Welcome to Claros Mortgage Trust's Third Quarter 2024 Earnings Conference Call. My name is Bridget, and I will be your conference facilitator today. All participants will be in a listen-only mode. I would now like to hand the call over to Anh Huynh, Vice President of Investor Relations of Claros Mortgage Trust. Please proceed.

Thank you. I'm joined by Richard Mack, Chief Executive Officer and Chairman of Claros Mortgage Trust; and Mike McGillis, President and Chief Financial Officer and Director of Claros Mortgage Trust. We also have Priyanka Garg, Executive Vice President who leads MRECS 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. If you have any questions, please contact me. I'd like to remind everyone that today's call may include forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Actual results may differ materially from those indicated by 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 on today's call, such as distributable earnings, which we believe may be important to investors to assess our operating performance. For reconciliations of non-GAAP measures to their nearest GAAP equivalent, please refer to the earnings supplement. I would now like to turn the call over to Richard.

Thank you, Anh, and thank you everyone for joining us this morning for CMTG's third quarter earnings call. James Carville famously quipped in 1992, 'It's the economy, stupid,' referring to how Clinton would and did unseat the elder Bush. In 2024, one might say that it was inflation, stupid, or Donald Trump's promise to tame it that brought him back to the White House. The question, however, is whether the President-elect's stated policies are actually more inflationary than Democratic Party proposals, or will those proposals be scaled back in favor of more anti-inflation, business-friendly policies? Right now, it seems that Wall Street believes that our new and previous President will bring prosperity, if not deflation. If it can bring both, we will see a boon to commercial real estate, which has had a tough run for the last few years. Like many other interest-rate sensitive sectors, commercial real estate has been and will continue to be disproportionately impacted by the Fed's actions. While the recent cut was very helpful to transitional real estate assets, it's unclear how much of an inflection point this will be for property values, which will depend on future Fed actions. Currently, many market pundits see a Goldilocks environment. Inflation appears under control, while the job market seems resilient. With inflation easing, oil prices stabilizing, and shelter cost declines finally being accounted for in CPI, job growth seemingly slowing, and deflationary pressures from China, we believe that now is the time for the Fed to cut rates to stay ahead of the curve. However, even with Donald Trump as President, who has promised to force the Fed to lower short-term rates, we cannot rely on this. It is prudent for CMTG to remain patient and recognize that the industry is in a transitory phase, which will likely persist until it reflects a normalized yield curve. Having experienced one of the most aggressive rate tightening cycles in decades, this has been a challenging period for commercial real estate broadly. However, expectations that the lack of new supply will raise rents, that construction costs are likely to remain high, and that rates will reset to what may be considered normalized levels are starting to drive transaction volumes by investors who want to be ahead of asset value reinflation. We are already witnessing this; the anticipation of better fundamentals and lower borrowing costs, coupled with enhanced liquidity, could lead to lower cap rates, becoming a self-fulfilling prophecy and providing tailwinds to valuations. This is a positive sign, but for transaction volumes and values to truly recover, we believe that rates must continue to trend downward. As this happens, we believe increased transaction volume will promote confidence from market participants, and importantly, basis resetting has the potential to restart a virtuous valuation cycle and increase confidence in commercial real estate. We see this floor on valuations reflected in improved leasing markets and unsolicited offers for our sponsors' owned assets. Additionally, in CMTG's portfolio, transaction activity has been increasing; so far this year, we have had $1.2 billion in realizations. Looking ahead to 2025, we anticipate transaction volume to gain momentum as sponsors begin to access the capital markets favorably once again. We could also see an uptick in construction as developers revisit projects that have been placed on hold for two years or more. In managing our business over the past couple of years during this elevated rate environment, we've been pragmatic and focused on proactive asset management while being responsive to our borrowers' needs and reducing nominal leverage levels. While we believe it is prudent to maintain a defensive posture during this transitory period, inherent value in our portfolio is expected to be realized as underlying asset values recover. We are in the process of transitioning our portfolio over the medium to long term. This may include selling watch list loans into an improving market that is now bidding them more strongly, pursuing future REO opportunities, and paying down high-cost debt. As we've noted previously, multifamily continues to represent our largest portfolio exposure and remains one of our high-conviction themes. Looking ahead, we see several drivers to support the multifamily investment thesis. Foremost is that supply constraints continue to challenge overall U.S. housing availability due to a strong economy and muted new construction activity. As a result, we have observed strong pricing trends in major urban markets, and we believe that as long as the economy remains relatively stable, this will support NOI growth in the years to come. Our multifamily portfolio is generally well-positioned to benefit from these trends, and we will look to be opportunistic when borrowers are unable to support their assets. We have identified select properties that we believe would be compelling multifamily REO assets, which reflect our long-term confidence in this property class. Therefore, we will seek to extract value for our shareholders by leveraging our sponsor's deep multifamily real estate experience to bring select multifamily assets into REO under our management when we can and when prudent to do so. If executed correctly, we believe this can be another lever to create value for investors. As always, I thank you for participating, and I will now turn the call over to Mike.

Thank you, Richard. For Q3 of 2024, CMTG reported a GAAP net loss of $0.40 per share and a distributable loss of $0.17 per share. Distributable earnings per share prior to realized losses were $0.22 per share. CMTG's loan held for investment portfolio decreased to $6.3 billion at September 30 compared to $6.8 billion at June 30. The quarter-over-quarter decrease was the result of several moving parts. First, the third quarter was active with regard to loan repayments. We received a total of $374 million in loan repayments, including the full repayment of four loans totaling $354 million of UPB. The loan repayments during the quarter translated to reductions in relatively more challenging property types, including office and life science, while also reducing our total future funding commitment through the repayment of two construction loans. Included in the $354 million of full repayments, we were repaid on a $123 million previously rated New York office loan. CMTG's office exposure has historically been relatively small at only 14% of the portfolio at quarter end, and our pre-COVID negative sentiment towards the sector has proven beneficial throughout this cycle. We were also repaid on a $109 million Boston life science loan, an asset class that has been under pressure. Rounding out this quarter's repayments, we received repayment on two construction loans—a $99 million loan on an industrial project in Nevada and a $23 million loan on a build-to-rent project in Georgia. Partially offsetting total repayments during the period was the impact of $186 million in fundings on new and existing loan commitments. As a result of the fundings and repayments of construction loans, our future funding commitments decreased to $584 million at September 30 from $749 million at June 30. Of the $584 million, our expected future net equity commitment is $185 million, which we expect to fund over the course of about two years. At quarter end, we reclassified three loans to held for sale. The fact pattern surrounding each of the three loans held for sale is distinct, and our decision to sell represents our view of the optimal outcome for CMTG given a variety of facts and circumstances. The first loan, a $30 million subordinate and unencumbered loan secured by to-be-developed land in Miami, was originated in July 2021. Upon reaching its initial maturity date in July 2023, the borrower exercised its right to extend the loan to its fully extended maturity date of July 2024. In July 2024, we agreed to a modification with the borrower to extend the loan to September 2024 as the borrower worked towards a refinancing. When we reached the September 2024 maturity date, the borrower requested additional time to execute the refinancing. To minimize the impact of execution risk, we pivoted our strategy and sold the loan at 99.5% of par. The sale closed subsequent to the quarter in early October, realizing an investment level gross IRR above 15%. The second loan, a $211 million senior and unencumbered California for sale condo loan, was originated in October 2019 and had been downgraded to risk grade four in the second quarter of this year. From 2022 through the summer of 2023, we received $83 million in loan repayments, reducing our UPB from just under $300 million. As we mentioned on our last earnings call, the borrower relied on offshore capital sources, resulting in disruption in the borrower's business plan. After assessing our options, we determined that a loan sale was our most appropriate path, recording a charge-off for the accrued interest receivable and a $28 million principal charge-off upon reclassifying the loan to held for sale. The third loan, a $115 million senior loan secured by a multi-family building in Colorado, was originated in August 2022. This three-risk rated loan has been performing since origination with an initial maturity date set for next summer. During the quarter, we received an offer to sell this loan at a small discount to UPB that approximated our general CECL reserve. Given the environment, we made the decision to execute on the sale and repurpose the capital to deleverage existing financings, which will increase our net interest margin and reduce our average advance rates. We view this type of selective loan sale as an important step in repositioning the portfolio and related financing, enabling us to pivot towards offense over time. In light of all this activity, the portfolio's composition remains relatively in line with the prior quarter. Multifamily continues to be our biggest exposure at 42% of the portfolio at quarter end. As Richard mentioned, we remain optimistic on multifamily. However, the elevated rate environment has been challenging for multifamily borrowers, and we continue to observe this theme in our portfolio. Consequently, during the third quarter, consistent with what we have seen year-to-date, credit migration has been concentrated within our multifamily book. During the quarter, we moved two multifamily loans to a four-risk rating, representing a total UPB of $325 million. These loans, with the same sponsor, are collateralized by assets located in Denver and Phoenix. The sponsor has experienced difficulties accessing the capital markets, and while we have a positive long-term outlook on housing in these markets, we believe it prudent to proactively downgrade these loans. Additionally, we moved three multifamily loans to a five-risk rating. These three loans, with the same sponsor and a combined UPB of $186 million, are collateralized by assets located in Las Vegas, Phoenix, and Dallas. These loans were placed on non-accrual status in Q1, and the decision to further downgrade was made in anticipation of taking ownership of the assets over the next quarter or two. As part of this process, we recorded specific reserves of $30 million collectively against these loans, representing 16% of UPB. It's important to note that this reflects the current valuation of these assets and does not represent what we view as the long-term value of these assets under our management. We believe that leveraging our sponsors' extensive multifamily experience will enable us to successfully execute a value-add plan to improve cash flow over time, which should positively affect asset value. Turning to liquidity, as of September 30, we reported $116 million in total liquidity, which includes cash and approved and undrawn credit capacity based on existing collateral. Unencumbered assets consist of loans totaling $459 million of UPB, including $213 million of loans classified as for sale, along with our mixed-use REO with a carrying value of $146 million. I'll now turn the call over to the operator.

The first question comes from Doug Harter with UBS. Doug, your line is now open.

Thanks. I'm hoping you could talk, kind of big picture about the four-rated loan bucket and kind of how you see those progressing either through sale, through resolution or potentially downgraded and kind of how you think about the carrying value of that bucket?

Yeah. Hi, Doug. It's Priyanka. Thank you for the question. Thanks for joining. You know, I'm going to be a little repetitive to what both Richard and Mike said. Of our I'll and I'll talk about fours and fives in aggregate. About half of that exposure is multifamily. So, if we were going to have assets that are on our watch list, that's the one sector that we are most excited about or most constructive on, I would say. We always want our sponsors to be successful in their business plans, but if they're not, multifamily is where we want the exposure. The fundamentals are strengthening, and there's no secular shift in the asset class, and all of those multifamily assets that are fours and fives are cash flowing and have value-add opportunities. We know we can do a better job of ultimately managing those assets, particularly by leveraging the broader platform, and alongside that with a normalized rate environment creating more value inherently. So, I think fours and fives multifamily assets—we hope to work something out with the borrowers. But if not, we're ready to take those REOs as indicated by the three assets that we moved to a five this quarter. Of the other half of our fours and fives, I would say we're making great progress on the $1.2 billion that we've had in realizations year-to-date. A third of that has been four-rated loans, and that excludes the asset we moved to held for sale. So, I think we're making really good progress on the non-multifamily assets. The resolution is going to come down to whether we think there is long-term value creation. Is it a good use of our capital allocation, and should we foreclose or sell assets? I think we've demonstrated over the last few quarters that we take that decision quite seriously, and we put a lot of analytics behind it. If it's not a great use of capital, we're going to sell at a discount and move on. So, that's kind of the broad big picture answer.

The next question comes from the line of Rick Shane with JP Morgan. Rick, your line is open.

Thanks for taking my questions. Look, the reserve is important because at some point, you're going to start taking that down. In the third quarter, you used, I don't know if that's the right term, but you used 27% of the prior quarter's reserve recognizing losses. At the same time, the reserve continued to grow another 13%. Obviously, there are some mechanical aspects of that in terms of when loans migrate, you have to take much higher reserves. But I am curious, is the increase in reserves and the continued migration at this point surprising to you? We're trying to wonder when you'll be able to dimensionalize the extent of the challenges in the portfolio. When you have a quarter where you take this big of a charge-off and the reserve builds, it kind of suggests that we're not there yet.

Mike, do you want me to take that?

No, I'm on. I got it. I think, Rick, obviously, establishing these reserves is a pretty subjective process, and a lot of it depends on what our ultimate plan is to resolve some of these assets. Obviously, in scenarios where we decide to go REO with assets, there will be specific charge-offs on some of those assets that we would expect to recover over time under our management. In particular, with fundamental strengthening, in other scenarios as previously mentioned, where we may pursue a loan sale path or other forms of resolution on the loans. The decisions behind ultimate reserves or charge-offs will be driven by the facts and circumstances at the time. In an improving environment, I believe we'll continue to look to be opportunistic as we work through the medium to near-term.

No, I think that covers it. I mean, it’s just very dynamic, and we're going to make decisions based on data points in that quarter at that time. So, Rick, I think it's hard to project that out.

Got it. Fair enough. Look, the other aspect of this is that there are several paths to resolving a loan. But the difference in optics between REO and selling a loan, resolving a loan through a loan sale might enhance distributable earnings in the short term, but might not have as long term a positive impact. What are you playing for at this point? Like what is the motivation or incentive between those two choices?

Rick, this is a—you wanna go, Mike? Go ahead. It's a great question. Oh, you go first.

No, it's a great question. It's one that we deliberate over as we work through these scenarios. And it's all about what is our capital allocation decision. Where do we get the best return on our invested capital? With multifamily assets, we feel like we are extremely well-positioned to take advantage of that opportunity with minimal capital requirements going into those assets in the near term. On some of the bigger loans that are much longer-term turnaround plays, we need to carefully evaluate the decision to invest more capital versus selling the loan, getting capital today, and redeploying that capital into higher-yielding or more accretive opportunities. So that's part of our daily evaluation.

Yes, sure. And that was a terrific answer, Mike. Rick, this is certainly a dynamic situation. When making these decisions, we also examine the risks inherent in executing a business plan, as well as what the market is bidding. We may test the market on many things and determine whether or not the price is strong enough for us to sell rather than hold. You have to let the market speak, consider the reinvestment analysis, and look at the associated risks to make tough decisions. These decisions are very dynamic, requiring a great deal of our time. One factor influencing our behavior is the strong market bids we are seeing at the moment. That could change, but because there hasn't been considerable distress in the market, those whose business plans are distressed are needing to be relatively aggressive with their bids on these properties. The more aggressive the bids are, the more likely we are to sell and move on, even in cases where we have the capacity to add value, where we may decide not to take the asset over and instead do so.

If I could just add…

Yes, go ahead, sorry.

Sorry, Rick. Just one more thing I would add to what Richard and Mike said. You can see that the focus is on cash-flowing multifamily that has the value-add component. Part of that is when we're making that capital allocation decision, we can efficiently finance the REO position. So, that obviously plays a heavy role in the capital allocation decision.

Look, it is a really insightful answer in terms of thinking about the decision trees, and I always appreciate your willingness to take the tough questions. So, thank you.

The next question comes from the line of Steve DeLaney with Citizens, JMP. Steve, your line is now open.

Nice to see your stock up 6% this morning. Richard, I guess when you look at the emerging new vintage bridge loan market, I don't know if there's enough data points or transactions yet, but what are you seeing in terms of loan terms and quality in the 2024, 2025 vintage of bridge loans versus the 2021 and 2022? Just curious if you've seen enough transactions to have a sense of how the market is evolving. Thank you.

Yes, sure. Steve, thanks so much for that question. What I would say very generally is that returns on a leveraged basis have not moved significantly because the cost of the most senior part of the capital stack has expanded, which has reduced values. Even when we look at the market, our returns aren't really higher. However, what is improved this time is the quality of assets available. There is a flight to quality, better sponsors, and lower values, along with increased conservatism in business plans. Therefore, risk is down, even though the returns remain relatively equivalent to where they were before. Currently, we are seeing back leverage costs coming in, albeit slowly. The question remains whether financing costs or absolute spreads on loans will improve more as rates decline. At present, pricing has somewhat stabilized, but we see better quality of assets, sponsors, and projections at lower costs, leading to a perception of lower risk for the same return.

That's very helpful. And hopefully, this time, we can keep a lot of the bad actors off the playing field. You don't want the market too hot, do you, because it brings in the worst of competitors? Quick wrap-up question.

Absolutely correct.

Okay. Thank you. Your ability to sell that loan—are you seeing underperforming loans that you described and moved to HFS? Is the bidding coming from private debt funds primarily? Are you seeing private funds being created to buy these distressed assets? Is that where I'm going with it? Is there more money being formed for this purpose?

I think there's been money on the sideline that's had this mandate. Go ahead, Priyanka. Sorry.

No. Sorry, Richard. Go ahead.

What we're seeing is that money was raised to handle distress or to pursue opportunistic deals. It has been really patient, but that patience is waning as their investment periods start to shorten, and there's also increasing competition for assets in the market. Investors are currently making purchases, especially in the multifamily sector. Cap rates are low and have stayed low because buyers are seeking low cash-on-cash returns in anticipation of rent growth and rate declines. This philosophy also applies to the loan sale market involving private capital. I will hand it over to Priyanka, who has been actively communicating with buyers and may have more insights.

The only additional point I would make is that we are also seeing family offices and high-net-worth capital making aggressive bets because they are entering at a great basis. We've effectively engaged with that source of capital, as they tend to move more quickly, thereby providing us with more certainty in execution. As we navigate through these dynamics, certainty of execution is crucial, as these funds do not get bogged down in investment committees and similar hurdles.

Yes, but the answer remains that it's primarily private capital, as you suggested.

The next question comes from the line of Jade Rahmani with KBW. Jade, your line is now open.

Thank you very much. Was curious, you say there hasn't been much distress this cycle, but about 20% thereabouts in mortgage REIT portfolios are non-performing and about 10% plus in CMBS, with a preponderance, of course, in office. So, do you mean that outside of office, there hasn't been much distress, or do you think lenders haven't let these loans go, particularly the banks, and maybe that's starting to change?

Yes. Jade, you're hitting it on the nose; not much distress has traded, which may differ from the reality that there is a lot of distress out there—particularly in the office sector. There is indeed a significant amount of distress, and I've had discussions with banks about their office assets. Given the uncertainty and limited bids on office properties, banks are largely deciding against selling those assets. We could see distress come into the market, but if behavior remains, as we get into an improving asset value cycle, I do think it will trickle out slowly at increasing prices. However, it's important to note that the office sector operates on its own dynamics, and we could see a distress market develop. At present, we do not see many distressed trades, but you are categorizing it correctly.

As you evaluate the relative value spectrum between equity for cash-flowing assets, transitional lending, and also construction—whether as a developer or in construction lending—where do you find returns most attractive right now?

I would tell you that construction lending is probably offering the best risk-adjusted return we see out there. Broadly speaking, the lending business feels a bit better because it avoids relying on numerous assumptions. So, if you view the market as it currently stands, debt returns are more predictable. If you believe fundamentals are improving, as we do, and that they are going to get dramatically better due to a robust economy, leading to cap rate compression, returns in the equity business can also be attractive. However, making substantial assumptions is necessary to achieve that outlook. Previously, during the great recession, one could talk about cash-on-cash returns of 8% to 10% when purchasing multifamily. Today, you might be receiving slightly negative to only marginally positive leverage to buy. This means if you engage in equity deals, you may end up paying to wait instead of being paid to wait, as was the case during the great recession. As a general statement, the debt market appears to be a stronger option at this time. Naturally, unique opportunities will always arise in the equity business, particularly with distressed or developmental assets, but these are often outliers.

Thank you. All that is really helpful in terms of your macro view, and I think you articulated it well. I wanted to ask about CMTG's capital availability and needs over the next year. Over what period is equity required for unfunded commitments need to be addressed? Will there be either sufficient repayment to fund that and what is your confidence level in the debt financing that will help fund the aggregate of those unfunded commitments?

Jade, it's Mike. I'm happy to take this one. Yes. As you can see, we've worked down that unfunded commitment level significantly over the last couple of years, and it's now down to a manageable level of approximately $584 million. It's important to note that about a third of that represents 'good news' money, meaning it's tied to leasing or other activities that improve asset value and lead to funding into those deals. Considering existing financing, we already have financing in place in the 60% to 65% range for those commitments. The equity required is about $185 million, assuming all this good news transpires. This capital need will span over approximately a couple of years based on what we expect from our borrowers' business plans. The funds have decreased to a very manageable level. As you've seen throughout this year, many of our repayments have come from construction loans that continue to have future funding commitments attached. As those projects persist, we expect to see continuous repayment activity, which will, in turn, decrease our future funding liabilities. Therefore, we believe our capital needs are at a reasonable level now.

If you were going to access incremental capital, would it be through another term loan or perhaps an additional credit facility or expanded relationship with one of your bank lenders?

The most likely route to access additional capital would be when we take on multifamily assets as REO. The financing in place for those assets is substantial, and we believe we can refinance them on a cash-neutral basis because of their transitional nature, improving cash flows over time. Hence, our source of capital is likely to be private lender executions for those assets, rather than tapping into the term loan market at this point.

Thank you very much.

There are no additional questions waiting at this time. I would like to pass the conference over to the management team for closing remarks.

I just want to thank everyone again for joining us. I think we're starting to feel like the market is recovering. Last quarter, we said we thought we might be at a bottom. I think it's unclear how much we've come off the bottom, but it does feel like things are stabilizing. We are going to be in a better position to execute everything that has to happen in order for us to view the future in a much brighter manner. We appreciate all your support, and we thank you for joining us. Take care.

That concludes the Claros Mortgage Trust, Inc. third quarter 2024 earnings conference call. Thank you for your participation and enjoy the rest of your day.