Welcome to Claros Mortgage Trust First Quarter 2023 Earnings Conference Call. My name is Alicia, and I will be your conference facilitator today. [Operator Instructions]. I would now like to hand over the call to Anh Huynh, Vice President of Investor relations for Claros Mortgage Trust. Please proceed.

Thank you. I'm joined by Richard Mack, Chief Executive Officer and Chairman of Claros Mortgage Trust; Mike McGillis, President and Director of Claros Mortgage Trust; and Jai Agarwal, CMTG's Chief Financial Officer. We also have Kevin Cullinan, Executive Vice President, who leads MRECS Originations; and Priyanka Garg, Executive Vice President, who leads the MRECS 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 the 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 on today’s call, such as net 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, everyone. Thank you for joining us for CMTG's first quarter earnings call. Before I get into my broader observations on the macroeconomic environment and as certain factors are impacting the commercial real estate market, let me provide a few comments on CMTG's performance in the first quarter. Our first quarter results were in line with our expectations, which reflects our team's solid execution. It was a relatively quiet quarter in terms of new originations and repayments, and the underlying credit quality of our portfolio has remained consistent since the start of the year. That continues to be driven by our focus on active asset management in a time of substantial market uncertainty and volatility. I want to take a moment to provide some thoughts on what's driving today's market conditions, and importantly, on how CMTG is well positioned to navigate this shifting landscape. The first several months of 2023 have been punctuated by heightened uncertainty and renewed volatility across equity and fixed income markets to a level not seen since the global financial crisis. In addition to the familiar themes of inflation, geopolitical instability, and a hawkish Fed, investors continue to face challenging developments, such as the recent turmoil experienced in the US regional banking system. Within a span of 72 hours, 2 regional banks were placed into receivership. Elsewhere, deposits were pulled ,and confidence was shaken. Specific to CMTG, our regional bank counterparty exposure was and remains de minimis. We are hopeful that the Federal Reserve, our elected leaders, and leaders of the major US banks, will continue to take the necessary steps to ensure long-term stability in the US banking system. But it is interesting to note that our current predicament could be the unintended consequences of certain past policy actions. The Dodd-Frank Wall Street Reform…

Thank you, Richard. For my prepared remarks this morning, I'll provide an overview on our portfolio and then turn to a discussion on select property types, specifically multifamily, hospitality and office. CMTG's portfolio, based on carrying value, increased 3% quarter-over-quarter to $7.6 billion. In line with our expectations, originations and repayment activity were relatively muted for the period. For the first quarter, we originated one loan totaling $101 million, made follow-on fundings of $227 million, and received aggregate loan repayments of $211 million. Given current market conditions, we expect new loan originations to remain modest, and highly dependent on repayment activity going forward. As Richard mentioned, heightened uncertainty and volatility set the market backdrop for the first quarter. During this time, we executed through the turbulence with an acute focus on proactive asset management. As a result, underlying credit quality of our portfolio remained fairly consistent quarter-over-quarter. The average risk rating in the portfolio was steady at 3.2. Our CECL reserve was also stable quarter-over-quarter. Further, loans with a risk rating of 4 or higher were relatively stable quarter-over-quarter, and the weighted average LTV on the portfolio was 69% at March 31, relatively stable with year-end. I'd like to note that during the first quarter, we also placed a $149 million hospitality loan located in the D.C. Metro area on non-accrual. The underlying collateral is located in a highly desirable infill location, and we feel confident in our basis here. While we are in the early stages of determining a resolution, based on recent market feedback, we believe that we are well positioned to recover our principle. The CRE industry collectively has been operating in a more difficult environment. And as Richard noted, we continue to maintain a cautious outlook. Given the higher interest rate environment and the potential for…

Thank you, Mike, and Richard. For the first quarter of 2023, our distributable earnings were $0.29 per share. The decline of $0.09 per share from last quarter was primarily related to two items. One was the expected seasonally weaker performance of our New York City REO hotel portfolio relative to the fourth quarter of 2022. While the first quarter is typically a weaker period for New York City Hospitality, overall, the performance of our REO hotel portfolio has been strong. The second was the impact of a $149 million loan that Mike previously mentioned, being added to non-accrual status during the quarter. We reported GAAP net income of $0.26 per share, and we paid a dividend of $0.37 per share. While the seasonality in REO impacted the first quarter distributable earnings, we expect that all things being equal, that distributable earnings approximate our annual dividend for 2023. Moving to CECL. Our total CECL reserve remained relatively unchanged at 1.9% of our UPB at March 31. Our general CECL reserve decreased slightly quarter-over-quarter, primarily due to seasoning of the portfolio and a modest improvement in risk ratings, particularly one Houston office loan being upgraded from a four to a three due to a pending sale transaction. This was offset by weakening macroeconomic assumptions. Turning to the balance sheet. As Richard mentioned, we increased our aggregate financing capacity by approximately $200 million to $8 billion at March 31. Our net leverage was a conservative 2.2x, which was unchanged compared to year-end. The weighted average advance rate on loans subject to asset-specific financings, was 69%, which can be further bifurcated into a 76% advance rate on multifamily loans, and a 64% rate on everything else. At March 31, we had a strong liquidity position of $555 million, which consists of cash and approved and undrawn credit capacity. This reflects the quarter-over-quarter increase in our cash position by $120 million. Additionally, we had unencumbered senior loans of $563 million at quarter end. Lastly, we believe, given our loan leverage of 2.2x and strong liquidity, we are well positioned to weather the current economic cycle. And with that, I would now like to open the call for questions. Operator, please go ahead.

[Operator Instructions]. The first question comes from the line of Don Fandetti with Wells Fargo. You may now proceed.

Can you talk a little bit more about the D.C. hospitality loan in terms of sort of what played out and then the timing on any potential resolution or sale?

Hi, Don, it’s Priyanka speaking. I'll take that. So, that is a - it's a hospitality loan because there was a hotel that was on the property. It was originated as a covered land play. The hotel closed two years ago in preparation for a redevelopment. So, we're really focused on what the collateral value is, which is beyond the existing hotel that's on site, and we believe we're very well collateralized there. In terms of just resolution and the situation, it's a very active situation, and I don't want to comment too directly on that because we're pursuing all avenues that are available to us, but we believe that we have very good optionality given the asset value as it relates to our loan amount.

Okay. Can you also talk a little bit about what you're seeing in New York City in general, given that you have a higher allocation? And specifically, there's a few land deals that I think are 4-rated?

I'll start on that and then others might want to weigh in here. But in New York City, I mean, we're definitely seeing a lot of activity coming back. And on those land deals in particular, we have a couple of borrowers that are in the midst of transactions to refinance us out or to take out construction loans. So, we're seeing that activity come back in a pretty strong way. But I think the guiding light for us goes back to what Richard said during his commentary, which is, we lend to bases that we're willing to own the asset, and we feel very good about all the protections we have around it, and land tends to be very well structured on the front end. So, we feel good about that exposure. But of course, it's on the watch list for a reason and we're very focused with our borrowers.

Let me just add that New York is a pretty interesting market. We've seen kind of the haves and have nots, and houses in New York are multifamily right now, which is performing really, really well. It is the best office buildings which are performing very, very well. And if you have land that is able to be converted or used to create the best office and the best multifamily, that's a pretty strong place to be in right now, notwithstanding 421a, which I think will get resolved over time. And I think the stuff that we have, we're pretty excited about.

Thank you, Mr. Fandetti. The next question comes from the line of Rick Shane with JPMorgan. You may now proceed.

Thank you for taking my questions this morning. So, in terms of the CECL reserve, it sounds like there were two sort of offsetting factors in the quarter. One was the transition from a loan from category four to category three, and then the other was perhaps more conservative macro assumptions. Can you sort of disaggregate that a little bit to help us understand the impact of each of those individually? Obviously, it feels at least sentiment-wise, and perhaps you guys would view it from a fundamental perspective, but it certainly feels like sentiment-wise, the macro outlook has deteriorated more sharply in the first quarter. I want to see how that impacted your reserves.

Sure. Thanks, Rick. This is Jai. So, one of the things I would point out is, as we disclosed in our earnings supplement, you can see that we do disaggregate our CECL reserves between 4-rated loans and everything else. As you can see, on the 4-rated loans, we had a CECL reserve of 4.2%, while our aggregate general CECL reserve is 1.1%, so disproportionately higher for the 4-rated loans, as you would expect. And since - like you said, one of the 4-rated loans was upgraded to a 3, disproportionately higher CECL reserve was released. And then on the macro assumptions, yes, the macro assumptions did worsen. So, if you were to disaggregate the impact of macro assumptions, it was somewhere in the single-digit basis point impact to the overall CECL reserve.

Got it. Okay, thank you. And again, your disclosure on this is very good. I appreciate what's going on in scrolling through the 10-K - or the 10-Q, looking at the disclosures related to the 4s and 5s on non-accrual, it looks like the policy is specific reserves for non-accruals on 5s, and general reserves for non-accruals on 4. Any consideration on the quarter to increase the specific reserves on the two 5-rated loans?

Yes. Hi, Rick, it’s Priyanka. I'll take that. So, we think those are appropriately reserved at this point based on what we know today. I will say on the one 5-rated loan that's in New York City, we are working towards taking the deed on that, and we're working through that with the borrower. We feel very good about that value proposition for our shareholders. The asset is in our backyard. We think there's a lot of uncovered value there that we think based on our ownership experience and our relationships, we can get to that. So, as we go through that process, obviously, we will potentially realize an additional loss. We're still working through all of that. But beyond that, on the two other 5-rated loans, we think those are appropriately reserved based on what we know today, and as of March 31.

Got it. And I apologize, my middle-aged years fail me. Did you say you were taking the keys on that or the fees? I believe you said keys.

I actually said deed, but yes, the keys as well.

Oh, see. There you go, middle-aged ears. Thank you, guys.

Thank you, Mr. Shane. The next question comes from the line of Vilas Abraham with UBS. You may now proceed.

Hey, everybody. Just wanted to follow up on that D.C. loan, if I could. It migrated from a three to a four it looks like in Q4 of last year, right? And the reports out there suggest that it was looking like a problem potentially before that. So, can you just walk us through what's the trigger to make the downgrade in general? And what specifically in that situation took some time?

Yes, hi, it’s Priyanka. I'll take that. So, what changed was the - I mentioned earlier, this was a covered land play. There is a redevelopment plan in place. As of right, owner has the ability to build a fairly large-scale mixed-use development. The borrower was pursuing that plan. They were in the market to capitalize the project, and then subsequently, we’re in the market to sell the project or sell the rights to that redevelopment. And there was real interest in the middle of 2022, into the fall of 2022. And then the capital markets, as we all know, just moved against the borrower. And so, that was the big change that occurred for us to move it to the watch list. And then that, in conjunction with rising rates, motivated the borrower to say, you know what, our maturity is coming up on January 9 of 2023, and we are going to - we're not going to protect our position. And so, that's where we are today, negotiating through that with them. But that also - that confirms our view on asset value because all the discussions that the borrower was having based on capitalizing the project, also sale of the project, were, again, well in excess of our loan amount. This is - I just want to reiterate, this is irreplaceable real estate. It's in Northern Virginia right on the Potomac, just irreplaceable locations. So, that was the fact pattern, Vilas. Does that answer your question?

Yes, that’s helpful. So, it sounds like the potential for a sale being off the table by late last year was kind of the linchpin there in some of your decision-making?

Yes.

As it relates to LTV in general on the portfolio, which I think you said is 69% as of 3/31, can you remind us again on how your appraisal process works and who is involved there?

I'm going to start out here. It’s Priyanka. So, we generally report loan-to-value, loan-to-cost as determined at origination. That is based on multiple factors depending on the asset type. Obviously, if it's construction, it's based on cost. If there is an existing asset, we definitely will take the lower of our underwriting or appraisal. And then during the hold period of that loan, we update loan-to-value, loan-to-cost based on some sort of event occurring. So, if there is a new appraisal, if it's in connection with potentially a financing transaction or an appraisal otherwise, then we'll update value for that. Of course, we update values, the LTC, LTVs based on any kind of payoff or collateral release. But generally, we're defaulting to the LTVs, LTCs at origination, which I think is a consistent approach amongst the peer group.

Okay. And are there any third-parties involved in the reappraisal events?

At origination, all appraisals are done by third parties.

And Vilas, this is Mike. I'll just interject a little bit. And then to the extent there's an updated appraisal that gets performed in connection with some sort of a refinancing or other event on the asset, then that would be a third-party appraisal too that's utilized for the top, the LTV.

Got you. Thank you.

Thank you, Mr. Abraham. The next question comes from the line of Sarah Barcomb with BTIG. You may now proceed.

Hey, everyone. Thanks for taking the question. So, you've spoken a lot about the D.C. hotel that was added to non-accrual, but my question is on the broader non-accrual bucket. So, are each of these loans current, or are any of those not current on interest?

I'll jump in here. It’s Priyanka. They are not current on interest and we're not accruing any interest against those loans.

Okay. But there was a small inflow that flowed into book value during the quarter, right? Or there just was no cash collections on those at all?

Sarah, this is Jai. If you look on Page 16 of our 10-K - or excuse me, 10-Q, we actually list out loan by loan what is on cost recovery and what is on a cash basis. There was one loan where we did recognize interest income that was current where the borrower did pay partial interest, and that was $1.1 million.

Okay, thank you. And then could you also give an update where you can, on the three loans that are in default, but remain in the accrual bucket, those three loans that are still current on interest, but in default?

Yes, it’s Priyanka. Thanks, Sarah. I'll take that one. So, those are - they're in default because they're not totally current on interest, but the borrower is making ongoing interest payments. And furthermore, we feel that we were very well collateralized, which is supported by the fact that the borrower is continuing to put in capital behind us. So, that is why they remain on accrual but are not necessarily current.

Okay, thank you.

Thank you, Ms. Barcomb. The next question comes from the line of Jade Rahmani with KBW. You may now proceed.

Thank you very much. To start out with, maybe for Richard, what's the magnitude of commercial real estate price correction you're expecting? And would you expect that to translate to that same magnitude of increase in LTV for the portfolio?

Sure, Jade. Thanks. I think we have to expect a downturn here of about 20% to 25% overall in the market, with kind of office weighing that number down substantially. Having said that, it does appear that this valuation decline is likely to happen or it's happened pretty quickly. And given how strong the fundamentals are, those, if they begin to really weaken, they'll probably be associated with a move down in rates, stabilizing at the bottom and a relatively quick move up given all the dry powder in the market. And I can tell you, Jade, that we're, on the equity side of the business, trying to buy assets. And the assets that we're trying to buy, we are not having success buying at a 20% asset decline. So, we really haven't gotten there. I think we're going to be reassessing our LTVs kind of along the way as we go. But given our exposure to multi and given that multi has not really moved all that much maybe, and hospitality has, in many cases, gone up in value, even in this environment, we feel like our LTV is not going to move down that substantially. But of course, we're paying attention to it on a tailing weekly basis.

Thank you. The next question would just be, what are you hearing from warehouse and repo providers? Any change in tone or behavior?

Yes, this is Jai, Jade. I can take that. That's a great question. From our warehouse providers, we're not hearing anything substantially different. Several of them are - or most of them, not all of them are large banks who have been recipients of deposits. So, they are actively wanting to put money out, and they want to concentrate their exposure with larger borrowers like ourselves. So, if anything, we are going to be beneficiaries of this environment.

Thank you, and that’s great to hear. Lastly would be just the overall strategy. I think you have the benefit of not being a traditional mortgage REIT. Having that history in the business, you bring us perspective as an equity owner, developer, and that's unique amongst your peers. And I was fascinated by the April 24 press release about senior lending capabilities with unlevered loan program. Do you think it makes sense at this point to pivot to lending unlevered for CMTG, in particular, taking that catastrophic risk, that existential risk off the table, which clearly, I think, the price-to-book discounts for the space imply? How do you feel about that overall and the use of leverage?

I think that's a terrific question, and thank you for asking. We like the lending unlevered right now better than we think - than we like levering the balance sheet to make loans. So, I think as we start to play offense, initially, we're going to do it on a levered basis and look to lever later on. The senior capital providers are just taking too much of the total return. And therefore, the absolute incremental return that you're getting by using leverage is just not that great right now. So, I think being a little bit more careful coming out of this and doing deals unlevered, maybe even at a little bit of a lower attachment-to-attachment price basis, seems like a really good strategy to us, and thank you for asking that question.

Thank you very much.

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

Well, I just want to thank you all for joining. These are certainly turbulent times, but we've been here before. Real estate is a cyclical business, and we need to be prepared for these times and ready to live through them. And every time I've gone through a cycle like this in my career, asset values have not only recovered, but they've recovered and increased in value beyond where they were before the correction. It doesn't mean that's what's going to happen here, but that is certainly what we've seen in the past. I also want to point out that I think we've been very realistic about the problems that were coming into the real estate market. And that realism, I think, allows us to deal with problems as they come up in a very unemotional and objective way. And that comes from having been through this before. And so, it's going to be volatile, but we're hopeful that the opportunities are going to exceed the problems as we come through this. And we thank you all for being with us today and for all your support. Thank you.

That concludes today's conference call. Thank you for your participation. You may now disconnect your lines.