Claros Mortgage Trust, Inc.

Welcome to Claro's Mortgage Trust first quarter 2023 earnings conference call. My name is Alicia, and I will be your conference facilitator today. All participants will be in listen-only mode. After the speaker's remarks, there will be a questions and answer period. If you would like to ask a question, please press star 1 on your telephone keypad. I would now like to hand the call to Ann Nguyen, Vice President of Investor Relations for Claro's Mortgage Trust. Please proceed.

Thank you. I'm joined by Richard Mack, Chief Executive Officer and Chairman of Claris Mortgage Trust, Mike McGillis, President and Director of Claris Mortgage Trust, and Jay Agarwal, CMTG's Chief Financial Officer. We also have Kevin Cullinan, Executive Vice President, who leads the MREX Originations, and Priyanka Garg, Executive Vice President, who leads the MREX Portfolio and Asset Management. Prior to this call, we distributed CMTG's earnings release of supplements. 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 a forward-looking statement 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 the 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 distributable earnings, which we believe may be important to investors to assess our operating performance. For reconciliation of non-GAAP measures to their nearest GAAP equivalents, please refer to the earnings supplement. I would now like to turn the call over to Richard.

Good morning, everyone. Thank you for joining us for CMCG's first quarter earnings call. Before I get into my broader observations on the macroeconomic environment, and as certain factors are impacting the commercial real estate market, let me provide a few comments on CMTG's performance in the first quarter. Our first quarter results were in line with our expectations, which reflects our team's solid execution. It was a relatively quiet quarter in terms of new originations and repayments, and the underlying credit quality of our portfolio has remained consistent since the start of the year. That continues to be driven by our focus on active asset management in a time of substantial market uncertainty and volatility. I want to take a moment to provide some thoughts on what's driving today's market conditions, and importantly, on how CMTG is well positioned to navigate this shifting landscape. The first several months of 2023 have been punctuated by heightened uncertainty and renewed volatility across equity and fixed income markets to a level not seen since the global financial crisis. In addition to the familiar themes of inflation, geopolitical instability, and a hawkish Fed, investors continue to face challenging developments, such as the recent turmoil experienced in the U.S. regional banking system. Within a span of 72 hours, two regional banks were placed into receivership. Elsewhere, deposits were pulled and confidence was shaken. Specific to CMTG, our regional bank counterparty exposure was and remains de minimis. We are hopeful that the Federal Reserve, our elected leaders, and the leaders of the major U.S. banks will continue to take the necessary steps to ensure long-term stability in the U.S. banking system. But it is interesting to note that our current predicament could be the unintended consequences of certain past policy actions. The Dodd-Frank Wall Street Reform Bill created opportunities for lenders, like CMTG, by raising the cost for banks to make bridge loans and to take credit risks. The U.S. government stimulus during the pandemic led to a surge of deposits. Perhaps these two government responses to unrelated exogenous forces incentivize regional banks to take on duration risk instead of taking more deposit match term credit risk. Whether regional banks will perform as badly in their real estate credit underwriting as they've done managing duration risk remains to be seen. But what's now apparent is that buying long-dated, high-quality liquid securities can be a high-risk endeavor when done so unhedged. It's unclear how much more credit losses are lurking in the banking system, but one thing is clear. Commercial bank lending contraction has arrived. The quality of bank underwriting could be the next commercial real estate market problem, but in many ways, this seems already priced into the public market real estate values. From CMTG's perspective, regional bank failures are a cautionary tale about managing duration risk and credit risk. We believe that CMTG employs a conservative financing strategy. We are a floating rate lender, and we have floating rate liabilities. CMTG's strategy is to lend on assets at a basis we find compelling, in markets we know well and on assets we would be willing to own. This is hard for banks to do and may be another indication that non-bank lenders are going to be more necessary than ever to the real estate capital markets. Furthermore, a rising rate environment tends to increase opportunities to finance high-quality transitional commercial real estate projects at an attractive basis and risk-adjusted return. We believe many borrowers are still dealing with COVID-related portfolio issues, and delayed business plans. This means there will be continued and likely increasing demand for transitional lending capital. In addition, these same borrowers must also contend with spikes in financing costs and a potentially slowing economy. The virtual standstill of CLO and CMBS issuance combined with the pullback in bank lending has significantly reduced capital availability. On the other hand, it appears that large banks, who have been the beneficiary of substantial deposit inflows and historically active in warehouse lending to the CRE sector, may now be more incentivized than ever to partner with experienced non-bank lenders such as CMTG. This is especially true if they are to be further restricted by greater regulatory scrutiny. Looking ahead, CMTG will remain cautious in 2023. we believe that the commercial real estate landscape will continue to be challenging. While the majority of sectors and markets outside of the office asset class continue to demonstrate strong fundamentals, rent inflation is flattening in most markets and thus unlikely to catch up to rate and spread increases in the near term, even as an uncertain economic outlook applies further downward pressure on asset values. Furthermore, the credit markets that were already constrained now need to cope with regional bank lending pullback and muted transaction activity, which all contributes to the lack of clarity around asset valuations. Generally speaking, real estate values are down, and we have been observing substantial declines in the public equity markets. We feel fortunate to have, on average, 31% equity capital subordination. We believe our borrowers are very motivated to protect their equity. We also believe that our low leverage will better insulate us from asset value decline. Thus far, value erosion has been largely driven by cap rate expansion due to the rapid increase in interest rates and spread, even as fundamentals are holding up in most property types. It's worth noting that things could swing in the opposing direction too. In a recession, fundamentals will likely weaken, but rates could decline even more rapidly than rent. So as a result, we believe that property capital markets will remain volatile until bank deposits stabilize, credit default severities become clearer, and interest rates normalize, or real estate values correct. Inevitably, this volatility and the associated capital market contraction that has already begun will lead to opportunities and challenges for non-bank real estate lenders. That view, of course, holds certain conditions constant in a world in which the only recent constant has been the rapid reordering of expectations. In this environment, we strive to focus on what we can control, such as our own asset management and balance sheet management. We feel well positioned because our portfolio which represents our high conviction themes, is concentrated in sectors and high growth markets that we believe will outperform on a relative basis during periods of downward pressure. Multifamily continues to be our largest allocation and remains one of the most defensive sectors in commercial real estate. It has little tenant concentration risk and we continue to have a national shortage of housing. We also believe it to be inflation resilient due to the short-term nature of its leases. Further, CMTG has one of the lowest office exposures in the space and no standalone retail, which has been our strategy since our formation. Our portfolio is well diversified by geography as we focused on enhancing our presence over the past few years in select high-growth markets such as Dallas and Miami. We believe that these high-growth markets will demonstrate their resilience during uncertain times due to their strong underlying fundamentals. CMTG's management team has both the expertise and relationships necessary to successfully manage through challenging economic environments, having demonstrated this multi-cyclical experience over long tenures in commercial real estate. While managing through one of the most aggressive interest rate hike periods in our history presents its own unique set of challenges, Four underlying principles will guide our strategy for the remainder of the year. First is proactive asset management. Executing our demonstrated asset management playbook where we seek to be ahead of borrowers. This means understanding necessary changes in business plan and execution even before our borrowers do. Partnering with them to figure out the best way to adapt And where and when necessary, we're ready and able to exercise our remedies to bring our execution capabilities to the front line. Second is maintaining our strong relationships with our financing counterparties. With this in mind, I'm pleased to share that during the first quarter, we secured additional financing for our investments by increasing our overall financing capacity by approximately $200 million. Third is prudent balance sheet management. We believe that a conservative approach to balance sheet management is critical during these times, and we have been maintaining low leverage levels in addition to ample liquidity. Fourth is getting ready to play offense when the market has stabilized, loan repayments increase, and the cost of back leverage comes in. Risk adjusted returns today, especially on an unlevered basis, are very compelling. We believe we can achieve attractive returns in the intermediate term. Over the long term, we believe the better performing asset classes in commercial real estate should provide inflationary value protection with the benefits of participating in the capital stack as a debt provider, all at a detachment point with significant subordinate capital behind us. Finally, we are observing more opportunities to lend on higher quality assets and projects and to higher quality, better capitalized sponsors. I will now turn the call over to Mike.

Thank you, Richard. For my prepared remarks this morning, I'll provide an overview on our portfolio and then turn to a discussion on select property types, specifically multifamily, hospitality, and office. CMTG's portfolio based on carrying value increased 3% quarter over quarter to $7.6 billion. In line with our expectations, originations and repayment activity were relatively muted for the period. For the first quarter, we originated one loan totaling $101 million, made follow-on fundings of $227 million, and received aggregate loan repayments of $211 million. Given current market conditions, we expect new loan originations to remain modest and highly dependent on repayment activity going forward. As Richard mentioned, heightened uncertainty and volatility set the market backdrop for the first quarter. During this time, we executed through the turbulence with an acute focus on proactive asset management. As a result, underlying credit quality of our portfolio remained fairly consistent quarter over quarter. The average risk rating of the portfolio was steady at 3.2. Our CECL reserve was also stable quarter over quarter. Further, loans with a risk rating of four or higher were relatively stable quarter over quarter, and the weighted average LTV of the portfolio was 69% at March 31, relatively stable with year-end. I'd like to note that during the first quarter, we also placed a $149 million hospitality loan located in the DC metro area on non-accrual. The underlying collateral is located in a highly desirable infill location, and we feel confident in our basis here. While we are in the early stages of determining a resolution based on recent market feedback, we believe that we are well positioned to recover our principle. The CRE industry collectively has been operating in a more difficult environment, and as Richard noted, we continue to maintain a cautious outlook. Given the higher interest rate environment and the potential for a slowing economy as a result thereof, We anticipate that some of our borrowers will experience challenges that will require them to invest more capital into their assets amidst the backdrop of reduced returns. We are actively managing through some of these pressures while also seeing some positive trends despite headwinds. Our borrowers are generally protecting their assets by keeping their loans in balance, and investing equity is needed to replenish interest reserves and purchase replacement interest rate caps. I'd now like to provide additional color on the portfolio. At March 31st, multifamily represented 40% of our portfolio, which is relatively unchanged from prior quarter. As mentioned on our last call, we started seeing softening in underlying asset performance, and we've seen this trend continue through the first quarter. Overall, we're still observing rent growth, albeit it has slowed, and strong occupancy and collection numbers. Although we anticipate growth rates and multifamily rents to remain muted, our outlook on the sector remains positive on a relative basis due to strong demographic trends, high cost of homeownership, and general housing shortages. In addition, we believe that rental demand will continue to favor institutional assets located in well-situated markets even during softer market conditions. Hospitality represented 21% of the portfolio at the end of the first quarter. Overall, we're seeing hospitality assets deliver strong top-line numbers as a result of continued underlying demand. Similar to last quarter, this demand has been driven by leisure travel as business travel remains modest. While hospitality asset performance continues to demonstrate strong momentum, we're keeping a close eye on the sector in light of a slowing economy. Jay will provide color on our REO hotel portfolio later in the call. Turning to office, we've been spending a disproportionate amount of our time focusing on our relatively limited number of loans collateralized by office assets. We have historically been highly selective when it comes to the office sector and by design maintained a relatively low office exposure compared to other property types. This was unchanged quarter over quarter with office representing 15% of our portfolio at March 31st and 19%, including the office allocation of mixed use assets. Loan performance was also substantially unchanged quarter over quarter, but we anticipate the next several quarters to be instructive as it relates to tenant's leasing decisions and borrower behavior. In this environment of haves and have nots, we believe our office portfolio falls into the former category. Our borrowers continue to have conviction in their business plans and are investing additional capital subordinate to CMTG in the form of reserves and carry costs Further, roughly a third of our office exposure reflects borrowers who are actively working on a sale or refinancing of the asset or have significant repayment guarantees. Qualitatively, we believe that our underlying office collateral, which tends to consist of non-commodity office, is better positioned to address the evolving needs of the workplace as a majority of our office portfolio is either new construction or recently renovated with in-demand amenities are in 24-hour micro locations within their sub markets, mitigating concerns regarding obsolescence. Further, our loans tend to be highly structured given the transitional nature of our collateral and focus on borrower execution of their stated business plans, including some loans with additional credit support in the form of repayment guarantees that I just mentioned. So while we're highly focused on our office exposure, we feel CMTG is well positioned in this dynamic market. I would now like to turn the call over to Jay.

Thank you, Mike and Richard. For the first quarter of 2023, our distributable earnings were 29 cents per share. The decline of 9 cents per share from last quarter was primarily related to two items. One was the expected seasonally weaker performance of our New York City REO Hotel portfolio relative to the fourth quarter of 2022. While the first quarter is typically a weaker period for New York City hospitality, overall, the performance of our REO Hotel portfolio has been strong. The second was the impact of a $149 million loan that Mike previously mentioned being added to non-accrual status during the quarter. We reported gap net income of 26 cents per share, and we paid a dividend of 37 cents per share. While the seasonality in the REO impacted the first quarter distributable earnings, we expect that all things being equal, that distributable earnings approximate our annual dividend for 2023. Moving to CECL. Our total CECL reserve remained relatively unchanged at 1.9% of our UPB at March 31st. Our general CECL reserve decreased slightly quarter over quarter, primarily due to the seasoning of the portfolio and a modest improvement in risk ratings, particularly one Houston office loan being upgraded from a four to a three due to a pending sale transaction. This was offset by weakening macroeconomic assumptions. Turning to the balance sheet, as Richard mentioned, we increased our aggregate financing capacity by approximately $200 million to $8 billion at March 31st. Our net leverage was a conservative 2.2 times, which was unchanged compared to year end. The weighted average advance rates on loans subject to asset-specific financings was 69%, which can be further bifurcated into a 76% advance rate on multifamily loans and a 64% rate on everything else. At March 31st, we had a strong liquidity position of $555 million, which consists of cash and approved and undrawn credit capacity. This reflects a quarter of a quarter increase in our cash position by $120 million. Additionally, we have unencumbered senior loans of $563 million at quarter end. Lastly, we believe given our loan leverage of 2.2 times and strong liquidity, we are well positioned to weather the current economic cycle. And with that, I would now like to open the call for questions. Operator, please go ahead.

Thank you. If you would like to ask a question, please press star followed by 1 on your telephone keypad. If for any reason you would like to remove that question, please press star followed by 2. Again, to ask a question, press star 1. As a reminder, if you're using a speakerphone, please remember to pick up your handset before asking your question. We'll pause here briefly as questions are registered. The first question comes from the line of Don Venditti with Wells Fargo. You may now proceed.

Hi, good morning. Can you talk a little bit more about the DC hospitality loan in terms of sort of what, you know, played out and then the timing on any potential resolution or sale?

Hi, Don. It's Priyanka speaking. I'll take that. So that is a, it's a hospitality loan because we, there was a hotel that was on the property. It was originated as a cover land play. The hotel closed two years ago in preparation for a redevelopment. So we, you know, we're really focused on what the collateral value is, which is beyond the existing hotel that's on site. And we believe we're very well collateralized there in terms of just the resolution and the situation. It's a very active situation and I don't want to comment too directly on that because we're pursuing all avenues that are available to us, but we believe that we have very good optionality given the asset value as it relates to our loan amount.

Okay. Can you also talk a little bit about what you're seeing in New York City in general given that you have a higher allocation and specifically there's a few land deals that I think are forerated?

I'll start on that, and then others might want to weigh in here. But in New York City, I mean, we're definitely seeing a lot of activity coming back, and on those land deals in particular. We have a couple of borrowers that are in the midst of transactions to refinance us out or to take out construction loans. So we're seeing that activity come back in a pretty strong way. But I think the guiding light for us goes back to what Richard said during his commentary, which is we lent at basis that we're willing to own the asset, and we feel very good about all the protections we have around it, and land tends to be very well-structured on the front end. So we feel good about that exposure, but, of course, it's on the watch list for a reason, and we're very focused with our borrowers.

Let me just add that New York is a pretty interesting market. We've seen kind of haves and have-nots. And haves in New York are multifamily right now, which is performing really, really well. It is the best office buildings, which are performing very, very well. And if you have land that is able to be converted or used to create the best office and the best multifamily, that's a pretty strong place to be in right now, notwithstanding 421A, which I think will get resolved over time. And I think the stuff that we have, we're pretty excited about.

Thank you, Mr. Fandetti. The next question comes from the line of Rick Shane with JPMorgan. You may now proceed.

Thank you for taking my question this morning. So, in terms of the CECL Reserve, it sounds like there were two sort of offsetting factors in the quarter. One was the transition from a loan from Category 4 to Category 3. And then the other was perhaps more conservative macro assumptions. Can you sort of disaggregate that a little bit to help us understand the impact of each of those individually? Obviously, it feels, at least sentiment-wise, and perhaps you guys would, from a fundamental perspective, but it certainly feels like sentiment-wise, the macro outlook has deteriorated more sharply in the first quarter and want to see how that impacted your reserves.

Sure. Thank you. This is Jay. So, one of the things I would point out is, as we disclosed in our earnings supplement, you can see that we do disaggregate our CECL reserves between four-rated loans and everything else. As you can see on the four-rated loans, we had a CECL reserve of 4.2%, while our aggregate general CECL reserve is 1.1%. disproportionately higher for the four-digit loans, as you would expect. And since, like you said, one of the four-digit loans was upgraded to three, disproportionately higher CECL reserve was released. And then on the macro assumptions, yes, the macro assumptions did worsen. So if you were to disaggregate the impact of macro assumptions, it was somewhere in the single-digit basis points basis point impact to the overall CSIL reserve.

Okay. Thank you. And again, your disclosure around this is very good. I appreciate what's going on in scrolling through the 10Q, looking at the disclosures related to the fours and fives on non-accrual It looks like the policy is specific reserves for non-accruals on fives and general reserves for non-accruals on four. Any consideration on the quarter to increase the specific reserves on the two five-rated loans?

Yeah. Hi, Rick. It's Priyanka. I'll take that. So we think those are appropriately reserved at this point based on what we know today. I will say on the one five-rated loan that's in New York City, we are working towards taking the deed on that and we're working through that with the borrower. We feel very good about that value proposition for our shareholders, the assets in our backyard. We think there's a lot of on a lot of uncovered value there that we think we, you know, based on our ownership experience and our relationships, we can get to that. So as we go through that process, you know, obviously we will potentially realize an additional loss. We're still working through all of that. But beyond that, on the two other five rated loans, we think those are appropriately reserved based on what we know today. And as of March 31st. Got it.

And I apologize, Mike. My middle-aged ears failed me. Did you say you were taking the keys on that or the fees? I believe you said keys.

Oh, I actually said deed, but yes, the keys as well.

Oh. Yes. Yep. See, there you go, middle-aged ears. Thank you, guys.

Thank you.

Thank you, Mr. Shane. The next question comes from the line of Belus Abraham with UBS. You may now proceed. Thank you.

Hey, everybody. Just wanted to follow up on that DC loan, if I could. It migrated from a three to a four, it looks like, in Q4 of last year, right? And the reports out there suggest that it was looking like a problem potentially before that. Can you just walk us through what's the trigger to make the downgrade in general and what specifically in that situation took some time?

Yeah, hi, it's Priyanka. I'll take that. We, so what changed was the, I mentioned earlier, this was a covered land play. There is a redevelopment plan in place. As of right, owner has the ability to build a fairly large scale mixed use development. The borrower was pursuing that plan. They were in the market to capitalize the project and they bought and then subsequently were in the market to sell the project or sell the rights to that redevelopment. And there was real interest in the middle of 2022 into the fall of 2022. And then the capital markets, as we all know, just moved against the borrower. And so that was the big change that occurred for us to move it to the watch list. And then that, in conjunction with rising rates, motivated the borrower to say you know what our maturity is coming up on January 9th of 2023 and we are going to you know we're not going to protect our position and so that's where we are today negotiating through that with them but that also that confirms our view on asset value because all the discussions that the borrower was having capitalizing the project also sale of the project were again well in excess of our loan amount this is I just want to reiterate this is irreplaceable real estate. It's in Northern Virginia, right on the Potomac, you know, just irreplaceable location. So that was the fact pattern. Does that answer your question?

Yeah, that's helpful. So it sounds like the potential for a sale being off the table by late last year was kind of the linchpin there in some of your decision making. Yeah. As it relates to LTV in general on the portfolio, which I think you said is 69% as of 331, can you remind us again on how your appraisal process works and who is involved there?

I'm going to start out here. It's Priyanka. So we generally report loan to value, loan to cost as determined at origination. That is based on multiple factors depending on the asset type. Obviously, if it's construction, it's based on cost. If there is an existing asset, we definitely will take a lower of our underwriting or appraisal. And then during the hold period of that loan, we update loan-to-value, loan-to-cost based on some sort of event occurring. So if there is a new appraisal, if it's in connection with potentially a financing transaction or an appraisal otherwise, then we'll update value for that. Of course, we update values for the LTC, LTVs based on any kind of payoff or collateral release. Okay. Generally, we're defaulting to the LTDs, LTCs at origination, which I think is a consistent approach amongst the peer group.

Okay. And are there any third parties involved in those reappraisal events?

At origination, all appraisals are John Dye third parties.

Okay.

Okay. All right. Thank you, Evan. This is Mike. I'll just interject a little bit. And then to the extent there's an updated appraisal that gets performed in connection with some sort of a refinancing or other event on the asset, then that would be a third-party appraisal, too, that's utilized for the top date, the LTV.

Gotcha. Thank you.

Thank you, Mr. Abraham. Next question comes from the line of Sarah Barkham with BTIG. You may now proceed.

Hey, everyone. Thanks for taking the question. So you've spoken a lot about the DC hotel that was added to non-accrual, but my question is on the broader non-accrual bucket. So are each of these loans current or are any of those not current on interest?

I'll jump in here, Priyanka. They are not current on interest, and we're not accruing any interest against those loans.

Okay. But there was a small inflow that flowed into book value during the quarter, right? Or there just was no cash collections on those at all?

This is Jay. If you look on page 16 of our 10Q, we actually list out loan by loan what is on cost recovery and what is on a cash basis. There was one loan where we did recognize interest income that was current, where the borrower did pay partial interest, and that was $1.1 million. Okay. Thank you.

And then could you also give an update where you can on the three loans that are in default but remain in the accrual bucket, those three loans that are still current on interest but in default?

Yeah, it's Priyanka. Thanks, Sarah. I'll take that one. So those are – they're – In default, because they're not totally current on interest, but the borrower is making ongoing interest payments. And furthermore, we feel that we're very well collateralized, which is supported by the fact that the borrower is continuing to put in capital behind us. So that is why they remain on accrual but are not necessarily current.

Okay. Thank you.

Thank you.

Thank you, Ms. Barkham. The next question comes from the line of Jay Romani with KBW. You may now proceed.

Thank you very much. To start out with, maybe for Richard, what's the magnitude of commercial real estate price correction you're expecting, and would you expect that to translate to uh, that same magnitude of increase in LTV for the portfolio?

Um, sure. Jade, thanks. Uh, you know, I think we have to expect a downturn here of about 20% to 25% overall in the market with kind of office weighing that, that number down substantially. Um, Having said that, it does appear that this valuation decline is likely to happen, or it's happened pretty quickly. And given how strong the fundamentals are, those, if they begin to really weaken, will probably be associated with a move down in rates, a stabilizing of the bottom, and a relatively quick move up given all the dry powder in the market and i can tell you jade that you know we're on the equity side of the business trying to buy assets um and the assets that we're trying to buy um we are not having success buying at a 20 asset decline so we really haven't haven't gotten there um i think you know we're going to be reassessing our our ltv's kind of along the way as we go. Um, but given our exposure to multi and given that multi has not really moved all that much, you know, maybe, and, and, and hospitality is in many cases gone up in value. Um, even in this environment, um, you know, we feel like our, our, our LTV is not going to move down that substantially. Um, but of course we're, we're paying attention to it on a, uh, daily and weekly basis.

Thank you. Next question would just be, what are you hearing from warehouse and repo providers? Any change in tone or behavior?

This is JJ. I can take that. That's a great question. From our warehouse providers, We're not hearing anything substantially different. Several of them, or most of them, if not all of them, are large banks who have been recipients of deposits. So they are actively wanting to put money out, and they want to concentrate their exposure with larger borrowers like ourselves. So if anything, we are going to be beneficiaries of this environment.

Thank you, and that's great to hear. Lastly would be just the overall strategy. I think you have the benefit of not being a traditional mortgage REIT, having that history in the business. You bring a perspective as an equity owner, a developer, and that's unique amongst your peers. And I was fascinated by the April 24th press release about senior lending capabilities with unlevered loan program. Do you think it makes sense at this point to pivot to lending unlevered for CMTG in particular, taking that catastrophic risk, that existential risk off the table, which clearly I think the price of the book discounts for the space imply? How do you feel about that overall and the use of leverage?

I think that's a terrific question, and thank you for asking. We like the lending unlevered right now better than we like levering the balance sheet to make loans. So I think as we start to play offense, initially we're going to do it on an unlevered basis and look to lever later on. The senior capital providers are just taking too much of the total return and therefore the absolute incremental return that you're getting by using leverage is just not that great right now. So I think, you know, being a little bit more careful coming out of this and doing deals unlevered, maybe even at a little bit of a lower attachment to attachment price basis seems like a really good strategy to us. And thank you for asking that question.

Thank you very much.

Thank you, Mr. Romani. Ladies and gentlemen, this concludes our questions and answers session. I would like to turn the conference back over to Richard Mack for any closing remarks.

Well, I just want to thank you all for joining. These are certainly turbulent times. But, you know, we've been here before. Real estate is a cyclical business. And we need to be prepared for these times and ready to live through them. And every time I've gone through a cycle like this in my career, asset values have not only recovered, but they've recovered and increased in value beyond where they were before the correction. Doesn't mean that's what's going to happen here. That is certainly what we've seen in the past. I also want to point out that I think we've been very realistic about the problems that were coming into the real estate market. And that realism, I think, allows us to deal with problems as they come up in a very unemotional and objective way. And that comes from having been through this before. And so it's going to be volatile, but we're hopeful that the opportunities are going to exceed the problems as we come through this. And we thank you all for being with us today and for all your support. Thank you.

That concludes today's conference call. Thank you for your participation. You may now disconnect your line.