CMTG - NYSE

Hello, everyone, and welcome to Claros Mortgage Trust Second Quarter 2023 Earnings Conference Call. My name is Bruno, and I’ll be your conference facilitator today. [Operator Instructions] I will now hand over to your host, Anh Huynh, Vice President of Investor Relations for Claros Mortgage Trust. Please proceed.

Thank you. I’m joined by Richard Mack, Chief Executive Officer and Chairman of Claros Mortgage Trust; Michael McGillis, President and Director of Claros Mortgage Trust; and Jai Agarwal, CMTG’s Chief Financial Officer. We also have Kevin Cullinan, Executive Vice President, who leads Emric Originations; and Priyanka Garg, Executive Vice President, who leads MREG Portfolio and Asset Management. Prior to this call, we distributed CMTG’s earnings release supplement. We encourage you to reference these documents in conjunction with the information presented on today’s call. If you have any questions following today’s call, please contact me. I’d like to remind everyone that today’s call may include forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Actual results may differ materially from those indicated by these forward-looking statements as a result of various important factors, including those discussed in our other filings with the SEC. Any forward-looking statements made on this call represent 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 reconciliations of non-GAAP measures to their nearest GAAP equivalent, please refer to the earnings supplement. I would now like to turn the call over to Richard.

Thank you, Huynh, and thank you, everyone, for joining us for CMTG’s Second Quarter Earnings Call. Most of us have seen the headlines this summer. They tell a consistent story. 2020 has been a challenging year for the entire commercial real estate industry, owners, operators, developers and lenders alike adjust business plans in an environment of higher rate and sharply reduced bank lending. This has resulted in very tight credit conditions, unit transact in volume and continued asset value decline, reset, reflecting interest rate increases. These conditions are exacerbated by sluggish office fundamentals and valuations as well as conflicting signals around recessionary and inflationary risk. Last month inflation print registered inflation down broadly against the backdrop of strong economic activity and employment. Many interpreted the data suggest that we may be nearing the end of interest rate hike at stance of a recession has lessened, not surprisingly long bonds and equity restock rally. However, the next several months of inflation readings and economic reports will be critical to the Fed’s plan for the remainder of the year, and we expect volatility will continue to be the watch word as the market and the Fed incorporate and react to the data and determine whether or not more rate hikes are necessary. Our view is that while inflationary forces of war, stimulus and trade disputes will be with us in the short and medium term, the long-term deflationary forces of technology and globalization will eventually win out. Rates will normalize. However, CMTG we need to be prepared for an environment where inflation and high interest rates persist. Today, we are operating in an environment where benchmark rates have reached peak levels not seen in more than 2 decades. While we would hope for the coveted soft landing and lower short-term rates, we have to assume that we’re facing a higher or longer rate environment and/or recession and operate our business accordingly. When we evaluate our portfolio in the context of a higher for longer rate environment and worsening office market distress, we believe our thoughtfully constructed portfolio is defensively positioned. As a primarily floating rate lender, CMTG has been, in part, positively impacted by rising interest rates. We are generating historically high all-in yield. But at the same time, we must acknowledge that the rapid rise in rates has put extreme stress on borrowers and their borrowing costs. That said, generally, our borrowers have significant capital to protect and in most instances, we are continuing to see them do so. We also need to acknowledge that work from home is continuing to plague the office sector and that we have just begun to see distress in that sector. The question of what impact an office market downturn will have on the overall real estate capital market is just starting to become apparent as the industry is beginning to see resolutions occurring. Institutional owners are starting to make difficult decisions regarding their office assets. Borrowers are giving back fees, many of whom have assets worked less than the debt outstanding. And in a few cases, transactions are closing in major markets had deep value declines to free pandemic valuation. As to our portfolio, we intentionally constructed it to have low office exposure, and we expect office to decline as a percentage of the portfolio in the near term. Further, a significant portion of our office book is fully renovated, highly amenitized or is the type of office space that tenants demand today. Furthermore, many of our office loans are structured with additional credit support. Despite this, given the state of the office economy today, we all need to consider if any office exposure is too much office exposure. And we expect that positive resolutions of office loans were required creativity and resourcefulness from both lenders and borrowers. In terms of portfolio composition, multifamily continues to be our largest allocation, reflecting one of our high conviction themes. Multifamily fundamentals continue to be relatively strong, even at elevated rates impact the asset class more broadly. However, we remain optimistic as the supply-demand fundamentals for the sector continue to be extremely favorable. From a lender’s perspective, we’ve also been observing many of our borrowers demonstrate both the financial wherewithal and the motivation to protect and carry their assets through this period of higher interest rates. This has been driven today by an optimistic forward yield curve by the healthy market fundamentals that we are experiencing, with the acceptance of very few markets such as San Francisco. Additionally, one consideration we believe will be a boom for our multifamily portfolio is a fundamental shortage of housing in the U.S. and how difficult it is now to capitalize new construction. Looking ahead 1 to 3 years, we believe that historically low supply should translate into higher rent, which could make our existing assets more valuable. Mike will provide a more detailed discussion on our portfolio later on in the call, including additional color and multifamily office and hospitality exposures. While we believe our portfolio is well positioned in the current market environment and remain confident that our approach to proactive asset management will continue to help us identify potential concerns early in the process, our business is not immune to pressure that the industry has been experiencing. We expect to hire for longer interest rates and some select softening of asset performance will continue to stress borrowers. In such an environment, some landlords may decide not to protect their assets. Consequently, we anticipate that there will continue to be instances where we will need to collaborate and/or modify loans for our borrowers, instances where we will want to exit our loans and instances where we will want to take in for all of these assets ourselves. In general, we had strong conviction in the underlying assets collateralizing our portfolio. We manage our portfolio with a long-term view and with an objective of maximizing returns and building book value for our shareholders over the medium and long term. So when our borrowers decide not to protect their assets, given the broader organizational capabilities of Mack Real Estate Group, we are ready, willing and able to do so. Our broader platform experience as an owner, operator and developer gives us confidence that we have the necessary expertise to execute in a variety of scenarios. This is our type of market to take advantage of weakness when appropriate. The leaders of our business have been here before. We have seen the power of owning discounted assets and riding out the cycle. We have the capabilities and market intelligence to be prudent and disciplined when they come to understanding value and being opportunistic. Being opportunistic requires investment capital. And during this period of uncertainty, preservation and generation of liquidity will be a tension that we have the appropriate resources to actimize shareholder value over the long term. Therefore, and as a normal course of business, our management team and Board of Directors will continue the dynamic process of reviewing all liquidity options available to us, given the current market environment. I will now turn the call over to Mike.

Thank you, Richard. I’d like to start my prepared remarks this morning with a portfolio summary, then provide color on what we’re currently seeing in the market, specifically across the multifamily, hospitality and office sectors. CMTG’s primarily floating rate portfolio was $7.5 billion based on carrying value at June 30. The portfolio is comprised of 98% senior loans and as a portfolio LTV of 68.5%. During the quarter, we made follow-on fundings of $162 million and received partial loan repayments of $49 million. Looking ahead, we expect several loans to repay in the back half of the year across a number of property types, including an office construction loans. CMTG portfolio composition remained relatively consistent quarter-over-quarter. However, we added an additional REO asset on June 30, which I’ll touch on in a bit. Multifamily comprised 41% of the portfolio as of June 30, representing our largest property type concentration. Given that our loans are transitional in nature, which involve a repositioning of assets, we are continuing to see positive trade-outs, positive lead renewals and rent increases, though rent appreciation has been moderating from the historical highs we had been seeing. As Richard mentioned, the current rate environment has been stalling. Many multifamily borrowers have been struggling with negative leverage. And as a result, we anticipate instances where we’ll be collaborating with our borrowers to develop solutions while also protecting our position. In aggregate, we like our base and feel that we have the expertise to exercise our rights and remedies if needed. To that end, during the quarter, we moved 4 multifamily loans from a free risk rating to a core risk rating. 3 of these loans are collateralized by tax flowing multifamily assets located in Texas and Arizona with the same operator and represent 2% of the portfolio’s carrying value of $154 million. The borrower has been impacted by the negative leverage dynamic I just spoke to, but continues to contribute MREG capital to carry the assets. Turning to hospitality. As of June 30, hospitality represented 20% of the portfolio. The industry is experiencing downward pressure on top line growth. While occupancy has held, ADR has been impacted by a number of factors. Pent-up domestic leader demand post COVID has abated, the relatively strong dollar has motivated consumers to opt for European destinations as opposed to traveling domestically. Additionally, corporate group travel has not recovered the level seen prior to the pandemic, which has resulted in fewer opportunities to put great during compression period. The overall performance of our hospitality portfolio has been holding steady in light of these dynamics and our hospitality assets are performing in line with expectations and generally outperforming their peers in their relative stock market. Office comprised 15% of the portfolio as of quarter end. As Richard mentioned, the office sector continued to face rostral headwinds. In managing our office portfolio, we are being creative in developing solutions for our 4-rated office loan. In most cases, borrowers are demonstrating conviction n their business plans and their intent to be on paramount. Requiring bare to contribute additional capital has been part of our discussion throughout loan modifications. Dave will discuss the office loan that we placed on nonaccrual this quarter later in the call. Before turning the call over to Jai, I’d like to take a moment to speak to the assignment and lower foreclosure we completed on June 30. As mentioned on our previous earnings call, we identified a New York City Mix deep loan that we are working towards taking the dead. On June 30, we completed the transfer of the property via an assignment and lieu of foreclosure. And in conduction with the transaction, we reported a principal scharge-off of $67 million. We are now carrying the property on our balance sheet at a basis of $144 million. We believe that our sponsor variant of an owner, operator and developer will be key in generating long-term value in this property. In addition to what we consider low-hanging through, we believe there are strategic opportunities to reposition the property and improve NOI. A great example of where we feel comfortable being in the ownership position in terms of taking on the execute and risk to maximize shareholder value. I would now like to turn the call over to Jai.

Thank you, Mike and Richard. For the second quarter of 2020, we reported distributable earnings, excluding net realized losses of $0.35 per share. Including net realized losses, distributable loss was $0.01 per share. The realized loss was comprised of $67 million, $0.47 per share loss on an assignment in lieu of foreclosure in the New York City mid-tier property that Mike spoke about, offset by a $2.3 million or $0.02 per share gain on extinguishment of debt. Again, as some retirement at a discount of $22 million in face value of our SomnB due August 2026. The performance of our New York to the REA hotel portfolio grew quarter-over-quarter, primarily due to seasonal way, concluding $3 per share to earnings for the quarter. We reported GAAP net income [indiscernible] per share. [Indiscernible] is impacted by the addition of 2 loans and another third loan held in a joint venture and accounted for under the equity method in non-approval set. I was briefly surprised each of these 3. The first is 900,000 subordinate for which we also reported a 900,000 or 100% secured by equal loan. The second is a holding 12 million senior loan secured by a noncommodity June but of the property in San Francisco. The third is a $42 million surbodinate loan secured by a hotel construction loan in New York City. Non of this specific loans was recorded against these last 2 loans based on nonaccrual. For this is mentions, the economic and higher rate environment continues to impact the broader CRE industry to this reflects that trend. We also increased our specific business on 3 loans. One, we added 19 million to the previously fibrated multifamily investment in San Francisco, reducing our carrying value to $101 million, representing 27% under UPB of the loan. The second is a $900,000 of the subordibate loan under [indiscernible]. And lastly, in addition of $25 million in the New York City mixed-use REO property, bringing the carrying value of the loan to $144 million at the time of [indiscernible]. This represents a 32% reserve on the UPB of the loan. The key specific base of $67 million against the New York mixed REO assets was charged off and a loss upon assignment in new of foreclosure. As a reminder, the Newmid-tier property is comprised of office-based, finite, well leased CPL and the TimesSquare submarket, and the asset is sell unlevered without anytime. Our general piece of dividend stands at 1.1% or $80 million at quarter end. [Indiscernible] 3.6% on to 0.6% on the remaining loan. Turning to the balance sheet. We continue to maintain conservative net leverage levels, increasing slightly quarter-over-quarter from 2.2x [indiscenible] 31 to 3.3x in June 30. The weighted average advance rate on loans project to asset-specific financing to 68%. This can be quater [indiscernible] into 75% advance rate on multifamily levels and 65% on every day. We remain focused on liquidity and reported $407 million of liquidity on June 30. This consists of cash and approved economic credit capacity. We also have significant unencumbered assets comprised of $404 million in senior loans as well as the $144 million mixed-use REO property. Additionally, subsequent to the quarter, we extended the late maturity of all financing under our largest warehouse facility in July of 2023. I would now like to open the call for questions. Operator, please go ahead.

[Operator Instructions] We have our first question coming comes from Don Fandetti from Wells Fargo.

Yes. Can you talk a little bit more about the multifamily properties that were moved from 3 to 4. I think you mentioned negative leverage and just more broadly in multifamily, how are borrowers handling higher rates and cap rates moving up?

Yes. Don, it’s Priyanka. Thank you for that question. We took a very proactive and transparent approach there. So those 4 loans that we moved to a 4, they are where sponsors have asked us for rate relief. These are the only loans in our book where borrowers approached us asking for rate relief during the quarter, which is why we downgraded them. It does not mean that we’re going to agree to it. In fact, quite the opposite. We feel very good about our basis in those loans, and we don’t anticipate significant modifications but really made the shift to provide transparency. We’re going to work with the borrowers on path forward, if needed, but we’re also willing to take title at our basis. The other point I would make is that all the cash flowing loans are current on debt service borrowers are contributing capital, but they did approach us. And so again, we wanted to be transparent in this very dynamic market.

Okay. And just more generally in multifamily, are you seeing borrower pressure with higher rates?

Yes, absolutely, of course. And that’s exactly why we made that shift in credit ratings on those 4 properties because we have a huge multifamily exposure. We are very focused on monitoring all of those and making sure that borrowers are being successful in an environment where they have negative leverage. But they are all doing the right thing. They believe in their thesis. They’re putting in additional capital. So we have yet to see cracks in their business plans because we’re a transitional lender. We’re still seeing NOI increase generally across the board. So we were optimistic that the borrowers will be able to refinance this out over time, but we are monitoring it very closely. And again, that was the reason for the migration on the handful of loans that we moved to our form.

Got it. And then real quickly, we’ve seen some other companies selling office loans. Are you looking at that option as well?

I’ll start and then Richard, you might want to jump in here. We’re going to look at all options available to us. As Richard said in his remarks, there are going to be moments where we’re going to say, okay, we want to exit the loan. There are going to be moments where we say, we like our basis. That example being the REO asset in New York that we just took on June 30, which has an office component, but we like our basis there, and we think we have a great business plan. But there are going to be other, there might be other loans where we’re going to say, you know what, we don’t think that it makes sense to try to take ownership of it. We don’t think we can add value specifically. And in which case, we might look to exit loans, but nothing on our radar as we sit here today. Richard?

Let me just add as a general statement that everything that we own is kind of for sale. And so we are constantly looking at what is the value going forward that we think we can create. And if we think a sale is better, we’re going to sell. And if we think we can create value really in this environment, equity-like returns holding an asset or taking an REO, then we will.

Our next question comes from Vilas Abraham from UBS.

Can you talk a little bit more about the liquidity trends. Cash was down quarter-over-quarter, also quarter-to-date. Just any color on what specifically is driving that? How much of that is maybe posting additional collateral to financing counterparties. And then maybe in that context that you could also touch on the dividend and how you feel about it in the context of the liquidity pressure?

Sure, Vilas. This is Mike McGillis. Yes, in terms of the liquidity trend, obviously, we paid our second quarter dividend in mid-July. We’ve also continued to reduce leverage in the portfolio. So those are the primary drivers of the movement in liquidity. However, we do have some significant loans in various stages of expected repayment over the remaining course of the year, representing about in excess of $600 million, whether current market environment, whether they happen or not is always a question, but those payoffs would generate in excess of $400 million of liquidity to the balance sheet. So in terms of your other question, I mean, we’re constantly reevaluating as a management team, along with our Board of Directors, where we stand with respect to earnings, where we stand with respect to liquidity and make dividend calls with our Board on a quarterly basis on that. See any liquidity we do have is really going to be deployed to maximize long-term shareholder value. That’s our critical focus in everything we do.

And on that REO property, do you plan to keep that on an unlevered basis or would you put any financing on that given the quality of the collateral there?

It’s Priyanka. I’ll jump in there. We’re definitely going to look at potentially putting on financing. It’s really going to depend on leverage levels and pricing, but we’re also very optimistic about creating value. So the question is going to be, do we encumber it with financing now or wait until there’s additional value created.

Okay. And Priyanka maybe you could answer this one. On maturity defaults around $400 million or so, and that’s outside of the kind of official nonaccrual bucket and that’s kind of unchanged, I think, quarter-over-quarter. Just how do we think about that balance and just where do we go from here on those?

Yes, that’s a great question and obviously, one that we talk about a lot internally. Our view there is we’re going to be as patient as we can with our borrowers as long as we feel good about our basis and we feel comfortable stepping in if we have to. But our goal is to allow borrowers to execute on their business plan and monetize when they can. Of the $400 million that you mentioned, half of those loans are actually under transaction of some sort under term sheet or LOI and part of the number that Mike just referred to where we might see some repayments in the back half of the year. Obviously, it’s a very uncertain environment. We don’t know where that will end up, but we’re going to monitor those. And in the interim, we’re coming up with plans, BC and D in terms of other various rent path to resolution. So we’re highly focused on it. But at the end of the day, it’s all about the basis and then are we comfortable stepping in or not, which the answer to all of those is yes.

And Richard, maybe last one from me for you. You touched on this a little bit in your opening comments in terms of transaction volumes. But just in terms of general posture between buyers and sellers, has there been any compression in the bid-ask spread there between now and, say, 6 months ago? Or do you feel like we’re just kind of in the same place and people are still waiting for more development in interest rates?

This is Mike. Richard, unfortunately, got dropped from the call and he’s trying to get back on. But yes, clearly, what we’ve seen is for high-quality assets, there continues to be demand, although transaction volumes are down. In terms of our visibility through our equity business, we continue to see a lot of transactions. We continue to see what we think are very reasonable pricing on high-quality assets such as multifamily, industrial, et cetera. The buyer pools are obviously a lot smaller. So in terms of the the bid-ask, you’re not seeing prices being pushed up as much because of multiple parties bidding. But we continue to see strong pricing in the multifamily and industrial and even hospitality markets as well, but the volumes are way down. I think of some kind of filing in the capital markets will clearly bring people back into the marketplace. That’s my view and I think Richard is back on the call.

Let me just add that we are active in trying to buy assets. And while valuations have moved down, we still see tremendous competition in a few assets that are out there and especially in the multi-space, we’re seeing assets trade at higher values than we would have expected. So while values are down, there’s still plenty of capital on the sideline that is showing up. So it’s a pretty interesting dynamic, and I think price discovery is going to be ongoing, but there is liquidity. So it’s quite an interesting market.

Our next question comes from Richard Shane from JPMorgan.

Thanks for taking my question this morning. Sorry, and I apologize if some of this has been covered. It’s a little bit of a chaotic and crazy morning for us. If we look at the end of the first quarter, there was a $60 million specific reserve. This quarter, you realized losses of just about $67 million. Was all of the loss during the quarter associated with the specific reserve. I just want to get a sense of sort of execution versus where the reserve levels were set. The other thing is that if we look, the overall reserve levels have come down, the general reserves come down a couple of million bucks, and it appears that what essentially happened was you replenished the specific reserve by about $38 million. Is that right? And should we sort of anticipate in the near term that $38 million of specific reserve manifesting into charge-offs.

Yes, this is Jai. I’ll take the first one first. On the specific to reserves, we did charge off $67 million, like you mentioned. Of that $42 million was reserved previously. This is under Banque misuse property, and we added another $25 million to that. The $38 million for the quarter, like I had mentioned, is comprised of $25 million for the TimeSquare property, $19 million for the multifamily San Francisco asset and just under $1 million for a subordinate loan, that’s in the specific reserves. On the general reserves, you are correct that it went down slightly. Now that’s a function of, I’ll say 2 things there. One, the CECL model is a very duration-sensitive model. So as our loan portfolio has been unchanged for the most part. As we are closer to the 90 days closer to the maturity date, the CECL should come down. So some of that is now offset by a worsening macroeconomic conditions, but net-net, a CECL reserves did reduce a little bit. The last thing I’d say there is we do disclose the component of the general reserves, the 1.1% broken out between 4 store rated loans and then loans that are rated better than once you break out that 1.1%, it’s actually 3.6% on 4 dairy loans and 60 basis points on three materials. So we feel we released intellectually, you get about the 3.6% on store rated loans.

Got it. And obviously, the portfolio is a little bit smaller as well, which also has an impact in terms of the general reserve?

Exactly.

And in terms of migration from specific reserve to loss. And again, the good news is that there’s not a ton of data within your history to help us sort of do pattern recognition. But when we look back at the times where you have had losses, generally speaking, it looks like the specific reserves have turned fairly quickly into realized losses, which is frankly the way it should work. Should we use that $38 million as a sort of near term? And I would describe near term as sort of next 1 to 2 quarters perspective on what we could see for realized losses?

I’ll start with it’s a very case-by-case basis. Every asset is different. So it’s hard to draw some kind of a parallel as to what happened in atonal happen with other assets. But Priyanka please add more on where specific reserves could go in terms of charge-offs.

Yes, sure. Thanks Richard for the question. We’re that’s related to the San Francisco multifamily properties and the additional reserve that was put on it was really just due to migration of cap rates in the San Francisco market. It’s no surprise that, that market has been challenged. And as it relates to that loan, we are exploring all of our options and we’ll determine whether this is a loan we ultimately end up exiting or if we think we should own it or not based on the framework that Richard has already gone through. But in the interim, the assets are generating enough cash flow to cover operating expenses. We’re entirely focused on protecting the asset value as we determine the right path to resolution here?

Okay. That’s very helpful. Thank you, guys.

[Operator Instructions] Our next question comes from Jade Rahmani from KBW.

One of your peers reduced their dividend by eliminating the supplemental dividend today, and that’s about a 6% impact. And when you said dynamic process of reviewing all options and Mike gave some color around that, I assume that’s meant to signal a dividend reduction. So are there any parameters or framework for thinking about that, that you might be able to talk to? For example, distributable earnings, excluding all items, was about $0.35. The portfolio is going to be going down in value based on the repayments you’ve identified, and there’s also probably some carrying costs associated with the New York mixed use. So directionally, it would be lower than the $0.35. And then I also assume you’re not just going to reduce it by $0.01 or $0.02 to save liquidity. It would be more meaningful than that. So any commentary would be appreciated.

No, Jade, there’s no comment on the dividend. I mean I think the way that we think about distributable earnings were $0.35, excluding these net realized gains losses this quarter. There are catalysts to increase distributable earnings in the form of higher benchmark rates in the form of future fundings on our existing portfolio, which are at a higher spread than the weighted average portfolio at this time. We have a number of liquidity events in process, i.e., payoffs on existing loans that can be redeployed in ways to enhance returns, including deleveraging the existing portfolio would be accretive to distributable earnings. So we look at distributable earnings, and I would just say that there’s a number of items that could enhance that. And to the extent there’s additional nonaccrual loans that are added that will reduce it on the New York mixed-use asset that is has leases in place. it does generate NOI. And then the broader picture is from a liquidity standpoint, we’re constantly looking at that across the business as a management team and with our board, and we’re going to do what we think maximizes value over medium to long term for our shareholders. I’ll leave it at that.

Mike McGillis. Let me add a few things. In my comments, everything is on the table, and we own unlevered assets. We are looking at selling assets. We are trying to be opportunistic and make those moves that we think are going to create the greatest long-term shareholder value. And that’s what I was trying to get at.

I just wanted to ask about the New York mixed-use project. I saw in the 10-Q the discount rate, 7% to 7.5%, I believe, an exit cap rate 5% to 5.5%. I just wanted to ask about the basis for those assumptions and what your thoughts were.

Yes. It’s Priyanka. Jade, I’ll jump in there. I mean those assumptions are based on certainly what we observe in the market. We also had a third-party appraiser involved, and these were all vetted by our auditors. But it is all a guess, I suppose, in this kind of market environment. But we’re very optimistic about the path forward there, just given it’s in the assets in our backyard and our firm has deep ownership experience and relationships where we can really add value here. We want to particularly highlight the rich history of the asset in order to reposition the building. And so we think there’s a lot of low-hanging fruit that’s both strategic and operational. We had a former owner here that was not really paying attention to the asset. And we’re optimistic about growing the NOI on that asset. Just as a data point, the other REO hotel portfolio that we have, when we took ownership, NOI was significantly negative. And now here we are with NOI that’s very close to pre-Covid levels. So we’re seeing a similar story, which is why we chose to take ownership of that asset. If we see an opportunity, we’re going to take it because of the experience and the team that we have to execute, and we see that opportunity in that asset.

And lastly, just the Virginia land hospitality asset. I think last quarter, you said there were bids for the debt above your basis or perhaps bid for the property. Is that still the case? And I noticed there’s no CECL reserve there and it’s rated risk for. Just some commentary on that would be appreciated.

Yes, of course. I’ll take that. So the commentary last quarter was there have been bids that were provided to the borrower prior to our ownership or sorry, prior to the default. And so those bids were out there. Obviously, that was a very different capital markets environment. So while we think this is a very attractive development site, it’s just not the right time to monetize the investment. That said, we think the basis makes sense, and that’s why it continues to be rated 4. We’ll continue to evaluate the path forward with or without the borrower. And our path is going to really be driven by the goal of maximizing shareholder value in the long term there, but this is not the right moment to monetize that opportunity.

Our next question comes from Sarah Barcomb from BTIG.

Hi, everyone. Most of my questions have been answered. But I did want to mention that we’ve heard from some of your peers that they’ve taken a look at amending some of their covenants given the pressure coming from this rising rate environment. Could you speak to how you’re feeling about meeting those covenants on a go-forward basis? And if you look to make an amendment there.

Sarah, this is Jay. Yes, you’re right with the rising interest rate environment, we are in active dialogue with our lenders and we actively monitor our covenants, we are comfortable that we are going to meet our financing covenants. And to the extent we need to be proactive about modifying some of those, we will go ahead and do that.

Okay. And I was also hoping you could speak maybe more thematically on what you’re seeing on the ground in your construction book. How is the labor market there? Are you seeing more projects get certificates of occupancy? Any color you can give on the ground-up exposure.

Yes. Sarah, it’s Priyanka. I’ll take that one. We’re really happy with our construction exposure. In fact, this quarter, we shifted a number of loans from construction status to operating status in light of achieving their certificates of occupancy. And so that has brought down our construction exposure. And of those assets that have recently become operating assets, 2 out of 8 of them are working on sales and refinancings and the others are really going through a lease-up process right now. So we’ve been really happy with that performance. And we’ve always liked our construction exposure really for 2 reasons. One, our sponsors are going to have best-in-class real estate upon completion, which is going to fare better in this uncertain environment. Certainly, we’re seeing that with the 2 assets that are right now being sold and refinanced. And two, we have much better structure. We get to reunderwrite the asset monthly, borrowers are rebalancing monthly. They’re contributing equity as needed. And of course, we have completion guarantees from really creditworthy sponsors. So we’ve been really happy with that exposure, and it’s played out as we would have expected.

We currently have no further questions. So I’d like to hand the call back to Richard Mack for closing remarks. Richard, please go ahead.

Thank you, and thank you all for joining us today. I would summarize how we see managing our business as focusing every day on creating long-term shareholder value. And to do that, we are going to be opportunistic when we can and we’re staffed to be. We are organized to take assets back, if necessary, sell them, refinance them and just be opportunistic around creating shareholder value for the long term. That is a dynamic process as we manage our liquidity versus opportunity, and something that we’re working on every day. And we think that the process that we’re undergoing and the value we’ve created already in some of the REO and some of the other actions we’ve taken working with borrowers is going to pay dividends, so to speak, is going to continue to increase value over the long term. So thanks all for joining, and we will look forward to our next earnings call.