Chubb Q3 2023 Earnings Call Transcript

Quartr
Provided by Quartr
October 24, 2023

There are 10 speakers on the call.

Operator

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. Followed by 0. After today's presentation, there will be an opportunity to ask questions. Please note this event is being recorded.

Operator

I would now like to turn the conference over to Jack Swetala. Please go ahead.

Speaker 1

Great. Thanks, operator, And welcome to the KKR Real Estate Finance Trust earnings call for the Q3 of 2023. As the operator mentioned, this is Jack Swetala. Today, I'm joined on the call by our CEO, Matt Salem our President and COO, Patrick Matson and our CFO, Kendra Decius. 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 and do not guarantee future events or performance.

Speaker 1

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 Q3 of 2023, we reported GAAP net income of were $17,400,000 or $0.25 per share, including a write off of $15,000,000 or $0.22 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.

Speaker 1

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 $0.43 for common share with respect to the Q3. With that, I'd now like to turn the call over to Matt.

Speaker 2

Thanks, Jack. Good morning and thank you for joining us today. The portfolio continues to benefit from the higher interest rate environment. KREF averaged run rate distributable earnings of $0.48 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 $64,000,000,000 equity and credit portfolio.

Speaker 2

In addition, KKR has a dedicated weighted special servicer and asset management platform called Kstar. Started in 2022, Kstar has over 45 people $40,000,000,000 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 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 the assistance of KKR Capital Markets, we've built high levels of liquidity and ended the quarter with $716,000,000 of availability, Including $108,000,000 of cash on hand and $500,000,000 of corporate revolver capacity, 76% of our secured financing As of September 30th, it was fully non mark to market with the remaining balance mark to credit only.

Speaker 2

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 KRYST' financing structure remains a true differentiator. We continue to proactively manage our current portfolio of 7 $900,000,000 which remained effectively flat quarter over quarter. We received repayments of $152,000,000 in the quarter across 4 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.

Speaker 2

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 5 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 build on the multifamily portfolio of 2015. Office assets represent 25 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 Q3, we did not downgrade any loans across the portfolio, While we amended the risk ratings of 2 of our office loans higher, we raised our Chicago loan It has been on the watch list to a risk rating of 3 following a modification, another example of our proactive approach to asset management.

Speaker 2

We also upgraded our Oakland, California office loan to a risk rating of 2 as we received a large partial paydown of approximately 68%. We expect full repayment of the Oakland office loan in mid-twenty 24. With that, I'll turn the call over to Patrick.

Speaker 3

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 $6,000,000 decrease in our CECL allowance for a total of $222,000,000 or 2.93 basis points on our loan principal balance. The decrease in our allowance was partially a result of a subordinated note write off in in connection with an office loan that we restructured.

Speaker 3

We continue to proactively manage the portfolio. And to that end, in September, KREF closed on a modification of $118,000,000 senior loan backed by an office property located in Chicago, Previously risk rate at 4. As a part of this modification, the sponsor contributed $18,500,000 of new capital, including a $15,000,000 principal pay down of the senior loan. In connection with the principal reduction, to the new contributed capital and subsequently wrote off the subordinated loan. Following the modification, we upgraded the reduced Senior loan of $88,000,000 to a risk rating of 3 as of quarter end.

Speaker 3

Similar to last quarter, Approximately 2 thirds of our total CECL allowance is held against 3 5 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 We're 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.

Speaker 3

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 $156,000,000 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 4 separate buildings totaling 711,000 square feet, including a 500 space parking garage.

Speaker 3

And we are exploring parallel paths of taking ownership of 1 or more of the properties. Additionally, subsequent to quarter end, KREF finalized modification on a risk rated 4 $176,000,000 Washington D. C. Loan, which included a $20,000,000 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.

Speaker 3

As a result of pay down and recent leasing activity, we would anticipate a On the other risk rated for Washington DC office loan With the current balance of $169,000,000 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 3 or better office portfolio, which equates to just under half of the outstanding principal balance of the office segment, continues to perform well And as attractive credit metrics, in aggregate, the 8 properties representing these underlying risk rated 3 or better office properties We're 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 rating of the portfolio was 3.2 and 85 Our portfolio is risk weighted 3 or better. Our portfolio is 99% floating rate, and all of our floating rate assets and liabilities Our benchmark to SOFR.

Speaker 3

KREF has built a fortified liability structure with $8,900,000,000 of financing capacity and $2,700,000,000 of undrawn capacity. A portion of our non mark to market capacity remains substantial at 76% and is diversified across 2 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 2 CRE CLOs, reinvesting over $400,000,000 of proceeds year to date on attractive financing terms. Excluding match term 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.

Speaker 3

As of September 30, KREF had $108,000,000 of cash $500,000,000 of corporate revolver capacity available. Our best in class non mark 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.

Operator

Thank you. We will now begin the question and answer session. Today's first question comes from Sarah Barcomb with BTIG. Please go ahead.

Speaker 4

Hi, everyone. Thanks for taking the question. So you commented in the prepared remarks that approximately 2 thirds of that Total CECL reserve is allocated to those 3 5 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 Q, Whereas the implied cap rates in the equity markets for high quality stabilized office REITs 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.

Speaker 4

Thanks for any comment there.

Speaker 5

Thanks, sir. It's Matt. Appreciate the question and you joining us today. Yes, 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.

Speaker 5

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 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 5 rated loans when we factor in kind of all those different endpoints at this point in time.

Speaker 4

Okay. Thank you. And then just another one for me. So excluding that $15,000,000 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 And so, pivot to offense here, just given liquidity is looking pretty good.

Speaker 4

And at what point do you go out into the market and maybe start to take a look Sourcing high coupon loans, with any comment on sector interest there. And just Any comments there? Thank you.

Speaker 5

Sure. Thanks, Sarah. It's Matt again. I think there's a couple of questions embedded there. Let me try to I'd answer those in totality.

Speaker 5

1, from just a liquidity perspective, which I think was I think we feel really good about where we stand from a liquidity perspective. We addressed that

Speaker 2

in some of

Speaker 5

the call 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.

Speaker 5

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, but 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.

Speaker 5

We are anticipating more repayments in 2024 in our portfolio. And so if certainly if that starts to come to fruition and we start to see more velocity there, we would want to go out and re 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 It 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.

Speaker 5

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.

Speaker 4

Great. Thanks for the comments.

Operator

The next question comes from Stephen Laws with Raymond James. Please go ahead.

Speaker 6

Hi, good morning. Let's see. Patrick, appreciate the comments on the loans. I may have missed it, but you give us an update on the Minneapolis office and what the outlook is for an option there?

Speaker 3

Sure, Steve, and 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 so and that loan has got term through 2025.

Speaker 3

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.

Speaker 6

Great. And Can you talk a little bit about the restructuring for the modification process? I think if I'm looking at my notes correctly, maybe one received a short term extension. And I think it was 3 years, though, maybe on the restructuring on the new senior. Can you talk about the considerations that go into how much additional duration you're Willing to give certain property types, certain borrowers, certain business plans.

Speaker 6

Can you maybe talk a little bit about how the modification and restructure

Speaker 5

Sure, Stephen. It's Matt. I can jump in there. I would say, 1st 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, etcetera. Where we've given Longer term, that typically is around a more holistic solution, where you've got a committed sponsor.

Speaker 5

There's typically dollars coming in the door to delever 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 at least from that new basis. So that's really what it comes down to. When you see short term That's just a way for us to try to effectuate a broader either modification or Vacation or loan sale or foreclosure or typically it's we're in the middle of just effectuating something else And we need a little bit more time. So I got to think about it as the longer terms are you 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.

Speaker 6

Great. Helpful color. Thanks, Matt. Appreciate the comments this morning.

Speaker 2

Thank you.

Operator

The next question comes from Don Fandetti with Wells Fargo. Please go ahead.

Speaker 2

Hey, Matt. Can you talk a little bit about your thoughts on multifamily credit? And if the Fed has to raise, let's say, another 50 basis points, is that a manageable

Speaker 5

Sure, Don. I appreciate the question.

Speaker 2

So I think

Speaker 5

that Just 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 Yes, 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 KRAS, but just broadly in the sector, for floating rate loans secured by It's occurred 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. Occupancy has remained high.

Speaker 5

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 heavily are still heavily involved from a financing perspective.

Speaker 5

So it's got a lot of positives, but clearly the rate environment It's 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. Thanks.

Operator

The next question comes from Jade Rahmani with KBW. Please go ahead.

Speaker 7

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. The average earning portfolio should be smaller for 2020 And therefore, it would follow that cash flow from operations would be pressured.

Speaker 7

So can you give any color as to your thinking around Those two metrics. Secondly, as it relates to covenants, there's 2 Main ones that come out. 1 is the interest coverage covenant, which is a function of interest income versus interest expense. And then the second would be liquidity as a percentage of loans. How are you feeling about adequacy on both of those?

Speaker 5

Got it. Thanks, Jade. It's Matt. I can jump in for the first one and then maybe Patrick can cover The second question is 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 in over the next handful of quarters.

Speaker 5

Nothing has really changed in terms of how we evaluate that dividend and the Board makes a decision Every quarter and we are really coming at it from a run rate operating earnings perspective as you are identifying and not

Speaker 6

really from like a liquidity perspective.

Speaker 5

So as 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 a decision 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.

Speaker 3

Jade, 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 sulfur, it's just math at some point that coverage becomes sort of tighter. But we did proactively this quarter Reduced that covenant from 1.5x to 1.4x. We still cleared the covenant this 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.

Speaker 3

With regard to the other covenants, So whether it be net worth or liquidity, as we've indicated in our prepared remarks, this quarter and past quarters, we feel really good 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.

Speaker 7

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

Speaker 5

I don't have that data by fingertips. We can follow-up with you offline on that. But there's still I mean, keep in mind, There is still a range there in terms of where we are in the different stages of the business plan. We obviously leased on some new loan I mean loans on some newer assets that are still in lease up. And then there's a handful of assets that have renovation programs and upgrades going on as well.

Speaker 5

So these are still in Transition in terms of what we think about is like fully stabilized cash flows, debt yield and assets, but we could follow-up.

Speaker 7

Thank you very much. Sure.

Operator

The next question comes from Rick Shane with JPMorgan. Please go ahead.

Speaker 8

Thanks guys for taking my questions this morning. I'd love to talk a little bit about Mountain View in 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.

Speaker 8

With those changes, 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?

Speaker 5

Yes, it's Matt. I appreciate the question. I would say that our Reserves are updated every quarter. And so as these Processes continue to evolve. We're updating the reserves to reflect that.

Speaker 5

And so that I mean, that's The basic answer to your question. And so we shouldn't anticipate any potential changes as it relates to like our comments as And where we are currently in the process because that's already been it's already been factored in.

Speaker 8

Understood. And look, I understand that that's the GAAP accounting and there is but at the same time, 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 remains at that 2 thirds of the overall reserve and we can't see what's specific Those 3 level 5s, other than that sort of broader comment, I'm just How should we what should we take from this? It sounds to me like things are obviously, the 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, well, we actually think we can get a better deal.

Speaker 5

Right. I think you should take away a few things. First of all, the market is 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, we're always Mindful that like nothing is done until it's done in this market. And so we're always somewhat discounting that happening.

Speaker 5

We're moving on from that, obviously, one buyer and have a potential buyer on a subset of the properties and then the other ones being more stabilized Cash flow and we could potentially own. So a little bit just more color on Philadelphia specifically. But Again, 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 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 are always good updated to the extent the process changes and it impacts value.

Speaker 5

So that's kind of where we are on

Speaker 2

those two assets in particular.

Speaker 8

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 restructured 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.

Speaker 8

Do you would you, generally speaking, expect to realize losses then or do does it get deferred further as part of that resolution?

Speaker 5

If we go to title, we would take realized loss At that moment in time, based on an appraised value.

Speaker 8

Okay, terrific. Thank you guys very much.

Operator

The next question comes from Steve DeLaney with JMP Securities. Please

Speaker 5

ahead. Steve, you there?

Speaker 9

I apologize, I was on mute. I was to say good morning and congratulations on this Chicago office loan workout. It's not one that we had on The watch list loans are 4 or 5, 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.

Speaker 9

Loan that is being reworked That that may be a 4th quarter item. In that rework and I know you're limited probably in what you can say, do you As you put a new facility in for the borrower.

Speaker 5

Yes. So two comments there. Thank you for joining Today, just one just to clarify, the Chicago office loan where we received a $15,000,000 Paydown and then the $15,000,000 subsequent write off on our loan subordination and write off, that was a 4 rated loans. That is one of the watch list loans that That's correct.

Speaker 9

That was watch list. Yes.

Speaker 2

I just want

Speaker 5

to make sure that was clarified. And then on the Washington DC loan That you're highlighting, it's not our anticipation that there would be any write off or consideration in conjunction with that modification.

Speaker 9

Okay, great. I would just as a side comment, it would be great, I know there's legal issues with all this, But like the Chicago item of $0.22 I mean, we could argue whether that's material. It's certainly not with Not with respect to book value, but I just ask you to consider like an 8 ks when you have one of these workouts. One, it shows progress And 2, it gives the analysts 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.

Speaker 9

Gosh, the so no write down expected on DC. Matt, you had comments about rates and sort of the strategic thing. The Fed has kind of signaled Late last week that maybe they're done, not there's never done forever, but it feels like they're saying the bond market 5% has kind of done their job for them. I'm just curious if on the private equity side of KKR, 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 1 to 2 years. Wouldn't that encourage some flows of private equity and strategic money Kind of coming into the U.

Speaker 9

S. Commercial real estate market, once we get the Fed kind of get its foot off the throat of the market, just curious With 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.

Speaker 5

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.

Speaker 5

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, 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.

Speaker 9

Thanks for the comments.

Operator

The next question is a follow-up from Jade Rahmani with KBW. Please go ahead.

Speaker 7

Thank you for taking the follow-up. Just on CECL, in the Q3, the economy performed really well, Including on the employment side, that's a tailwind for the CECL macro component. In 4Q, things should Slow and we also have the treasury rate spike. So do you think that alone drives an increase in just the macro component Of CECL in the 4th quarter?

Speaker 5

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. Certainly could happen, but it's not something like we spent 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

Speaker 7

Just have an office question. In the Q3, 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?

Speaker 5

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 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 we our general impression has always been that things are a little bit better than people think.

Speaker 7

Thanks for that. And then a technical question. When I look at the slide deck, it shows 100 $52,000,000 of repayments, but the cash flow statement subtracting the 9 months from the 6 months implies $43,000,000 is the difference timing related or something else?

Speaker 3

Jade, it's Patrick. That has to do really with the Oakland partial pay down that Matt had referenced. On that deal, we originate a whole loan, Sold a first mortgage and we retained a mezz. 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 mezz portion.

Speaker 7

Got it. That makes sense. Thanks a lot.

Speaker 2

Thanks, Jake. Thank you.

Operator

This concludes our question and answer session. I would like to turn the conference back over to Jack Switala for any closing remarks.

Speaker 1

Great. Thanks, operator, and thanks, everyone, for joining today.

Operator

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.

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