Claros Mortgage Trust, Inc.

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. All participants will be in a listen-only mode. After the speaker's remarks, there will be a question and answer period and during that presentation you can register to ask a question by pressing star followed by one on your telephone keypad. I will now hand over to your host, Ant Yuen, 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 Claris Mortgage Trust, Mike McGillis, President and Director of Claris Mortgage Trust, and Jay Agarwal, CMTC's Chief Financial Officer. We also have Kevin Cullinan, Executive Vice President who leads MREX Originations, and Priyanka Garg, Executive Vice President, who leads MREC's portfolio and asset management. Prior to this call, we distributed CMTG's earnings release and 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 success or 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, Ann, and thank you, everyone, for joining us for CMPG's second quarter earnings call. Most of us have seen the headlines this summer. They tell a consistent story. 2023 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 rates and sharply reduced bank lending. This has resulted in very tight credit conditions, muted transaction volumes, 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's inflation sprint registered inflation down broadly against the backdrop of strong economic activity and employment. Many interpreted the data to suggest that we may be nearing the end of interest rate hikes and that the chance of a recession has lessened. Not surprisingly, long bonds and equity restocks rallied. 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 watchword as the market and the Fed interpret 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, at CMCG, 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 two 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 a recession and operate our business accordingly. When we evaluate our portfolio in the context of a higher or longer rate environment and worsening office market distress, we believe our thoughtfully constructed portfolio is defensively positioned. As a primarily floating rate lender, CMCB has been in part positively impacted by rising interest rates. we are generating historically high all-in yields. 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 keys, many of whom have assets worth less than the debt outstanding. And in a few cases, transactions are closing in major markets at steep value declines to pre-pandemic valuations. 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. 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 will require creativity and resourcefulness from both lenders and borrowers. In terms of portfolio composition, multifamily continues to be our largest allocations. reflecting one of our high conviction themes. Multifamily fundamentals continue to be relatively strong, even as 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. has been driven to date by an optimistic forward yield curve and by the healthy market fundamentals that we are experiencing, with the exception of very few markets such as San Francisco. Additionally, one consideration we believe will be a boon for our multifamily portfolio is the fundamental shortage of housing in the U.S. and how difficult it is now to capitalize new construction. Looking ahead one to three years, we believe this historically low supply could 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 for 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 pressures that the industry has been experiencing. We expect a higher 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 control of these assets ourselves. In general, we have 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 Mac Real Estate Group, we are ready, willing, and able to do so. Our broader platform experience as an owner, operator, and developer give 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 it comes to understanding value and being opportunistic. Being opportunistic requires investment capital. And during this period of uncertainty, preservation and generation of liquidity will be essential to ensure that we have the appropriate resources to maximize 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.