Q2 2024 Claros Mortgage Trust Inc Earnings Call

Ladies and gentlemen, please remain holding. The conference will begin momentarily. Again, please remain holding. The conference will begin momentarily.

Jaquita: remain holding. The conference will begin momentarily. , , , , , , , , , , , , Welcome to the Claros Mortgage Trust second quarter 2024 earnings conference call. My name is Jaquita and I will be your conference facilitator today. All participants are in a listen only mode.

Speaker Change: Unknown Executive, Richard Mack, Anh Huynh

Speaker Change: Welcome to the Claros Mortgage Trust second quarter 2024 earnings conference call.

Jacquita: My name is Jacquita, and I will be your conference facilitator today.

Jacquita: I'll participate in a listen-only mode.

Jaquita: My name is Jaquita and I will be your conference facilitator today.

Speaker Change: All participants are in a listen-only mode. After the speaker's remarks, there will be a question-and-answer period.

Jacquita: If you would like to ask a question, please press star one on your telephone keypad.

Unknown Executive: I would now like to hand a call over to, on when Vice President of Investor Relations for Clare of Mortgage Trust, please proceed.

Jaquita: After the speaker's remarks, there will be a question and answer period. If you would like to ask a question, please press star one on your telephone keypad. I would now like to hand the call over to Anh Huynh, Vice President of Investor Relations for Claros MRT Trust. Please proceed.

Anh Huynh: If you would like to ask a question, please press star 1 on your telephone keypad. I would now like to hand the call over to Anh Huynh, Vice President of Investor Relations for Claros Mrtg Trust. Please proceed.

Richard Mack: Thank you. I'm joined by Richard Mack, Chief Executive Officer and Chairman of Clare of Mortgage Trust. I'm Mike McGillis, President, Chief Financial Officer, and Director of Clare of Mortgage Trust. We also have Priyanka Garg, Executive Vice President, who leads the Emrex portfolio and asset management. Prior to this call, we distributed CMTG's earnings release and supplement. We encourage you to reference these documents in conjunction with the information presented on today's call.

Anh Huynh: I'm joined by Richard Mack, Chief Executive Officer and Chairman of Claros Mortgage Trust, and Mike McGillis, President, Chief Financial Officer and Director of Claros Mortgage Trust. We also have Priyanka Garg, Executive Vice President, who leads Embrex Portfolio and Asset Management.

Anh Huynh: Thank you.

Speaker Change: I'm joined by Richard Mack, Chief Executive Officer and Chairman of Claros Mortgage Trust, and Mike McGillis, President, Chief Financial Officer, and Director of Claros Mortgage Trust. We also have Priyanka Garg, Executive Vice President, who leads MREC's Portfolio and Asset Management.

Anh Huynh: 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.

Unknown Executive: If you have any questions, please contact me.

Unknown Executive: I'd like to remind everyone that today's call may include four of looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Actual results vary different materially from those indicated by before looking statements. As a result of various important factors, including those discussed in our other filings with the SEC. Any four of the 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.

Speaker Change: 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.

Speaker Change: Actual results may differ materially from those indicated by these forward-looking statements, as a result of various important factors, including those discussed in our other filings with the SEC.

Speaker Change: Any forward-looking statements made on this call represent our views only as of today, and we undertake no obligation to update them.

Speaker Change: 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.

Unknown Executive: For reconciliation of non-GAAP measures to their nearest GAAP equivalent, please refer to the earnings supplement.

Speaker Change: For reconciliation of non-GAAP measures to their nearest GAAP equivalent, please refer to the Earning Supplement.

Richard Mack: I would now like to turn the call over to Richard.

Richard Mack: Thank you on, and thank you everyone for joining us this morning for CMTG's second quarter earnings call. It's been more than two years since the Fed started raising interest rates in response to rising inflation. and it's not been an easy run for the commercial real estate industry, to say the least. When we take a step back and look at the broader picture, we can see many variables at play. Property owners have not had the pricing power of other industries that were able to pass on rising costs to consumers. Falling demand for office space, an additional supply coming online in multi-family and industrial, have coincided with traumatic increases in real estate expenses and capital costs.

Speaker Change: I would now like to turn the call over to Richard.

Richard Mack: Thank you Anh and thank you everyone for joining us this morning for CMPG's second quarter earnings call.

Speaker Change: It's been more than two years since the Fed started raising interest rates in response to rising inflation.

Richard Mack: And it's not been an easy run for the commercial real estate industry to say the least.

Speaker Change: When we take a step back and look at the broader picture, we can see many variables at play. Property owners have not had the pricing power of other industries that were able to pass on rising costs to consumers.

Speaker Change: Falling demand for office space and additional supply coming online in multifamily and industrial have coincided with traumatic increases in real estate expenses and capital costs.

Richard Mack: This is translated into real estate values, falling rapidly across the board. Commercial real estate takes time to build and time to stop building, so it lags the economy, and in the short term, the industry has been disproportionately hurt by inflation and rate movements. But it can also result in outsized benefits when this pattern reverses. New construction has been dramatically reduced against the backdrop that features a generally resilient consumer, pooling inflation, and a broad-based market expectation that the Fed is poised to begin cutting rates. Furthermore, many investors are also predicting a resumption of rent increases in both multi-family and industrial, given limited new supply and sustained demand.

Speaker Change: This is translated into real estate values falling rapidly across the board.

Speaker Change: Commercial real estate takes time to build and time to stop building, so it lags the economy, and in the short term, the industry has been disproportionately hurt by inflation and rate movements.

Speaker Change: But it can also result in outsized benefits when this pattern reverses.

Speaker Change: New construction has been dramatically reduced against the backdrop that features a generally resilient consumer, cooling inflation, and a broad-based market expectation that the Fed is poised to begin cutting rates.

Speaker Change: Furthermore, many investors are also predicting a resumption of rent increases in both multifamily and industrial, given limited new supply and sustained demand, just as rates may start to fall.

Richard Mack: Just as rates may start to fall, this double benefit impact has some investors calling the bottom, essentially since construction costs have also risen significantly. Not surprisingly, then, we are starting to see green shoots in the commercial real estate market, suggesting a more positive trajectory for the industry could be on the horizon. While it's still too early to declare sea change and investor sentiment, large and no-worldly transactions are getting done. Lenders are slowly returning to the market as new sources of private credit emerge. With this gradual increase in liquidity, albeit still muted from recent historical levels, we've seen borrowers successfully and willingly secure financing, even in light of the elevated rate environment.

Speaker Change: This double benefit impact has some investors calling the bottom, especially since construction costs have also risen significantly.

Speaker Change: Not surprisingly, then, we are starting to see green shoots in the commercial real estate market, suggesting a more positive trajectory for the industry could be on the horizon.

Speaker Change: While it's still too early to declare a sea change in investor sentiment, large and noteworthy transactions are getting done.

Speaker Change: Lenders are slowly returning to the market as new sources of private credit emerge.

Speaker Change: With this gradual increase in liquidity, albeit still muted from recent historical levels, we've seen borrowers successfully and willingly secure financing, even in light of the elevated rate environment.

Richard Mack: With regard to our portfolio, we continue to be constructive on the long-term outlook of the multi-family sector, which remains our largest portfolio concentration. We expect population growth, migration to many of our current and target MSAs, and limited housing supply will continue to drive the overall fundamental picture we are seeing in rental housing. Additionally, we have made meaningful progress towards improving value in our two-Oreo assets, and we attribute this success to our management team's experience and hands-on asset management approach. Looking ahead, many of the real estate industry expect that rate relief will re-energize the real estate capital markets, providing valuation tailwinds for most asset classes.

Speaker Change: With regard to our portfolio, we continue to be constructive on the long-term outlook of the multifamily sector, which remains our largest portfolio concentration.

Speaker Change: We expect population growth, migration to many of our current and target MSAs, and limited housing supply will continue to drive the overall fundamental picture we are seeing in rental housing.

Speaker Change: Additionally, we have made meaningful progress towards improving value in our two REO assets, and we attribute this success to our management team's experience and hands-on asset management approach.

Speaker Change: Looking ahead, many in the real estate industry expect that rate relief will re-energize the real estate capital markets, providing valuation tailwinds for most asset classes.

Richard Mack: And while we remain focused on liquidity, we also believe that the optimism around the Fed-reducing rates provides us a compelling opportunity to re-evaluate how we are deploying and directing our capital in expectation of asset value increases. Although the number of assets on non-accrual and the watch list increased the squatter, the rate of increase decelerated, implying an improving cycles. In such an environment, we do not believe that the current portfolio designations reflect the inherent value of our portfolio over the median to long-term.

Speaker Change: And while we remain focused on liquidity, we also believe that the optimism around the Fed reducing rates provides us a compelling opportunity to re-evaluate how we are deploying and directing our capital in expectation of asset value increases.

Speaker Change: Although the number of assets on non-accrual and the watch list increased this quarter, the rate of increase decelerated, implying an improving cycle.

Speaker Change: In such an environment, we do not believe that the current portfolio designations reflect the inherent value of our portfolio over the medium to long term.

Richard Mack: with all of these factors in mind.

Richard Mack: Our Board of Directors has decided to adjust our quarterly given to 10 cents per share, beginning in the third quarter of 2024. We believe this decision enables us to pursue capital allocation strategies with the objective of preserving and enhancing book value, while also positioning the portfolio for earnings growth. Those capital allocation decisions may include investing in our current and potential future REO assets, paying down high-cost debt, buying back our term loan, or buying back CMTG stock, which we believe is significantly undervalued at current price levels.

Speaker Change: With all of these factors in mind, our Board of Directors has decided to adjust our quarterly dividend to $0.10 per share beginning in the third quarter of 2024.

Speaker Change: We believe this decision enables us to pursue capital allocation strategies with the objective of preserving and enhancing book value, while also positioning the portfolio for earnings growth.

Speaker Change: Those capital allocation decisions may include investing in our current and potential future REO assets.

Speaker Change: Paying down high-cost debt.

Speaker Change: buying back our term loan or buying back CMTG stock, which we believe is significantly undervalued at current price levels.

Mike McGillis: I would now like to turn the call over to Mike.

Mike McGillis: At quarter end, our multifamily portfolio was unchanged compared to the prior quarter, representing our largest exposure at 40% of the portfolio. As Richard mentioned, the supply-demand imbalance continues to benefit the housing market, and we remain bullish on the long-term fundamentals of the sector.

Mike McGillis: Thank you, Richard. For the second quarter of 2024, CMTG reported a GAAP net loss of nine cents per share and distributive earnings of 20 cents per share. Distributable earnings per share prior to realize losses were 21 cents per share, which was in line with the first quarter result of 20 cents per share.

Speaker Change: I would now like to turn the call over to Mike.

Mike: Thank you, Richard.

Mike: For the second quarter of 2024, CMTG reported a gap net loss of $0.09 per share.

Mike: Distributable Earnings of $0.20 per share. Distributable Earnings per share prior to realized losses were $0.21 per share, which was in line with the first quarter result of $0.20 per share.

Mike McGillis: The New York City REO hotel portfolio had a stronger second quarter due to expected seasonality, which resulted in a five cent per share improvement in earnings compared to last quarter. This was partially offset by the impact of a New York land loan placed on non-accrual during the quarter.

Mike: The New York City Aereo Hotel portfolio had a stronger second quarter due to expected seasonality, which resulted in a 5 cent per share improvement in earnings compared to last quarter.

Mike: This was partially offset by the impact of a New York land loan placed on non-accrual during the quarter. I'll provide additional information on the non-accrual loan later in the call.

Mike McGillis: I'll provide additional information on the non-accrual loan later in the call.

Mike McGillis: Beginning with the left side of the balance sheet, CMTG's loan portfolio grew slightly to 6.8 billion at June 30th compared to 6.7 billion at March 31st. The quarter-over-quarter change is attributable to follow-on funding of 143 million, offset by the impact of partial loan repayments totaling 41 million. At quarter end, our multi-family portfolio was unchanged compared at prior quarter, representing our logistic exposure at 40 percent of the portfolio.

Mike: Beginning with the left side of the balance sheet, CMTG's loan portfolio grew slightly to $6.8 billion on June 30th, compared to $6.7 billion on March 31st.

Mike: The quarter-over-quarter change is attributable to follow-on fundings of $143 million offset by the impact of partial loan repayments totaling $41 million.

Mike: At quarter end, our multifamily portfolio was unchanged compared to prior quarter, representing our largest exposure at 40% of the portfolio.

Mike McGillis: As Richard mentioned, the supply-demand imbalance continues to benefit the housing market, and we remain bullish on the long-term fundamentals of the sector. However, borrowers continue to experience challenges as they are adversely affected by higher interest rates, elevating their cost of carry, among other items. As a result, during the quarter, we downgraded three loans to a four risk rating, representing a total carrying value of 370 million. Two of these loans, with a UPB of 161 million, are collateralized by multi-family assets located in the Dallas MSA, with the same sponsor. The current interest rate environment plays significant pressure on the sponsor's ability to effectively operate their broader portfolio.

Mike: As Richard mentioned, the supply-demand imbalance continues to benefit the housing market, and we remain bullish on the long-term fundamentals of the sector.

Speaker Change: However, borrowers continue to experience challenges as they are adversely affected by higher interest rates, elevating their cost of carry, among other items.

Richard Mack: As a result, during the quarter, we downgraded three loans to a four-risk rating, representing a total carrying value of $370 million.

Mike: Two of these loans, with a UPB of $161 million, are collateralized by multifamily assets located in the Dallas MSA with the same sponsor.

Mike: The current interest rate environment has placed significant pressure on the sponsor's ability to effectively operate their broader portfolio.

Mike McGillis: The downgrades of these loans are driven primarily by this pressure on the sponsor rather than by underlying long-term real estate fundamentals. We are likely to take ownership of these assets along with other four rated multi-family loans in the common quarters.

Mike: The downgrades of these loans are driven primarily by this pressure on the sponsor rather than by underlying long-term real estate fundamentals. We are likely to take ownership of these assets along with other four-rated multifamily loans in the coming quarters.

Mike McGillis: The third loan, which is unencumbered, that was downgraded this quarter was collateralized by a four-sale condo project in California. In this instance, the sponsor, who relied on offshore capital sources, has experienced financial difficulty outside of this particular investment.

Mike: The third loan, which is unencumbered, that was downgraded this quarter was collateralized by a forest sale condo project in California.

Mike: In this instance, the sponsor, who relied on offshore capital sources, has experienced financial difficulty outside of this particular investment.

Mike McGillis: Smith. Prior to defaulting on the loan, the sponsors successfully sold the number of condo units at levels well above CMTG's basis per square put. However, the sponsor has experienced financial difficulty, and we have been working with them to find a path to resolving this loan, including a loan restructuring, loan sale, our area.

Mike: Prior to defaulting on the loan, the sponsor successfully sold a number of condo units at levels well above CMTG's basis per square foot.

Mike: However, the sponsor has experienced financial difficulty, and we have been working with them to find a path to resolving this loan, including a loan restructuring, loan sale, or REO.

Mike McGillis: They were no new, five rated loans this quarter. We did, however, place an existing four-rated land loan on non-accrual status. The loan is a carrying value of $88 million, and is collateralized by a development site in New York City, that is owned from mixed use building. This loan has been risk rated a four since the fourth quarter of 2023, as the borrower has failed to make progress towards its business plan and has been delinquent in paying interest.

Mike: There were no new 5-rated loans this quarter. We did, however, place an existing 4-rated land loan on nonaccrual status.

Mike: The loan is a carrying value of $88 million and is collateralized by a development site in New York City that is zoned for mixed-use building.

Mike: This loan has been risk rated a four since the fourth quarter of 2023 as the borrower has failed to make progress towards its business plan and has been delinquent in paying interest.

Mike McGillis: At June 30, total Cecil reserves as a percentage of UPB increased to 3.1% compared to 2.6% of the prior quarter. Specific Cecil reserves represented 23.1% of the UPB of our loans with specific Cecil reserves. The general Cecil reserve of 2.1% of the UPB was comprised of 3.3% of the UPB on four rated loans, and 1.5% of the UPB on the remaining loans. During the quarter, we recorded provisions for CECL reserves of $34 million or 24 cents per share. The increase in the general Cecil reserve is primarily a result of increases in expected loan duration, increases in third party historical loss rate data on similar loans, and, to a lesser extent, changes in risk ratings and accrual status of loans in our portfolio.

Mike: At June 30, total CECL reserves as a percentage of UPB increased to 3.1% compared to 2.6% for the prior quarter.

Mike: Specific CECL reserves represented 23.1% of the UPV of our loans with specific CECL reserves.

Mike: The general CECL reserve of 2.1% of the UPB was comprised of 3.3% of the UPB on for-rated loans and 1.5% of the UPB on the remaining loans.

Mike: During the quarter, we recorded provisions for CECL reserves of $34 million or $0.24 per share.

Mike: The increase in the general CECL reserve is primarily a result of increases in expected loan duration, increases in third-party historical loss rate data on similar loans, and to a lesser extent, changes in risk ratings and accrual status of loans in our portfolio.

Mike McGillis: Now, turning to financing and liquidity. At June 30, we reported $191 million in total liquidity, which includes cash and approved and under on credit capacity based on existing collateral. Unencumbered assets were comprised of loans totaling $490 million of UPB, of which 94% were senior loans, and our mixed use area with a carrying value of $146 million. These unencumbered assets provide us with additional flexibility in maintaining our desired levels of liquidity. Subsequent to quarter-end, repayment activity continues to accelerate. We've received full repayments of three loans totaling $244 million of UPB. The $22 million loan collateralized by a bill to rent portfolio, a $99 million loan collateralized by an industrial asset, and finally a $123 million loan collateralized by a four-rated New York City office loan.

Mike: Now, turning to financing and liquidity.

Mike: At June 30, we reported $191 million in total liquidity, which includes cash and approved and underwritten credit capacity based on existing collateral.

Mike: Unencumbered assets were comprised of loans totaling $490 million of UPB, of which 94% were senior loans, and our mixed-use REO with a carrying value of $146 million.

Mike: These unencumbered assets provide us with additional flexibility in maintaining our desired levels of liquidity.

Mike: Subsequent to quarter end, repayment activity continues to accelerate. We've received full repayments of three loans totaling 244 million dollars of UPB.

Mike: A $22 million dollar loan collateralized by a build-to-rent portfolio, a $99 million dollar loan collateralized by an industrial asset, and finally a $123 million dollar loan collateralized by a four-rated New York City office loan.

Mike McGillis: This loan had been risk rated a four since the fourth quarter of 2023. The transaction reduced our office exposure and reduced our overall leverage. Year to date, we have received a total of $873 million of loan proceeds through pay officer loan sales. Of that amount, loans totaling approximately $646 million were construction loans. In addition, loans totaling approximately $400 million were risk rated four, demonstrating continued progress in resolving watch list loans.

Mike: This loan had been risk rated a four since the fourth quarter of 2023. The transaction reduced our office exposure and reduced our overall leverage.

Mike: Year to date, we have received a total of $873 million of loan proceeds through payoffs or loan sales.

Mike: Of that amount, loans totaling approximately $646 million were construction loans. In addition, loans totaling approximately $400 million were risk rated for, demonstrating continued progress in resolving watch list loans.

Mike McGillis: Before turning the call to the operator, I'd also like to provide some additional color with regard to certain of our financing arrangements with the most restrictive financial covenants. During the second quarter, we significantly expanded our relationship with our largest financing counterparty, while also completing covenant modifications on each of our repurchased facilities. Overall, we reduced our minimum required interest coverage levels and tangible net worth covenant levels. We believe that these changes provide us with needed flexibility to preserve and enhance book value while also demonstrating our ability to work constructively with our various financing counterparties through challenging market conditions.

Mike: Before turning the call to the operator, I'd also like to provide some additional color with regard to certain of our financing arrangements with the most restrictive financial covenants.

Mike: During the second quarter, we significantly expanded our relationship with our largest financing counterparty, while also completing covenant modifications on each of our repurchase facilities.

Mike: Overall, we reduced our minimum required interest coverage levels and tangible net worth covenant levels.

Mike: We believe that these changes provide us with needed flexibility to preserve and enhance book value while also demonstrating our ability to work constructively with our various financing counterparties through challenging market conditions.

Unknown Executive: Operator, I would now like to open the call for questions.

Unknown Executive: Absolutely.

Speaker Change: Operator, I would now like to open the call for questions.

Unknown Executive: We will now begin the question and answer session. If you would like to ask a question, please press star one on your telephone keypad. If, for any reason, you would like to remove that question, please press star two. If you're using a speaker phone, please remember to pick up your hands up before asking your question.

Operator: Absolutely. We will now begin the question and answer session. If you would like to ask a question, please press star 1 on your telephone keypad. If for any reason you would like to remove that question, please press star 2.

Unknown Executive: We will pause the place link to allow questions to register.

Speaker Change: If you're using a speakerphone, please remember to pick up your handset before asking your question. We will pause briefly to allow questions to register.

Doug Heather: The first question, canceling our line of action with JP Morgan. Your line is now open. Good morning, guys. Thanks for taking my question. Look, I'd like to talk a little bit about the strategy on REO in the past when you've had foreclosures. You've taken different paths; sometimes selling the property, sometimes managing them. I think a lot has to do with the potential investment required. It sounds like you have some additional REOs coming your way. You've reduced the dividend in order to enhance liquidity, and Richard made a comment about having capital to invest in the REO.

Mike: The first question comes from Alana Rick-Shan with J.P. Morgan. Your line is now open.

Alana Rick-Shan: Good morning, guys. Thanks for taking my question.

Alana Rick-Shan: Look, I'd like to talk a little bit about the strategy on REO. In the past, when you've had foreclosures, you've taken different paths, sometimes selling the property, sometimes managing them.

Speaker Change: and I think a lot has to do with the potential investment required. It sounds like you have some additional REOs.

Speaker Change: Coming your way, you've reduced the dividend in order to enhance liquidity and Richard made a comment about having capital to invest.

Richard Mack: I'm curious if that strategy is changing or if the REO that you intend to keep on balance sheet is going to be cash-following positive.

Speaker Change: in the REO. I'm curious if that strategy's changing or if the REO that you intend to keep on balance sheet is going to be cash flowing positive.

Richard Mack: Yeah, so let me let Prianka discuss some of the details of the asset. But let me just, Rick, thank you for your question. This is Richard. Let me respond to the macro. Our view at this moment is that we should be opportunistic around REO. I think in the past we've been more focused on creating liquidity. But we now feel like this is the moment in time where we've got especially the cash-following multi. We want to be aggressive with borrowers, and if they're not able to manage the property as well as we are and they're not putting cash in, we want to take those assets and ride the value back up.

Richard Mack: yeah so let me let Priyanka discuss some of the details of the asset but let me just Rick thank you for your question this is Richard let me respond to the macro

Priyanka: Our view at this moment is that.

Speaker Change: We should be opportunistic around REO. I think in the past, we've been more focused on creating liquidity. But we now feel like this is the moment in time.

Richard Mack: Where we've got, especially the cash flowing multifamily, we want to be aggressive with borrowers. And if they're not able to manage the property as well as we are, and they're not putting cash in, we want to take those assets.

Priyanka: where we've got especially the cash flowing multi, we want to be aggressive with borrowers. And if they're not able to manage the property, as well as we are, and they're not putting cash in, we want to take those assets.

Richard Mack: We have only taken two assets back that has been the right decision on both of those. We've been really careful about it. We're going to continue to be careful. I think we're feeling at this moment that, again, while it's hard to call the bottom, this is about as good a time to be acquiring assets at a discount. I know it's not exactly acquiring assets, but this is a pretty good time to take advantage of opportunities on our own balance sheet and improve value significantly.

Speaker Change: and ride the value back up.

Speaker Change: We've only taken two assets back.

Speaker Change: That has been the right decision on both of those. We've been really careful about it. We're going to continue to be careful. I think we're feeling at this moment

Speaker Change: Again, while it's hard to call the bottom, this is about as good a time to be acquiring assets at a discount. I know it's not exactly acquiring assets, but this is a pretty good time to

Speaker Change: take advantage of opportunities on our own balance sheet and improve value significantly.

Priyanka Garg: Scott, do you want to just respond on the specific assets? Sure, thanks, Richard. The only thing that I would add to what Richard said is if you look at, you know, from a credit migration standpoint, the last couple of quarters, it's really been focused on residential assets, and in that sector, we truly believe that there's not been a secular shift in value. It's more of a moment in time. So the ability to bring these assets onto our balance sheet, like Richard said, you know, do a much better job managing them and the sponsors in many cases, and then writing the value up as we see rates come down, cap rates come in.

Speaker Change: Priyanka do you want to just respond on the specific assets?

Speaker Change: Sure, sure. Thanks, Richard. The only thing Rick that I would add to what Richard said is if you look at, you know, from a credit migration standpoint, the last couple of quarters, it's really been focused on residential assets.

Richard Mack: And in that sector, we truly believe that there's not been a secular shift in value, it's more of a moment in time. So the ability to bring these assets onto our balance sheet, like Richard said, you know, do a much better job managing them than the sponsors in many cases, and then riding the value up as we see rates come down, cap rates come in. So we think that there's, you know, a particularly compelling opportunity at the moment.

Richard Mack: So we think that there's, you know, a particularly compelling opportunity at the moment.

Richard Mack: And I will make you. Sorry, Rick. Let me have one more time. I was going to make the observation, Richard, that, oh, go ahead. Sorry. The delay is difficult. Yeah, I would only say that I, we could also see borrowers surprise us and find rescue capital and pass off. As we take more aggressive action, because we see the real value of these, otherwise we wouldn't be taking them. So that's not our expectation, but I think it's now is the time to act relatively aggressively. Got it. Okay. And sorry for talking over each other. I apologize to that.

Richard Mack: And I will make the.

Richard Mack: Sorry, sorry, Rico. Let me add one more. Richard that. Oh, go ahead. Sorry.

Rick: The delay is difficult. Yeah, I would only say that I we could also see borrowers surprise us and find rescue capital.

Speaker Change: and pass off as we take more aggressive action because we see the real value in these, otherwise we wouldn't be taking them. So that's not our expectation, but I think it's now is the time to act relatively aggressively.

Richard Mack: Look, I think the reality is that is more a more consistent approach with your historic strategy. And I realize we've been through a pretty challenging period where the focus, instead of optimizing outcome by managing it, has been focused on liquidity. But it does seem like you're going back to what your original intent was. That's absolutely right. I think we've tried to manage to with the expectation that rates would be higher for longer and coming to what we believe is the end of that rate. The increase cycle for certain and very likely could be a significant cut here.

Speaker Change: Got it. Okay. And sorry for talking over each other. I apologize for that.

Speaker Change: Look, I think...

Rick: to what we believe is the end of that raid.

Richard Mack: It's time to pivot back to our original strategy as it relates to assets and our capacity and ability to create value. I think it's going to be demonstrated over the next few quarters here.

Unknown Executive: Thank you.

Jaquita: Thank you. The next question comes from the line of Doug Hutter with UBS. Your line is now open.

Doug Heather: The next question comes in a line of Doug Heather with UBS. Your line is now open. Hi, thanks. You talked about working with your lenders about adjusting covenants. You just talk about whether there was anything you had to any concessions you had to give to them in order to get those or just kind of how those negotiations went.

Mike McGillis: Sure, Doug, this is Mike. I'll take this one. I would say, you know, we've always had a very constructive relationship with our repo counterparties, and it's been very collaborative. As we've looked at sort of the state alone portfolio, we've been very much ahead of the curb in terms of working for through assets that have been demonstrating challenges, reducing leverage on those assets to be more reflective of what the current environment was looking like. So the, I would just because of the fact that I think we've been very proactive in de-leveraging our balance sheet, we're very transparent with our lenders in terms of where we saw the world heading over the course of the over the next year or so and demonstrated to them that having some covenant relief while we work through so.

Rick: [inaudible]

Rick: of the curve in terms of working through assets that have been demonstrating challenges, reducing leverage on those assets.

Unknown Executive: So I would just demonstrate to them that having some covenant relief while we work through some of these things, including taking

Mike McGillis: Some of these things, including taking certain loans to RIO and improving cash flow, it's not going to happen overnight, but it will happen over time. Those, you know, the covenant relief that we were going to need to execute on those strategies from both an interest coverage and tangible net worth perspective was recognized, and we were able to work through those modifications.

Mike McGillis: And then just as a follow-up, you know, kind of where do you stand with covenants on your term loan and, you know, just how should we think about the other parts of the deck deck. Sure, so term loan has a similar interest coverage covenant, but it's a different mechanic that is involved in calculating that. So we continue to comply with that interest coverage covenant on our term loan. Now that we've sort of worked through certain these repurchase agreement facilities, recognizing our term loan expires or matures in August of 2026, over the latter part of this year, we will pivot into having discussions with them around modification, extension, potential pay.

Rick: Covenant, but it's a different mechanic that is involved in calculating that. So we continue to comply with that interest coverage covenant on our term loan.

Unknown Executive: recognizing that our term loan expires or matures in August of 2026.

Rick: around modification, extension, potential paydowns.

Doug Heather: Downs necessary to extend the term of that facility, but too early to know where it's going to go just yet. But try to stay well ahead of it before the maturity in a couple of years. Great. Appreciate the answer. Thank you.

Rick: necessary to.

Rick: Extend the term of

Rick: of that facility, but too early to know where it's going to go just yet, but try to stay well ahead of it before the maturity in a couple of years.

Speaker Change: Great. Appreciate the answer. Thank you.

Unknown Executive: The next question, a lot of promcatcher word would be TIG. Your lines are open. Thank you and good morning, everybody. Richard, you mentioned in your remarks the expectation of lower rates and higher real state values driving a real evaluation of where you want to allocate capital, and you listed a number of potential options. I'd assume that that evaluation takes time; obviously, taking more stuff on balance sheet and investing in that takes time.

Speaker Change: Thank you.

Speaker Change: The next question comes from the line of Parham Caterward with BTIG. Your line is now open.

Speaker Change: Thank you and good morning, everybody.

Speaker Change: Richard, you mentioned in your remarks the expectation of lower rates and higher real estate values driving a reevaluation of where you want to allocate capital, and you listed a number of potential options. I'd assume that that evaluation

Richard Mack: Are there parts of those investment options that could be executed sooner rather than later as far as whether it's stock buybacks or debt buybacks, and what are other ones that are more likely to be medium term option. Thank you. Excellent question. Some of what is in front of us, we're going to execute on rapidly because we have been expecting this market turn. We I don't want to say that we were expecting the dramatic sell-off or shot across the bow that the market is sending to the Fed. That's what it is. But we were expecting that there was going to be a bit of change because we're seeing it in the real estate capital markets; we're seeing liquidity come back.

Speaker Change: takes time, obviously, taking more stuff on balance sheet and investing that takes time. Are there parts of those investment options that could be executed sooner rather than later, as far as whether it's stock buybacks or debt buybacks? And what are other ones that are more likely to be medium term options?

Speaker Change: Sure, thank you. Excellent question.

Speaker Change: Some of what is in front of us, we're going to execute on rapidly because we have

Speaker Change: In expecting this market turn, I don't want to say that we were expecting the dramatic

Speaker Change: sell off or shot across the bow that the market is sending to the Fed. That's what it is. But we were expecting that

Speaker Change: there was going to be a bit of change because we're seeing it.

Richard Mack: So we were already expecting this; the move is likely to be much greater than it may be any of us anticipated just a week ago. So we were really set up and ready to go and kind of getting ahead of these events. So we do think that there are things that we can execute on quite rapidly. Of course, everything is on the table, and the more payoffs we get, the more likely it is that we pivot away from Oreo. We'll see what component Oreo will be of it towards other things like new origination, hanging off that as well as buying stock.

Speaker Change: in the real estate capital markets. We're seeing liquidity come back. So we were already expecting this.

Speaker Change: The move is likely to be much greater than maybe any of us had anticipated just a week ago. So we were really set up and ready to go and kind of getting ahead.

Speaker Change: of these events. So we do think that there are things that we can execute on quite rapidly. Of course, everything is on the table and the more payoffs we get.

Speaker Change: We'll see what component REO will be of it towards other things like new origination.

Richard Mack: We want them all to be on the table because the pace of repayments has been accelerating, while the pace of problems has been decelerating. So really, everything is on the table here.

Speaker Change: We want them all to be on the table because the pace of repayments

Speaker Change: has been accelerating, while the pace of problems has been decelerating, and so really everything is on the table. Here, we've just come to the point where we're ready, and we've been waiting.

Richard Mack: We've just come to the point where we're ready, and it's been waiting to see something that felt like a bottom to take those steps. I hope that was reasonably responsive.

Unknown Executive: I hope that I was reasonably responsive.

Speaker Change: to see something that felt like a bottom to take those steps.

Mike McGillis: That very helpful Richard that actually kind of ties into the next question we were thinking about, which maybe this one for Mike, given the accelerated activity level around repayments, especially post 2Q, what are your expectations in terms of repayments for the balance of this year and how are you thinking of allocating those potential proceeds between committed funding that you have to meet this year? That's the first building liquidity for those more opportunistic investments that Richard mentioned. Sure. I think we have pretty good line of sight and pretty significant amounts of repayments through the rest of this year and into the early part of 2025.

Speaker Change: I hope that was reasonably responsive.

Speaker Change: Very helpful, Richard. And that actually kind of ties into the next question we were thinking about, which maybe...

Speaker Change: Sure. And, you know, I think we have pretty good line of sight and pretty significant amounts of repayments all through the rest of this year and into the early part.

Mike McGillis: It's always just a capital allocation decision when we have excess capital. What are we going to do with it? As Richard highlighted, we do expect to take assets back into RIO. That is a judicial process. So there's time considerations that you have to work through to get there, but frequently we control that timing. Obviously, there's some fairly accretive uses of that liquidity and buying back some of our higher cost debt and paying down leverage. Ash, as well as potential share buybacks or new originations, but it's going to be a decision at that point. Time what to do with that capital.

Speaker Change: of 2025 and

Speaker Change: It's always just a capital allocation decision when we have excess capital. What are we going to do with it? As Richard highlighted,

Richard Mack: As Richard highlighted, you know, we do expect to

Speaker Change: As well as potential.

Richard Mack: Share buybacks or new originations, but it's going to be a

Mike McGillis: A lot of those things sort of fed into our decision to cut the dividend in this quarter. And I'll think it should be viewed solely as an indicator of where we think distributable earnings will be. We sort of looked at it more around what dividend level do we need to meet to maintain our reach status. And given that we've paid out pretty much everything we need to pay out from a dividend perspective to maintain our reach status. We thought it was best to keep that capital in the system and use it for purposes that would help us grow earnings or grow book value.

Speaker Change: decision at that point in time what to do with that capital. A lot of those things sort of fed into our decision to cut the dividend this quarter.

Speaker Change: And I don't think it should be viewed solely as an indicator of where we think distributable earnings will be. We sort of looked at it more around what dividend level do we need to meet.

Speaker Change: to maintain our REIT status.

Speaker Change: And given that we've paid out

Speaker Change: Pretty much everything we need to pay out from a dividend perspective to maintain our REIT status, we thought it was best to keep that capital in the system and use it for

Speaker Change: purposes that would help us grow earnings or grow book value.

Unknown Executive: Understood.

Unknown Executive: And then Mike, last one for me, you've mentioned office loan repayment post 2Q. For the non-cash consideration part of that, was the discounted loan a slice of the senior position or a mes position. And what were the two equity interests that came along with that repayment? When will I pre on could you want to handle that one? Yeah. Sure. Hi, Tom. It's pre on. So we, I'll take a step back real quick just to explain how we thought about that transaction. You know, we were basically trading out of a vacant office building in Brooklyn, reducing New York City office exposure, which is going back to the earlier comment when we think about shifts in value.

Speaker Change: Understood and then Mike last one for me you've mentioned office loan repayment post 2Q for the non cash consideration part of that was the discounted loan a slice of the senior position or a MES position and what were the two equity interests that came along with that repayment?

Speaker Change: Why don't I, Priyanka, do you want to handle that one? Yeah.

Speaker Change: So we, I'll take a step back real quick, just to explain how we thought about that transaction. You know, we were basically trading out of a vacant office building in Brooklyn, reducing New York City office exposure, which just going back to the earlier comment, when we think about shifts in value, what's what's a fundamental shift versus a capital market shift, and you know, we view that.

Priyanka Garg: What's a fundamental shift versus a capital market shift. And you know, we view that that asset exposure that we traded out of is more of a fundamental shift in value that's not likely to come back. And we, um, to answer your direct question, traded into a parry mortgage piece on a cash flowing versus vacant asset with improving performance, positive trajectory in an asset class that is improving retail and improving asset class. And then, um, as we mentioned with additional credit support on other assets that are owned by that sponsor. So view it as a very positive trade from an asset quality standpoint and visibility to pay off versus the asset that we were in prior.

Speaker Change: That asset exposure that we traded out of it's more of a fundamental shift in value that's not likely to come back. And we, to answer your direct question, traded into a Perry mortgage piece.

Speaker Change: on a cash flowing versus vacant asset with improving performance, positive trajectory in an asset class that is improving. Retail has become an improving asset class.

Speaker Change: And then, as we mentioned, with additional credit support on other assets that are owned by that sponsor. So view it as a very positive trade from an asset quality standpoint and visibility to pay off versus the asset that we were in prior.

Mike McGillis: And, and will those equity positions show up as parry, or they just be kind of bundled into other in your, in your holdings. Mike, do you want to take that back? That's just going to be another income-based. Yeah, go ahead. Yeah, we'll expect to recognize, won't reflect any basis for that, and our financials is the current expectation. and to the extent we received distributions, it would be cash basis. That's the expectation. It's just additional collateral. It's just additional credit support. That's all it is. It's both stirring the underlying essence. Understood.

Unknown Executive: And, And will those equity positions show up as ARIA, or will they just be kind of bundled into other investments in your portfolio?

Speaker Change: And will those equity positions show up as REO or they just be kind of bundled into other in your in your holdings?

Speaker Change: Mike, do you want to take that? That's just going to be other income based on this. Yeah, go ahead.

Unknown Executive: Yeah, we'll expect to recognize revenue that won't reflect any basis for that. And our financials reflect the current expectation, and to the extent we receive distributions, it'll be cash.

Mike: Yeah, we'll expect to recognize, won't reflect any basis for that and our financials is the current expectation and to the extent we receive distributions, it'll be cash basis.

Speaker Change: That's the expectation. It's just additional collateral. It's just additional credit support.

Speaker Change: That's all it is. It's bolstering the underlying asset.

Unknown Executive: Thanks everyone. Excellent.

Unknown Executive: Thank you.

Speaker Change: Understood. Thanks, everyone.

Unknown Executive: Arren, ladies and gentlemen, if you would like to ask a question, please press bar one on your telephone. Keep that.

Speaker Change: Thanks a lot.

Speaker Change: Thank you. Again, ladies and gentlemen, if you would like to ask a question, please press star 1 on your telephone keypad.

Jade Rahmani: The next question comes in a lot of J.

Priyanka Garg: Rahmani with KBW. Your line is not open. Thank you very much. What's the dollar amount of loans you expect to take into RIO?

Speaker Change: The next question comes from Alana J. Rahmani with KBW. Your line is now open.

Speaker Change: Thank you very much. What's the dollar amount of loans you expect to take into REO?

Jade Rahmani: Hey, Jade, it's Priyanka. I think that's hard to put a number on. It's just given that we are working with borrowers in certain instances. And it's just unclear where we're going to end up on in that. But this specific sponsor, where we've had a lot of credit migrations from three to four over the prior quarters, that in and of itself is about 5% of our UPB. So I would say that those are likely to become RIO, but that said, just depending on where we end up with other sponsors, there might be additional loans. The 5% is beyond the Dallas multi-family.

Speaker Change: Hey Jade, it's Priyanka. Um, I think that's hard to put a number on it, you know, just given that we are

Speaker Change: working with borrowers in certain instances. And it's just

Speaker Change: Unclear where we're going to end up on in that but

Speaker Change: Unknown Executive, Anh Huynh, Jai Agarwal, Priyanka Garg, Sarah Barcomb, Claros Mrtg sponsor where we had a lot of credit migrations from 3 to 4 over the prior quarters. That in and of itself is about 5% of our UPB.

Speaker Change: So I would say that's, you know, those are likely to become REO, but that said, just depending on where we end up with other sponsors, there might be additional loans.

Priyanka Garg: No, that's inclusive of the Dallas multi-family. Okay. That's somewhat helpful.

Speaker Change: No, that's inclusive of the Dallas multifamily.

Speaker Change: Okay.

Priyanka Garg: Turning to risk ratings. I'm curious why do you have risk-rated four loans that you expect to take into RIO? Since those be risk five. Well, Jade, it's a function of whether or not you. Priyanka, you can handle it. Part of the question, I think, is more around gap accounting requirements, but just because alone is expected to go to RIO doesn't mean that a specific reserve is required. There may be a specific reserve on a wired-based closure based on the appraisal we get on the asset prior to four closure. But I think in all of these we feel very comfortable with the long-term collateral value that will be stepping into Priyanka.

Speaker Change: That's somewhat helpful. Turning to risk ratings.

Speaker Change: I'm curious, why do you have risk-rated for loans that you expect to take into ARIA?

Priyanka Garg: Well, Jade, it's a function of whether or not you, Priyanka, you can handle it. Part of the question, I think, is more around... requirements, but just because a loan is expected to go to REO.

Speaker Change: Shouldn't those be RISC-V?

Speaker Change: Well Jade, it's a function of whether or not you...

Speaker Change: Priyanka, you can handle it. Part of the question I think is more around

Priyanka: Gap Accounting

Priyanka: requirements, but just because a loan is expected to go to REO.

Speaker Change: doesn't mean that a specific reserve is required. There may be a specific reserve required based on closure.

Speaker Change: Based on the appraisal we get on the asset prior to foreclosure, but I think in all of these we feel very comfortable with the long-term collateral value that we'll be stepping into. Priyanka, I don't know if you want to add anything to that.

Priyanka Garg: I don't know if you want to add anything to that. Nope, I think that's exactly right. Thank you.

Priyanka: Nope, I think that's exactly right.

Speaker Change: Unknown Executive, Richard Mack, Anh Huynh

Unknown Executive: Very no additional questions. We're about this time.

Speaker Change: Unknown Executive, Richard Mack, Anh Huynh

Speaker Change: Thank you.

Richard Mack: So I would now like to pass the cross-case back to management for any additional or closing remarks. Well, I just want to thank everyone for joining us on the call today for the questions and conclude, really, with the main theme of today's call. And that is that we think that momentum is likely to continue to swing towards more repayment.

Speaker Change: There are no additional questions at this time, so I would now like to pass the conference back to management for any additional or closing remarks.

Speaker Change: Well, I just want to thank everyone for joining us on the call today and for the questions.

Speaker Change: and conclude really with the main theme of today's call and that is that we think the momentum is likely to continue to swing towards more repayments.

Richard Mack: and more liquidity in the market and against this background, that's the background which we feel confident. but now is the time to be even more decisive and opportunistic with our capital and we are kind of looking forward with optimism to a bit more of an up market and to being able to take advantage of the opportunities that are in front of us. So sessions with some of you, and we appreciate your questions.

Speaker Change: and more liquidity in the market and against this background.

Speaker Change: That's the background in which we feel confident that now is the time to be even more decisive and opportunistic with our capital.

Speaker Change: And we are kind of looking forward with optimism to a bit more of an upmarket and to being able to take advantage of the opportunities that are in front of us.

Unknown Executive: So, thank you all for joining us. I'm sure we'll have follow-up sessions with some of you, and we appreciate your questions. Thank you all.

Speaker Change: So, thank you all for joining. I'm sure we'll have follow-up sessions with some of you and we appreciate your questions. Thank you all.

Unknown Executive: Thank you all.

Unknown Executive: Back to you. Today's conference call. Thank you for your participation.

Unknown Executive: You may now disconnect your line.

Speaker Change: That concludes today's conference call. Thank you for your participation. You may now disconnect your line.

Speaker Change: www.thevenusproject.com www.thevenusproject.com