Welcome to the Claros Mortgage Trust Third Quarter 2022 Earnings Conference Call. My name is Elliot, and I will be your conference facilitator today. I would now like to hand over the call to Anh Huynh, Vice President of Investor Relations for Claros Mortgage Trust.

Thank you. I'm joined by Richard Mack, Chief Executive Officer and Chairman of Claros Mortgage Trust; Mike McGillis, President and Director of Claris Mortgage Trust; and Jai Agarwal, CMTG's Chief Financial Officer. We also have Kevin Cullinan, Executive Vice President, who leads MREC Originations; and Priyanka Garg, Executive Vice President, who leads MREC Portfolio and Asset Management. Prior to this call, we distributed CMTG's earnings supplement. We encourage you to reference these documents in conjunction with the information presented on today's call. If you have any questions following today's call, please contact me. I'd like to remind everyone that today's call may include forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Actual results may differ materially from those indicated by these forward-looking statements as a result of various important factors, including those discussed in our other filings with the SEC. Any forward-looking statements made on this call 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 such as distributable earnings, which we believe may be important to investors to assess our operating performance. For non-GAAP reconciliations, please refer to the earnings supplement. I would now like to turn the call over to Richard.

Good morning, and thank you, everyone, for joining us for our third-quarter earnings call. It may be an understatement to note that market volatility and uncertainty continue to be the prevailing themes as investors and borrowers grapple with high inflation, rising interest rates, supply chain disruptions, geopolitical risk overseas, and political division and uncertainty at home. Economic data remains mixed, and valuations widely distributed as investors across all asset classes assess the Fed's interest rate policy and debate its ability to engineer a soft landing. Despite these factors, we believe that the U.S. economy is stronger and more resilient compared to prior recessions. It is the healthiest major economy in the world, and we believe the U.S. property sector will be more resilient than international markets. However, it is now our view that a recession is likely to occur sometime in 2023 as the Fed attempts to resolve the current inflationary environment. Looking ahead, over the near term, we anticipate more pressure on real estate valuations driven by higher interest rates and in some cases, slower NOI growth, but the impact will be uneven and highly dependent on property type, asset quality, and market. On a positive note, it is important to recognize that there are opportunities for well-capitalized and well-positioned lenders that have demonstrated the ability to manage through challenging economic conditions, like CMTG. Our investment strategy is to focus on transitional lending opportunities secured by high-quality assets with institutional-grade sponsorship. We employ a disciplined approach to underwriting and portfolio construction and are just as focused, if not more so, on asset management. As a result, we believe that our portfolio is well positioned in today's evolving market environment. Our portfolio is comprised almost entirely of floating rate loans and therefore, has benefited from the current interest rate environment. All else remaining equal, additional benchmark rate increases could translate into further earnings growth based on the current portfolio, and more than 90% of our floating rate loan portfolio has interest rate caps in place. With regard to asset allocation, we are heavily weighted towards multifamily, which accounts for more than 40% of our portfolio. We have relatively low office exposure and no stand-alone retail. Today, our portfolio is exclusively focused on U.S. investments, and we do not have any European exposure. For the last two years, we have been diversifying away from the coastal markets, capitalizing on favorable demographic trends and underlying job and rent growth in select markets that we believe will prove to be more resilient in a scenario involving an economic downturn. To do this, we've leveraged the analysis and insights of our broader Mack Real Estate Group team, which has made recent equity investments in several of these markets. Moreover, with an average portfolio LTV of 68% and low leverage on our balance sheet by design, we believe that we are well insulated against adjustments in real estate asset values. We have a conservative approach to managing our balance sheet and have consistently employed relatively low leverage since our formation. In uncertain economic times, our view is that a conservative approach to leverage, adequate liquidity, and access to capital are critical, and we would like to note that we had more than $500 million of liquidity at the end of the third quarter. We believe that our business and strategically constructed portfolio will continue to be resilient despite the uncertain market landscape. Our senior management team has several decades of global real estate investing experience through multiple economic cycles. While each market cycle is unique, our team is recognizing both similar and new factors in the current environment that are informing our focus areas. During the third quarter, we continued to execute on our strategic priorities. Those strategic priorities include targeted originations, proactive asset management, and balance sheet management. Demonstrably, we took advantage of our liquidity position and the market dislocation to originate $878 million of new loans, had strong historical spreads while focusing on our high conviction themes in the residential sector, high-growth markets, and in another drive-to hospitality loan. We're pleased to share our nonaccrual loans represented less than 1% of the portfolio at the end of the quarter, down from 4% at the beginning of the year. Additionally, despite a challenging capital market environment, we continue to have access to financing. Notably, we entered into a $1 billion non-mark-to-market match term financing facility with JPMorgan. Jai will provide additional color on this exciting closing. In summary, we believe our achievements for the quarter speak to the strength of our management team, portfolio, and institutional relationships in addition to our sponsor's integrated real estate lender, owner-operator, developer, and property manager business model. Looking ahead, we expect to selectively target our originations volume to seize upon only those we see as the best risk-adjusted return opportunities while remaining defensive. Our pace of deployment will depend on where we see prudent and accretive leverage as well as the pace of repayments from the existing portfolio, which could slow due to the overall softening transaction volume and the challenging refinancing climate. It bears repeating that we believe we are well-positioned for what lies ahead. There will likely be volatility, uncertainty, and persistent dislocations that come with economic disruptions. And we believe this environment will present many compelling CRE lending opportunities in the coming year despite and due to the challenging capital markets. We believe CMTG has the scale, balance sheet, and team to pick and choose our investment opportunities and execute in today's environment. Before turning the call over to Mike, I am pleased to share that our Board of Directors recently authorized the repurchase of $100 million of the company's common stock. We believe this decision reflects our conviction in our business strategy and long-term financial outlook in addition to our commitment to enhance shareholder value. I would now like to turn the call over to Mike.

Thanks, Richard. CMTG's portfolio based on unpaid principal balance increased 4% quarter-over-quarter to $7.4 billion as new originations and follow-on fundings outpaced loan repayments. Our cash balance of $461 million at the beginning of the third quarter, coupled with repayments of $559 million, positioned us well to capitalize on a number of attractive investment opportunities during the quarter. As Richard mentioned, we originated $878 million in total loan commitments across six investments. These had a weighted average credit spread of 530 basis points over SOFR with a weighted average LTV of 67%. 60% of our originations by loan commitment represented multifamily investments, which we view as a defensive asset class. Multifamily continues to be our largest asset class concentration representing over 40% of our portfolio. In addition, during the quarter, we continued our expansion into several high-growth markets with the third quarter marking our entry into the Salt Lake City, Utah MSA. We originated two multifamily loans in Salt Lake City, representing aggregate loan commitments of $252 million at weighted average LTVs below 65%. The larger of the two loans is a $176 million construction loan for a high-rise tower to a well-known and respected sponsor. The second loan is for $76 million of acquisition financing for an existing multifamily asset. These transactions provided opportunities for us to execute at wider than normal credit spreads while further enhancing our portfolio's geographic diversification. The Salt Lake City MSA represents a target market for us as it is one of the fastest-growing MSAs in the country and has exhibited strong population, job, and wage growth. While the interest rate environment has benefited our portfolio yields, we recognize that borrowers and operators have been impacted by higher financing costs. In addition to our asset management team closely monitoring our borrowers' ability to pay debt service, we have a number of structural protections in our loan documents designed to mitigate the impact of rising rates on the borrower's ability to pay debt service. These include interest rate caps, lender-controlled cash management accounts, and interest and carry reserves, among others. I would now like to turn the call over to Jai.

Thank you, Mike, and thank you, Richard. For the third quarter of 2022, our distributable earnings were $47.1 million or $0.33 per share, and GAAP net income was $42.1 million or $0.30 per share. Our current quarterly dividend is $0.37 per share, which is an 8.2% yield to book value. Earnings this quarter benefited from $3 million or $0.02 per share from the acceleration of fees on two early repayments. Excluding this $0.02 as well as the impact of gains and losses last quarter, our quarter-over-quarter distributable earnings increased $0.09 per share, primarily due to the increase in benchmark rates and net portfolio growth. We stand to benefit from the steep forward curve and based on the static portfolio at quarter end, a 100 basis point increase in rates would generate $0.04 of quarterly earnings. It is important to highlight that benchmark rates are already up 70 basis points since quarter end, and we are currently in a position to cover our dividend. Our general CECL reserve stands at just above 100 basis points of aggregate principal balance. Quarter-over-quarter, our CECL reserve increased by approximately $2.5 million due to net portfolio growth and worsening macroeconomic indicators. This was offset by seasoning as well as improvement in our credit profile. As a reminder, we have virtually zero specific CECL reserves. Turning to the balance sheet. We continue to maintain a conservative net leverage ratio of 2.0x, and our target leverage remains at 2.5 to 3.0x of equity. Despite a challenging capital markets environment, we were able to access the secured financing market in the form of warehouse lines and note-on-note financing. Most notably, as Richard mentioned, subsequent to quarter end, we closed a financing facility of up to $1 billion with JPMorgan and simultaneously financed three loans on it with an aggregate maximum financing commitment of approximately $400 million. This financing is still matched non-mark-to-market. At September 30, we had $4 billion outstanding under our $5 billion of warehouse lines with six counterparties. It is worth noting that the weighted average advance rate under these facilities was a conservative 67%. This 67% can be bifurcated into, one, 75% advance rate on multifamily loans; and two, 60% on all of the property types, both weighted average numbers. Lastly, we continue to maintain strong liquidity. At quarter end, we had $507 million of liquidity, comprised of $230 million in cash and $277 million of approved and undrawn capacity on our warehouse lines. As of today, we have over $0.5 billion in liquidity. We believe this puts us in a strong position to be both offensive and defensive. I would now like to turn the call over to the operator for questions.

Thank you. Our first question comes from Don Fandetti from Wells Fargo.

Good to hear the comments on the dividend coverage. Can you talk a little bit about what you're seeing in New York City regarding the office and hotel sectors and whether that is continuing to improve?

Sure. I’ll address the question broadly and then turn it over to Priyanka to share insights about our hotel portfolio. We're continuously surprised by the resilience of the New York economy. Tourism seems to be rebounding, even though we aren’t seeing as many international visitors. Multifamily rents and occupancy rates are at record highs. However, the office sector is still lagging. The trends we've previously noted are still in play. The top-tier buildings are performing well, but we're beginning to observe some pushback regarding rent concessions, and weaker buildings are facing significant challenges. It’s a divided market. Utilization rates remain considerably lower than pre-pandemic levels and are also below those in the rapidly growing Sunbelt regions. We are apprehensive about the office market in New York. We acknowledge that some buildings will thrive while others will not, and there will be an ongoing need to convert or demolish many outdated structures in the office sector. Furthermore, New York City must collaborate with the government to establish dynamic, round-the-clock communities that integrate work and living spaces. This transformation will require time. There will be some areas in New York where traditional office usage may no longer be viable. Thus, we are worried about the office market in New York, while we are more optimistic about hotels. Priyanka, would you like to elaborate on what you are observing in our portfolio?

Yes. Thanks, Richard. Hi Don, in our REO hotel portfolio, the third quarter was very strong. I think we're seeing that across the hospitality sector in New York. We performed very well on the top line. I think, interestingly, hospitality has really reset at a new level of ADR, really above the 2019 level. Occupancy was also quite strong throughout the third quarter, being driven largely by leisure transient demand, but we're starting to see some group and corporate come back. We had a large financial institution retain a large block of rooms at one of our hotels during the fall period. So we're excited to see that compression is back and the last rooms are really selling at huge premiums. So we're very encouraged by the underlying performance of the REO portfolio.

We turn to Rick Shane from JPMorgan.

Look, I think you guys have highlighted that we're in some ways at a crossroads in terms of the market and fundamentals. And given your low leverage and how well positioned you are, you essentially have three choices: you can grow assets, you can repurchase shares, or you can hoard liquidity in light of a potential extension of asset duration. How do you think about those three choices? Obviously, you increased the authorization on the buyback. And how do you think about increasing leverage on the business at this moment in time?

Let me take the last question first. On the leverage side, we are conservatively leveraged today at 2.0x. And like we've said in the past, we do expect leverage to tick up to around 2.5x and a max of 3.0x. Regarding your other questions about asset growth, buyback, and liquidity, we hold a conversation every single day internally, and it's a debate, honestly. During these times, whether we buy back shares, hold liquidity, or invest in assets, we are being very selective in where we deploy capital because the returns are very strong today. But we also recognize the importance of keeping liquidity. Richard, would you like to add on?

Yes, Rick, I would just say that we're trying to be opportunistic around all three of these sectors. If the market opens up for us to increase our leverage in a manner that we deem accretive both for offense and defense, we're likely to do that. If the market gives us what we believe are outsized risk-adjusted returns, we'll put more money to work. But it's also going to be dependent on how much capital we get from repayments and making sure that we're holding a little bit of extra cash. As it relates to the shares, I think we want to be opportunistic and prudent about where we buy back shares if we buy back shares. It's a constant day-to-day analysis and discussion amongst the team about how to be opportunistic in those three areas. It's a really great question. There's just no perfect answer to it.

Thank you. It's tough to navigate the current situation. Reflecting on the past day, it was quite disheartening. Today, the markets are erratic. I can imagine it's equally challenging for all of you. When considering your current portfolio and available opportunities, should you invest additional funds into your existing assets, or are there so many compelling opportunities in the market that it makes more sense to reinvest the next dollar?

Again, that's something we're debating every day. We're staying active in the market to look at the risk-adjusted returns surrounding what's in our portfolio and what looks similar to our portfolio, what diversifies our portfolio, and what those returns look like. It’s a kind of everyday job that we're seeking to maximize the value for shareholders.

Our next question comes from Steve Delaney from JMP Securities.

Well, your stock buyback decision and allocation, your stock is up 10% this morning. So there may be a near-term revision in how you view that. I just say that in jest, but it's nice to see. I think the thing that struck me in your report was the new facility from JPMorgan, $1 billion and very favorable terms and structure to you. I'm thinking back to March of 2020. I mean, since March of 2020 or the spring of 2020, what we've gone through in the last couple of months is probably the most unstable and uncertain period. Curious about your thoughts on why the banks are hanging in there this time? It strikes me that maybe in 2020, I think people were concerned about a credit event due to the economic impact of the pandemic. Perhaps this time, as you mentioned, Richard, about the New York City economy, people are looking at this as a rates event caused simply by the Fed's posture and tightening. For some, the banks don't seem to be backing off. I would really appreciate views from you, Richard or Mike or Jai, whoever has been talking to the banks and kind of what generally you see the banks' mindset to be about lending to real estate companies like yourself.

I think all three of us will have slightly different thoughts on this. So I'll start by saying that the banks are being much more careful about how they're doing business. They seem to be very selective about whom they want to work with. As it relates to JPMorgan, I think we've demonstrated to them that we are who they want to do business with. They're willing to put out capital at higher rates, but they only want to do so with a select group. This is a very healthy environment for a business like ours. It's a have-and-have-not environment in terms of who has access to capital.

Steve, I would also add that not all banks are open. Some banks have told us they're just not lending in this space anymore. So that is also occurring, but we are in a favorable spot where we continue to have access to capital.

I would also add regarding the money center banks, I completely agree with Richard's and Jai's sentiments, but we continue to see some of the regional banks for the right projects with the right size characteristics continue to be active financing counterparties for us across our business lines. There is a distinction between the money center banks and the regional banks, particularly those that are very relationship-oriented and focused on their borrowers. This has been an interesting development we've seen over the last couple of years.

Appreciate that. And just one final thing. $878 million is a big quarter, given you had sort of a mid-$6 billion portfolio going in. Is there anything chunky in there about maybe a large portfolio opportunity? And looking at that, I mean, it’s good to be lending if you have the capital and find quality deals. But should we expect over the next quarter or so that you could continue to have strong origination quarters? Or was this third quarter just a little chunk?

There's nothing particularly chunky in the third quarter; that was across six different investments. We came into the quarter with a strong balance sheet position and a solid liquidity position. I think everyone has probably seen that the market or the transaction volume has pulled back a little bit, and we were set up to step up and fill a little bit of that void. We're very happy with the positions we put on during the third quarter. I do expect over the course of the fourth quarter for volume to slow down a little bit. But that goes back to what we've been discussing throughout this call, where we're balancing the various opportunities that our balance sheet has afforded us to invest, whether that's internally in the company, or continuing to take advantage of what we think is a very strong but a little bit more challenging environment right now.

We now turn to Jade Rahmani from KBW.

Can you talk about the upcoming loan maturities? The slide shows $576 million. Is that what you anticipate in 2023? I'm sure that’s just a couple of chunky deals, but are you expecting those to pay off? Anything else you could touch on about credit risk in the portfolio?

Yes. Jade, it's Priyanka. I'll take that. Generally, we have a relatively small number of loans maturing or fully extended in 2023, amounting to less than $500 million in unpaid principal balance across six loans. Some of these are likely to be paid off, while others may require negotiations with the borrower. We are preparing for the worst but hoping for the best with all our borrowers. Structurally, we have good protections in place, and we feel confident about the exit risk in our basis and the capital our borrowers will want and need at that time. So as I look at the upcoming maturities, I don't have any significant concerns.

On the single-family for rent and build-to-rent sectors where you've been active, how are you feeling about the outlook there? I know you're not engaged in this exact type of lending, but hard money lenders, not just Broadmark, which reported this week, but also some others are having difficulty in that space and have seen a pretty dramatic deterioration in credit. And, of course, homebuilders are reeling in terms of excess supply. At the same time, some of the single-family rental names are showing some deterioration in NOI. I want to check in on how that portfolio is doing? Also, can you contextualize the size of it?

Sure, Jade. So very good question. We're tracking what you're noticing in the homebuilder space. This can create more opportunity for larger, well-capitalized, and institutional single-family rental owners. Home affordability is certainly on a downward trajectory throughout most of the country, leading to fairly robust fundamentals in the single-family rental space in the markets that we’ve been focused on. Within the entire CMTG portfolio, it's a relatively small portion of our balance sheet that is invested in the single-family rental space. It's primarily throughout one portfolio that is still under development and has been presold to a large institutional developer. There’s a schedule of units that are delivering throughout this year and next, and we've been quite happy with the initial lease-up of some of the communities. We’re also looking at a forward sale here that has materially de-risked our position as well.

There’s one more thing that I think is important to note: there is a distinction that has not yet been clear and will probably evolve over time between the single-family rental space and build-to-rent single-family rental space. Our loans are on build-to-rent single-family rentals, which is much more closely tied to the multifamily market than I think people recognize. This is more of an extension of the multifamily market. We are building this in Phoenix, where there is significant demand for this product, effectively operating like horizontal multifamily. Some of the pitfalls and strengths of the multifamily market can be exhibited in these products.

Jade, just to clarify, the Phoenix development Richard mentioned is in the equity side of our business. So just to be clear on that, not in CMTG’s portfolio.

It's on Page 11, around $200 million, Jade. We've disclosed that on Page 11 of the earnings supplement.

That's 2% of our total commitment, and our unpaid principal balance right now is quite small, given that these are all under construction.

Ladies and gentlemen, this concludes our question-and-answer session. I would now like to turn the conference back over to Richard Mack for any closing remarks.

Thank you, and thanks, everyone, for joining. We feel really good about our last quarter. As per the questions going forward, it’s going to be a challenge—one that we think we're equipped to handle. To manage the opportunities that present themselves in the market and the difficulties that come with those challenges, we’re pretty excited about it. We think we are well-positioned going forward with liquidity, the ability to increase our leverage, the ability to buy back stock, and great access to deal flow and the ability to work through issues as we've demonstrated in our portfolio. We anticipate that we will have some more of that to do as we continue through this fairly disruptive and dislocated market over the next probably year plus. So thanks, everyone, for joining, and we look forward to speaking to you all soon in our next quarterly call.

Today's call has now concluded. We'd like to thank you for your participation. You may now disconnect your lines.