Welcome to Clara's Mortgage Trust 4th Quarter 2024 Earnings Conference Call. My name is Marie and I will be your conference facilitator today. All participants will be in a listen-only mode. After the speaker's remarks, there will be a question and answer period. During the presentation, you can register a question by pressing star followed by 1 on your telephone keypad. Now if you change your mind, please press star followed by 2. I would now like to hand over the call to Anne Nguyen, Vice President of Investor Relations for Claris Mortgage Trust. Please proceed.

Thank you. I'm joined by Richard Mack, Chief Executive Officer and Chairman of Claris Mortgage Trust, and Mike McGillis, President, Chief Financial Officer and Director of Claris Mortgage Trust. We also have Priyanka Gard, Executive Vice President, who leads MREC 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 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 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 equivalents, please refer to the earnings supplement. I'll now like to turn the call over to Richard.

Thank you, Ann, and thank you everyone for joining us this morning for CMTG's fourth quarter earnings call. Commercial real estate continues to undergo a significant transition period. While the underlying fundamentals are generally strong and the capital markets have been demonstrating signs of healing, the recovery has been slow and progress has not been linear nor universal interest rate driven valuation concerns and the higher for longer rate environment continue to be key themes weighing on commercial real estate investors for the fourth quarter of 2024 cmtg had 300 million in transaction activity which included repayment proceeds from borrowers in addition to loan sales that we successfully executed at or close to par. Mike will provide additional color later on the call. We also experience credit migration in the portfolio as borrowers continue to be impacted by the challenging real estate environment. While we have been working towards resolving watchlist loans, certain pending loan and asset sales that we had forecasted for the fourth quarter did not materialize due to circumstances unique to each situation. As such, our objectives of achieving resolutions while also enhancing overall liquidity were pushed into 2025. Additionally, as many of you are aware, back in November, the interest rate outlook once again became uncertain and less optimistic when the Fed signaled fewer rate cuts than the market was forecasting at the time. Given this and the understanding that the industry collectively will continue to navigate an elevated rate environment, we believe that adopting a conservative stance in managing our available capital was prudent. In line with this, back in December, our board of directors, after taking into consideration that CMTG had already fulfilled its re-taxable income distribution requirements for 2024, decided to pause the quarterly dividend to preserve capital and enhance financial flexibility. As we look out to 2025, we are encouraged by the industry momentum we are seeing. Commercial real estate is commencing the year on the heels of quarterly growth in transaction volume. In the CMBS market, spreads have tightened meaningfully over the past several quarters, despite increasing primary issuance levels. Against this backdrop, we believe that this will be a pivotal year for CMTG as we execute on our 2025 strategic priorities. Today, we have a subset of loans in our portfolio that are risk-rated four or five, and non-accrual loans in addition to REO assets. Accelerating the resolution of these watchlist loans will enable us to accomplish the following objectives. First, reduce the drag on earnings. Second, enhance our overall portfolio credit metrics and liquidity. And third, utilize the additional liquidity to strategically deploy capital to more accretive uses. This may include de-levering the portfolio and investing in opportunities we have previously identified within the existing portfolio, such as foreclosing on select multifamily assets. Mike will speak to this in more detail later on in the call. Our approach as an asset manager has been to fight for full value on every asset, as our executive team has experienced from prior cycles, patiently working out problem loans and seeing asset values recover dramatically. This approach has meant being willing to work with borrowers to help them execute while also being willing and able to take assets REO. However, at times our approach to maximizing value has required difficult trade-offs on liquidity. Looking forward into 2025, while these continue to be uncertain times, our base case expectation is that refinancing and demand for real estate assets will continue at levels that will allow us to transition out of a meaningful level of our non-earning or lower-earning assets. As for CMTG stock, we do not believe that the recent trading levels appropriately reflect the inherent value of our portfolio. Therefore, we will continue to execute and be prepared to take actions designed to improve credit matrix and liquidity, reduce leverage, and accretively redeploy capital. If we are successful, we believe this will translate into a valuation for CMTG stock that is more reflective of our inherent business and portfolio. I would now like to turn the call over to Mike.

Thank you, Richard. For the fourth quarter of 2024, CMTG reported a gap net loss of $0.72 per share and a distributable loss of $0.59 per share. Distributable earnings prior to realized gains and losses were $0.18 per share. The MTG's held for investment loan portfolio decreased to $6.1 billion at December 31st compared to $6.3 billion at September 30th. The quarter-over-quarter decrease was primarily the result of loan repayments and loan sales. During the fourth quarter, we received a total of $99 million in loan repayments, including the full repayment of three loans totaling $80 million in UPB. Offsetting these total repayments was $75 million in fundings on existing loan commitments. We also executed three loan sales with an aggregate UPB of $205 million during the quarter. The first two loans were previously reported as third-quarter subsequent events and were classified as held for sale on the balance sheet at third-quarter end. The first loan was a $30 million subordinate loan secured by to-be-developed land in Miami, sold for 99.5% of UPB. The second loan was $115 million, senior loan, collateralized by a multifamily property located in Colorado, sold at $111 million. We sold the third loan, a $60 million loan, secured by a multifamily property located in Las Vegas at 99% of UPB. In addition, we also completed a loan sale that was executed subsequent to year-end, a $101 million senior loan collateralized by a hotel in San Diego. This loan was classified as held for sale at December 31st because the loan sale was completed in early January at par. 2024 was an active year with regard to transaction activity. During the year, CMTG executed an aggregate of $1.3 billion of realizations, which is split evenly between repayments and loan sales. We view loan sales as positive for the portfolio in that we accelerated loan repayment activity while removing the risk of the borrower being unable to secure refinancing at maturity during a period of capital markets volatility. During 2024, four, five of seven loan sales were executed at a level at or above 97 percent of par, which speaks to the credit quality of these loans. The two exceptions relate to loans with future funding commitments and construction risks that were not deemed to be the most accretive use of CMTG's capital. During a quarter, we also reclassified the REO New York hotel portfolio to held for sale, and we marked the asset to a value based on where we believe it could trade in the market. As a reminder, the portfolio is comprised of seven limited-service hotels located throughout Manhattan, and back in 2021, we foreclosed on the mezzanine borrower. Since foreclosure, we have seen the portfolio's revenue rebound to all-time highs. As mentioned on prior calls, we have regularly explored a sale of the portfolio, launching a process last summer. Our process was temporarily delayed due to what ultimately became the New York City Safe Hotels Act legislation, which was passed during the fourth quarter of 2024. With this behind us, we have made progress towards executing a sale of the portfolio and look forward to providing an update on our progress. We have a similar perspective on the five multifamily loans currently risk-rated five. These five multifamily loans collectively represent 50% of our five-rated loans. We believe that these multifamily loans have experienced temporary valuation pressure due to the elevated rate environment, and our borrowers not having access to capital or other resources to effectively manage these assets. from our vantage point we believe these loans have substantial upside under our management and with a modest capital injection as a result we plan to foreclose on these assets in the coming quarters in anticipation of these foreclosures these loans are now all risk rated five and we've recorded specific cecil reserves at an average of 12 percent of the UPB, which correspond to their estimated fair values and will be charged off upon foreclosure. There are, however, other scenarios where we have determined that foreclosure is not the optimal path due to prioritizing our best uses of capital, despite believing in the long-term underlying asset value. One example is a $390 million loan we originated in 2019, secured by a multifamily building in Manhattan. The loan is performed in accordance with its terms throughout its five-year term. In November, this loan reached its maturity, and following extensive conversations with the borrower, we agreed to permit the borrower to satisfy its principal repayment obligation with a discounted payoff option if certain conditions are met, including continuing to pay debt service while we continue to believe the long-term collateral value supports the loan we believe that the incentive to monetize our investment generating approximately 100 million of net liquidity strengthens our position to take advantage of accretive capital allocation opportunities heading into the second half of 2025. given the contingencies associated with the modification this loan was downgraded to a risk rating of four and we reserve for this potential loss within our general reserve looking ahead we expect to continue to pursue loan sales foreclosures and or discounted payoffs however before doing so we will first seek to maximize value through loan modifications and credit support for example in the third quarter we modified a loan on a New York City mixed-use asset that included a $7.2 million principal repayment and bifurcation of the loan into two loans, one of which is secured by a retail property and the other a well-structured personal loan to individuals with significant net worth. Subsequent to this modification, the office component of the original collateral was recently foreclosed on by a ground lessor, resulting in our sponsor losing its collateral. In other words, a third quarter modification provided for an exchange of collateral to avoid losses on the now foreclosed office component. CMTG's foresight helped to avoid a difficult situation where a significant loss or protracted legal battle would have been likely. And more broadly, as part of our ongoing asset management efforts, we are actively pursuing guarantees on defaulted loans, particularly when the guarantor has meaningful net worth and the guarantee can be pursued in a short-form litigation process. Turning to liquidity. At December 31st, we reported $102 million in total liquidity, which includes cash and approved and undrawn credit capacity based on existing collateral. As Richard mentioned, enhancing our liquidity position, reducing the levels of our watch list loans, non-earning or suboptimal earning assets, and deleveraging the balance sheet will be a focus area for our team throughout 2025. And to that point, we expect the pace of resolutions to accelerate, including the remaining held-for-sale loans, the hotel portfolio, and anticipated loan repayment. There are sales and refinancing transactions underway, which could result in just under $2 billion of gross realization proceeds. We anticipate between one-third and two-thirds of this total to be finalized in the coming quarters, with approximately 40% of such proceeds increasing our liquidity, which we anticipate accretively redeploying. I would now like to turn the call over to the operator.

Thank you. To ask a question, please press star followed by 1 on your telephone keypad now. If you change your mind, please press star followed by 2. When preparing to ask your question, please ensure that your device is unmuted locally. Our first question comes from the line of Rick Shane of JPMorgan. Please go ahead.

Hey, guys. Thanks for taking my questions this morning. Look, you guys just referenced the third quarter modification of the New York City mixed use. We've had a lot of questions on that. I believe that that is related to Loan 33 that's listed in your disclosures as a land loan. And I think that perhaps given that restructuring, that land loan designation may be confusing. Is that actually accurate? how should we think about Loan 33 in the context of modifications you just described?

Hi, Rick. It's Priyanka. I'll take that question. Loan number 33 is totally unrelated to the modification that Mike spoke about or to the mixed-use asset. That has always been a land loan um since origination i can comment on the modification that um mike referred to if that's helpful yeah that would be great because again uh that that's a high profile situation and there have been a lot of questions on it yeah and and exactly for that reason we ordinarily do not comment on specific loans but in this instance given all the reasons that you just highlighted we will clarify that we have zero exposure to the Chrysler building. We did previously have exposure to that asset, but we modified the loan in the third quarter, as Mike mentioned. As part of that modification, we received a pay down of 15%, and we improved the collateral package, which now excludes the leasehold interest on the Chrysler building or anything related to the Chrysler building. And maybe more importantly, that modification created an accelerated path to get paid off. This now modified loan benefits from amortization payments and is current on all obligations.

Got it. Okay. Very helpful. And I think investors will really appreciate that clarity. Thank you.

Thank you for asking the question, Rick. Our next question comes from the line of Doug Carter from UBS. Please go ahead.

Thanks.

Page 11 of your, or the way you list your risk-rated for assets you talk about the near-term repayment of two multi-family assets you talked about the new york one hoping you could talk about the uh the california asset and you know the outlook for repayment there yeah hi doug it's priyanka i'll take that um we are working with the borrower on a near-term resolution process there so it is a cooperative discussion it's ongoing You know, I prefer not to get into any more detail, but it's very – it's on a good path, I will say that.

And then just on those two, you know, can you just talk about how you set the reserve levels against those two assets and, you know, how much the near-term resolution and visibility into that factors into that reserve level?

Yeah, so on the one that Mike discussed in a little more detail in his prepared remarks, that has a, we added to the general reserve to match what is the discounted payoff that is agreed upon with the borrower. So that is the path that we expect to occur. So that is fully in the general reserve. It is based on a number of contingencies that need to occur, which is why there's not a specific reserve. And as we mentioned, we think asset value does exceed that level, but it's really a liquidity decision that we made. On the second one, we think that that process that we're discussing with the borrower to create liquidity does not require any additional reserves beyond what's in the general reserve. This is a very well-located asset. It has benefited from a tremendous amount of leasing in recent months, and it should be very well positioned to be liquid in this market, particularly given the improving capital markets inflows in the multifamily sector.

Appreciate that color, Priyanka.

No problem. As a reminder, to ask a question, please press star followed by one on your telephone keypad. Our next question comes from the light of Jade Dramani of KVW. Please go ahead.

Thank you. On the financing side, is it the company's plan to further reduce leverage in 2025? Will there be financing attached to any of the taking of REO? And also, can you address any plans for the secured term loan?

Sure, Jade. This is Mike. And the answer with respect to deleveraging is yes, we do intend to continue to deleverage the portfolio, particularly repaying some. With respect to that we plan to take REO, we are working on will allow us to accomplish that at financing levels, very consistent with where they're currently financed on repo lines. So hopefully that's responsive to that. And that is a facility that will allow us to bring on more. I think that's a very good financing solution for what we are looking for. And then with respect to the term loan B, that has an August 2026 maturity. We are, and so we get within one year of maturity in August of 2025. And, you know, we'd expect work on either an A&E transaction or a placement financing transaction on that. I can't really talk about specifics at this time, but that is the point.

Okay. And then with regards to deleveraging, with $100 million in cash on hand and unfunded commitments, can you just talk about the moving parts? what's the magnitude of the leveraging? How much of the unfunded commitments will be funded in 2025? And are there any plans or contemplation of issuing some sort of additional equity-like instrument such as a preferred, something else that could bolster the liquidity profile as well as capital buffer?

Sure. So first and foremost, we do have, with respect to our liquidity position, we have minimum liquidity requirements under our financings. So first of all, we've got to maintain compliance with those. And we continue to comply with those, but we'd like to have a little more liquidity on hand for obvious reasons. With respect to raising capital, I think we will continue to look at what we believe is the best way to generate liquidity, and that's resolving some of these four and five rated loans and converting that to cash. We have a fairly under a low leverage balance sheet, so we have a fair amount of liquidity tied up in certain loans that we think we can release by working through a number of these situations. With respect to additional equity capital raise, you know, obviously that is something that we think about a lot, but we have no plans right now.

And Mike, if I could just jump in, Jade. Go ahead. Thank you.

Sorry, Jade. I was just going to also highlight in addition to everything Mike said, I just want to reiterate what Mike said in his prepared remarks, which is that we have, there are a number of transactions that are already underway that are, you know, would be $2 billion of gross realization proceeds, and we think a good chunk of that's going to happen in the coming quarters, which will certainly change liquidity profile, which is what we're very focused on, and also resolve some non-earning and lower-earning assets. So that will be in addition to everything Mike just said.

In terms of the valuation, you mentioned stock being attractive or not reflecting fair value. How do you think about that? Is there some kind of a trough book value or NAV number in mind?

So if you look at our gap book value, we are, you know, it's roughly $14 a share. We've got reserves on our loan portfolio that are about 4.3%. You know, obviously monetizing a number of these loans, we think results in recoveries significantly in excess of where the stock is trading today. I think as we generate liquidity, work through the deleveraging process, including the TLB over the upcoming quarters, the 4- and 5-rated loans to continue to reduce, monetize IREO, as well as improve operating performance of what will become IREO, elevate the share price to a level at more price.

Thanks very much.

Our next question comes from the line of Chris Muller from Citizens JMB. Your line is now open. Please go ahead.

Thanks for taking my questions. And I want to compliment you guys on your transparency. You give a lot of really good detail on your deck, and it's very helpful from our seat. So looking at the watch list, and Mike touched on this a little bit in his comments, but I guess how aggressive do you guys plan to be on resolving those loans? Will it be more of your patient approach you've done historically, or can we see some big resolution numbers start to come through in the near term? And then just second part of that, should we expect to see more loan sales as part of that strategy?

So I want to turn this is Richard. I want to turn it to Chris. Thank you for that question. I want to turn it over to Priyanka, but I think we know we have been very, very tough in trying to maximize every dollar. And I think given a refocus on liquidity, we are going to have to be more aggressive in creating liquidity over 2025. I think that's really our plan. We've got multiple levers to pull on that, but we're focused on liquidity. And we know then in solving liquidity will elevate our stock. And that's really why we're thinking about the world in terms of liquidity right now.

Yeah, and I would just add to that. Thank you, Chris, for the question. I would just add that, you know, given that we're starting to see transaction volume increase, capital markets are becoming a lot more accessible. We think that in this improving transaction environment, there's a real opportunity to use discounted payoffs and short sales as a tool, and that goes to our more aggressive view to resolve those watch list loans, Chris, to your point. And I think, you know, the first of that that you're seeing is the loan that Mike discussed during his prepared remarks. And we're going to continually balance what we can get from a liquidity standpoint with timing and certainty and accelerating resolution. So I think you can continue to see more of that from us.

Yeah, that's very helpful. And then just a clarifying question on the REO fair value marks. Was this the second time that that hotel portfolio was written down since REO gets marked to fair value when you guys take the asset back? And if so, can you just talk about what changed since you took it back? I guess it's been almost four years at this point, but just any changes that drove those right down.

Sure. I'll start and I'll let Priyanka finish. Thank you, Chris. You know, when we foreclosed on the asset back in 2021, we marked it to fair value. Our original loan was a MES loan. and it had a securitized senior financing associated with it when we foreclosed on the asset we marked it to fair value which resulted in a modest gain um on the um as part of the foreclosure you know probably the big driver of change um in the mark is primarily driven by the safe hotel legislation that was recently passed by New York City, which has, I think, sort of created a little bit of uncertainty on hotel pricing, particularly around non-union hotels. Priyanka, if you want to maybe expand on that, that would be helpful.

Yeah, I think, look, underlying performance, particularly top line, but even flow through has been very, very strong. 2024, the assets resulted in greater EBITDA than in 2019 pre-pandemic. So we continue to feel very good about the underlying performance. We've all read all the information around beneficial demand supply dynamic as well as new supply dynamics, which is all favorable in New York City. The issue has really been this New York City Safe Hotels Act, which was first raised by New York City Council in August of 2024, which was right in the middle of our sales process, which caused us to temporarily pause that process. And then it was ultimately passed into legislation in October. And so that has really is what has caused the adjustment in value. But again, just focusing, Chris, on the first question you asked, from a liquidity standpoint and freeing up capital, we're committed to the sale. That said, we are tracking a dual-track process to execute on a CMBS refinancing should a sale not occur.

Got it. That's all very helpful. Thank you for taking the questions.

As a reminder, to ask a question, please press star followed by one on your telephone keypad. We have a question from the line of Tom Catherwood from PTIG. Your line is now open. Please go ahead.

Thank you. And just one question for me. For the five rated multifamily loans that you're planning to take, REO, is the 12% reserve a reflection of where you could sell the assets as is today? or does that reflect the value you're expecting once you invest incremental capital and stabilize the assets?

Thanks, Paul. Great question. It's a combination of both. We triangulate around values in terms of what we think the sell price might be right now versus where we think stabilized value is. It's very hard to say where something would sell today, particularly as a loan with an borrower who has, you know, in many cases, starved the asset of capital. So we don't think that relying on that alone makes a tremendous amount of sense, but we do have third-party appraisals as well to support the values that result in those reserves.

Got it. And do you have a sense of the kind of aggregate amount of incremental capital that you might have to put into those assets?

It's a moving target, as you might imagine, and it'll depend on the timing of bringing those assets REO when we can control more of the decision making. But it's one of the reasons that we've identified these assets to be REO versus some of the others is because they are cash flowing and the capital requirement is not enormous. A lot of the capital that would be required would be as it relates to renovating units as residents vacate the units but one thing that we're seeing in this current economic environment is higher renewal rates and people staying in units for longer so i think there's going to be a lot of factors that impact that but you know we don't think it's going to be a tremendous amount of capital we think there's just a little a little money is going to go a long way given how the assets have performed to date Understood.

And that's it for me. Thanks, everyone. Thank you.

Thank you. We currently have no further questions, so I will hand back to Richard Mack for closing remarks.

So thank you all again for joining us. I think just to be very clear and to summarize our path for 2025, we're going to be focused on improving our balance sheet and increasing liquidity. It's going to be less about maximizing value, although we are selectively ready to maximize value in terms of REO. The market recovery is going to continue to be slow, going to continue to be choppy, and we need to respond to that and meet the market. And so in an elevated rate environment, even with spreads coming in, we are not going to hope that valuations are going to move meaningfully, although we expect over 2025, given what the capital markets are doing, they will. But we're going to meet the market as a general statement and try to move assets on and off and improve liquidity. Having said that, we're not going to be afraid to take assets back when we need to. And so this is going to be the balance, but we're going to lean a little bit more towards liquidity and away from REO or being very difficult in 2025 with a real focus on liquidity because we believe that once we can fix liquidity, our valuation of our stock is going to be a lot better. So we thank you all for joining and we're looking forward to speaking to you all later and thank you again. Take care.

This concludes today's call. Thank you for joining. You may now disconnect