Q3 2025 Claros Mortgage Trust Inc Earnings Call

Speaker #1: Excuse me , everyone , thank you for your patience . The conference call will begin momentarily . Again , thank you for your patience .

Speaker #1: The conference call will begin momentarily . Welcome to the Claros Mortgage Trust, Inc. . Third Quarter 2020 Earnings Conference call . My name is Alisa and I will be your conference facilitator today .

Speaker #1: All participants will be in a listen only mode after the speakers remarks , there will be a question and answer period . If you would like to ask a question , please press star followed by one on your telephone keypad .

Speaker #1: I would now like to hand the call over to UN Nguyen , Vice President of Investor Relations for Claros Mortgage Trust, Inc. . Please proceed .

Speaker #2: Thank you . I'm joined by Richard Mack Chief Executive Officer and Chairman of Claros Mortgage Trust, Inc. , and Michael McGillis president , Chief Financial Officer and Director of Claris Mortgage Trust .

Speaker #2: We also have Priyanka Garg , Executive Vice President , who leads credit strategies for Mac real Estate Group . Prior to this call , we distributed Cmg's earnings release and supplement .

Speaker #2: 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 .

Speaker #2: 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 #2: 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 #2: Any forward looking statements made on this call represent our views only as of today , and we undertake no obligation to update them .

Speaker #2: 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 .

Speaker #2: I would now like to turn the call over to Richard .

Speaker #3: Thank you all . And thank you all for joining us this morning for Cmg's third quarter earnings call . As we approach the end of the year , we are encouraged by the continued signs of stabilization and recovery across the broader real estate markets .

Speaker #3: Liquidity has slowly but steadily returned to the commercial real estate industry , supporting increased transaction volumes and tighter lending spreads . Recent and perhaps expected rate cuts by the fed have improved the outlook even as investors consider the uncertainty surrounding the slowing economy .

Speaker #3: Collectively , these market dynamics have created a more constructive backdrop , enabling CMG to continue executing on a strategic priorities for the year .

Speaker #3: In particular , resolving watch loans , enhancing liquidity and delivering the portfolio . At the beginning of the year , we stated that we expected approximately 2 billion in total resolutions .

Speaker #3: I'm pleased to share that we have already exceeded this target with 2.3 billion in total resolutions , which includes partial repayments as of November 4th .

Speaker #3: We have significantly improved liquidity by 283 million to 385 million . Further delivered the portfolio and resolved a total of nine watchlist loans .

Speaker #3: As previously reported , we have foreclosed on select cash flowing multifamily assets and have identified additional multifamily assets that are foreclosure candidates . The remain positive on the multifamily sector given the favorable long term supply demand dynamics and persistent housing affordability constraints .

Speaker #3: And as we look ahead , we believe that the sharp decline expected in multifamily deliveries over the next few years , coupled with declining base rates , should help offset any impact of an economic slowdown given our sponsors experience as an owner , operator and developer and the progress we have made in our Rio portfolio to date , we believe we are well positioned to think creatively about value enhancement and exit strategies for many of these multifamily assets , in particular .

Speaker #3: We have identified opportunities to implement operational and capital improvements . Some of which can be executed more quickly than others . Since foreclosing , we have received strong , unsolicited interest from prospective buyers on certain properties , which we believe is a positive reflection of the underlying demand for these assets .

Speaker #3: Taking into account our business plans , the strong interest we are seeing in the market and the current capital markets environment , we are actively evaluating opportunities to monetize , select multifamily assets in the coming quarters .

Speaker #3: Overall , we feel positive about the progress we've made so far this year . In addition to reporting more than 2 billion of resolutions , we have achieved the following .

Speaker #3: The resolve nine watchlist loans , representing 1.1 billion of UPB , bolster liquidity by 283 million to 385 million today . Reduced total borrowings by 1.4 billion and increased our unencumbered asset pool to 548 million from 456 million .

Speaker #3: We believe this progress positions us well to achieve our near-term priority of addressing the August 2026 term loan maturity , and we will continue to evaluate our options with respect to this maturity .

Speaker #3: Before turning the call over to Mike to discuss Cmg's financial results and the portfolio , I want to note that we will not be addressing the New York mayoral elections in our prepared remarks .

Speaker #3: That said , we are happy to take questions in the Q&A portion of this call . Now , I'd like to turn the call over to Mike .

Speaker #4: Thank you , Richard , for the third quarter of 2025 , CMT reported a GAAP net loss of $0.07 per share in a distributable loss of $0.15 per share .

Speaker #4: Distributable earnings prior to realized gains and losses were $0.04 per share. Earnings from Rio Investments contributed $0.01 per share to distributable earnings, net of financing costs.

Speaker #4: CMT held for investment loan portfolio decreased to 4.3 billion at September 30th , compared to 5 billion at June 30th . The quarter over quarter decrease was primarily the result of four loan resolutions that occurred during the quarter and the reclassification of one loan to held for sale , one resolution was a regular way repayment of a $168 million construction loan collateralized by a mixed use property in Northern Virginia .

Speaker #4: Upon construction completion , the asset is experienced strong leasing momentum across its various components . Construction loans have been a valuable component of Cmg's portfolio and a point of differentiation for our firm .

Speaker #4: Given our sponsors' development and asset management expertise, while our construction exposure has historically performed well, it has also become a smaller component of our portfolio as sponsors have pursued their business plans to refinance such assets upon completion.

Speaker #4: The other three resolutions all watch list loans were addressed on last quarter's earnings call , and consist of the discounted payoff on a $390 million loan collateralized by a New York City multifamily property , as well as foreclosures of two loans collateralized by multifamily properties in Dallas .

Speaker #4: Finally , we reclassified a $30 million Boston land loan from held for investment to held for sale . As a result of a third party buyer prevailing at a mortgage foreclosure auction in September .

Speaker #4: Subsequent to the third quarter , the sale was executed modestly below carrying value , and because the loan was unencumbered , generated 28 million of net cash proceeds .

Speaker #4: This transaction enabled us to enhance liquidity without incurring carry costs or assuming risks associated with taking title to this asset. To recap, we've had $2.3 billion of total resolutions year to date, which includes $81 million in partial repayments and nine watchlist loans totaling $1.1 billion of UPB.

Speaker #4: Turning to portfolio credit during the third quarter , we did not have any loans migrate to a 4 or 5 risk rating . We had one loan moved to Non-accrual , a $170 million for rated loan collateralized by a Colorado multifamily property .

Speaker #4: The underlying asset performance has been tracking below our expectations and has also been impacted by new supply in that market . We're evaluating all available options to pursue our remedies as a lender .

Speaker #4: Our total CSO reserve on loans at September 30th was 308 million , or 6.8% of UPB , compared to 333 million , or 6.4% of UPB at June 30th .

Speaker #4: Our general Cecl reserve increased by $0.6 million to 140 million , or 3.9% of UPB of loans , subject to our general Cecl reserve , compared to 3.8% of UPB as of June 30th .

Speaker #4: During the quarter , we determined that a sale of the New York hotel portfolio was no longer optimal amid evolving market conditions impacted by the New York City .

Speaker #4: Mayoral election . As a result , we reclassified the hotel portfolio to held for investment . As we continue to evaluate the market , the underlying assets continue to perform well in the strong return on equity generated by the portfolio provides an opportunity to optimize value for our shareholders .

Speaker #4: When market conditions become more favorable , particularly in light of the refinancing executed in June . We also made progress during the quarter on further sales from the commercial condominium ization of our mixed use REO asset .

Speaker #4: To date , we've sold nine of the 12 commercial condo units that were created as Richard mentioned previously , it's our intention to accelerate the sale of some multifamily REO assets given positive market sentiment .

Speaker #4: Our focus on loan resolutions has strengthened our balance sheet by significantly reducing leverage in improving liquidity . During the third quarter , outstanding financings decreased by $376 million , which included $52 million of incremental deleveraging , bringing the reduction in financing up to 1.2 billion during the first nine months of 2025 , and to 1.4 billion year to date through November 4th .

Speaker #4: This activity is reflected in the meaningful decrease in our net debt to equity ratio , which was 1.9 x at September 30th . This compares to 2.2 x at June 30th and 2.4 x at December 31st , 2024 .

Speaker #4: In terms of liquidity , as of November 4th , we've increased our liquidity position by $283 million since year end 2024 to quickly recap , at September 30th , CMG reported $353 million in liquidity , which is subsequently increased to $385 million as of November 4th .

Speaker #4: At September 30th , CMG total unencumbered assets were $398 million of loan UPB and 104 million of REO carrying value , which has since increased to a combined $548 million .

Speaker #4: As a result of an additional loan becoming unencumbered , partially offset by the aforementioned loan and REO sales . We believe our liquidity position and unencumbered asset pools strengthen our position in addressing the upcoming maturity of Mtg's term .

Speaker #4: Loan B we continue to explore various paths to a refinancing or extension , and we anticipate being in a position to provide additional details on a solution in the coming months .

Speaker #4: Before we open the call to Q&A , I'd like to share some recent news . We entered into an amendment to the terms of our term loan B , including the modification and waiver of certain financial covenants through March 31st , 2026 , including minimum tangible net worth and minimum interest coverage .

Speaker #4: As defined respectively , pursuant to the terms of the modification . We're also utilizing a portion of our liquidity to make a principal repayment of $150 million on the term loan B , I would now like to open the call up to Q&A .

Speaker #4: Operator .

Speaker #1: Thank you so much . We will now begin the question and answer session . If you would like to ask a question , please press star followed by one on your telephone keypad .

Speaker #1: If you need to remove your question , please press star followed by two again . To ask a question , please press star one .

Speaker #1: And as a reminder , if you are using a speakerphone , please remember to pick up your handset before asking your question . The first question comes from Rick Shane with JP Morgan .

Speaker #1: Your line is now open .

Speaker #5: Hey guys , two questions that are related . The first is what was the impact in the third quarter of reversal of accruals on the known on the loan that was placed on Non-accrual so that we can get a sense of what the run rate is .

Speaker #5: Obviously there's a recurring impact , but there's also a restatement effectively . Guys , are you there ?

Speaker #3: Mike is on mute. Rick.

Speaker #5: Sorry . Stunned silence is never reassuring .

Speaker #3: Yes .

Speaker #4: That was .

Speaker #6: About Rick .

Speaker #4: Sorry . It was about 4.5 million . The reversal of the accrued interest receivable on that particular loan . Okay .

Speaker #5: Got it . Okay . Thank you . And look , you know , the narrative here has been that NII is has been declining obviously with that reversal , with the run off of the portfolio , with the additional non-accrual , you know , it was down again sequentially , fairly sharply .

Speaker #5: When do you think we will see a trough . Are we there at this point or is there still going to be more downward pressure on NII ?

Speaker #4: Thanks , Rick . Great question . I think right now we are really in the process of transitioning a portfolio and trying to aggressively move out of our four and five rated loans and Non-earning and sub earning assets .

Speaker #4: Obviously , with the liquidity we have , we can deliver financings , which is helpful to earnings , but we really need to continue to make progress on moving out of the four and five rated loans .

Speaker #4: Get that capital back and get it earning again . So it's going to be a little what I'll call lumpy over the near term while we while we work through that .

Speaker #5: Got it . Okay . And .

Speaker #6: I , I would just add one thing and that is I feel like the market has come through a trough . And the environment in which we are operating in is a lot more constructive for everything we're trying to do .

Speaker #6: It's not exactly that is not exactly directly answering your question , but I think it's important to state .

Speaker #5: No , look , it's it's a totally fair observation . You know , the I think there are two stages to this . One is the , the identification stage of challenges .

Speaker #5: And within the portfolio and it feels like we have reached that point or are very , very close . And then there's the resolution stage .

Speaker #5: And this is not like a credit card loan where 180 days later you charge it off . These , these resolutions can take years , as we've seen .

Speaker #5: And I think we're probably in the midst of that right now .

Speaker #6: We absolutely are in the midst , in the midst of it . But I will say that we have been in the midst of it for a while , and we are taking aggressive actions to resolve things .

Speaker #6: And we're really not trying to allow problems to fester or we're not allowing problems to fester .

Speaker #5: Got it . Okay . Thank you guys very much . Appreciate it .

Speaker #1: Thank you for your question . The next question comes from Jade Rahmani with KBS . Your line is now open .

Speaker #7: Thank you very much . Can you give an update on the term loan ? I know you touched on it , but where would liquidity stand ?

Speaker #7: Post the $150 million repayment ? Over what timeframe do you expect to consummate a refinancing ? And are you considering any equity like options in conjunction with this to bolster , you know , the company's capital base ?

Speaker #7: Give it wherewithal to deal with problems in the portfolio and also improve the corporate finance ability . Those things might include preferred equity .

Speaker #7: Thanks .

Speaker #4: Thanks . Jade boy , that's a big question , but a good question . Let's see . We continue to have very productive discussions on the term loan refinancing .

Speaker #4: As noted , we had before the impact of this recent modification , the balance outstanding is about 712 million . We'll make a paydown of about 150 million in connection with this modification .

Speaker #4: That'll bring cash down to the call it . Two 3235 range , but we do expect some additional sort of monetizations of assets over the relatively near term , which will further improve liquidity .

Speaker #4: And what we would envision is a modest incremental paydown in connection with establishing a new facility or extending the existing facility . At this point , we do not anticipate going into the market for preferred equity as part of this solution , but obviously down further down the path that that could be an option .

Speaker #4: But we we think the trajectory of the business in terms of liquidity resolving watch list loans is is heading in the right direction at this time .

Speaker #6: Jade , I would just like to add that the yeah , the the cost of equity is still quite high right now . And the opportunities in the market to increase the implicit or explicit leverage , depending on how you want to view equity in order to originate .

Speaker #6: I think just don't see the trade off right now . We're going to keep our eye on it . And if we think that changes , certainly pref equity is is an interesting approach for us to take .

Speaker #7: Regarding the risk five risk for loan buckets , which each total about a billion . So that's 2 billion in total . And then current Rio , can you give some expectations around you know , the risk five .

Speaker #7: Where does that is that going to continue to moderate . And where will that be in 1 to 2 quarters . The risk fours .

Speaker #7: Do you contemplate any additional adds or will those continue to moderate and will those be improved through modification to risk ? Three and then Rio , you know , what is the current balance .

Speaker #7: You know , expectation . You have including you know , any any monetizations in process . And the additional multifamily foreclosures you noted .

Speaker #8: Yeah . Hi , Jade . It's Priyanka , thank you for the for the question . I'll start with the Rio . We are you know , we are continuing to monetize some of the Rio .

Speaker #8: We have the mixed-use asset that we've kind of minimized that. Mike discussed earlier. There will be some additional realizations out of that.

Speaker #8: Richard mentioned the realizations on some of our already Rio multifamily . But in the near term , we do expect the Rio portfolio to increase in size on page ten of our earnings sup , we show our five rated loans and we show four of them being anticipated .

Speaker #8: Rio . Those are all in the multifamily asset class . And you know this is a tool in the toolkit . And we we always want to try to work with our borrowers .

Speaker #8: But if if we can't come to a resolution that we think is in the best interest of our shareholders , we are going to foreclose .

Speaker #8: So we do identify those fours as anticipated , foreclosures and coming on Rio in terms of additional fives and fours , we , you know , we've obviously classified those loans as we see fit .

Speaker #8: Today . It's a dynamic environment . Don't we can't always control borrower decision making or what happens at the borrower or the market level .

Speaker #8: But you know , based on what we know today , we think that list is accurate . And we're actively negotiating with borrowers in the four category .

Speaker #8: As you mentioned to try to come to a reasonable modification , which could result in an upgrade . But also , you know , as we've proven , I think year to date , there's a lot of tools in the toolkit in terms of other ways to monetize the assets , to turn over the book .

Speaker #8: As Mike mentioned earlier .

Speaker #7: So I think the the $640 million of risk five rated multifamily loans anticipated Rio . That would put the Rio portfolio to 1.3 billion and reduce the risk five from a billion to around 335 million .

Speaker #7: And then the risk for I don't believe that there's Rio anticipated out of that . Is that correct ?

Speaker #8: Yeah . At this moment , that is correct . On the fours , on the fives , I would just say the Rio , you know , it doesn't go on to our balance sheet at the UPB .

Speaker #8: It's going to go on at the carrying value after the specific reserve . So the 640 is a bit inflated . So it's lower than that .

Speaker #8: But but yes there will be growth in the Rio portfolio . But like I said there are there's very clear visibility into our current Rio portfolio being partially monetized as well .

Speaker #7: Okay . So that would be actually about 1.24 billion , less than 80 million specific reserve . Do you know what . the yield .

Speaker #7: Do you know what the current yield is?

Speaker #8: On the Rio in total .

Speaker #7: Yeah, the low single digits.

Speaker #8: It's it's a it's a very mixed bag on the hotels . That is , that is in the low to mid teens . That is a very good return on equity because of the refinancing that that we got done earlier this year , as well as just really strong underlying fundamentals .

Speaker #8: As you can imagine , as we've taken assets , Rio in the multifamily portfolio , there is a lot of noise in the in the NOI numbers in terms of , you know , just just blocking and tackling like you want to evict a number of non-paying tenants .

Speaker #8: And that means you're taking a charge off . And so we're in this period of transition . So that yield is much lower .

Speaker #8: But over time we can you know , we see that increasing . I mean , it's anywhere between very low single digits to 6% today on a , you know , unlevered basis .

Speaker #8: We'll see if our plan is certainly to improve the yield on some of those others . Like I said , are ready for monetization .

Speaker #8: Now .

Speaker #7: Okay . Thanks very much for taking the questions .

Speaker #8: Thanks , Jared . Thanks .

Speaker #1: Thank you . The next question comes from John Nicodemus with Btig . Your line is now open .

Speaker #9: Hello , and thanks for taking the time this morning . Somewhat related to Jade's last question regarding the anticipated Rio multifamily . Five rated loans , notice that your largest loan , the California Multifamily , moved into that bucket of anticipated Rio versus where it was in the last quarter .

Speaker #9: We'd just love to hear . What changed there . And being such a significant size , how that process could play out in terms of taking it .

Speaker #9: Rio , thank you .

Speaker #8: Thanks , John , for the question . It's Priyanka . Yeah , it is . Obviously we're very , very focused on it .

Speaker #8: Sponsorship , is unwilling to support the asset . So at this juncture , you know , I think we've proven our ability to evaluate whether we would like to do loan sales depots , short sales .

Speaker #8: And one, you immediately create value and you go from a loan to a deed. If we wanted to flip and sell it, but more importantly, as we have dug in, we've seen a lot of low-hanging fruit here in terms of the ability to improve top line and the ability to improve expenses.

Speaker #8: when we did all of that , we have determined that the best course of action is actually to take ownership of the asset .

Speaker #8: And so we think this is really a a good opportunity for shareholders in terms of creating additional value in terms of the process .

Speaker #8: It's in California . It's a non-judicial foreclosure state . So it should be a pretty clean process . And we're , you know , the sponsor is well aware of the plan going forward .

Speaker #9: Great . Thank you . Priyanka , that's really helpful . And then other ones from me just wanted to ask about repayments . You've had three significant repayments in the second half of the year so far .

Speaker #9: Two of those were on loans that were on the watch list . A couple , three rated loans . Just just curious if there was any line of sight on any significant repayments before the end of this year , or maybe even early next year , whether that's out of the watch list or just out of the rest of the loan book in general .

Speaker #9: Thanks .

Speaker #8: Yeah . Thanks , John . We . Yes , absolutely . As the short answer , as both Richard and Mike alluded to , capital markets are healthy .

Speaker #8: So we are seeing borrowers in various stages of refinancing plans , both on three and four rated loans . So , you know , we we alluded to this last quarter , we don't control those outcomes .

Speaker #8: So I can't even put a number on it . But there is that is absolutely a possibility going into the balance of the fourth quarter .

Speaker #8: In addition to the first quarter , separately , absolutely dual tracking . The goal of turning over the book . And we will focus on Effectuating transactions , even on difficult assets that are less borrower driven and more lender driven .

Speaker #8: And that , again , goes to all the tools in the toolkit . And that will be very fast and circumstances based in terms of borrower market , asset class .

Speaker #8: And we we have a couple of those in process . And I can see a couple of those getting resolved here in the coming quarters .

Speaker #9: Great . Does that answer the answers ? Priyanka . And thank you for your time today . Yes . No , it definitely does .

Speaker #9: Thank you .

Speaker #8: Okay . Thank you John .

Speaker #1: Thank you sir . There are no additional questions waiting at this time . So as a reminder , it is star followed by one to ask a question .

Speaker #1: We'll pause here briefly as questions are registered . There are no additional questions at this time , so I would like to pass the conference back over to Richard Mack for any closing remarks .

Speaker #6: Well, I just want to thank everyone for joining and for the questions. I would summarize by saying we continue to be in a healing capital markets.

Speaker #6: We're seeing tightening spreads and high demand for assets . And this is allowing us to create value in the portfolio by taking over assets when we need to , by accelerating repayments all to continue to deliver the book , reduce our cost of capital and be prepared to refinance our term loan , be and hopefully get on the other side of that and resume originations and other opportunities .

Speaker #6: So we thank you all again and we'll look forward to speaking to many of you soon . And to our next quarterly meeting .

Speaker #6: Thank you all very much .

Speaker #1: That will conclude the Claros Mortgage Trust, Inc. incorporated third Quarter 2020 Earnings Conference call . Thank you for your participation . You may now disconnect your line .