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spk03: Good morning and welcome to the KKR Real Estate Finance Trust Incorporated third quarter 2023 financial results conference call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then one on your telephone keypad. To withdraw your question, please press star then two. Please note, this event is being recorded. I would now like to turn the conference over to Jack Switala. Please go ahead.
spk08: Great. Thanks, Operator, and welcome to the KKR Real Estate Finance Trust earnings call for the third quarter of 2023. As the Operator mentioned, this is Jack Switala. Today, I'm joined on the call by our CEO, Matt Salem, our President and COO, Patrick Mattson, and our CFO, Kendra Deschis. I'd like to remind everyone that we will refer to certain non-GAAP financial measures on the call, which are reconciled to GAAP figures in our earnings release and in the supplementary presentation, both of which are available on the investor relations portion of our website. This call will also contain certain forward-looking statements, which do not guarantee future events or performance. Please refer to our most recently filed 10-Q for cautionary factors related to these statements. Before I turn the call over to Matt, I'll provide a brief recap of our results. For the third quarter of 2023, we reported gap net income of $21.4 million, or 31 cents per diluted share. Distributable earnings this quarter were $17.4 million, or 25 cents per share, including a write-off of $15 million, or 22 cents per share. Distributable earnings prior to realized losses were $0.47 per share relative to our Q3 $0.43 per share dividend. Book value per share as of September 30, 2023, was $16.29, a decline of less than 1% quarter over quarter. Our CECL allowance decreased to $3.21 per share from $3.30 per share last quarter. Finally, in mid-October, We paid a cash dividend of 43 cents per common share with respect to the third quarter. With that, I'd now like to turn the call over to Matt.
spk06: Thanks, Jack. Good morning, and thank you for joining us today. The portfolio continues to benefit from a higher interest rate environment. KRF averaged run rate distributable earnings of 48 cents per quarter throughout 2023, excluding realized losses. KREF benefits from KKR's large real estate team with access to real-time market data across our $64 billion equity and credit portfolio. In addition, KKR has a dedicated, rated special servicer and asset management platform called KSTAR. Started in 2022, KSTAR has over 45 people and $40 billion of special servicing rights which enhances our market connectivity, gives us real-time performance information, and enhances our ability to offer differentiated, high-quality service to our borrowers and to drive asset management outcomes. The rate complex continues to evolve, with higher for longer, now the predominant theory, and the 10-year Treasury closing in on 5% for the first time since 2007. This recent increase will likely lead to further declines in real estate values and create a more cautious market sentiment. Borrowers continue to feel pressure from higher carrying costs, including the need to purchase interest rate caps and near-term loan maturities. However, this is not a surprise for us. We have positioned KREF to manage this market environment with proactive asset management, market-leading levels of liquidity, and diverse largely non-mark-to-market financing. With the assistance of KKR Capital Markets, we have built high levels of liquidity and ended the quarter with $716 million of availability, including $108 million of cash on hand and $500 million of corporate revolver capacity. Seventy-six percent of our secured financing as of September 30th was fully non-mark-to-market. with the remaining balance marked to credit only. We have succeeded in terming out our debt, and we have no corporate debt or final facility maturities due until Q4 of 2025. The composition of KRUS financing structure remains a true differentiator. We continue to proactively manage our current portfolio of $7.9 billion, which remained effectively flat quarter over quarter. We received repayments of 152 million in the quarter across four loans, the majority of which was related to office pay downs. Consistent with what we have previously stated, we expect limited repayments for the remainder of 2023, although we do expect repayments to exceed future fundings through 2024. As we determine the run rate earnings potential of the business into 2024, the main drivers will be interest rates, portfolio performance, and the ability to unlock equity held in our risk-rated five assets. At quarter end, multifamily remains our largest segment by property type. Our multifamily portfolio has performed well, with weighted average rent increases of 4.1% year over year, weighted average occupancy of 91%, and median year built on the multifamily portfolio of 2015. Office assets represent 25% of KRAS outstanding portfolio. And as mentioned last quarter, we feel that we have identified the potential office issues within our watch list and do not anticipate further negative ratings migrations to the watch list from the office sector. Furthermore, in the third quarter, we did not downgrade any loans across the portfolio while we amended the risk ratings of two of our office loans higher. We raised our Chicago loan that had been on the watch list to a risk rating of three following a modification, another example of our proactive approach to asset management. We also upgraded our Oakland, California office loan to a risk rating of two as we received a large partial pay down of approximately 68%. We expect full repayment of the Oakland office loan in mid-2024. With that, I'll turn the call over to Patrick.
spk02: Thank you, Matt. Good morning, everyone. I'll begin with updates to our CECL allowance and watch list, followed by our efforts on the capital and liquidity front. This quarter, there was a $6 million decrease in our CECL allowance for a total of $222 million, or 293 basis points, on our loan principal balance. the decrease in our allowance was partially a result of a subordinated note write-off in connection with an office loan that we restructured. We continued to proactively manage the portfolio, and to that end, in September, KREF closed on a modification of a $118 million senior loan backed by an office property located in Chicago previously risk-rated for. As a part of this modification, the sponsor contributed $18.5 million of new capital, including a $15 million principal pay down of the senior loan. In connection with the principal reduction, we increased the loan term for an additional five years and agreed to subordinate $15 million to the prior loan balance to the new contributed capital and subsequently wrote off the subordinated loan. Following the modification, we upgraded the reduced senior loan of $88 million to a risk rating of three as of quarter end. Similar to last quarter, approximately two-thirds of our total CECL allowance is held against three five-rated loans. We continue to focus on solutions to efficiently resolve watch list loans while seeking to maximize shareholder value. Whether the best path leads to a loan modification or taking title and managing the property, we have the tools at our disposal to maximize outcomes across a host of scenarios. With this in mind, I'll provide a brief update to some of our watch list office loans. Regarding our Mountain View office loan, we continue to consider next steps for the asset, which may include taking ownership as we work with the sponsor on a transition plan. including exploring a path with a JV partner. As a reminder, this property is recently renovated, very high quality Class A office campus located in a more challenged leasing market. While precise timing is uncertain, we would anticipate transition to a new structure to be complete within the next couple of quarters. Regarding our $156 million Philadelphia office loan, The previously discussed short sale process for the entire portfolio did not result in a sale of the asset this quarter, and so we provided the existing sponsor another short-term loan extension as we evaluate next steps. The loan is secured by a portfolio of four separate buildings, totaling 711,000 square feet, including a 500-space parking garage. And we are exploring parallel paths of taking ownership of one or more of the properties will continue to explore individual asset sales. We'll provide further updates to this process next quarter. Additionally, subsequent to quarter N, KREF finalized a modification on our risk-rated for $176 million Washington, D.C. loan, which included a $20 million partial pay down, an additional year of term, and spread reduction. Following some positive leasing momentum, the property is currently 92% leased with a weighted average lease term of 12.8 years. As a result of pay down and recent leasing activity, we would anticipate a potential risk rating upgrade during the fourth quarter. On the other risk rated for Washington, D.C. office loan with a current balance of $169 million, the property is now currently 88% leased following strong leasing activity this year. The sponsor is currently pursuing a recapitalization. Away from the watch list, our risk-rated three or better office portfolio, which equates to just under half of the outstanding principal balance of the office segment, continues to perform well and has attractive credit metrics. In aggregate, the eight properties representing these underlying risk-rated three or better office properties are 90% leased. with a weighted average debt yield of 9.5% and a median 8.2 years of weighted average lease term remaining. Consistent with the prior quarter, the average risk gradient of the portfolio was 3.2, and 85% of our portfolio is a risk rate at 3 or better. Our portfolio is 99% floating rate, and all of our floating rate assets and liabilities are benchmarked to SOFR. KREF has built a fortified liability structure with $8.9 billion of financing capacity and $2.7 billion of undrawn capacity. A portion of our non-market-to-market capacity remains substantial at 76% and is diversified across two CRE CLOs and a number of match-term lending agreements and asset-specific financing structures, as well as our corporate revolver. We continue to optimize our two CRE CLOs, reinvesting over 400 million of proceeds year to date on attractive financing terms. Excluding match terms secured financing, there are no corporate debt or final facility maturities until late 2025. KREF is well capitalized with a debt to equity ratio of 2.3 times and a total look-through leverage of 4.1 times as of quarter end. As of September 30th, KREF had $108 million of cash and $500 million of corporate revolver capacity available. Our best-in-class non-market-to-market financing and high levels of liquidity, coupled with our deep relationships with both our financing partners and borrowers, position KREF strongly for this dynamic CRE credit and interest rate environment. Thank you for joining us today. Now we're happy to take your questions.
spk03: Thank you. We will now begin the question and answer session. To ask a question, you may press star then 1 on your touch tone phone. If you are using a speaker phone, please pick up your handset before pressing the keys. To withdraw your question at any time, please press star then 2. At this time, we will pause momentarily to assemble our roster. Today's first question comes from Sarah Barcom with BTIG. Please go ahead.
spk01: Hi, everyone. Thanks for taking the question. So you commented in the prepared remarks that Approximately two-thirds of that total CECL reserve is allocated to those three five-rated office loans, pretty similar to last quarter. It looks like the reserve on those assets are still being triangulated with a cap rate of about 6.6% to 8.7% in the queue. Whereas the implied cap rates in the equity markets for high-quality, stabilized office rates are north of 9% in some cases. So I'm just curious as to what's driving the reserves there, especially given that we haven't yet seen a resolution or a buyer come in for those assets that we might have expected as part of these results. Thanks for any comment there.
spk06: Thanks, sir. It's Matt. Appreciate the question and you joining us today. Yeah, I mean, obviously, there's a number of assumptions that are going into that, one of which is cap. There's lease-up assumptions as well. And then we're also looking at, when you think about some of these assets that are a little bit further down the road or have gone through some form of sales processes, we're actually looking at where things are pricing in the market around us or specifically for these assets. So When we look at those reserves, I think we still feel pretty good about the quantity of those reserves against those five-rated loans when we factor in all those different inputs at this point in time.
spk01: Okay, thank you. And then just another one for me. So excluding that $15 million loss on the Chicago asset that you talked about, Earnings and cash flows comfortably covered the dividend this quarter. So with that in mind, are you thinking about a potential pivot to offense here, just given liquidity is looking pretty good? And at what point do you go out into the market and maybe start to take a look at sourcing high coupon loans with any comment on sector interest there? And just given the equity markets are a bit tough right now, how are you thinking about sourcing capital? Are you comfortable with liquidity in place for offense versus defense? Is there any opportunity for KKR to come in, for the REIT? Just curious on any comments there. Thank you.
spk06: Sure. Thanks, Sarah. It's Matt again. I think there's a couple questions embedded there. Let me try to answer those and... in totality. One, from just a liquidity perspective, which I think was towards the end of the questions, I think we feel really good about where we stand from a liquidity perspective. We addressed that in some of the remarks, prepared remarks on the call here. And we're still at pretty close to our highest levels of liquidity. So we'll continue to maintain that. From an offense-defense perspective, I still think we're in the maintain liquidity mode here. We want to understand what the market environment looks like. We want to see more velocity and repayments in our loan book. We want to see a return to normal across the broader real estate equity complex and the broader capital markets as well. We're obviously still in a very dynamic rate environment. The geopolitical landscape is quite volatile right now. So I'd say we're still in, let's continue to maintain this high level of liquidity. As we start to get into 2024, could you see that pivot? I think that's potential for sure. We are anticipating more repayments in 2024 in our portfolio. And so certainly if that starts to come to fruition and we start to see more velocity there, we would want to go out and redeploy that capital into the market. Away from KREF, as you well know, we're actively lending. We're actively lending across insurance capital, bank capital, as well as debt fund capital. So we are actively pursuing the market. And this is a market where you just want to kind of keep it simple. So we're sticking to those on theme property types that we all know. So multifamily and industrial and just trying to take advantage of not only the volatility I just described, but there's clearly some capital sources out of the market, namely U.S. domiciled banks. So I think that's, to the extent we turned on KREF, we'd be pursuing some of those same type of themes into next year.
spk03: Great. Thanks for the comments. The next question comes from Steven Laws with Raymond James. Please go ahead.
spk07: Hi, good morning. Let's see. Patrick, appreciate the comments on the loans. I may have missed it, but could you give us an update on the Minneapolis office and what the outlook is for an option there?
spk02: Sure, Steven. Good morning. So, we didn't have any comments specifically on that asset. Not too much to report from last quarter. As you know, we've done the modification. That asset on the new senior rate covers. We've got lease term in place for some considerable duration. And that loan's got term through 2025. So no real update. We continue to actively work on that asset, particularly just on around some of the leasing activity, but no sort of further updates on the market.
spk07: Great. And then, you know, can you talk a little bit about the restructuring for the modification process? You know, I think if I'm looking at my notes correctly, maybe one received a short-term extension, you know, I think it was three years, though, maybe on the restructuring on the new senior. You know, can you talk about the considerations that go into, you know, how much additional duration you're willing to give? You know, is it certain property types, certain borrowers, certain business plans? Can you maybe talk a little bit about how the modification and restructure discussions are going as you look at, you know, what, six or seven loans left to address.
spk06: Sure, Stephen. It's Matt. I can jump in there. I would say, first of all, as you're highlighting, every modification or negotiation is very facts and circumstances dependent. And a lot of it is related to what your borrower is willing to do. Obviously, what the occupancy and cash flow is at a particular asset, et cetera. Where we've given longer term, that typically is around a more holistic solution where you've got a committed sponsor. There's typically dollars coming in the door to deliver us at times in conjunction with us writing down or subordinating some of our mortgage. to induce that payment and get to a capital structure that makes more sense and our sponsors can then lease, have a lower basis and lease from that new basis. So that's really what it comes down to. When you see short-term extensions, that's just a way for us to try to effectuate a broader either modification or loan sale or foreclosure or typically we're in the middle of just effectuating something else and we need a little bit more time. So I've got to think about it as the longer terms or you've basically reached a resolution to that loan, at least in the intermediate term, and then any of these short-term ones as you're trying to get to that moment in time. Great.
spk07: Thanks, Matt. Appreciate the comments this morning. Thank you.
spk03: The next question comes from Don Fandetti with Wells Fargo. Please go ahead.
spk10: Hey, Matt. Can you talk a little bit about your thoughts on multifamily credit? You know, if the Fed has to raise, let's say, another 50 basis points, is that a manageable situation?
spk06: Sure, Don. I appreciate the question. So I think that Taking a step back even beyond multifamily, obviously this rate environment, as we mentioned in our prepared remarks, is creating a lot of pressure on values, pressure on sponsors, and you're going to need a lot of liquidity to carry these assets through. As it relates to multifamily specifically, in our own portfolio, we haven't seen any real challenges yet from the rate environment on that component of the multifamily portfolio. We're watching it closely and certainly understand that the longer this period goes, obviously the more stress or pressure is in the system. But I'd say right now, we're not really seeing it within our own portfolio. I do expect over time, taking a step out of KRF, but just broadly in the sector, for floating rate loans secured by multifamily to have some issues, especially if you have a sponsor that doesn't have a lot of liquidity to carry the asset through to a more or a lower interest rate environment. That being said, if you think about the fundamentals of multifamily away from value and away from cap rates, we're still seeing a lot of positive trends there. Occupancies remain high. We mentioned some of the rental increases year over year in our own portfolio within KREF. And obviously if you go back further over a longer period of time to like 2021, you're talking about high teens type of rental increases over that period. So we're still seeing positive fundamentals there. It's still a very liquid asset class. The agencies are still heavily involved from a financing perspective. So it's got a lot of positives, but clearly the rate environment is a headwind there, and we'll continue to watch our portfolio closely to see if it creates any potential noise there. But long-term value, I think we feel relatively good about that sector from a loan basis perspective.
spk10: Thanks.
spk03: The next question comes from Jade Ramani with KBW. Please go ahead.
spk05: Thank you very much. First one would be a broad question around cash flow from operations, the dividend, as well as attentiveness to covenants. So in the quarter, cash flow did cover the dividend, which is a strong result. However, considering that the portfolio continues to shrink and with rates, there is clearly the risk of further credit migration from The average earning portfolio should be smaller for 2024, and therefore it would follow that cash flow from operations would be pressured. So can you give any color as to your thinking around those two metrics? Secondly, as it relates to covenants, there's two main ones that come out. One is the interest coverage covenant, which is a function of interest income versus interest expenses. And then the second would be liquidity as a percentage of loans. How are you feeling about adequacy on both of those?
spk06: Got it. Thanks, Jade. It's Matt. I can jump in for the first one, and then maybe Patrick can cover the second questions around the covenant. I think from a dividend perspective, like you're highlighting some of the things that we highlighted in our own commentary. just about what some of the big drivers are going to be as we think about the go forward and over the next handful of quarters. Nothing's really changed in terms of how we evaluate that dividend and the board makes a decision every quarter. And we're really coming at it from a run rate operating earnings perspective as you're identifying and not really from like a liquidity perspective. So as we start to go down the road here and understand what the market environment looks like, then we'll make the decision at that point in time. But this is a very difficult market to be projecting that far out in the future in terms of what things may or may not look like. So we'll take it quarter to quarter, and the board will make that decision.
spk02: Jay, this is Patrick, and I'll follow up on the covenant question. So you asked the question specifically with regard to interest coverage. That's something that we've been monitoring. Frankly, the whole market's been monitoring because it's so affected by the increase in SOFR. It's just math. At some point, that coverage becomes sort of tighter. But we did proactively this quarter reduce that covenant from 1.5 to 1.4 times. We would have still cleared the covenant this quarter without that adjustment, but I think just an example of us being sort of proactive around the covenants, and that went smoothly with all of our financing sort of partners. With regard to the other covenants, whether it be net worth or liquidity, as we've indicated in our prepared remarks this quarter and past quarters, we feel really good on the liquidity side, and so I don't feel challenged on either of those covenants. So really interest coverage was the one that was most in focus, and we made an adjustment this past quarter just to give us further breathing room.
spk05: Thank you very much for both answers. The follow-up to Don's question about multifamily, do you know what the in-place debt yield is? Because the occupancy stats you cited and rent growth stats are very strong, so I'd assume that it's close to a stabilized debt yield. What's the current debt yield?
spk06: I don't have that data by fingertips. We can follow up with you offline on that. But there's still a range. I mean, keep in mind, there's still a range there in terms of where we are in the different stages of the business plan. You know, we obviously leased out some loans on some newer assets that are still in lease up. and then there's a handful of assets that have renovation programs and kind of upgrades going on as well. So these are still in transition in terms of what we think about as, like, fully stabilized cash flows, debt yield, and assets. But we can follow up.
spk05: Thank you very much. Sure.
spk03: The next question comes from Rick Shane with J.P. Morgan. Please go ahead.
spk09: Thanks, guys, for taking my questions this morning. I'd love to talk a little bit about Mountain View and Philadelphia. Incrementally, it sounds like what's changed at Mountain View is still considering the possibility of taking ownership, but perhaps doing it in JV structure. And Philadelphia sounds like the sale fell through. Now you're adding the possibility of taking ownership for at least portions of that, those properties as well. I'm curious a couple of things. With those changes, you know, incrementally in the context of what you expect your losses will be there, and again, Category 5 loans, so you're expecting losses, do those developments increase or decrease your potential loss expectations?
spk06: Yeah, that's Matt. I appreciate the question. I would say our reserves are updated every quarter. And so as these processes continue to evolve, we're updating the reserves to reflect that. And so that's the basic answer to your question. And so we shouldn't anticipate any potential changes as it relates to like our comments and where we are currently in the process because that's already been factored in.
spk09: Understood. And look, I understand that that's the gap accounting issue. But at the same time, you know, from a probability perspective, I'm assuming that you guys say, okay, wait a second, these developments were incrementally positive or incrementally negative. And since the reserve itself, you know, remains at that two-thirds of the overall reserve and we can't see what's specific to those three level fives, other than that sort of broader comment, Um, I'm just, how should we, what should we take from this? Um, it sounds to me like things are obviously. Short sale, not going through the implication seems to be negative in that you were willing to sell the property below cost and take a loss. And you weren't able to achieve that. I'm assuming it's not because you came back and said, wow, we actually think we can get a better deal.
spk06: Right. I think you should take away a few things. First of all, the market's very illiquid. And a lot of our reserves are accounting for that level of liquidity. And even on the Philly sale that you're identifying, while we had a real process, we had a real engaged buyer, I think all of us here were always mindful that like nothing is done until it's done in this market. And so we were always somewhat discounting, you know, that happening. We're moving on from that, obviously one buyer and have a potential buyer on a subset of the properties. And then, you know, the other ones being more stabilized cashflow and we could potentially, we could potentially own. So a little bit, just more color on, on Philadelphia, you know, specifically, but again, I, I wouldn't necessarily think about this as like, all right, we're trying to be transparent. We're trying to give you information as it evolves, understanding that it will evolve because this market is opaque and illiquid. But we're trying to give as much information as we can. I would say our reserves always get updated to the extent the process changes and it impacts value. So that's kind of where we are on those two assets in particular.
spk09: Got it. Look, I appreciate having a very imperfect crystal ball. I certainly struggle with that as well in terms of what we do. From a mechanical perspective, look, I appreciate the intellectual integrity of when you restructure the loan, creating a subordinated loan and writing it off immediately as opposed to sort of carrying that on balance sheet and sort of extending and pretending. If and when you are to take possession of properties, would you generally speaking expect to realize losses then or does it get deferred further as part of that resolution?
spk06: If we go to title, we would take realized loss at that moment in time based on an appraised value. Oh, terrific. Thank you guys very much.
spk03: As a reminder, to ask a question, you may press star then one. The next question comes from Steve Delaney with JMP Security. Please go ahead.
spk06: Steve there.
spk04: I apologize. I was on mute. I was to say good morning and congratulations on the Chicago office loan workout. It's not one that we had on the watch list loans, a four or five, but it's nice to avoid a potential problem down the road, which is why I assume you took that action. Leads us to the discussion of Patrick's comments about the Washington, D.C. loan that is being reworked, that that may be a fourth quarter item. In that rework, and I know you're limited probably in what you can say, do you anticipate that reworking that would involve in any kind of a write-off to KREF as you put a new facility in for the borrower?
spk06: Yeah, so two comments there. Thank you for joining today. Sure. Just to clarify, the Chicago office loan where we received a $15 million pay down and then a $15 million subsequent write-off on our loans, subordination and write-off, that was a four-rated loan. So that is one of the watch list loans that... That's correct.
spk04: That was watch list.
spk06: Yeah. I just want to make sure that was clarified. And then on the Washington, D.C. loan that you're highlighting, it's not our anticipation that there would be any write-off or consideration in conjunction with that modification.
spk04: Okay, great. Just as a side comment, it would be great. I know there's legal issues with all this, but like the Chicago item of 22 cents, I mean, we could argue whether that's material. It's certainly not with respect to book value. But I just ask you to consider like an 8K when you have one of these workouts. One, it shows progress. And two, it gives the analyst a chance to go quickly go in and update an estimate before we get to the earnings call. So just a request, and we can follow up offline on that. Gosh, so no write-down expected on D.C., You know, Matt, you had comments about rates and sort of the strategic thing. You know, the Fed has kind of signaled late last week that maybe they're done. There's never done forever, but it feels like they're saying the bond market at 5% has kind of done their job for them. I'm just curious if on the private equity side of KKR, you know, if in fact there's a consensus that this is the peak of rates, and that they have nowhere to go but down over the next one to two years, wouldn't that encourage some flows of private equity and strategic money kind of coming into the U.S. commercial real estate market once we get the Fed kind of get its foot off the throat of the market? Just curious what the connection you might see between where we are with rates and the rate cycle and the hope that some capital will flow into U.S. real estate. Thank you.
spk06: Sure. No, thank you. I would say, yes, we anticipate that once we get through this rate hike environment and the market understands where that's going to settle out, that transaction volume is going to pick up. I would say that's not just in real estate. I think we're seeing that across the broader KKR complex, including private equity, corporate credit, infrastructure. So it does feel like we certainly could be moving into somewhat different market environment as it relates to, again, transaction activity and acquisitions. At the same time, I think we're seeing good progress overall, and the market is overall, just in terms of capital coming into the system from different fundraisers. I think the market, everybody understands that there's going to be a pretty good opportunity in commercial real estate over the course of the next year. So that just broadly is a consensus and you're seeing capital formation around that.
spk04: Thanks for the comments.
spk03: The next question is a follow-up from Jay Dramani with KBW. Please go ahead.
spk05: Thank you for taking the follow-up. Just on CECL, in the third quarter, the economy performed really well, including on the employment side. That's a tailwind for the CECL macro component. In 4-2, things should slow, and we also have the Treasury rate spike. Do you think that alone drives an increase in just the macro component of CECL in the fourth quarter?
spk06: It's Matt again. That's a tough one, Jade. I would say it's hard to predict what the macro output is going to be at this point and how those different paths look. And part of the model is not just macro in terms of GDP, employment, interest rates. It's also CRE prices, which have adjusted a fair amount, as you know. So it's difficult to say. It certainly could happen, but it's not something like we spend a lot of time thinking about or forecasting in terms of like what the next macro modeling CECL reserve is. I think we're much more focused on loan by loan outcomes from an asset management perspective and what we can control.
spk05: Thanks. Just have an office question. In the third quarter, there were definitely some green shoots in leasing within certain markets and also within a subset of best-in-breed type properties. Some landlords also have said they're going to moderate TIs, and it looks like there's a little bit of relief in our tracking on free rent. How would you characterize the major office trends you're seeing?
spk06: Well, I think that the numbers you're referencing are likely a better indicator of what's going on in the broader market because we don't have that big a portfolio. And there's only really a handful or so of assets that we're focused on there. I would say that our general impression across our assets in the office space is is that the leasing environment has been better than the capital markets anticipates, that there is demand for office. And while it's costly, it's not uneconomic at a lender's basis. So that's where our general impression has always been that things are a little bit better than people think.
spk05: Thanks for that. And then a technical question. When I look at the slide deck, it shows $152 million of repayments, but the cash flow statement subtracting the nine months from the six months implies $43 million. Is the difference timing related or something else?
spk02: Jade, it's Patrick. That has to do really with the Oakland partial pay down that Matt had referenced. On that deal, we originated a whole loan, sold a first mortgage and we retain a MES. So that difference is due to the fact that we own a mezzanine loan. And so while we're showing that pay down reflective of that full loan balance, the reality is we just own the MES portion.
spk05: Got it. That makes sense. Thanks a lot.
spk02: Thanks, Jake. Thank you.
spk03: This concludes our question and answer session. I would like to turn the conference back over to Jack Switala for any closing remarks.
spk08: Great. Thanks, operator, and thanks, everyone, for joining today. Please reach out to me or the team here if you have any follow-up questions. Take care.
spk03: The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.
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