and nimble, investing across all major classes, we expect residential investments to continue to be a meaningful component of our portfolio. Now, just a couple of comments about the geopolitical environment and interest rates. First, our thoughts are with the Ukrainian people. We admire their bravery and regret the suffering that is unfolding from the Russian invasion. The range of outcomes here is perhaps unprecedented. Our expectation is that the longer the siege and related economic sanctions last, the more likely it is that Europe and other parts of the world, including the U.S., could face the terrible forces of stagflation. However, right now, growth in the U.S. has been so robust that we currently discount stagflation here. Of course, we are keeping our eye on it. As discussed already, there is dislocation in the securitization market, and one could expect that transitional lending spreads will rise as a result of geopolitical and stagflation concerns, particularly in Europe. We will be monitoring this opportunistically. As it relates to our existing portfolio, we feel comfortable with our limited exposure to office and hotel and zero standalone retail. In addition, we have some select high yielding exposure to land and to construction, where we are comfortable with our last dollar basis and the underlying collateral. These are lending opportunities where the MAC platform's development and construction experience position us well to generate alpha, particularly in the multifamily development space. We view residential as inherently defensive, and our team's expertise enables us to evaluate risk in this asset class. As to interest rates, Invencim Europe are pushing up oil prices. compounding pre-existing commodity and supply chain issues and further escalating inflation concerns. At the same time, the Fed is transitioning away from an accommodative monetary policy to begin to combat inflation. If we assume a continued upward trajectory of 10-year Treasury rates to a normalized level with continued economic growth, this should be very positive for real estate. Inflation seems likely to continue to drive rents and expenses upward, translating into higher NOIs against higher, perhaps appropriately higher, but still historically modest interest rates. We see this as a very healthy economic backdrop for real estate assets. Further, we believe that CMTG is well positioned over the immediate term with a predominantly floating rate portfolio to be rewarded by rate rises in such an environment. Before turning the call over to Mike, I'm excited to welcome Jay Agarwal to the Mack Real Estate Group. He joined our firm recently and will soon step into his role as CMTG's Chief Financial Officer. Mike McGillis will continue to serve as the President of CMTG. I will now turn the call over to Jay to say a few words. Jay, welcome and to you.

Thank you, Richard, and good morning, everyone. I'm very excited to be joining the patented team at Mac and CMTG. I look forward to the continued growth and evolution of the business, and I'm truly honored to be working with this team. And I look forward to interacting with you all. And I will now turn the call over to Mike.

Thanks, Jay. The fourth quarter was a pivotal quarter for us as we entered a new phase in our lifecycle amidst our transition to becoming a public company We delivered on several key objectives as we head into 2022. Specifically, we executed our strongest originations quarter of the year, adding $1.8 billion of new transitional loans, further diversified and expanded our portfolio into markets and property types that we expect to perform well in the current economic environment. Carried that origination momentum into 2022, reduced overall pricing on our term loan B by 100 basis points, generating annual cash savings of $7.5 million, and increased the weighted average term to maturity of our portfolio. I would now like to review our fourth quarter operating results. We reported GAAP net income of $17 million, or $0.12 per share, Net distributive learnings for the fourth quarter were $40.9 million, or $0.30 per share, compared to $45.3 million, or $0.34 per share, for the prior quarter. The sequential quarter change in net distributive learnings is primarily attributable to one-time transaction expenses related to the term loan B repricingly completed during the quarter. Our book value per share at December 31, 2021, is $18.35. Adjusted for our general CECL reserves and accumulated depreciation on our REO, book value per share was $18.88. The UPB of our transitional loan portfolio increased to $6.6 billion as of year-end, driven by initial fundings on new loans of $1.5 billion, fundings of $210 million during the quarter for existing loans, This growth was offset in part by $1.5 billion in full or partial loan repayments on the loan portfolio. With respect to the loans that repaid in full, 21% of those represented office and hotel investments, which contributed to the quarter-over-quarter decreases in exposure to those property types. Turning to the balance sheet, since our inception, we've adopted and maintained a conservative approach to leverage. Our year-end debt-to-equity ratio remained relatively unchanged compared to the prior quarter, with a net debt-to-equity ratio of 1.7x. While we anticipate leverage levels to increase as we continue to deploy capital and finance our investments, we expect total leverage to continue to be in the range of 2 to 3x debt-to-equity in the near to intermediate term. Our balance sheet at December 31st reflects the IPO we completed last November for 5.5 million shares, generating net proceeds of about $91 million. As I mentioned earlier, we also repriced our term loan fee financing, reducing our coupon rate by about 100 basis points. Subsequent to quarter end, we expanded our warehouse capacity by $700 million across two counterparties, bringing our aggregate warehouse capacity to $5 billion. Looking ahead, we plan to continuously monitor the capital markets and take advantage of our opportunities to further optimize our capital structure. As we mentioned last quarter, we identified several key catalysts that will be instrumental to increasing our net distributive learnings going forward. We completed the first focus area, which was the repricing of our Term 1B financing. The second catalyst was capital deployment. As Richard mentioned, our fourth quarter originations momentum carried into 2022. So far in the first quarter, we've executed more than $1.2 billion in total loan commitments, and we anticipate continued portfolio growth as we deploy cash and work through our robust pipeline of attractive investment opportunities that complement our current portfolio. Lastly, we also spoke of resolving non-accrual loans as well as improving the operating performance of our REO asset. We continue to make progress in the resolution of these matters, and in doing so, we leverage the capabilities of our sponsors' broader platform as an owner, operator, and developer. In particular, we believe these situations can result in outsized returns in the form of recovery of past due interest, possible default interest, and NOI growth and value creation that may materialize upon resolution of these assets. That wraps up my prepared remarks. I would now like to open the call for Q&A. Operator?

Thank you. If you would like to ask a question, please press star followed by one on your telephone keypad. If for any reason you would like to remove that question, please press star followed by two. As a reminder, if you are using a speakerphone, please remember to pick up your handset before asking your question. Our first question today comes from Dan Fandetti from Wells Fargo. Dan, please go ahead. Your line is now open.

Yes, good morning. Can you talk a little bit about the New York City office market and what you're sort of seeing and your outlook and also hotels in New York? Sir, this is Richard Mack. I will take the beginning of this, and I'd like Priyanka to discuss a little bit about what we're seeing in our hotel portfolio. As it relates to office in New York, we're seeing an extremely bifurcated market. There appears to be solid demand from technology tenants and tenants seeking Class A space. really the market drops off quite precipitously after that now there are many we can argue what class a space is um but uh i think any space that is creative in nature brand new highly amenitized or uniquely um located uh seems to be in quite high demand But I think there's real questions as to whether or not any other office space is going to be valuable in the future. One of the things we are starting to feel is that there's class A space, and defining that is not as simple as it used to be, and perhaps empty space. And so I think we are quite concerned about that. And that really applies beyond New York. New York just has a huge office stock, and we may feel it more precipitously in the New York market. As it relates to hotel, I think that we're seeing some pretty good recovery. Clearly, the Omicron was a little bit of a hit. But the war right now does not seem to be stopping tourists from coming from Europe to the U.S. And we're seeing a pretty good recovery. I'd like to turn it over to Priyanka to discuss a little bit more about what we're seeing in our portfolio.

Thanks, Richard. Generally, I agree with everything Richard said. As a general comment, I would say the big group houses are certainly still struggling in New York, no surprise to anybody. But specifically as it relates to our REO portfolio, which is a much more granular portfolio, we're cautiously optimistic on underlying performance. Second quarter and third quarter booking activity, forward booking activity, is actually right in line with what these hotels had achieved back in 2019. So we're really encouraged by that. That also implies normalized booking windows for leisure demand, which is another great fact. Corporate demand is increasing, but it's still very short booking windows there. So I think that'll strengthen over time, hopefully, as we're putting COVID a little bit in the back of the mirror. And, you know, finally, Richard touched on Ukraine a little bit. What we're seeing in our portfolio, international demand has not been impacted really at all in the last several weeks by the activity in the European theater. Demand from UK, Spain, Italy have all remained steady in our portfolio.

Okay, great. Thanks. That was helpful.

Thank you, John. The next question today comes from Steve Delaney from JMP Securities. Steve, please go ahead. Your line is now open.

Good morning, and thanks for the question. The repayments obviously stood out in the fourth quarter. 25% of the portfolio came back to you. I'm just curious if there was any activity whereby you refinanced an existing loan in the quarter such that that loan showed up in both repayments and new originations for the quarter. I'm picking up on Richard's comments about, you know, CLOs and CMBS. So I'm just curious if any borrowers are kind of continuing this transitional phase and sort of refinancing their existing loans. Thanks. Mike, do you want to take that or Kevin? Why don't I take this one, and then I'll ask Kevin to add on to that. And, Steve, thanks for the question. Always nice to hear from you. Sure. Of the $1.8 billion of originations, roughly $800 million of those were refinancing of existing loans. Got it. As the borrowers were much further along in executing that. their business plan. So we sort of our view on that is the loan we know is the loan we like.

Sure.

Let's Kevin touch base a little bit more and provide some more color.

Thank you. Yes, Steve, it's Kevin calling in. I'll provide just a little bit more color. Mike might give you the specific figure, but to maybe get a little bit more granular on that. There were a few loans, particularly some that we had made the original construction loan on a development of a multifamily asset or a mixed-use asset going back two or three years or even four years in some instances. And into 2020 and 2021, we saw those assets deliver. We saw them perform. We saw them, I would say, lease up and start to perform even beyond what we had originally projected. So we're very happy with the performance, and we looked at selectively opportunities for assets that we thought were candidates for being repaid because of how far along they were in their business plan to work out a solution with the borrower whereby we're slightly improving their cost of capital and trading that for duration in the portfolio on what we view to be high-quality assets in markets that we continue to be very active in. Yeah, that's great. That makes a lot of sense.

Yes. Sorry, I didn't mean to speak over, but I just wanted to add also just high-quality sponsors, which we really, really liked that as well.

And so looking out over the first quarter or maybe first half of this year, should we, for modeling purposes, should we expect continued high repayments? And if so, are you confident that if those come in that you will find new opportunities so that you'll be able to at least maintain, if not grow, the portfolio over the next six months? Kevin, why don't I take this, and you and Priyanka can add on as well. Steve, we haven't seen much in the way of repayments according to date in Q1. We expect to get back to a more normalized level, but we have a very strong pipeline of opportunities at the moment. And as Richard highlighted, it really reflects the shift to multifamily opportunities and shifting into higher growth markets in the Southeast, Southwest arenas. Kevin, if you want to add on to that, feel free.

Yeah, maybe. I would say quarter to date, and it's hard to predict 12 months going forward, but quarter to date, our new originations fairly meaningfully eclipse repayments in the quarter and I think, you know, we have pretty good visibility as to the next few weeks, certainly. So I think, you know, we expect to be able to demonstrate, you know, pretty substantial loan book growth over the course of the first quarter as a result of, you know, the meaningful variance we're seeing in new origination versus repayment activity.

Yeah. I think you had the figure $1.2 billion in the deck that's out there. So we can use that. Okay. Thank you, everyone, for the comments.

Thank you. Thank you, Steve. The next question today comes from Jade Romani from KBW. Jade, please go ahead. Your line is now open.

Thank you very much. Considering the volatility in the market, I appreciate all the comments, Richard, that you provided. I wanted to ask for some further color if you could give any sense as to what percentage of the $1.2 billion pipeline was negotiated or in negotiation before the volatility? And if you've seen any fall off in opportunities as a result of the volatility, how are real estate sponsors behaving at this point?

All right, so I'm going to turn that one to Kevin. But as a general statement, we're not seeing a fall off and people are operating business as usual, which has presented a lot of opportunities for us. I'll let Kevin be a little bit more granular on that. Yeah, sure.

Jay, to touch on the first part of your question, of the number that we mentioned that we closed already in the quarter, substantial majority of that is carry over from assets that we were pursuing or that were in our pipeline at the end of the year. But we do continue to grow the pipeline going forward, looking beyond what had originally been negotiated towards the end of last year. And I think, are we seeing a drop off in opportunity? No, I actually think it's the opposite. I think we're seeing more opportunity today, which is allowing us to be even more selective than we otherwise might be because of some of the factors that Richard had mentioned in his prepared remarks with some groups that we would otherwise consider to be normally competitors that might have been relying on public market securitizations or CLO exits. They've certainly had to pull back. in terms of their activity because of that volatility, whereas our business is not set up to rely on that, and we have substantial balance sheet capacity. So I think that's allowed us to really pick our spots here in the first quarter, and we're excited about what we're working on and what the opportunity set is going forward.

In the CMBS and CRE CLO market, we've seen spreads widen by 40 to 50 basis points in some areas. commercial real estate brokerage loan pricing notes that I track, it seems that loan pricing primarily fits rate loans. So I know it's not a direct corollary, but is up perhaps 20 basis points, 10 to 20 basis points. Curious as to whether you could give any range or color on the floating rate market and on the loans that you're quoting, if there's been any impact to pricing.

Yeah, I'll try and address that as best I can. It's a great question and something that we look at day in and day out. I'll start the answer this way. I think we've actually seen in the floating rate side, particularly at this moment in time, we've seen whole loan pricing change more so than our cost of financing. So I think we've seen a movement in both, but we've seen net interest margins creep up at this moment in time. How long that will continue to be the case, it remains to be seen. But I think we've improved ROE apples to apples risk versus where it might have been, you know, one quarter ago or two quarters ago.

And with respect to how the future may play out, is it your expectation that cap rates widen, taking multifamily as the case in point, we are seeing multifamily trades at such low cap rates because of the strength in rank growth that we've seen. So, normalizing a couple of years out, those cap rates do improve. But absent that, do you expect the cap rates to widen as a result of interest rate increases?

Michael Heaney So, I guess I'll take this one because it's a very good and tough question. What you're referring to in the multifamily sector is a lot of the assets that are trading are trading at all-time low cap rates because there are mark-to-market rent increases, implicit and rental growth in markets where there have been demographic shifts. And so most of the price discovery that you're seeing is in high-growth markets. The low-growth markets, take a market like New York, strangely enough, Multi-family rental has performed really well of late, but I do think that cap rates in a place like New York, as strong as the performance has been, are likely to be impacted. But as a lender, we've always taken the view that cap rates are likely to expand. And I think at our basis, we are kind of very comfortable with a 50 basis point expansion, although we haven't seen trades that I think acknowledge that that really has to happen as a response to interest rates. One more comment I want to make is that while you know the market is hard to discern cap rates have come in and spread to interest rates have come in but we have stood for a long time with a relative gap to allow for a normalization of interest rates and we think that that is coming our way. So I think some expansion, certainly in multifamily cap rates in lower growth markets and or when we see some more stabilization and of growth that are likely to and should, as a natural course, expand. And our expectation, our underwriting, is that that will happen. But most of the loans that we are making are in places where cap rates are going to stay low for a while and where they're still going to try to adjust to all the population increase that they're seeing. And with interest rates rising, and being harder for people to buy homes, you know, that could actually have a countervailing effect. So I hope that I've answered that question. It's quite a hard one because you really have to dissect multiple markets to answer it.

Thank you very much. I'm going to get back in the queue.

Thank you. As a reminder, if you would like to ask a question, please press star followed by 1 on your telephone keypad. The next question today comes from Brock Vandevliet from UBS. Brock, please go ahead. Your line is now open.

Thank you for the question. Richard, that is highly quotable. There is class A and there is empty space. That's a pretty powerful statement, if you could expand on that a bit in terms of, you know, is that driven by, I get sort of the intuitive, there's obviously strength in the latest and greatest and most amenitized. What's driving the weakness in everything else? For example, is it, you know, corporates just deciding to, you know, put things on pause coming out of COVID? You know, what's driving that? And And as a corollary, where are we in terms of the price discovery and price adjustment process on some of those assets?

Yeah, so I thank you for saying it's quotable. I'm actually a little worried about that now, but yeah. I think that we can expand the definition of Class A space. So I think that's one thing to consider. But I think to be more to focus in on your question. Yeah, I mean, corporations are not sure how much space they're going to need. We're probably moving to a hybrid work environment. And that means that only the biggest firms can really contract, but they're certainly not going to expand until they know where they're going. And so what they're trying to figure out is how much space do we need? And if we are going to take space and we're going to take less space, then that space needs to be better. And I think law firms are an example of that, for example. And that's the way they're thinking about the world. As we think about the marginal demand in the office space sector, which clearly drives rents, I think we have to recall that that marginal driver of rents started out as the co-working spaces, co-working tenants, and then became the technology tenants. And so technology tenants, because rent is such a small part of their overall expense and their gross margins are – their net margins are so high that they really are in a battle for talent. And in a battle for talent, they're really looking for the best space. So as we sit here today – It is, I think, very concerning that if you have real commodity space that doesn't have the ability to be turned into Class A, doesn't have some type of Class A component to it, it's really hard to think about what that space is going to be in a market like New York. It might have to be rezoned, and that is a process. I do think in markets where there's a lot of population growth, The office may have a little bit of a better life, but a lot of money has to be spent to turn it into A. So you think about that as land value or structure value. So when we look at the office market, we want to be a lender when we can and we can get paid, which is to your next question, on Class A office. But we're going to be very, very careful about anything else. During COVID, we were able to make a few Class A loans, particularly a construction loan for a Class A office to a very, very blue-chip institutional sponsor in Nashville. And that's the type of thing that we want to lean into. I want to turn it over to Kevin to just talk a little bit about where spreads are headed in the office market and where we might look to participate.

where they're headed, we'll continue to track, but I'll maybe focus the, you know, my comments on where we've seen them move. And everyone on the call has seen that, you know, a large majority of our focus has been in the multifamily sector. We think that's an asset class that's well poised to perform well in this environment. But if you look at, you know, I would say that apples to apples leverage levels from multifamily to office are You know, depending on the market and depending on the leasing profile, you might see a 50 do as much as 100 basis point premium for what might be high quality office just because of the uncertain environment that we're investing in and that we're living in. So we are taking a very discerning eye and making sure that we're trying to make bets on that. uh, assets or office assets that are, that are designed and capitalized to succeed in this environment. Uh, and we do expect to continue to be active in that, albeit, um, cautiously.

Got it. Okay. And, um, this is a followup on, on multifamily. Um, certainly the rent act in New York, um, In 2019, I believe it was pretty chilling in terms of the economic impact on the rent-stabilized multifamily. There seems to be more percolation of moves to stabilize rents or even control them nationally. And just if you could reflect on that in terms of a threat to the multifamily model.

Yeah, well, so we're certainly keeping our eye on that. We have expanded mostly into red states. But the shift in demographics in those red states, and particularly the major population centers in those red states, means that they're turning purple. And you have to be concerned about that. So we're just going to monitor it the best that we can. But I don't think that we're ready to pull back from the multifamily market until and unless we have intelligence on the ground in these markets, which, by the way, we are, as a general statement, developing in, that they are likely to pass regulation. And so I think we're looking at it with concern first as a developer and then secondarily as a lender. But being on the ground with pretty strong legal contacts, political contacts and relationships in each of these markets, I think hopefully allows us to be proactive.

Got it. Okay. Thank you.

Thank you. Next up, we have a follow-up question from Jade Romani from KBW. Please go ahead. Your line is now open.

Thank you very much. Very fascinating discussion of the York office market. I wanted to ask about the loan loss provision. You mentioned that $800 million of the $1.8 billion of originations were refinancings in the portfolio. So that's about it. And the loan loss provision was $8.5 million, which would be 0.85% on the new originations. So could you give any color if the $8.5 million loan loss provision relates to the CECL reserve on new originations or if there were any specific loan loss reserves?

Jay, this is Michael. I'll handle that one.

There were no new specific loan loss reserves established during the quarter. Most of the provision relates to the new originations, and it's primarily driven by the extended duration of the portfolio, the way that the CECL model works. That's the primary driver of the CECL provision. So hopefully that's explanatory.

Okay. And what's the duration on the new originations that you assume?

I may have to get back to you on that. Most of these are three ones and four ones. So I'll get back to you on that one.

Okay. Thanks for taking the questions.

Okay. Thank you. As a reminder, if you would like to ask a question, please press star followed by 1 on your telephone keypad. There are currently no further questions registered, so I'd like to pass the conference back to Richard Mack for closing remarks. Richard, please go ahead.

Well, thanks for all the questions, and thank you all for joining us. It's a pretty interesting time out there, as your questions represent. And I think the world of real estate is changing fast, and we are trying to be ahead of the trends and opportunistic in taking advantage of some of the things that we see out there from a spread-widening perspective and capital allocation perspective. And I think the fourth quarter and the first quarter probably as well will allow us to continue to take advantage of opportunities while diversifying our portfolio and increasing our exposure to cash-flowing assets. And with that, I'll just say thank you, and we look forward to the next quarterly meeting and all your questions at that moment in time as well.

That concludes the Clarus Mortgage Trust Incorporated Fourth Quarter 2021 Earnings Conference Call. Thank you for your participation. You may now disconnect your lines.