Q2 2026 Claros Mortgage Trust Inc Earnings Call
Speaker #2: Welcome to Claros Mortgage Trust, Q2 2026 earnings conference call. My name is Elodie, and I will be your conference facilitator today. All participants will be in a listen-only mode.
Speaker #2: After today's prepared remarks, we will host a Q&A session. If you would like to ask a question, please press star 1 to raise your hand.
Speaker #2: To withdraw your question, press star 1 again. I will now hand the conference over to Anh Huynh, Vice President of Investor Relations for Claros Mortgage Trust.
Speaker #2: Please proceed.
Speaker #3: Thank you. 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.
Speaker #3: We also have Priyanka Garg, who serves as Executive Vice President of CMTG and President of Mack Real Estate Group. Prior to this call, we distributed CMTG's earnings release and supplement.
Speaker #3: We encourage you to reference these documents in conjunction with the information presented on today's call. If you have any questions, please contact me. I'd like to remind everyone that today's call may include forward-looking statements.
Speaker #3: Within the meeting of the private securities litigation reform act of 1995, actual results may differ materially from those indicated by these forward-looking statements, as a result of various important factors, including those discussed in our filings with the SEC.
Speaker #3: Any forward-looking statements made on this call represent our views only as of today, and we undertake no obligation to update them. We will also be referring to certain non-GAAP financial measures on today's call, such as distributable earnings.
Speaker #3: which we believe may be important to investors to assess our operating performance. For a reconciliation of non-GAAP measures to their nearest GAAP equivalents, please refer to the earnings supplement.
Speaker #3: I would now like to turn the call over to Richard.
Speaker #4: Thank you, Anh, and thank you all for joining us this morning for CMTG's Q2 2026 earnings call. The broader macroeconomic environment continues to present investors with both opportunities and challenges.
Speaker #4: Inflation has remained above targeted levels, interest rates remain elevated, and geopolitical of volatility across financial markets. At the same time, commercial real estate fundamentals have generally improved, supported by limited new construction, healthy levels of capital-seeking deployment, and improving transaction activity.
Speaker #4: With this as a backdrop, CMTG's Q2 results represent continued progress—albeit painful progress—towards returning to originating loans on transitional real estate. As we have highlighted previously, our strategic priorities for 2026 have been turning over the portfolio and resolving watchlist loans, repositioning our REO assets, and deleveraging the balance sheet.
Speaker #4: Our Q2 results and activity to date in July reflect this commitment to working towards these goals. Highlights include another $482 million of loan and REO resolutions, including three watchlist loans. These resolutions reduced leverage, generated additional liquidity, and reduced watchlist loan exposure, while moving us closer to the point where we can make capital allocation decisions.
Speaker #4: Last quarter, we mentioned eight lender-driven sale processes that were being held across our portfolio. These processes have yielded pricing discovery on liquidation values, versus our view of the inherent value of the underlying assets over a longer-term horizon.
Speaker #4: While demand in these sales processes has generally been strong, in certain cases, pricing levels have fallen short of our expectations, especially in the multifamily sector, which we would have expected to be more resilient given demand we see from investors in that asset class.
Speaker #4: Therefore, and consistent with our stated goals, we took additional specific CSO reserves during the quarter on certain office and Sunbelt multifamily loans to reflect anticipated near-term resolutions.
Speaker #4: We also reduced the carrying value of two REO assets that we moved to held for sale, these adjustments resulted in a Q2 2026 book value of $8.58 per share.
Speaker #4: This reduction in book value is primarily attributable to nine loan and REO positions in the portfolio. The balance of the portfolio can be divided into three categories: First, our 15 loans on unaccrual, subject to general CSO reserves. Two of these repaid in July, and we currently anticipate the remaining 13 loans to repay in full, similar to the $464 million of UPB that have had full repayments in this calendar year.
Speaker #4: Second, there are only four loans subject to specific CSO reserves that have not yet been subject to price discovery and are likely to be longer-term resolutions.
Speaker #4: And finally, there are seven additional REO assets with appropriate carrying values and perhaps some upside. These provisions reflect our commitment to turning over the portfolio and resolving watchlist loans and REO assets, deleveraging the balance sheet, and building liquidity in order to reallocate capital to more accretive uses in the near future.
Speaker #4: As we continue to make progress in our strategic priorities, we hope to cause the disconnect between our book value and our stock price to become less pronounced.
Speaker #4: That said, we acknowledge that our goals of returning to a largely performing loan portfolio and executing on other accretive transactions such as share buybacks and ultimately resuming a dividend will take time.
Speaker #4: But our continued focus on executing our strategic priorities should position us well to meet those objectives. As you've heard me say before, we have had to make difficult decisions over the last two years.
Speaker #4: And although we still have work to do, based on the progress to date, we believe we have largely turned the corner and now expect to be in a position to make capital allocation decisions in the coming quarters which may include new loan originations and additional deleveraging and investment in select REO assets and share repurchases.
Speaker #4: We are committed to these strategic priorities because they are necessary for us to capitalize on what we believe will be an increasingly attractive investment environment for CMTG over time.
Speaker #4: I'll now turn the call over to Mike.
Speaker #5: Thank you, Richard, for the Q2 of 2026. CMTG reported a gap net loss of $1.81 per share, and distributable loss of $63 per share.
Speaker #5: Distributable loss prior to realized gains and losses was $0.07 per share. During the quarter and through July, we remained focused on executing the strategic priorities Richard discussed.
Speaker #5: Completing another $482 million of total loan and REO resolutions, including $223 million of regular-way repayments. Proceeds from these resolutions were used to reduce leverage by $346 million, while overall liquidity increased from $116 million on May 5 to $168 million at July 24.
Speaker #5: During the Q2, we resolved one watchlist loan through foreclosure. This was a $25 million five-rated loan collateralized by a multifamily property in the Dallas MSA.
Speaker #5: We also completed the sale of one of our Dallas multifamily REO assets originally foreclosed upon in July 2025 for gross proceeds of approximately $47 million which was slightly above our carrying value.
Speaker #5: Subsequent to quarter-end, we've had an active July. We resolved the watchlist loan through a loan sale yielding gross proceeds of $70.7 million. As of June 30, the loan was classified as held for sale.
Speaker #5: This was a San Francisco office loan originated in February 2020, which has faced significant challenges. The loan had been on our watchlist since early 2022.
Speaker #5: As part of our strategy to turn over the book, we determined that this was the right time to sell, given the recovery in the San Francisco market.
Speaker #5: Also, subsequent to quarter-end, we resolved the watchlist loan through a discounted payoff for gross proceeds of $70 million versus a $75 million UPB or $94% of par.
Speaker #5: The loan was secured by a multifamily property in the Salt Lake City MSA. The loan was downgraded to a 5 during the quarter once the discounted payoff was agreed upon.
Speaker #5: Finally, subsequent to quarter-end, we were repaid in full on two loans totaling $223 million of UPB. Both loans were collateralized by multifamily assets one in Seattle and one in Chicago.
Speaker #5: In summary, since the beginning of the Q2, we've resolved five loans totaling $435 million of UPB prior to principal charge-offs, of which three were watchlist loans totaling $212 million of UPB.
Speaker #5: Year to date, we've resolved ten loans totaling $1 billion of UPB prior to principal charge-offs, of which seven were watchlist loans totaling $647 million of UPB.
Speaker #5: Our watchlist loans have been steadily coming down from $2.7 billion at year-end 2024 to $1.7 billion at year-end 2025 to $1.1 billion today. Following July resolutions, our portfolio is now comprised of 23 loans or $3.1 billion of UPB and nine REO assets with a total carrying value of $724 million.
Speaker #5: Turning to portfolio credit. As Richard alluded to, our loan and REO asset sale marketing processes along with our goal of turning over the portfolio has led to downgrades on four loans and increased specific reserves on three loans and reclassification of two REO assets to held for sale.
Speaker #5: Three loans with a combined UPB of $372 million were downgraded from risk rating 4 to 5 primarily due to price discovery in our lender-driven sales processes.
Speaker #5: In order to resolve the loans today, CMTG needs to meet purchase and return thresholds which remain elevated in the current interest rate environment. As a result of the downgrades, we took specific CISO provisions on these loans of $109 million or $75 per share which reflects our commitment towards executing our stated goals and reflects our willingness to transact at today's levels.
Speaker #5: The fourth loan being downgraded is $75 million Utah multifamily loan previously mentioned. This loan was downgraded from a risk rating of 3 to a risk rating of 5 during the quarter after negotiating the $94% discounted payoff that occurred subsequent to quarter-end.
Speaker #5: As Richard mentioned, in addition to these four downgrades, we increased specific CISO reserves on three other previously five-rated loans to reflect real-time market feedback from our lender-driven sales processes.
Speaker #5: As a result of feedback from our sales processes, we took additional specific CISO provisions of $74 million or $51 per share during Q2 which again reflects our commitment towards executing our stated goals and willingness to transact at today's levels.
Speaker #5: Our overall specific CISO reserve at quarter-end was $517 million, averaging 32% of related UPB. While there may be greater collateral value in certain of these watchlist loans on a longer-term basis, we believe these risk ratings and reserve levels are appropriate given our stated objective of turning over the book in the near term and generally aligning our book value with such objectives.
Speaker #5: Our general CISO reserve and gross dollar terms remained relatively static quarter over quarter at approximately $50 million; however, as a percentage of UPB relating to loans subject to the general reserve, the reserve increased from $2.3% to $2.9% of UPB.
Speaker #5: Turning to REO. At quarter-end, we reclassified our mixed-use REO asset and one of our multifamily REO assets to held for sale at carrying values that we expect to transact at in the coming months.
Speaker #5: As a result, we recognized a loss upon reclassification to held for sale of $30 million or $21 per share for the quarter. As expected, our New York City hotel portfolio yielded improved performance quarter on quarter due to expected seasonality.
Speaker #5: The portfolio contributed $0.03 per share of distributed earnings representing an improvement of $0.05 per share compared to the first quarter and an improvement of $0.02 per share compared to Q2 2025.
Speaker #5: Our multifamily REO portfolio operating performance remained in line with Q1 results. We continue to focus on enhancing property performance, completing targeted capital improvements where appropriate, and actively evaluating monetization opportunities across the multifamily portfolio.
Speaker #5: We remain encouraged by the level of buyer interest for several of our REO assets and while market clearing prices at times have been lower than anticipated, we continue to believe that in most cases, taking these assets' REO has created incremental value beyond what could have been achieved in a loan sale.
Speaker #5: Turning to the balance sheet. During the quarter, we reduced outstanding financings net by approximately $66 million including $20 million of deleveraging payments. Despite this, our net debt-to-equity ratio increased to 2.0x compared to 1.7x at March 31st primarily driven by declines in book value as a result of additional CISO provisions and losses on REO held for sale taken during the quarter.
Speaker #5: Following resolutions to date in July, an additional financing repayments of $299 million our net debt-to-equity ratio has decreased to 1.7x on a pro forma basis.
Speaker #5: Liquidity at quarter-end totaled $103 million, including cash of $90 million. As of July 24th, our liquidity increased to $168 million. In addition, our unencumbered asset pool, totaling $509 million of loan UPB and REO carrying value, continues to provide financial flexibility. We are in the process of executing sales of certain of those assets, which we believe will generate approximately $140 million of additional liquidity.
Speaker #5: Overall, we've made solid progress in achieving our stated objectives turning over the portfolio, resolving watchlist loans, repositioning our REO assets, and deleveraging the balance sheet.
Speaker #5: Our strategy has been deliberate and consistent. As we continue executing against those priorities, we expect CMTG to be well-positioned for the company's next phase.
Speaker #5: I would now like to open the call for questions. Operator?
Speaker #1: We will now begin the question and answer session. If you would like to ask a question, please press *1 on your telephone keypad. To withdraw your question, press *1 again.
Speaker #1: Please pick up your handset when asking a question. If you are muted locally, please remember to unmute your device. Please stand by while we compile the Q&A roster.
Speaker #1: Your first question comes from the line of Rick Shane with JPMorgan. Please go ahead.
Speaker #3: Hey, guys. Thanks for taking my questions this morning. And I appreciate you guys laying out so much detail here. Look, you are in the market with property sales.
Speaker #3: You're in the market with loan sales. I am curious what types of investors what types of buyers do you see out there? And also, it's interesting.
Speaker #3: We had a call in an adjacent sector yesterday where a very large company talked about lower volumes in the second quarter as a function of rate volatility.
Speaker #3: And it sort of froze their markets a little bit. I am curious since you guys are in the market as net sellers right now, how behavior and how feedback has changed and is there any chilling effect as a function of the rate volatility we've seen?
Speaker #4: Hi, Rick. It's Priyanka. I'll start off and then maybe Richard will want to add some thoughts. Yeah. Really, pertinent question, something we've been talking about a lot.
Speaker #4: We are so the first question, what kinds of investors? I mean, given that some of these assets are require a lot of operational focus.
Speaker #4: We're seeing a lot of local guys who are going to work out assets both multifamily and office. So local GP players who are then looking to partner with LP Capital.
Speaker #4: So and that LP is coming from a variety of sources, but a lot of private family offices and private investors. We're seeing less so in the more private equity hedge fund space.
Speaker #4: And that's a good segue into the second part of your question. Yes, we are definitely seeing volatility. A lot of that volatility is informing the CISO, the additional CISO reserves we took this quarter as well as some of those downgrades.
Speaker #4: Investors simply have higher return thresholds, and that's being driven by rate volatility but also the availability of LP capital. Because I think that LP capital, which has a wider array of investment options, is allocating differently.
Speaker #4: And they are waiting for what they perceive to be better opportunities coming down the pike. But I'll summarize my comments by saying we are very committed to turning over the book.
Speaker #4: We're meeting the market. That's reflected in our book value that we just reported. And we think we can achieve those levels.
Speaker #3: Got it. I'm sorry, Richard.
Speaker #5: Yeah. Rick, I just want let me just add one thing, Rick, and thank you for the question. What's very interesting is that we have we see a very deep market of buyers.
Speaker #5: Sometimes we'll see 20 people show up for a bid list. And as Priyanka suggests, the volatility is extreme. We sometimes we see a price that's much better than we thought, and sometimes it's much worse.
Speaker #5: And so it reflects, I think, a lot of people out there—a high cost of capital, a different underwriting perspective, and the volatility of rates.
Speaker #5: And so when we put something on the market, we're trying to be conservative about it. And also opportunistic. So when we get bids that we feel are valuable, we want to take them.
Speaker #5: And when we don't, and we feel like we really get a bid that is on the other end of the volatility spectrum—especially given what's going on with rates every day—oftentimes, we want to maybe take a CISO reserve, hold it, try to add a little value, and then go back out.
Speaker #5: So it's just a market with a tremendous amount of volatility in pricing, and I think that's reflecting a little bit of a negative leverage environment in some asset classes.
Speaker #5: And just a tremendous amount of debt capital available, but not as much equity. So hopefully that's a fulsome response.
Speaker #3: Got it. And actually, Richard, that dovetails into my follow-up question, which is that look, as you guys move towards the condition of a little bit more liquidity and starting to deploy some capital again, is there how are you guys thinking about providing seller financing on some of those some of those property sales?
Speaker #3: And realizing there is skepticism in the market about that, but at the same time, it does reduce some frictions for you and potentially allows you to lend in the situation if you understand pretty well.
Speaker #5: Yeah. Look, I'm going to turn this to Priyanka in a minute, but we are going to be opportunistic about it. As a general statement, there's a lot of capital out there for people to buy.
Speaker #5: We've got reset bases on these assets. And capital at pretty low spreads being driven by very low cost of capital on warehouse lines from the banks.
Speaker #5: So we don't often have to do that. But if someone says, "Hey, take back some junior paper or subsidize something and we'll get you something that we believe, on a present value basis, is more attractive for our investors," we'll absolutely look at that, of course.
Speaker #5: Priyanka, I'm just going to hand it to you.
Speaker #4: Okay. Thanks, Richard. Yeah. Rick, another topic that comes up quite a lot on our end. As we run through these processes, what we have found is our seller financing isn't necessarily going to be accretive to the pricing in terms of what our goals are.
Speaker #4: So the sale price isn't necessarily going to go up because we are so focused on releasing the embedded book value and the equity that is in each of those positions.
Speaker #4: And frankly, because we are much lower leveraged than a lot of the our peers who are offering seller financing, there is a lot of embedded equity on the sale.
Speaker #4: So when we do the math, it doesn't usually pencil to provide seller financing.
Speaker #3: Terrific. Thank you guys very much for answering our questions this morning.
Speaker #4: Thank you.
Speaker #1: Your next question is from Marissa Lobo with UBS. Please go ahead.
Speaker #4: Good morning. Thanks for taking the question. Just speaking about resuming originations, can you review the timeline for that in context of the five risk-rated population and the current rate environment?
Speaker #4: And what are you looking for in terms of balance sheet performance to what are the milestones before you resume originations?
Speaker #5: Why don't I thanks, Marissa, for the question. I'll start and I'll let Priyanka, Richard chime in. But I think as we've said before, before we get into position to evaluate other capital allocation opportunities, including new origination, we really want to reduce the level of watchlist assets in the portfolio.
Speaker #5: Continue to execute on our REO, monetization activities, deleverage the balance sheet. Including not just our asset level financings, but our term financing facility at the corporate level.
Speaker #5: The combination of all those things is going to put us in a position to start evaluating new origination opportunities. And it's hard to pick a timeline because we don't unilaterally control certain of these actions.
Speaker #5: But we think it's somewhere in the latter part of this year and early next year, is when we think we'll be in a position to start redeploying capital into new originations.
Speaker #4: Okay. Thank you for that.
Speaker #3: I don't have anything to add to that.
Speaker #4: Yeah. Okay. And just looking at the resolution of the San Francisco office loan, 63 cents on the dollar, can you speak to that relative to the other office five rated credits and just on the adequacy of reserves on those?
Speaker #2: Yeah, thanks for that question. So, as we said in our prepared remarks, that was a February 2020 origination. As we all know in this industry, timing is almost everything.
Speaker #2: So it was a very high basis. And just the timing really could not be more challenging. I think what we did really well, though, was exhibit some patience because if we had sold this loan a year ago, I think market clearing price was probably half of what it ultimately was.
Speaker #2: And our goal was as San Francisco was improving, we wanted to get out on the front end of a lender-driven sale process to really garner interest.
Speaker #2: And Richard alluded to this earlier, the bid sheet on this was so deep. And that just simply wouldn't have been the case prior. Maybe there potentially we lessened dollars on the table if we had waited a little bit.
Speaker #2: But I think really getting in early and having everybody interested in one of the more early lender-driven opportunities was really helpful to us. So I think that that asset was very unique because of the market it's in.
Speaker #2: You will notice that we did take specific additional reserves on two of the other office buildings. Those are informed by us being in the market today.
Speaker #2: Those were very live updates, so we think we're appropriately reserved on those. And then, that really leaves only two other office assets in our entire portfolio.
Speaker #2: And those are very unique in each of their markets and really fall into the have versus have not categories. It falls very much into the haves, in terms of newly renovated amenity base that tenants require.
Speaker #2: So, overall, we think we're well-reserved. That San Francisco loan was just a unique situation because of timing.
Speaker #4: Got it. I appreciate the detailed answer. Thank you.
Speaker #2: Thank you for the question.
Speaker #1: Your next question comes from the line of John Nicodemus with BTIG. Please go ahead.
Speaker #5: Hello. And thanks for the time today. So I know there were some ups and downs in the quarter on the leverage side. It sounds like that's coming down post-quarter end.
Speaker #5: I also noticed net interest income dipped slightly negative during the quarter. Given some of the deleveraging efforts that have already occurred in the third quarter thus far, and what's planned to be underway for the second half of the year, how could we see net interest income trend as we head toward the end of 2026?
Speaker #5: Thank you. Thanks, John. Appreciate the question. I think a couple of drivers of that. I think it's important to keep in mind that about a third of our interest expense relates to our corporate term loan financing.
Speaker #5: And we entered into that financing back in January of this year to take out our old term loan. Our objective on that is to pay that down as quickly as reasonably possible, along with continuing to repay financings on our other direct asset financing facilities.
Speaker #5: So with that backdrop, I think it's important to highlight that any time we resolve a watchlist loan or an underperforming asset and payoff related financing, that's going to be that'll improve our net interest income by reducing interest expense.
Speaker #5: Any kind of direct deleveraging as well from regular way repayments, even though it may reduce interest on performing loans, may reduce interest income, but by utilizing the recovery, the aggregate recovery from that to delever that will also have the impact of reducing interest expense as well.
Speaker #5: I think that and it's hard to predict exactly how that's going to lay out, but I think as we continue to resolve assets, particularly watchlist assets, deleverage the portfolio, and get ourselves into a position to rebuild the portfolio, and pay off the term loan, that will ultimately be a catalyst for improving net investment income on the loan portfolio in time.
Speaker #5: Great. Really appreciate that detail, Mike. That's super helpful. And then just to follow up for me, kind of to dovetail off my prior question, but given the pro forma figures you provided on page five of your supplemental, we've seen the loan portfolio come down by around a billion dollars to 3.1 billion as of the release.
Speaker #5: So just curious, based on your current plans, current outlook for the rest of the year, how low could we see the portfolio size drop to by the end of 2026?
Speaker #5: Thank you. I think I'll start, and then I'll let Priyanka chime in. Obviously, while we're working through regular way repayments, on a large percentage of the performing loan portfolio, in our objective of sort of moving out of some of the four and five rated loans, I think you're going to see the portfolio shrink pretty significantly, whether it's whether that occurs by the end of the year or sometime in early 2027 remains to be seen.
Speaker #5: But we've got a number of loans in the performing loan category where borrowers are actively working on refinancings or asset sales. So we would expect to be paid off on those.
Speaker #5: And as we said in our priorities, they're really to try to turn over the portfolio and eliminate the four and five rated loans in time, through these various sale processes.
Speaker #5: It's hard to pick a number, but I think it's fair to say it'll continue to decline until we're back in origination mode and can start rebuilding the loan portfolio.
Speaker #2: Yeah. The only thing I would add to that is it's almost a billion dollars worth of activity that's either actively being sold or refinanced by our borrowers or lender-driven sales that we've been discussing for the last quarter and a half.
Speaker #2: So there's a lot that is out there that could occur. We all understand the very volatile environment we're operating in. So I don't think it's all going to happen.
Speaker #2: By end of the year, first quarter of '27. But it could be I certainly agree with Mike that it's going to be a significant decline from where we are.
Speaker #2: On a percentage basis.
Speaker #5: Great. Really appreciate the time, Priyanka, and Mike. And that's all from me. Thanks, John.
Speaker #2: Thank you.
Speaker #1: Your next question is from the line of Jade Rahmani with KBW. Please go ahead.
Speaker #4: Thank you. Relative to your first quarter expectations, did things get worse or better? Or maybe not much difference during the quarter? On credit.
Speaker #2: I'll start on credit. I think the only thing, from my perspective, that actually got worse is meeting buyer expectations out in the market. Their return expectations have certainly increased since the beginning of this year, and even at the end of the first quarter.
Speaker #2: So their underwriting to higher returns, which obviously means that to meet the market, we have to bring our pricing down. And that is what you're seeing reflected in our book value today that we reported.
Speaker #2: So that has been disappointing, but I would say everything else in terms of pace, billion dollars of resolutions year to date. We had 2.5 billion last year, and that was a very active year.
Speaker #2: So the pace of transactions feels good. And particularly since we're saying we are going to meet the market in most cases, overall feel like we're well positioned to execute on our stated objectives.
Speaker #5: Jade, let me just add on that. Sorry. Jade just.
Speaker #4: Go ahead.
Speaker #5: What you I was just going to add one thing, then I'll take your question. Sorry. I was just going to say that on the refinancing side, for our performing loans, that has been very strong.
Speaker #5: And that's why we are seeing repayments. So it's kind of one of these bifurcated markets where, for the things that are performing, there's a lot of capital to refinance them.
Speaker #5: And the things that are not performing, there's a lot of volatility in the bid. Sorry. Jade, please go ahead.
Speaker #4: Do you have a range in mind for where book value might drop?
Speaker #5: I don't know that we want to answer that question, Mike. Maybe you want to. But.
Speaker #4: No, I think.
Speaker #5: Jade, I'll give it a I'll give it a shot. I can't really provide a specific answer. To that. Jade, but I think we've feel like we've taken some pretty significant write downs based on the active sale processes that we're engaged in right now.
Speaker #5: And so I think I feel pretty good about that. Obviously, if we continue to have operating losses for a few quarters, that'll continue to diminish book value.
Speaker #5: But I feel like we've got a good chunk of this behind us, but until these assets are moved out of the portfolio, it gets too early to call a bottom.
Speaker #5: But I think we've taken some pretty aggressive steps this quarter.
Speaker #4: Okay. How do you feel about multifamily? I think that some of the commercial mortgage rates have had a decent loss severity in multifamily, and yet others have had either minimal losses on their risk 4 or 5 rated multifamily loans, or maybe in the 5% to 10% range.
Speaker #4: So I mean, in general, it's probably lower loss severity than what we've seen in office. But do you think that is about to change?
Speaker #4: Because the higher rate environment is going to weigh on multifamily valuations. Or do you think that people are seeing more supply absorption, so feeling positive about 2027?
Speaker #5: Jade, that's a very good question and a very difficult one to answer. This is a very market-specific issue. I think if we look to the Sun Belt, we are going to continue to have elevated deliveries in 2026 and 2027.
Speaker #5: You're going to have 400,000 units delivered in the US, 60% of that is the Sun Belt. Average deliveries in the US have been about 280,000.
Speaker #5: So we have elevated deliveries across the U.S., particularly in the Sun Belt. But we have very strong absorption. However, we are seeing deportation and people going into reverse migration.
Speaker #5: For especially in the Sun Belt, the lower quality assets, which is weighing on the market, we see markets like Los Angeles, where they and Seattle, where they can't get their act together from a government perspective, where valuations are down.
Speaker #5: And yet we see markets like New York, where rent increases are incredibly strong and cap rates are cap rates are very low. It is really, really sub-market by sub-market specific as it relates to demand rental growth, supply, and as a result, cap rates.
Speaker #5: And then you layer on the interest rates which create more volatility. So I think the reason that you are seeing disparate results in multifamily is that it is a quasi it's used as a quasi fixed income asset.
Speaker #5: There's a lot of volatility in rates. And there's also a lot of volatility in the supply and demand picture in all of these various markets.
Speaker #5: So it's a very, very hard to pin this down other than to go market by market and discuss the supply demand balances or imbalances in each one of those markets.
Speaker #4: But most of the exposure is in the Sun Belt. So, do you think cap rates in Sun Belt multifamily are going to be increasing?
Speaker #5: I think that they are if interest rates continue to go up, I think you will see increases. If we have stable interest rates, I think there is at least optimism looking out to the end of 2027 or really just looking at starts, which have dropped off, that the only good news is it starts have dropped off.
Speaker #5: Deliveries continue, but starts have really dropped off. So it's a question of people looking forward to that. People have been more aggressive in looking forward to that drop-off in starts when rates have made them optimistic.
Speaker #5: And as rates make them pessimistic, they're less willing to. So I think it's stable to down until there's rate movement—rate movement down, I should say.
Speaker #4: Thanks very much. Appreciate it.
Speaker #5: Thank you.
Speaker #2: This concludes the question-and-answer session. I will now turn the call back over to Richard Mack for closing remarks.
Speaker #5: I want to thank you all again for joining us. It was a tough but productive quarter for CNTG. This year, we had a billion dollars of resolutions already, reflecting the availability of financing in the market.
Speaker #5: But the still-large bid-ask spreads, volatility of pricing, and concerns around interest rates have been keeping transaction volume at a modest level, but hopefully improving.
Speaker #5: We're going to continue to navigate this environment with hard work and hard decisions to turn the book and get back to the business of capital allocation.
Speaker #5: Thank you again for joining us.
