Q3 2023 Claros Mortgage Trust Inc Earnings Call

Okay.

Let's see one Omar can Chicago small gauge Chuck that's cool touch what are you 23 earnings conference call. My name is not yet and it'll be a conference facilitator today.

Participants will be in a listen only mode.

After the Speakers' remarks, there'll be a question and answer period if.

If he would like to ask a question. Please press star followed by one telephone keypad.

I would now like to hand over to coach I'm Lynn Vice President of Investor Relations for carbon pitch Trust. Please proceed.

Thank you I'm joined by Richard Mack, Chief Executive Officer, and Chairman of Claris Mortgage Trust, Mike Mcmullen, President and director of Claris Mortgage Trust.

And Jay Augur, well see Mpg's Chief Financial Officer.

Also have Kevin Cullinan Executive Vice President who leads IMAX origination.

Ah Priyanka Garg executive Vice President, who leads I'm Rex portfolio and asset management.

Prior to this call we distributed CMT cheese earnings release and supplement.

You did 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 actual results may differ materially from those indicated by those 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 represents 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 and thank you everyone for joining us for <unk> third quarter earnings call.

At this time last year, the conversation among investors centered around the timing and depth of a 2023 recession.

But it now looks like the U S may close this year without one.

And while this appears to be positive news there continues to be much capital market uncertainty as bond rates decline.

Especially in interest rate sensitive industries.

So it's a confusing time.

We're good news about economic growth can be bad news for asset values, and where headline economic data is subject to multiple interpretations.

Add to this the elevated geopolitical risk unseen since the depths of the Cold War pumps.

Punctuated by the ongoing Russia, Ukraine War, and a renewed and rapidly evolving war in the middle East.

And you have the basis for persistent market volatility.

As investors struggled to price capital and underwrite future economic growth corporate earnings and inflation.

Some of the professional investment space believe that we are nearing or at the end of interest rate hikes.

Some are starting to discuss when and not if the fed will begin to cut rates.

It's difficult for us to predict the trajectory of interest rates given the multitude of indicators that may influence fed actions and the numerous and many cases conflicting variables impacting inflation and economic growth.

With this in mind, we at <unk> have been executing our business within the context of a higher for longer rate environment.

And this is one of the main reasons, we have been so proactive.

We are managing our portfolio with a long term investment perspective towards maximizing shareholder value, while acknowledging the commercial real estate industry has challenges.

Covid related demand shifts have been disruptive, particularly in the office sector.

But perhaps not nearly as jarring as the COVID-19 stimulus induced inflation, we are dealing with today and the subsequent higher interest rate environment.

The combination of these two factors has resulted in capital markets dislocation that we continue to see throughout the real estate sector.

Not surprisingly amidst these headwinds sales and transaction volumes have been significantly down over the past several quarters.

However outside of the office market, we have yet to observe many truly distressed trades.

What we are seeing is transaction volume around select high quality assets at only modestly lower values in spite of the challenging environment.

Turning past the economic climate I'll now add a few high level remarks on the third quarter for CMT G.

We had an active and productive quarter overall with portfolio management and strategic execution focused on liquidity and capital preservation.

As mentioned on our last earnings call, we had anticipated significant loan repayments in our portfolio during the back half of the year and we're pleased to report that we remained on track with four loans repaying during the third quarter.

Given the limited transaction activity in the broader real estate market. We believe this reflects positively on the institutional quality of the assets and the sponsors within our portfolio.

During the quarter. We also executed two loan sales. The first loan was a Texas hospitality loan, which was sold at par with the intention of reducing our overall hospitality exposure and bolstering our liquidity.

The second loan was collateralized by a San Francisco multifamily portfolio with a rent regulated component.

In the current environment, it's important to be vigilant and as part of our asset management process, we evaluate our investments through the lens of optimizing long term shareholder value.

Against the time and capital required to achieve that value.

So in select circumstances, we will consider selling alone where we no longer have long term conviction in the investments.

This was the case with the San Francisco multifamily investment, we decided to sell during the third quarter.

It was a difficult decision due to the resulting realized loss.

But ultimately we believe that this portfolio management decision was prudent given the market and regulatory headwinds the investment was facing.

Mike will provide a more comprehensive portfolio review later on in the call, including details of the loan sales.

Lastly, as previously reported CMT G declared a dividend of 25 per share for the third quarter, which represents a reduction from prior quarterly dividend levels of 37 cents per share.

We considered a number of factors in resetting the dividend, including acknowledging that the current market disruption was and is very likely to persist.

And the desire to take advantage of potential opportunities that may arise within our portfolio.

Given these factors, we look to establish the dividend at a level, where we believe it will be sustainable and comfortably covered by distributable earnings before realized gains and losses.

And leave us prepared for future opportunities and potential on those I.

I'd now like to turn the call over to Mike.

Thanks, Richard and good morning, everyone. The.

Third quarter was a dynamic quarter, driven by strong repayment activity and two loan sales.

Standing in this activity the portfolio composition remained relatively unchanged, although we had a modest decline in office exposure.

To quickly recap CMT ge's, primarily floating rate portfolio based on carrying value was $7 1 billion at September 30, compared to seven 5 billion at June 30th.

The quarter over quarter decrease was primarily due to loan repayment and loan sale activity during the period, partially offset by follow on fundings on prior period loan commitments.

During the third quarter, we received an aggregate of $475 million in loan proceeds, which comprised $248 million of full loan repayments about $39 million of partial loan repayments and $188 million from loan sales that Richard mentioned earlier, which I'll touch upon in more detail.

Later.

In addition, we made follow on fundings of $174 million.

Turning to the composition of our portfolio multifamily continues to represent our largest sector representing 41% of the portfolio at September 30th.

While we are observing borrowers contending with higher interest rates, our long term outlook for the asset class remains positive.

Continue to believe that high quality, well located multifamily will perform well on a relative basis, given the strong long term underlying supply demand fundamentals favoring the sector as well as the impact of higher interest rates on homeownership affordability.

Hospitality, our second largest allocation represented 19% of the portfolio at September 30, relatively unchanged compared to the prior quarter.

In terms of office historically, we've been highly selective when it comes to office.

As a result of maintained a low portfolio concentration in this asset class.

During the third quarter, we further reduced our office exposure to 13% of the portfolio.

This was primarily a result of an office construction loan that repaid during the quarter as anticipated.

The loan was $141 million loan commitment and was secured by a newly built class a high rise office building located in Nashville, Tennessee.

This alone is a good example of high quality office continuing to be attractive and why we believe construction loan service a valuable component of our portfolio.

Particularly you want asset managed with discipline.

And built an access to the broader perspective and resources of the macro real estate group.

We believe that when a new asset it's delivered it will frequently represent one of the highest quality and most in demand assets and its sub market.

As Richard mentioned, we expected a meaningful number of loans to repay and during the third quarter, we received $248 million in full loan repayments about $39 million and partial loan repayments with additional loan repayments expected to occur over the near to medium term we.

We believe it's important to note how diverse the underlying collateral of these loans were.

They represent a cross section of collateral from various markets and property types and primarily assets that were recently delivered to the market.

We believe this suggests that there is still liquidity for high quality assets and sponsors validating the quality of the investments in our portfolio.

Before turning the call over to Jay I'd like to discuss the loan sales we completed during the quarter.

The first one was collateralized by a high quality hospitality asset located in Austin, Texas with a <unk> of $123 million that had seen significant improvement in operating performance during the long term.

We took advantage of an opportunity to sell the investment at par, which we believe speaks to the credit quality of the asset and the investment, particularly in this capital markets environment.

The transaction enabled us to enhance our liquidity.

Bolstering our balance sheet, while reducing our leverage and exposure to hospitality.

The second loan was $138 million loan originated in 2019 collateralized by a portfolio of multifamily properties, where the rent regulated component located throughout San Francisco.

The borrower continued to support this asset through Covid, 19, pandemic, but decided to stop making debt service payments in the fourth quarter of 2022, as a result of increasing interest rates and reduced NOI at the property given San Francisco market challenges.

Since the time of the payment default the dynamics of the San Francisco Real estate market have continued to deteriorate.

Which coupled with the expectation of continued regulatory pressure led us to the difficult, but clear sighted decision to sell along for gross proceeds of $65 million, representing a 53% discount to U P. P.

While this is a disappointing outcome for the San Francisco alone. It was driven by our belief that there are significantly better uses of this capital.

And we were able to use proceeds from the loan sale to reduce leverage which will be accretive to distributable earnings given that the loan was on nonaccrual.

We also believe this demonstrates our commitment to strong and efficient portfolio management.

Even when it requires moving away from an investment thesis.

I would now like to turn the call over to Jay.

Thank you, Mike and Richard.

In the third quarter of 2023, we reported distributable earnings excluding net realized losses of 35 per share.

Which comfortably covers our revised dividend of 25 per share.

Distributable loss, including net realized losses were <unk> <unk> per share.

The net realized loss of $73 million 52 per share.

Primarily it is the Alco.

Nadia: My name is Nadia and I'll be a conference facilitator today. All participants will be in a listen and only mode. After the speech remarks, there will be a question and answer period. If you would like to ask a question, please press star, Philippine one on the telephone keypad.

All of the previously five rated.

Multifamily investment that Mike mentioned.

We reported GAAP net loss of <unk> 50 per share.

Please refer to our earnings supplement for a reconciliation of non-GAAP financial measures.

Arnlin: I would now like to hand over the call to Arnlin, Vice President of the Western Relations for Clara Smorgge's Trust. Please proceed. Thank you.

I would now like to discuss the overall credit profile of the portfolio and risk rating migration during the quarter.

Richard Mack: I'm joined by Richard Mack, Chief Executive Officer and Chairman of Clara Smorgge's Trust, Mike McGillis, President and Director of Clara Smorgge's Trust, and Jai Agarwal, CMPG's Chief Financial Officer.

No new loans added this created four category.

However.

Floated in loans will migrate to the size of it.

These are loans with an aggregate <unk> of $335 million against which we recorded specifics because of the of $71 million.

Unknown Executive: We also have Kevin Cullinan, Executive Vice President, who leads Emrex Origination and Priyanka Garg, Executive Vice President, who leads Emrex Portfolio and Affent Management.

These include a land loan in Virginia.

Office loans in San Francisco and Atlanta.

Unknown Executive: Prior to this call, we distributed CMPG's earnings release in Supplement. We encourage you to reference these documents in conjunction with the information presented on today's call.

At September 30 was $155 million to.

Two 2% of UBB.

Unknown Executive: If you have any questions, please contact me. I'd like to remind everyone that today's call may include four looking statements within the meeting of the Private Security's Litigation Reform Act of 1995. Actual results may differ materially from those indicated by those four looking statements. As a result of various important factors, including those discussed in our other filings with the SEC. Any four looking statements made on this call represents our views only as of today, and we undertake no obligation to update them.

This is comprised of $72 million of specific.

$3 million of general system deserves.

Specific reserves represented 21, 3% of the UPC of the underlying loans at quarter end.

The agenda for reserve of one 2% is comprised of.

Two 6% of the APB and floating loans, 0.8%.

Unknown Executive: We will also be referring to certain non-gap 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-gap measures to their nearest gap equivalent, please refer to the earnings supplement.

It could be on the remaining loans.

Gentle system increased during the quarter, primarily as a result of deteriorating macroeconomic conditions.

Set by seasoning and a reduction in our loan portfolio.

In addition.

Richard Mack: I would now like to turn the call over to Richard. Thank you on and thank you everyone for joining us for CMPG's third quarter earnings call. At this time last year, the conversation among investors centered around the timing and depth of a 2023 recession, but it now looks like the U.S, may close this year without one. And while this appears to be positive news, there continues to be much capital market uncertainty as bond rates climb, especially in interest rate sensitive industries.

We placed another $98 million floating loans secured by an office building in Irvine, California, and non accruals tests.

Nonaccrual loans represented a six 1% of our loan portfolio at September 30th.

Turning to the balance sheet.

As Richard mentioned preserving the liquidity continues to be a priority for the organization.

Since September 30, we reported $433 billion in total liquidity, which includes cash and approved and Undrawn credit capacity.

Richard Mack: So it's a confusing time where good news about economic growth can be bad news for asset values, and where headline economic data is subject to multiple interpretations. Add to this the elevated geopolitical risk unseen since the depths of the Cold War punctuated by the ongoing Russia Ukraine war and renewed and rapidly evolving war in the Middle East. And you have the basis for persistent market volatility as investors struggle to price capital and underwrite future economic growth, corporate earnings, and inflation.

I didn't cover loans comprised $438 million, which includes $407 million in senior loans.

As well as $144 million mixed use.

Audio properties.

In addition, we've just lending commitments decreased to one 3 billion at September 30th.

Compared to $1 9 billion at December 31, 2022.

Our net debt to equity ratio remained consistent quarter over quarter coming in at two two times at September 30.

I would now like to open the call for questions. Operator. Please go ahead.

Richard Mack: Some in the professional investment space believe that we are nearing or at the end of interest rate hikes. Some are starting to discuss when and not if the Fed will begin to cut rates. However, it's difficult for us to predict the trajectory of interest rates given the multitude of indicators that may influence Fed actions and the numerous and many cases conflicting variables impacting inflation and economic. Growth.

Thank you if you would like to ask a question. Please press Star then one on your telephone keypad.

To retract your question. Please press star followed by Kate on the <unk>.

Can I ask a question. Please ensure your freight isn't muted lately.

And our first question is legacy Belton of BP.

Sarah. Please go ahead your line is open.

Hey, everyone. Thanks for taking my question.

Richard Mack: With this in mind, we at CMTG have been executing our business within the context of a higher for longer rate environment. And this is one of the main reasons we have been so proactive. We are managing our portfolio with a long-term investment perspective towards maximizing shareholder value while acknowledging the commercial real estate industry's challenges. COVID-related demand shifts have been disruptive, particularly in the office sector, but perhaps not merely as jarring as the COVID stimulus-induced inflation we are dealing with today and the subsequent higher interest rate environment.

So on the equity side, we've been hearing that the multifamily supply issue is becoming more prevalent developers are perhaps more pressured to get to get to breakeven in order to effectuate, a sale or more permanent financing could.

Could you comment on that and what Youre seeing on the ground in your development portfolio and sponsor behavior there.

Sure are we.

Looking about merchant builders selling at a loss or are we talking about.

Fundamentals from a leasing and.

And occupancy perspective just to.

Make sure I get the question and thank you for asking it.

Yeah Yeah.

Richard Mack: The combination of these two factors has resulted in capital markets dislocation that we continue to see throughout the real estate sector. Not surprisingly, amidst these headwinds, sales and transaction volumes have been significantly down over the past several quarters. However, outside of the office market, we have yet to observe many truly distressed trades. What we are seeing is transaction volume around select high-quality assets at only modestly lower values in spite of the challenging environment.

My question I guess is coming out of some comments, we've been hearing with respect to merchant built everything because of that and your concentration in development.

Just curious to hear your comments on that and what Youre seeing in your portfolio.

Sure Okay. So.

As it relates to kind of the sales market, we are seeing merchant builders sell at modest losses in order to get off of guarantees that they have on their loans.

That is one of the things that we like about our construction loans.

Especially in the multifamily space.

Richard Mack: Turning past the economic climate, I'll now add a few high-level remarks on the third quarter for CMTG. We had an active and productive quarter overall with portfolio management and strategic execution focused on liquidity and capital preservation. As mentioned on our last earnings call, we had anticipated significant loan repayments in our portfolio during the back half of the year, and we're pleased to report that we remained on track with four loans repaying during the third quarter.

The borrowers are incentivized to take losses, because they are generally on the hook.

To pay the interest rate guarantees.

So we are seeing merchant builders sell at discounts, but modest modest discounts.

And generally what we like about that.

Building the best product in the market is even when there is softness in fundamentals, which there are.

These are the first assets to lease up and there's always a level.

Always is a big word but.

Richard Mack: Given the limited transaction activity in the broader real estate market, we believe this reflects positively on the institutional quality of the assets and the sponsors within our portfolio. During the quarter, we also executed two loan sales. The first loan was a Texas hospitality loan, which was sold at par with the intention of reducing our overall hospitality exposure and bolstering our liquidity. The second loan was collateralized by a San Francisco multi-family portfolio with a regulated component.

I've never seen a market, where there wasn't a level where you could lease the best.

Asset in the market.

And so we feel comfortable.

Very comfortable with our multifamily development assets.

Demand as a general statement.

Is good in most markets, but we are still absorbing supply.

And that.

Absorption.

Is what is dampening rents and brand concessions back into the market.

Having said that.

Almost every planned development.

Richard Mack: In the current environment, it's important to be vigilant, and as part of our asset management process, we evaluate our investments through the lens of optimizing long-term shareholder value, balanced against the time and capital required to achieve that value. So in select circumstances, we will consider selling alone where we no longer have long-term conviction in the investment. This was the case with the San Francisco multi- and family investment we decided to sell during the third quarter. It was a difficult decision due to the resulting realized loss, but ultimately we believe that this portfolio management decision was prudent given the market and regulatory headwinds the investment was safe.

In the multifamily space has been stopped.

So anything that didn't begin.

More than six months ago.

Really is not getting off the ground. We are also seeing.

A slowdown in home sales.

As mortgage rates climb, we believe that over time that will be bullish for multifamily.

So we think that inflation of rents.

We'll come to the multifamily sector, but it is going to take some time to catch up with the supply.

How.

Long term quite bullish given the lack of housing.

Mike McGillis: Mike will provide a more comprehensive portfolio review later on in the call, including details of the loan sales.

Overall in the U S market and we are under supply from a housing perspective.

That was.

The address your questions.

Richard Mack: Lastly, as previously reported, CMTG declared a dividend of 25 cents per share for the third quarter, which represents a reduction from prior quarterly dividend levels of 37 cents per share. We considered a number of factors in resetting the dividend, including acknowledging that the current market disruption was and is very likely to persist, and the desire to take advantage of potential opportunities that may arise within our portfolio. Given these factors, we look to establish the dividend at a level where we believe it will be sustainable and comfortably covered by distributable earnings before realized gains and losses, and leave us prepared for future opportunities and potential unknowns.

Yes, I appreciate the color there.

And then my follow up is just related to the loan sales.

It sounds like from the prepared remarks that you're open to pursuing more loan sales to support liquidity.

We saw.

Watch less loan sale as well as the higher quality three rated loans held during the quarter.

Can you speak to where else in your portfolio, either with respect to sector or geography, or non watchlist versus watch list.

You see more opportunities to sell and bring in more liquidity.

Hi, Sarah its priyanka. Thank you for that question.

Think it is going to be very situational very asset and borrower specific so the watch list loan that was sold I think Mike did a great job.

Mike McGillis: I would now like to turn the call over to Mike. Thanks, Richard, and good morning, everyone. The third quarter was a dynamic quarter driven by strong repayment activity and two loan sales. Notwithstanding this activity, the portfolio composition remained relatively unchanged, although we had a modest decline in office exposure. To quickly recap, CMTG's primarily floating rate portfolio based on carrying value was 7.1 billion at September 30th compared to 7.5 billion at June 30th.

Sharing our perspective on how we arrived at that conclusion, we're only going to do that if we really feel like we're not capable of stepping in and owning the adds that I think we've done that successfully twice now.

Our REO portfolio in somewhere we're not going to shy away from that but if we don't think the fundamentals are there then.

If we want it.

Resolve the credit then it's going to be alone sale. There is nothing that we're seeing on the horizon that we have slated for that right now, but it's a very dynamic environment and that remains to be seen.

Mike McGillis: The quarter-over-quarter decrease was primarily due to loan repayment and loan sale activity during the period, partially offset by follow-on fundings on prior period loan commitments. During the third quarter, we received an aggregate of 475 million loan proceeds, which comprised 248 million of full loan repayments, about 39 million of partial loan repayments, and 188 million from loan sales that Richard mentioned earlier, which I'll touch upon in more detail later. In addition, we made follow-on fundings of $174 million.

The three rated loans that we sold that was just more opportunistic right timing, we were able to sell it at par created liquidity, we're not out in the market actively.

Marketing it that was all that was not marketed that was just kind of based on a conversation with a counter party with whom we do a lot of business. So again, it was just opportunistic and situational, but theres no programmatic strategy here online sales.

Okay I appreciate the comments.

Mike McGillis: Turning to the composition of our portfolio, multi-family continues to represent our largest sector, representing 41 percent of the portfolio at September 30th. While we are observing borrowers contending with higher interest rates, our long-term outlook for the asset class remains positive. We continue to believe that high-quality, well-located multi-family will perform well on a relative basis, given the strong long-term underlying supply demand fundamentals, favoring the sector as well as the impact of higher interest rates on home ownership affordability.

Thank you. The next question you guys you Rick Shane of Jpmorgan. Please go ahead. Your line is open.

Thanks can you guys hear me this morning.

Yes, yes, yes next week.

Okay great.

Sorry. This question won't really come as a surprise to anybody who's been listening to these calls, but would just love to hear a little bit about comedy ship dividend policy and appetite for repurchases.

I'm, assuming that the loan sales were contemplated when you reduce the dividend.

Mike McGillis: Hospitality, our second-largest allocation represented 19 percent of the portfolio at September 30th, relatively unchanged compared to the prior quarter. In terms of office, historically, we've been highly selective when it comes to office, and as a result, it maintained a low portfolio concentration in the asset class. During the third quarter, we further reduced our office exposure to 13 percent of the portfolio. This was primarily a result of an office construction loan that we paid during the quarter as DeLaney.

For the third quarter and going forward.

But all.

All things considered and with the stock trading at such a huge discount.

Does that dividend policy make sense or should you be more aggressive on the buyback.

And I would just observe that.

Yeah.

You guys own on a relative basis, a great deal of stock compared to many of you are.

Peer companies, so I think the.

Lives are pretty aligned.

Okay.

Mike McGillis: The loan was 141 million loan commitment and was secured by a newly built class A high rise office building located in Nashville, Tennessee. This loan is a good example of high quality office continuing to be attractive and why we believe construction loans service a valuable component of our portfolio, particularly when asset managed with discipline and built in access to the broader perspective and resources of the Macriola State Group. We believe that when a new asset is delivered it will frequently represent one of the highest quality and most in demand assets in its sub market.

Sure Rick it's Mike Thanks for the question.

I think from a.

From a dividend perspective in terms of the decision to reduce it it wasn't so much tied directly to the decision to sell this long, but it was really looking at.

Looking at our portfolio looking at distributable earnings profile on a go forward basis, assuming there was going to be some.

Uh huh.

Deteriorate potential deterioration given a higher for longer rate environment.

We're trying to be proactive in making that dividend cut to reflect.

Mike McGillis: As Richard mentioned, we expected a meaningful number of loans to repay and during the third quarter we received 248 million and full loan repayments, about 39 million and partial loan repayments with additional loan repayments expected to occur over the near to medium term. We believe it's important to note how diverse the underlying collateral of these loans were. They represent a cross section of collateral from various markets and property types and primarily assets that were recently delivered to the market. We believe this suggests that there's still liquidity for high quality assets and sponsors validating the quality of the investments in our portfolio.

Where we thought distributable earnings before any net realized gains and losses would be on a forecasted basis.

And allow us to.

Two substantially cover that go forward dividend given given the situation that we had significantly overpaid or.

Minimum distribution requirements under the REIT rules.

So that that was those were all critical elements of that decision.

With respect to share buyback I think right now.

Liquidity is key.

We.

We really are focused on preserving and maintaining liquidity and protecting the portfolio in this environment, even though we have the ability to buy back shares.

Mike McGillis: Before turning the call over to Jay, I'd like to discuss the loan sales we completed during the quarter. The first loan was collateralized by a high quality hospitality asset located in Austin, Texas with a UPB of 123 million that had seen significant improvement in operating performance during the loan term. We took advantage of an opportunity to sell the investment at par, which we believe speaks to the credit quality of the asset and the investment, particularly in this capital markets environment.

I don't expect that we'd.

We're saying never but.

Don't expect that we would do it unless we were really really comfortable that we had a lot of excess liquidity and that was the best use of capital relative to redeploying into what we think is a very favorable market right now, but we're being very.

And conservative.

It's also to keep in mind, we do have.

As Jay mentioned significant future funding commitments on our existing loans, which we're very comfortable with the performance of that portfolio.

Mike McGillis: The transaction enabled us to enhance our liquidity further bolstering our balance sheet while reducing our leverage and exposure to hospitality. The second loan was $138 million loan originated in 2019, collateralized by a portfolio multi-family properties with a rent regulated component located throughout San Francisco. The borrower continued to support this asset through COVID-19 pandemic but decided to stop making debt service payments in the fourth quarter of 2022 as a result of increasing interest rates and reduced NOI at the property given San Francisco market challenges.

It's important to highlight that those loans have a weighted average spread.

So four of 473 basis points over sulfur so.

In excess of 10% current coupon on leverage so.

That we feel like it's a very.

Mike McGillis: Since the time of the payment default, the dynamics of the San Francisco real estate market have continued to deteriorate which coupled with the expectation of continued regulatory pressure led us to the difficult but clear-sided decision to sell the loan for gross proceeds of $65 million, representing a 53% discount to UPB. While this is a disappointing outcome for the San Francisco loan, it was driven by our belief that there are significantly better uses of this capital and we were able to use proceeds from the loan sale to reduce leverage which will be accretive to distributable earnings given and that the loan was on.

Good use of excess liquidity as we have it.

So.

Hopefully that's responsive to your question.

It is thats helpful and and.

When we think about those undrawn commitments.

The common it had been made it.

Multifamily developer.

Development and a lot of cases is really stock does that suggest to you that in the near term the draws on.

Against those commitments will be relatively modest and so theres a little bit of a.

That is.

Liquidity won't be drawn until the environment improves a little bit is that is that the sort of check and balance there.

Hey, Rick its priyanka I'm going to jump in here we.

Mike McGillis: Nanakruel. We also believe this demonstrates our commitment to strong and efficient portfolio management even when it requires moving away from an investment thesis.

I think Richard to comment with more general comment related to the market and our portfolio. All construction is proceeding as expected on schedule all churn really on budget. So I wouldn't expect any change in our future funding commitments as it relates to our multifamily exposure or really.

Jay Agarwal: I would now like to turn the call over to Jay. Thank you Mike and Richard for the third quarter of 2023. We reported distributed learning, excluding naturalized losses of 35 cents per share, which comfortably covers our revised dividend of 25 cents per share. Distributable loss, including naturalized losses, was 16 cents per share. The naturalized loss of 73 million dollars, or 52 cents per share, was primarily a result of the sale of the previously-fibrated 10-centres-scale multi-family investment that Mike mentioned.

<unk> across our construction loans.

We've mentioned in past quarters, we had we have milestones in our loan documents, we have effectively stopped all right every month, that's where funding dries until we want to keep funding tried to keep the project moving forward and have borrowers continue to rebalance. So we're not seeing a slowdown inside of our portfolio of projects.

It started had continued.

Yes.

Got it okay. Thank you that's very helpful clarification. Thanks, guys.

Jay Agarwal: We reported gap net loss of 50 cents per share. We refer to our earnings supplement for reconciliation of non-gap financial measures.

Thank you Rick.

Okay.

Thank you as a reminder, if you would like to ask a question. Please press star followed by one on the color. Thank you.

Hey, Pat.

And our next question Betsy Jade Rahmani of type W. Jade. Please go ahead your line is open.

Jay Agarwal: I would now like to discuss the overall credit profile of the portfolio and this creating migration during the quarter. No new loans were added to this credit for category. However, three forwarded loans were migrated to a five rating. These are loans with an aggregate UPB of 335 million, against which we recorded a specific fee to the bill of 71 million dollars. These include a land loan in Virginia, an asset loan in San Francisco and Atlanta.

Hi, This is Jason <unk> on for Jade. So my first question.

<unk> commercial mortgage Reits take 30% to 50% losses on loan sales in some cases and these are on loans with 60% to 70% reported ltvs.

What do you think is driving that magnitude of loss how much of it is look through to the price decline at the asset level.

Much of it is delayed business plan and higher cost of carry and how much of it is.

Lack of ability to leverage what you bought.

Jay Agarwal: As a demeteria, a fee to the bill was 155 million, or 2.2% of UPB. This is comprised of 72 million dollars of the deficit and 83 million dollars of general fee to the bill. Specific fee to the bill are presented 21.3% of the UPB of the underlying loans that quarter end. The general fee to the bill of 1.2% is comprised of 3.6% of the UPB on 40 loans and 0.8% of the UPB on the remaining loans.

Yeah.

Okay.

Hi, its priyanka. Thanks, Thanks for that question.

I think it's a great question I think that's something we're all trying to understand right now, but I think these loan sales.

Obviously, I can only speak for ourselves, but theyre, all very situational and it really just depends on.

Strength of borrower or what people think they can go after and what jurisdiction, it's occurring because that impacts ability to foreclose.

There's obviously underlying asset deterioration like you just said.

I think.

For the for our situation in particular.

Jay Agarwal: The general fee to the bill increased during the quarter primarily as a result of deteriorating macroeconomic conditions, offset by seasoning off in a reduction in our loan portfolio. In addition, you placed another 98 million dollars forwarded loan secured by an office building in Irvine, California, a non-approved status. Non-equal loans represented 6.1% of our loan portfolio as a demeteria.

Kevin.

Our decision to go ahead and sell alone what we wanted to really focus on which in theory expedient and certain execution and so we selected a strong buyer could close quickly, which minimize both market and execution risks. So we will see I.

I think it's just a very dependent.

That situation and in our case, we really wanted to ensure that we got it off our books quickly just given the overall environment in San Francisco and as it related to the continued uncertain rate environment. So I think it's a great question, but I think there's just not a wholesale response.

Jay Agarwal: Turning to the balance sheet. As Richard mentioned, preserving the liquidity continues to be a priority for the organization. As a demeteria, we reported 433 million dollars in total liquidity, which include cash and approved and unlawed credit capacity. Unencumbered loans comprise 438 million dollars, which include 477 million dollars in senior loans. As well as 144 million dollars mixed use monocity are your property. D. In addition, Richard's funding commitments decreased to $1.3 billion as a term of 30th, compared to $1.9 billion as a term of 31st of 2022. And that's the equity ratio of the main consistent quarter of a quarter coming in at 2.3 times as a term of 30th.

Hum.

Let me jump.

Jumping to just a little bit yeah. So.

Yes.

When you when you look at the San Francisco sale.

For us when you look at what has occurred in San Francisco regulated multi housing is kind of a perfect storm.

California, and San Francisco in particular continue.

Continues.

Two to stagnate and continues to be impacted by work from home.

Crime.

Homelessness drug use.

Governance.

We can hi taxes, we can go on and on with.

Unknown Executive: I would now like to open the call for questions. Operator, please go ahead. Thank you. If you would like to ask a question, please press Scarf, fill it by 1 on your telephone keypad. If you choose to retract your question, please press Scarf, fill it by 2.

And the prospect of increased regulation I think we can go on and on with the issues as it relates to that asset and so given all of that uncertainty.

We decided to move on and take it very very significant loss as it relates to other losses like this.

Unknown Executive: When preparing to ask your question, please answer your phone as a new to locally.

Sarah Barcomb: And our first question today is to Sarah Barcom of BTIG.

In the market there have not been that many sales I would imagine very few people want to transact at.

Unknown Executive: Sarah, please can headline this open. Hey everyone, thanks for taking the question. So on the equity side, we've been hearing that the multi-family supply issue is becoming more prevalent. Developers are perhaps more pressured to get to break even in order to effectuate a sale or more permanent financing. Could you comment on that and what you're seeing on the ground in your development portfolio and sponsor behavior there? Sure, are we talking about merchant builders selling at a loss?

That type of a level unless they are in.

Asset classes like office, and then and in very weak markets, where they feel that the going forward opportunity for that asset is vastly diminished. So this was a very unusual and we hope a one off situation.

Terms of.

Just about everything that could go wrong going wrong wanting certainty and wanting to move on so that there are multiple factors here, but I don't I don't think other than that.

Unknown Executive: Are we talking about fundamentals from a leasing and occupancy perspective just to make sure I get the question. And thank you for asking it. Yeah, yeah. You know, my question I guess is coming out of some comments we've been hearing with respect to merchant builders and you know, because of that and your concentration and development, just with curious to hear your comments on that and then what you're seeing in your portfolio.

Outside of office, we're going to continue to see.

People selling loans at.

At those type of significant discounts.

Yeah.

Great. Thank you as my follow up question. The 10-Q provide some commentary around discount rates and terminal cap rates. So generally speaking what do you think stabilized cap rates should be on office and multifamily.

Unknown Executive: Sure. Okay, so as it relates to kind of the sales market, we are seeing merchant builders sell at modest losses in order to get off of guarantees that they have on their loans. That is one of the things that we like about our construction loans, especially in the multi-family space. The borrowers are incentivized to take losses because they are generally on the hook to pay the interest rate guarantees. And so we are seeing merchant builders sell at discounts, but modest discounts.

That's a very tough question.

Go ahead priyanka.

Yeah.

No I was going to say the exact same thing actually again I think it's just so market specific asset specific I mean, if youre talking about or at least stop asked that it depends on the quality of the rent roll.

Weighted average lease terms. So there's so many things that go into that.

I think the.

The reference you made to what's in the 10-Q. These are all related to transitional assets that are in our portfolio that have that.

That lease up and stabilization is going to take time, which as you know by definition in the transitional asset arena and so we have used cap rates that are indicative of a more normalized transaction environment rather than cap rates today, which is obviously a very capital constrained environment.

Unknown Executive: And generally what we like about the building the best product in the market is even when there is softness in fundamentals, which there are, these are the first assets to lease up. And there's always a level, always is a big word, but I've never seen a market where there wasn't a level where you could lease the best asset in the market. And so we feel comfortable, very comfortable with our multi-family development assets. Demand as a general statement is good in most markets, but we're still absorbing supply. And that absorption is what is dampening rents and bringing concessions back into the market.

Great. Thank you very much.

Thank you we have no further questions I'll now hand back to Richard for any type of incremental.

Okay.

Well, thank you all for joining us.

I think that.

This environment is difficult is going to continue to be difficult.

And.

We are ready for it.

It may not be fun everyday, but we are set up for an environment like this and to work through problems and get to the other side.

But it's going to be very bumpy road for the next year, we think at least.

Unknown Executive: Having said that, almost every planned development in the multifamily space has been stopped. So anything that didn't begin more than six months ago really is not getting off the ground. We are also seeing a slowdown in home sales as mortgage rates climb. We believe that over time that will be bullish for multifamily. So we think that the inflation of rents will come to the multifamily sector, but it is going to take some time to catch up with the supply.

We think we're very well set up.

To handle these problems.

And be ready for a capital market turnaround hopefully by 2025.

So thank you all for joining us and we'll look forward to speaking to you again at our next.

Earnings call. Thank you so much.

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

[music].

Okay.

Unknown Executive: But we are a long term, quite bullish, given the lack of housing overall in the US market. We are under supply from housing perspective. Hopefully that was that addressed your questions. Yeah, I appreciate the color there.

Okay.

Okay.

Okay.

[music].

Okay.

Unknown Executive: And then my follow-up is just related to the loan sales. It sounds like from the prepared remarks that you're open to pursuing more loan sales to support liquidity. We saw a watchless loan sale as well as a higher quality three rated loan sale during the quarter. Can you speak to where else in your portfolio, either with respect to sector or geography, or non watchless versus watchless where you see more opportunities to sell and bring in more liquidity.

Priyanka Garg: Hi, Sarah. It's Priyanka.

Priyanka Garg: Thank you for that question. I think it's going to be very situational, very asset and borrower specific. So the watchless loan that was sold, I think, might get a great job of sharing our perspective and how we arrived at that conclusion. We're only going to do that if we really feel like we're not capable of stepping in and owning the asset. I think we've done that successfully twice now in our REO portfolio.

Priyanka Garg: And so we're not going to shy away from that. But if we don't think the fundamentals are there, then, you know, if we want to resolve the credits, then it's going to be a loan sale. There's nothing that we're seeing on the horizon that we have slated for that right now. But it's a very dynamic environment. And, you know, that remains to be seen. The three rated loan that we sold, that was, you know, just more opportunistic right timing.

Priyanka Garg: We were able to sell it apart, created liquidity. We're not out in the market actively marketing it. That was also that was not marketed. That was just a kind of based on a conversation with a counterparty with whom we do a lot of business. So again, it was just an opportunistic and situational, but there's no programmatic strategy here on loan sales.

Unknown Executive: Okay. Appreciate the comment.

Unknown Executive: Thank you.

Rick Shane: The next question goes to Rick Shane of JP Morgan. Rick, please go ahead. Your line is open. Thanks. Can you guys hear me this morning? Yes. Thanks, Rick. Okay. Great. Sorry.

Mike McGillis: This question won't really come as a surprise to anybody who's been listening to these calls. But we would just love to hear a little bit about combination of dividend policy and appetite for repurchases. I'm assuming that the loan sales were contemplated when you reduce the dividend for the third quarter and going forward. But all things considered and with a stock trading at such a huge discount, does that dividend policy make sense or should you be more aggressive on the buyback?

Mike McGillis: And I would just observe that. You guys own on a relative basis a great deal of stock compared to many of your pure companies. So, I think the incentives are pretty aligned. Sure Rick, it's Mike. Thanks for the question. I think from a dividend perspective in terms of the decision to reduce it, it wasn't so much tied directly to decision to sell this loan, but it was really looking at looking at our portfolio, looking at distributable earnings profile on a go forward basis, assuming there was going to be some deteriorate potential deterioration given a higher.

Mike McGillis: There for longer rate environment, and we're trying to be proactive in making that dividend cut to reflect where we thought distributable earnings before any net realized gains and losses would be on a forecasted basis and allow us to substantially cover that go forward dividend given given the situation that we'd significantly overpaid our minimum distribution requirement. So, that was those are all critical elements of that decision with respect to share buyback I think right now liquidity is key.

Mike McGillis: We really are focused on preserving and maintaining liquidity and protecting the portfolio in this environment, even though we have the ability to buy back shares. I don't expect that we'd say never, but I don't expect that we'd do it unless we were really, really comfortable that we had a lot of access liquidity, and that was the best use of capital relative to redeploying into what we think is a very favorable market right now, but we're being very conservative.

Mike McGillis: I think it's also to keep in mind we do have as Jay mentioned significant future funding commitments and our existing loans, which were very comfortable with the performance of that portfolio. It's important to highlight that those loans have a weighted average spread to so far of 473 basis points over so far. So, you know, in excess of a 10% current coupon on leverage so, you know, that we feel like it's a very good use of excess liquidity as we have it. So, hopefully that's responsive to your question. It is, that's helpful.

Priyanka Garg: And when we think about those under on commitments, the common had been made that, you know, multifamily development in a lot of cases has really stopped. Does that suggest to you that in the near term, the draws on against those commitments will be relatively modest. That liquidity won't be drawn until the environment improves a little bit, is that the sort of check and balance there?

Rick Shane: Hi, Rick, it's Priyanka. I'm going to jump in here. I think we're going to come up with more general comment related to the market. In our portfolio, all construction is proceeding as expected on schedule. Generally on budget, so I wouldn't expect any change in our future funding commitments as it relates to our multi-family exposure or really across our construction loans. I think we've mentioned in past quarters, we have milestones in our loan documents.

Rick Shane: We have effectively and a stop all right every month as we're funding draws. And so we want to keep funding draws, keep the project moving forward and have borrowers continue to rebalance. So we're not seeing a slowdown inside of our portfolio projects that have started, has continued. Got it. Priyanka, thank you. That's a helpful, very helpful clarification. Thanks, guys. Thank you, Rick. Thank you, as a reminder, if you would like to ask a question, please press star, fill it by one or telephone keypad.

Unknown Executive: Can I ask a question?

Gade Romani: Is he Gade Romani of KBW Gade? Please go ahead, your line is open.

Priyanka Garg: Hi, this is Jason, Tabtron on for Jade. So my first question, we're seeing commercial mortgage rates take 30 to 50% losses on loan sales in some cases. And these are on loans with 60 to 70% reported LTVs. So what do you think is driving that magnitude of loss? How much of it is a look through the price to climb at the asset level? How much of it is the lead business plan and higher cost of carrying? How much of it is lack of ability to leverage what you're buying?

Richard Mack: Hi, it's Priyanka. Thanks for that question. I think it's a great question. I think that's something we're all trying to understand right now, but I think these loan sales, you know, obviously I can only speak for ourselves, but they're all very situational, and it really just depends on, you know, strength of borrower, what people think they can go after, and what's your restriction? It's occurring because that impacts ability to foreclose. There's obviously underlying asset deterioration, like you just said.

Richard Mack: I think, you know, for for for our situation in particular, given our decision to go ahead and sell the loan, what we wanted to really focus on was very expedient and certain execution. And so we selected a strong buyer who could close quickly, which minimize both market and execution risk. So we, you know, I think it's just a very dependent situation, and in our case, we really wanted to ensure that we got it off our books quickly, just given the overall environment in San Francisco, and as it related to the continued uncertain rate environment. So I think it's a great question, but I think that's just not a whole sale response.

Unknown Executive: Let me jump in. You just a little bit. Yeah, yeah.

Richard Mack: So I When you look at the San Francisco sale, you know, for us, you know, we look at what has occurred in San Francisco regulated multi housing as kind of perfect storm. California and San Francisco in particular continues to to stagnate and is continues to be impacted by work from home. Crime, homelessness, drug use, governance, we can high taxes, we can go on and on with and the prospect of increased regulation.

Richard Mack: I think we can go on and on with the issues as it relates to that asset and so given all of that uncertainty, we decided to move on and take a very very significant loss. As it relates to other losses like this in the market, there have not been that many sales. I would imagine very few people want to transact at that type of a level unless they are in asset classes like office and in very weak markets where they feel that the going forward opportunity for that asset is vastly diminished.

Richard Mack: This was a very unusual and we hope a one-off situation in terms of just about everything that could go wrong, going wrong, wanting certainty and wanting to move on so that there are multiple factors here. But I don't think other than that outside of office, we're going to continue to see people selling loans at those type of significant discounts.

Unknown Executive: Great, thank you. As my follow-up question, the 10 key provides some commentary around discount rates and terminal cap rates. So generally speaking, what do you think stabilized cap rates should be on office and multi family?

Priyanka Garg: That's a very tough question. Go ahead, Priyanka. Now I was going to say the exact same thing. Actually, again, I think it's just so market-specific asset-specific. I mean, if you're talking about a leased-up asset, it depends on the quality of the rent role, you know, weighted average lease terms. So there's so many things that go into that. I think the reference you made to what's in the 10Q, these are all related to transitional assets that are in our portfolio that lease up and stabilization is going to take time, which is by definition in the transitional asset arena. And so we have used cap rates that are indicative of more normalized transaction environment rather than cap rates today, which is obviously a very capital constrained environment.

Unknown Executive: Great, thank you very much.

Unknown Executive: Thank you.

Richard Mack: We have no further questions, and I'll hand back to Richard for any closing comments.

Richard Mack: Well, thank you all for joining us. I think that this environment is difficult. It's going to continue to be difficult. And we are ready for it. It may not be fun every day, but we are set up for an environment like this and to work through problems and get to the other side. But it's going to be a very bumpy road for the next. First year at least, we think we're very well set up to handle these problems and be ready for a capital market turn around, hopefully by 2025.

Unknown Executive: So thank you all for joining us and I will look forward to speaking to you again at our next earnings call. Thank you so much. Thank you.

Unknown Executive: This now includes today's call. Thank you all for joining. You may now just collect your lines.