Claros Mortgage Trust, Inc.

Welcome to Clara's Morgas Trust second quarter 2025 earnings conference call. My name is Becky and I'll be your conference facilitator today. All participants will be in a listen only mode. After the speakers remarks, there will be a question and answer period. If you would like to ask a question, please press star followed by one on your telephone key pads. If for any reason you would like to remove your question, please press star followed by two. I would now like to hand the call over to Arn Huynh, Vice President of Investor Relations for Clara's Morgas Trust. Please proceed.

Thank you. I'm joined by Richard Mack, Chief Executive Officer and Chairman of Clara's Morgas Trust, Mike McGillis, President, Chief Financial Officer and Director of Clara's Morgas Trust. We also have Priyanka Garg, Executive Vice President who leads credit strategies for Mack Real Estate Group. 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, please contact me. I'd like to remind everyone that today's call may include forward-looking statements within the meeting 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 violins 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 affiliations 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 all for joining us this morning for CMTG's second quarter earnings call. While the elevated rate environment remains a headwind for commercial real estate, we're encouraged to see signs of healing. Investor sentiment has meaningfully improved and transaction volumes have been steadily recovering. This backdrop has been constructive for CMTG, and we have made notable progress in achieving our key objectives for the year. To quickly recap, the start of 2025, we outlined three strategic priorities that we believe will deliver long-term shareholder value. Resolving watch list loans, improving our liquidity, and accretively redeploying capital for uses such as taking assets REO, reducing leverage, and potentially refinancing or extending our TLB. I'm pleased to say that we have made significant progress across all three priorities. The healing of the real estate capital markets and consequent increase in transaction volume has benefited CMTG. During the second quarter, we resolved eight loans totaling 873 million of UPB. This activity included four loans that were paid off by the borrower in full, representing 480 million of UPB, and the resolution of four watch list loans representing 393 million of UPB. In addition to these eight resolutions, during the quarter, we also resolved two additional watch list loans collateralized by multifamily assets representing 147 million of UPB. Thus far in the third quarter, this resolution momentum has continued with three additional watch list loan resolutions totaling 548 million of UPB, one through discounted repayment and two through multifamily mortgage foreclosures. In aggregate, 2025 resolutions to date total 1.9 billion of UPB consisting of 1.5 billion of loan resolutions and 305 million of foreclosures on multifamily properties. Accounting for these resolutions, CMTG's watch list is now down to 17 loans and 2.1 billion of UPB, a net decline of 758 million of UPB and seven loans from the first quarter end. This progress demonstrates the management team's focus on resolving watch list loans for optimal outcomes across our stated priorities. We have been proactively asset managing our loans on a -by-case basis, and if needed, working with borrowers who demonstrate both the financial wherewithal and the operational commitment to the underlying asset. In this regard, we have been and will continue to be proactive in exploring all options available to us as a lender, including loan sales, discounted payoffs, and foreclosures. All this progress has enabled us to achieve our second priority of enhancing our liquidity position. As of August 5th, we reported $323 million in total liquidity, representing a $221 million increase compared to our position at December 31. Michael provided more color on this and the realizations I just discussed in his remarks. As I've noted in the past, we believe that one of our competitive advantages is our sponsor's experience as a value-add owner, operator, and developer of real estate assets. We believe this perspective has enabled us to evaluate opportunities within the existing portfolio, to foreclose on loans when we see an opportunity to enhance value, and ultimately recapture this value for our shareholders. For example, you may recall that in 2023, we foreclosed on a mixed-use New York City building with office, retail, and signage components in Times Square. I'm pleased to share that during the second quarter, we completed the commercial condomization of the building, and subsequently, we've completed the sale of five office floors, which generated $29 million in gross proceeds. We believe that the commercial condominium strategy will maximize recovery of our original investment and is a strong example of how our sponsor's deep real estate experience positions us well to create value. We also previously shared our plans to pursue foreclosure on a number of cash-flowing multifamily assets. Once again, we believe we can significantly optimize recovery values by taking over under-managed assets, repositioning them to improve cash flows in order to enhance asset value and sell the assets in a strengthening supply-demand environment. As mentioned, we recently completed four mortgage foreclosures, two during the second quarter, and two subsequent to quarter end. We're optimistic about our approach to these multifamily REO assets and anticipate being in a position to monetize the first of these assets in the coming quarters. I would now like to turn the call over to Mike.

Thank you, Richard. For the second quarter of 2025, CMTG reported a gap net loss of $1.30 per share and a distributable loss of $0.77 per share. Distributable earnings prior to realized losses were $0.10 per share. Earnings from REO investments contributed $0.01 per share to distributable earnings net of financing costs. CMTG's held investment loan portfolio decreased to $5 billion at June 30th compared to $5.9 billion at March 31st. The -over-quarter decrease was primarily the result of loan resolutions that occurred during the second quarter. Of the eight full loan realizations totaling $873 million of UPB that two loans totaling $304 million were through loan sales and two loans totaling $89 million were negotiated discounted payoffs. We also received $25 million of partial loan repayments resulting in total repayment and sale proceeds of $773 million for the quarter net of charge-offs. As mentioned on our first quarter call, we received the discounted payoff of an $88 million Texas office loan that was previously a watch list loan. The realization of this loan resulted in proceeds equal to 73% of UPB and allowed us to resolve a watch list loan while reducing our office exposure. We also received the discounted payoff of a -$1 million residual loan position on $825 million alone that was otherwise repaid. Moving on to the two loan sales which were at a weighted average recovery at 67% of UPB. The first one was the sale of a California condo loan. The loan was previously classified as held for sale and non-accrual at our carrying value of $146 million at March 31st which reflected a previously recorded $78 million loss on UPB. As this loan was unencumbered, the $146 million of sale proceeds received with a primary driver in the increase in liquidity during the quarter. The second loan was an $80 million loan collateralized by a previously for-rated Southern California hospitality loan originated in 2018 that was sold at 70% of UPB after consideration of customary prorations and transaction costs. Given the sponsor's challenges, we viewed this decision as an opportunity to proactively resolve a watch list loan and reallocate capital to more creative uses. Not only have we remained proactive pursuing resolutions but we've also taken a disciplined approach balancing effectuating loan resolutions, deleveraging the balance sheet and generating liquidity. We believe this discipline is reflected in our results. As Richard mentioned on a -to-date basis, we had a total of $1.9 of UPB in loan resolutions consisting of $1.55 billion of loan repayments and sales and $305 million of multifamily property foreclosures. On a blended basis, we achieved an 88% recovery rate on these loans. We have reduced our watch list loans by $776 million of UPB, now down to $2.1 billion since year-end 2024. Turning to portfolio credit, while we have made meaningful progress in resolving loans and reducing our watch list, we continue to experience negative credit migration in the portfolio. During the quarter, we moved four loans from a four-risk rating to a five-risk rating. The first is a $402 million loan collateralized by multifamily property located in Southern California. The borrower recently initiated a sales process, however, the sale of a property did not materialize, which was a key factor behind the downgrade. We are currently evaluating all options available to us to pursue our remedies as a lender. The second and third loans totaling $212 million of UPB are both collateralized by multifamily properties located in Dallas, Texas. After evaluating the borrower's financial wherewithal and operational commitment to the asset, we determined that it would be prudent to foreclose on these loans in order to reposition these assets and improve operating cash flow under our sponsor's management, similar to the four assets that Richard mentioned. The fourth loan downgrade was resolved last week our carrying value. As disclosed at year end 2024, we entered into a contingent discounted payoff arrangement with a borrower on a $390 million loan collateralized by a multifamily property in New York City. The borrower is able to perform in accordance with the modification agreement and completed the discounted payoff at 90% of UPB. This transaction resulted in additional liquidity of $107 million, which will be redeployed into more CRETA abuses. In addition, during the quarter, we also downgraded a $71 million office loan located in Seattle to a four-rated loan. The loan is in good standing and the borrower is performing under its guarantee obligations. However, there is a pending maturity and the performance at the asset is tracking below our expectations. It's important to note that we have seven office loans with a UPB and carrying value of $834 million and $782 million respectively in our portfolio. Reflecting third quarter resolutions to date, loans with a risk rating of 4 or 5 or 2.1 billion of UPB are 42% of the loan portfolio based on carrying value compared to 2.8 billion of UPB or 46% of the loan portfolio based on carrying value at March 31st. As it relates to Cecil, our total Cecil reserve on loans at June 30th is $333 million or .4% of UPB compared to $243 million or .1% of UPB at March 31st. Our general Cecil reserve increased by $15 million to $139 million or .8% of UPB subject to our general Cecil reserve compared to .4% as of the first quarter. General Cecil reserve levels reflect our conservative outlook amidst capital market and political uncertainty. Specific Cecil reserves also increased during the period to reflect the credit downgrades during the quarter. Moving on to CMTG's REO portfolio, we continue to leverage our sponsor's platform as a key component of our loan resolution strategy. This approach enables us to apply a value add approach to optimize recovery results. Richard already spoke to the mixed use New York City asset so I'll turn to the rest of the REO portfolio. Starting with the hotel portfolio, operating performance of the underlying assets remain strong. During the second quarter, we successfully executed CMBS refinancing of the portfolio and secured attractive pricing on a non-recourse loan with up to five years of duration. The portfolio remains held for sale on our balance sheet, generating an attractive levered yield as we continue to seek an exit amidst uncertainty around the upcoming New York City election. As Richard mentioned, we have identified seven multifamily loans where we believe that foreclosing and leveraging our sponsor's multifamily ownership and management platform will allow us to reposition these assets and optimize outcomes for our shareholders. During the second quarter, we began executing the strategy and completed mortgage foreclosures on two loans. The first was a $50 million loan collateralized by a multifamily property comprising a total of 206 units in Phoenix, Arizona. The second was a $97 million loan secured by a multifamily complex totaling 376 units in the Las Vegas MSA. Subsequent to quarter end, we completed mortgage foreclosures on two additional multifamily loans. The first was a $119 million loan on two assets in Dallas, Texas, comprising a total of 555 units. The second was a $39 million loan on a multifamily asset also located in Dallas, totaling 370 units. Collateral for all four loans are cash flowing and we believe they provide opportunities for value creation. We intend to implement a value add strategy across each of these properties, drawing on our sponsor's multifamily operating expertise to stabilize operations, improve cash flow, and ultimately maximize recovery value. Looking forward, we expect to foreclose on the three remaining multifamily loans which we have targeted for foreclosure. Moving to the right side of the balance sheet, in March we closed on a $214 million financing facility that specifically enables us to finance non-performing loans and hold the underlying collateral as our real assets upon foreclosure. During the second quarter, we have four of which are performing, which improves our cost of capital for this facility. Securing this facility has been a critical component in effectively executing our REO strategy as it's allowed us to complete four mortgage foreclosures on a cash neutral basis. During the second quarter, we continue to aggressively reduce our indebtedness by $652 million in accordance with our stated priorities. The deleveraging includes $188 million of incremental deleveraging, which reduced our net debt to equity ratio from 2.4 to 2.2X. Quarter to date, in the third quarter, we further reduced leverage by $255 million in connection with loan repayments received, reducing our net debt to equity ratio on a pro forma basis to 2.0X. We feel positive about the progress that has been made in executing our strategic priorities year to date, resolving watch list loans, enhancing liquidity, and redeploying capital into more accretive uses. Given this progress, an additional focal point remains on addressing the upcoming maturity of our term loan B in August of 2026. As it stands, as of August 5th, one of the potential uses of the $323 million of current liquidity and $513 million of unencumbered assets could be used to facilitate a partial pay down in connection with an extension of the existing term loan or to facilitate replacement financing. To reiterate, year to date, we've resolved $1.9 billion of UPB of loans, reduced the UPB of outstanding financing by $1.1 billion, and increased our liquidity position to $323 million. Looking ahead, we anticipate continued momentum as we further resolve watch list loans and execute on our REO strategy. We look forward to updating you on our progress next quarter. I would now like to turn the call over to the operator.

Thank you. If you wish to ask a question, please press star followed by one on your telephone U pad. If for any reason you want to remove your question, please press star followed by two. When preparing to ask your question, please ensure your device is unmuted locally. Our first question comes from Doug Carter from UBS. Your line is now open. Please go ahead.

Thanks, and good morning. Just wanted to make sure that the liquidity number you gave, does that already factor in the discounted payoff of the New York City multifamily?

Yeah, the $323 million amount reflects the liquidity generated by the New York multifamily loan in July.

Great. And then, clearly success in generating payoffs and liquidity in the first half. What is your outlook for continued resolutions payoffs in the second half, and kind of the amount of liquidity that those payoffs might generate?

It's Priyanka. Hi, Doug. I'll jump in here. We look at capital markets are healing. We're seeing a lot more activity. So, I think we think that there will be additional payoffs between now and the end of the year. That said, we have been obviously using all the tools in our toolkit up to this point to generate liquidity and resolve those watch list loans. So, it's a larger number because of that, but that's what we said we would do to enhance shareholder value. And you can see we've unlocked significant equity given the low leverage at which we are operating. And so, I think going forward, we're going to be relying more on the regular way payoffs from our borrowers, absent some unique situations that come along.

Yeah, and then I guess what, as you look at that liquidity, what are the signposts you're looking for to maybe start deploying that liquidity, whether that be into further debt reduction of the term loan? Would you consider stock buyback at current valuations? How are you thinking about using that liquidity?

Sure, Doug. Thanks for the question. I think, as we stated, I think we'll continue to look to deleverage the balance sheet. Although we think the stock price is attractive and is an attractive buy opportunity, there's other considerations that we need to think through with respect to that. And the other thing that we've made significant progress on the liquidity front in the last couple of years is really significantly bringing down our unfunded loan commitments. And really, that is, we expect that to be a much less significant use of cash going forward, given that the net future funding obligations are now down to about $23 million out of existing financing on those. And the majority of that is good news money associated with leasing activity. So I think the other use is we really want to get comfortable that we can either get replacement financing done on our term loan or extend it. And, you know, I think a combination of those things, as those occur, may allow us to reevaluate pivoting back to offense.

Great. Appreciate those answers.

Thank you. Our next question comes from Rick Shane from JP Morgan. Your line is now open. Please go ahead.

Terrific. Thanks for taking my questions this morning. I'd like to focus on the REO and some of this may be redundant, but there's just so many moving parts. I just want to make sure we have this all right. End of the quarter with about $525 million of REO foreclosed on the balance sheet. So as of today, REO balance would be $650 to $660. Is that correct on the balance sheet?

Yes, that's correct.

Okay. Got it. So the six assets that you show, um, for each one of them, you outline a strategy, pursuing asset sale, pursuing unit sales, improving operational performance for eventual asset sale. Can we just go through one by one, the six assets and give some rough timeline in terms of how long you think it will take to play it out? Again, I realize this is a tough exercise, but is it two quarters for the hotel portfolio, six quarters for multifamily in Dallas? If you can just help us understand how this is going to go through over the next call it 18 to 24 months.

Yeah, sure. Doug, sorry, Rick, happy to do that. Um, so on, you know, as you said, it is tough to pinpoint timeframes. It is obviously dependent on a number of external factors. And I'll start with the hotel portfolio, which, you know, underlying performance has been really excellent. And, um, TTM through June 30th is at a, you know, peak during our ownership period. We have, um, much higher EBITDA than last year, higher ADR, everything's tracking in the right direction. I mean, just to put numbers on it, EBITDA 16% higher than it was last year for the second quarter. And the balance of the year is looking very, very strong in New York City in terms of compression. Historically, third and fourth quarters are much stronger in New York. So I think we, and, and we refinance the portfolio, which gives us time to execute a sale. We are holding it for sale. We anticipate selling the, selling the assets, but we want to make sure that we're getting appropriate value. And, and so we're going to take our time doing that, but that does, you know, it is held for sale. So we are targeting to do that over the next couple of quarters. That is absolutely not a long-term hold. And we think we've done a really good job demonstrating value there in terms of increasing EBITDA. In, in terms of the mixed use property, you, um, I'm sure saw, but in case you missed it, we have executed our commercial condominium ization strategy. We've already sold five of the nine office floors. We have two more that are under contract. So that those should be near term, um, sales. And then the balance of the majority of the balance of the value is in the, um, retail and signage components. And we are, um, marketing those now and we will, you know, ultimately determine if we think the bids that come in are, we're better off, um, holding them, or if we, you know, in general, in benefiting from the cash yield that's coming off of those components, because it is a hundred percent least, or if we're better off, um, selling and you, and then redeploying that capital and optimizing the balance sheet. Um, in terms of the multifamily, the first two, Arizona and Nevada, um, you know, since we foreclosed, because those we, we foreclosed several months ago, we have seen higher, um, values come in unsolicited in terms of offers, just the value created in just foreclosing and some of the really, really easy, low hanging fruit we executed on there. And we, um, so we think those could be very near term resolutions over the next couple of quarters. We have seen improvement in operations. We've seen improvement in each of those markets. So we're optimistic about, um, about the Arizona and Nevada assets. The Dallas assets are very fresh foreclosures and there is, we need to do the same amount of work there before we can really talk about timing, um, as we've done in the other two.

Terrific. I really appreciate you, uh, it does, it's a very thoughtful answer and I really appreciate it.

Thank you for the question.

Thank you. Our next question comes from John Nicodemus from BTIG. Your line is now open. Please go ahead.

Hello and good morning everyone. So along the lines of one of Doug's questions, I wanted to look back to the start of the year where you mentioned transactions underway at the could reach $2 billion of gross proceeds. Now that we're a bit more than halfway through the year, we've seen that $1.9 billion of loans resolved. How should we be thinking about that initial $2 billion number? Has that changed? Has that gone in line with your expectations and how are you viewing that playing out throughout the rest of 2025? Thank you.

Thank you. Um, this is Mike. I'll take a shot. Priyanka can add on. I think based on what we see coming down the pike, um, which Priyanka touched on a little bit, I think we are, we're tracking to, uh, exceed that target. Um, all these resolution activities are good just because it results in churn of the portfolio generation of liquidity for us that we can use in other ways, uh, in line with our stated priorities. So, uh, we feel pretty comfortable we'll exceed that, that $2 billion target of UPB resolutions that we laid out earlier in the year.

Yeah, I agree with all that and have nothing to add. I mean, it's, it's, it's our, we're using all the tools in the toolkit to make sure that we're achieving the goal of turning over the portfolio. And I think, um, we've gotten through a lot of it, but there will be some more between now and year round.

Great. Thank you so much, Mike and Priyanka. Very helpful. And then following Rick's question about the REO, just wanted to, um, go a little into that. For the two recently foreclosed Texas assets, I know it's still early days. What sort of, you know, capex operating improvement needs, um, are you seeing at those properties? Just curious sort of that whole process is going to look like before, you know, they're in a more stable state, the way the, uh, Arizona and Davada ones are. Thank you.

Yeah. I, um, I really appreciate that question, Sean, because I think it goes back to demonstrating the sponsor's ability to really, um, step in here. I, we've been really pleasantly surprised at just the low hanging fruit. I mean, it's not, it's not a lot that needs to be done to, um, to really reposition the asset in these markets. They have, they need to be, you know, for example, they need to be rebranded and you need to take the prior sponsor's name off the buildings and you need to make sure, you know, so it's a consumer product at the end of the day. So you need to make sure that what people are saying, um, online and the reviews match the product that we want to deliver. Um, but then beyond that, there's a lot just low hanging fruit around landscaping and curb appeal and, you know, very, very easy things to execute. And I think one of the other things that we've been surprised by is we strongly believe in, um, you know, unit renovations and upgrading units, but only if there is the ROI there. And in some of these assets in Dallas and they're wide ranging, the, uh, economics don't make sense because it is catering to a target market that really appreciates the lower price point. And, um, you know, we know in a well-managed asset, so it's, it's not a lot of capital and, uh, we, you know, we think we can make a big difference in the matter of just several quarters.

Thanks so much, Priyanka. That's all for me.

Thanks, John. Thank you. Our next question comes from Jade Romani from KBW.

Sorry, I'm not on the phone.

Please go ahead.

Thanks. Thanks very much. Um, I might be wrong, but it, it does sound like the outlook for resolutions in the second half of the year is a bit muted. I'm not sure if you agree with that, but that is a little bit at odds with, uh, the very strong transaction environment. We're seeing, you know, the Siri Brokers report as well as, you know, the select commercial mortgage reads that are robustly originating loans right now. So what do you think is driving that? Is it the stories of each of the assets or something else?

Yeah. Hi, Jade. It's Priyanka. I'll take that one. Um, so I think one, I would just say we, we sort of accelerated a lot of that activity. We have, you know, we, we saw significant turnover in the book year to date, uh, on a percentage basis, much higher than our peers and, and what a lot of other people have seen. So it's, it's a timing question and we were very focused on encouraging that activity to happen, um, more quickly. We now, I think, can be more patient around regular way repayments and we have a number of loans where our sponsors are under term sheet and working on refinancing. I just don't control those outcomes. So I think we're a little more, um, hesitant to provide forward looking guidance on that. But that said, completely agree with sentiment out there in terms of transaction volume and, um, ability, you know, strength of the capital markets and, and sponsors abilities to refinance this out. We just, we don't control those outcomes. So we're just being, um, you know, thoughtful in our response to those questions.

Okay. That's great. Um, just on the July, uh, New York multifamily, I'm not sure if you said this, there's lots of conference calls at this time, but, um, do you know what the discounted payoff was? If you could give that amount.

Um, the one that happened in July. Yeah, it was, um, it was 90 cents of par. So three 90 was the loan amount, three 50. It was the discounted pay off number.

Okay. Is that

the

only realized loss?

Just to be clear, that was sorry, I don't mean to interrupt you. I just want to make clear that that was already embedded in our book value as of year end that that loss.

Okay. That's good to know. Are there any other expected losses in the third quarter, uh, that you know of right now?

No, everything that we, we know of, we have reflected in our, in our numbers at this point.

Okay. And then could Mike give an update on the term loan refi, how that's going, what you're thinking there? Will you downsize the loan? Will you go with a, you know, private credit option or issue some other form of debt? And then just broadly speaking, the capital structure of the company, do you think issuing the preferred, uh, would be attractive because that would bolster, you know, total equity and therefore improve the, uh, financing options, the leverage options, because there'd be a much bigger equity base, which would help cushion, you know, some of the transitions you're seeing in these assets like the REO and such.

Yeah. Thanks, Jay. Very thoughtful question. Um, you know, we're still working through the term loan process, so I can't give a ton of specifics around it, but we have a number of private credit providers who we're speaking with. Um, you know, with respect to the existing holders, we expect to engage, started engaging with them. Um, and you know, I would expect that we will reduce the size of that financing, given the amount of liquidity we have in our balance sheet and our stated objective of reducing leverage with respect to preferred. Uh, we have, we have thought about it. Um, I think that our best source of capital really continues to be continuing to resolve some of the watch list assets in the portfolio, generate liquidity from that, that we can use to deliver. Obviously, I think a preferred, uh, would be very helpful, uh, in the future. Uh, but we'd like to approach that from more of a position of strength, which I think we're continuing to get there.

Okay. Thanks very much.

Okay. Thank you. We currently have no further questions, so I'll hand back to Richard Mack for closing remarks.

Thank you. Uh, I want to again, thank, thank everyone for the thoughtful questions. I would summarize by saying, uh, we're ahead of our projections for our priorities and just restate them again, which is resolving watch list loans, improving liquidity and redeploying cash, um, to hire and better uses, uh, including stabilizing the business. Um, but, uh, before I let everyone go, um, I want to follow many of our mortgage repairs by acknowledging magnitude of loss created by the senseless tragedy, which occurred at 3 45 park. We live in a very small New York city real estate community, and many of us here at CNPG have close ties with the victims and with the Blackstone and Rudin teams. I just want to say on behalf of everyone at CNPG that we mourn their passing. We send our condolences to their families and their colleagues and just note that the world is a much poorer place for their loss. Thank you all, and we look forward to reconvening next quarter.

This concludes today's call. Thank you for joining us. You may now disconnect your lines.