Claros Mortgage Trust, Inc.

Thank you. I'm joined by Richard Mack, Chief Executive Officer and Chairman of Claris Mortgage Trust, and Mike McGillis, President and Chief Financial Officer and Director of Claris Mortgage Trust. We also have Kevin Cullinan, Executive Vice President, who leads MREX Origination, and Priyanka Garg, Executive Vice President, who leads MREX Portfolio and Asset Management. Prior to this call, we distributed CMGG'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, 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. ASHA 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 all for joining us this morning for CMTG's first quarter earnings call. The meaningful decline in inflation at the beginning of the year provided rate-centered investors much optimism. Unfortunately, the last several months have revealed a different narrative. Recent inflation prints have been volatile and generally come in higher than expectations, making what seemed to be all but certain Fed rate cuts now very uncertain. As it relates to commercial real estate, we believe the general outlook for the industry will remain challenging for the remainder of the year and into 2025. We expect continued headwinds in the higher rate environment and because of a lack of clarity around the direction of interest rates. In addition to trying to handicap election year Fed actions, a number of variables also add further complexity to the outlook, including US economic uncertainty, growing US debt levels, and geopolitical tensions in Ukraine, the Middle East, and in East Asia. In our view, it is this uncertain environment, especially around interest rates, that has placed the real estate capital markets in stasis. No one wants to acknowledge value declines if interest rate cuts are just around the corner. Against this backdrop, we have been observing slowly increasing cap rates and decreasing real estate valuations that to date reflect not where short-term rates are, but where investors expect them to sell. Sellers and buyers are dancing, but not committing to each other, resulting in vastly lower transaction volumes that have not only limited investors' ability to refinance and recapitalize properties, but have also resulted in less new loans issued and bonds available. This lack of product has been driving down lending spreads for many types of real estate financing despite valuation uncertainties. While this is helpful, it does not yet reflect a recovery. Similar to previous cycles, real estate investors are awaiting the reemergence of real transaction volume and an active real estate capital market to provide confidence and a much needed liquidity infusion. This may be starting as evidenced by tightening spreads and investors looking to the revalued real estate sector for attractive risk-adjusted returns, but is by no means conclusive. Real estate transactions across almost all asset classes remain muted relative to historical norms. As you know from prior calls, CMTG has been executing our business strategy through the lens of a higher-for-longer rate environment. We continue to believe that a conservative and defensive stance is prudent given the uncertainty around where interest rates and loan spreads will ultimately settle. Higher interest rates have translated into higher financing costs for borrowers, with many continuing to contend with negative leverage. Therefore, we expect repayments to be slow and repayment timing less predictable. Further, it is likely that these trends will continue to impact our borrowers and portfolio And as we look ahead, we remain committed to loan resolutions and optimizing shareholder value. During this period, we anticipate that proactive asset management will remain a key focus for our team. As we work with borrowers, we expect them to not only demonstrate an operational commitment to their assets, but a financial commitment to them. For example, during the first quarter, we received repayments on two construction loans, notably one of which was a four-rated loan. We believe that this not only speaks to the liquidity that is starting to return to the market, but also to the quality of the sponsorships and the assets underlying our loans. I would now like to turn the call over to Mike.

Thank you, Richard. For the first quarter of 2024, CMTG reported a gap net loss of 39 cents per share and a distributable loss of 12 cents per share. Distributable earnings per share prior to realized losses were 20 cents per share compared to 31 cents per share for the prior quarter. The quarter-over-quarter change is primarily a result of the impact of seasonality on the New York City REO Hotel portfolio, which accounted for an 8 cents per share swing, as well as three loans placed on non-accrual during the first quarter, which negatively impacted earnings by 3 cents per share. We'll discuss the non-accrual loans in more detail later on the call. As previously discussed, The first quarter is generally the weakest quarter for New York City hotels, particularly compared to traditionally strong performance in the fourth quarter. CMTG's loans held for investment portfolio decreased to $6.7 billion at March 31st from $6.9 billion at December 31st. The quarter over quarter change is attributable to follow on fundings of $143 million more than offset by the impact of loan repayments totaling $146 million and the reclassification of a $216 million four-rated loan to held for sale. Additionally, as mentioned in our last earnings call, at year-end 2023, we classified three loans secured by a variety of asset classes as held for sale and completed the sales of such loans during the first quarter of 2024 for $262 million. This sales price represented 96% of the loan's UPB. As noted, this loan sale did not impact the first quarter loans held for investment portfolio because these loans were classified as held for sale at year end. Reflected in our first quarter results are the resolutions of two four-rated loans. The first $104 million construction loan on a hospitality asset located in New York City had been risk-rated for since 2020. During the quarter, we received a full repayment of this loan, including all contractual interest as well as some default interest and late fees. Despite the borrower's delay in executing its business plan, the borrower was able to identify and transact with another lender to refinance our position. We believe that CMTG's successful outcome with this loan speaks well to our conviction on collateral values and also suggests potential signs of a more normalized capital markets environment. The second loan, a $216 million construction loan secured by two multifamily assets in Southern California with a remaining unfunded commitment of $45 million, have been downgraded to a four-risk rating in the second quarter of 2023 and placed on non-accrual status last quarter. After careful consideration, we concluded that a loan sale was the best course of action, and in April, we completed the sale of the loan at 80% of UPB. Our first quarter balance sheet reflects this loan as held for sale, net of a $42 million principal charge-off Executing the sale enabled us to add liquidity, reduce debt levels, and reduce our future funding obligations. While our sponsor has the multifamily development expertise to take over these types of assets, after careful consideration, we decided that there were more effective uses of the capital and resources required to complete construction and stabilize and sell these assets. At March 31st, multifamily assets represented our largest exposure at 40% of our portfolio. We continue to have conviction in the long-term outlook of the sector with a particular focus on select high-growth markets. As previously mentioned, we're seeing some borrowers navigating the pressures of negative leverage, and we are actively monitoring these loans and working with our borrowers. During the quarter, we placed three multifamily loans with a combined UPB of 186 million on non-accrual status. The first is a 97 million loan collateralized by a 376-unit multifamily complex located in the Las Vegas MSA. The second is a 50 million loan collateralized by a 206-unit multifamily complex located in Phoenix, Arizona. And the third is a $39 million loan collateralized by a 370-unit multifamily complex located in Dallas, Texas. We continue to maintain a long-term favorable outlook on the multifamily sector, and our sponsor's deep experience as an owner, operator, and developer has informed our asset management approach with regard to these non-accrual loans. We have been aggressively pursuing our remedies and want to highlight that compared to the multifamily construction loan we sold, these three new non-accrual loans, which all share the same sponsor, are vastly different. These three new non-accrual loans are all cash flowing operating properties with solid occupancy, which were downgraded primarily as a result of the borrower's inability to contend with the impact of higher financing costs on their ability to execute their business plan. By comparison, pursuing foreclosure for these assets requires much less capital resources than the in-process construction loans and may translate to improved earnings relative to holding the loans on non-accrual status in the near term. With this in mind, we believe there may be select opportunities to foreclose on multifamily assets with in-place cash flow and execute the borrower's original business plan, but at a much lower cost basis and leverage levels. Total CECL reserves as a percentage of UPB increased to 2.6% compared to 2.2% for the prior quarter. Specific CECL reserves represented 22.9% of the UPB of our loans with a specific CECL reserve. The general CECL reserve of 1.6% was comprised of 3.1% of the UPB on full-rated loans and 0.9% of the UPB on the remaining loans. During the quarter, we recorded provisions for CECL reserves of $70 million, of which $42 million relates to the realized loss on the previously mentioned loan that was transferred to held for sale and sold in April 2024. Now turning to financing and liquidity. At March 31, we reported 265 million in total liquidity, which includes cash and approved and undrawn credit capacity. Unencumbered loans totaled 419 million, of which 93% were senior loans. Compared to last quarter, our portfolio's unfunded loan commitment declined from 1.1 billion to 890 million. Of the 890 million of unfunded loan commitments, Approximately $115 million relates to loans, which we do not believe the borrower will be able to meet conditions precedent to funding, reducing our expected future funding levels to $775 million. To fund this, we have $453 million of in-place financing commitments leaving a projected equity or net funding requirement of $321 million, which we expect to fund over the course of approximately 2.7 years. At March 31st, we had total financing capacity of $7.2 billion with aggregate outstanding balances of $5.5 billion. Our overall financing balance declined $226 million from the prior quarter, primarily due to a combination of loan sales and loan repayments, as well as proactive voluntary deleveraging of specific assets. During the quarter, we made voluntary deleveraging payments of $82 million bringing this total to $439 million since the first quarter of 2023. As a result, at March 31, four-rated loans and five-rated loans maintained materially lower financing advance rates of 59% and 47%, respectively, compared to 66% for loans with a three-risk rating. As Richard mentioned, we continue to manage the portfolio in the context of a higher-for-longer rate environment. We believe that our management team has deep industry and multi cyclical experience to navigate through this challenging capital markets and credit environment. In addition, we believe that our sponsors experience as an owner operator and developer provides us with additional market insights to effectively evaluate and pursue a broader range of alternatives and maximize recovery in various situations. Looking ahead, our priorities continue to be focused on liquidity, proactive deleveraging, loan resolutions, and proactive asset management. Over the past several quarters, we've demonstrated our commitment to liquidity management and loan resolutions from loan sales to pursuing our remedies, executing with an objective of maximizing recoveries in a challenging environment. Operator, I would now like to open the call for questions.