Welcome to Claros Mortgage Trust's First Quarter 2024 Earnings Conference Call. My name is Elliot, and I will be your conference facilitator today. [Operator Instructions] 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 Kevin Cullinan, Executive Vice President, who leads MRECS Originations; and 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 all for joining us this morning for CMTG's first quarter earnings call. The meaningful decline in inflation at the beginning of the year provided rate sense to investors much optimism. Unfortunately, the last several months have revealed a different narrative. Recent inflation frames have been volatile, and have generally come in higher than expectations, making what seemed to be all, but certain Fed rate cuts now very uncertain. As it relates to commercial real estate, we believe the general outlook for the industry will remain challenging for the remainder of the year and into 2025. We expect continued headwinds in the higher rate environment and because of the lack of clarity around the direction of interest rates. In addition to trying to handicap election year Fed actions, a number of variables also add further complexity to the outlook, including U.S. economic uncertainty, growing U.S. debt levels, and geopolitical tensions in Ukraine, the Middle East and in East Asia. In our view, it is this uncertain environment, especially around interest rates that has placed the real estate capital markets in stasis. No one wants to acknowledge value declines if interest rate cuts are just around the corner. Against this backdrop, we have been observing slowly increasing cap rates and decreasing real estate valuations that to date reflect not where short-term rates are, but where investors expect them to sell. Sellers and buyers are dancing, but not committing to each other, resulting in vastly lower transaction volumes that have not only limited investors' ability to refinance and recapitalize properties, but have also resulted in less new loans issued and bonds available. This lack of product has been driving down lending spreads for many types of real estate financing despite valuation uncertainties. While this is helpful, it does not yet reflect…

Thank you, Richard. For the first quarter of 2024, CMTG reported a GAAP net loss of $0.39 per share and a distributable loss of $0.12 per share. Distributable earnings per share prior to realized losses were $0.20 per share compared to $0.31 per share for the prior quarter. The quarter-over-quarter change is primarily a result of the impact of seasonality on the New York City area hotel portfolio, which accounted for an $0.08 per share swing as well as 3 loans placed on nonaccrual during the first quarter, which negatively impacted earnings by $0.03 per share. We'll discuss the nonaccrual loans in more detail later on the call. As previously discussed, the first quarter is generally the weakest quarter for New York City hotels, particularly compared to traditionally strong performance in the fourth quarter. CMTG's loans held for investment portfolio decreased to $6.7 billion at March 31 from $6.9 billion at December 31. The quarter-over-quarter change is attributable to follow-on fundings of $143 million, more than offset by the impact of loan repayments totaling $146 million and the reclassification of a $216 million 4-rated loans to held for sale. Additionally, as mentioned on our last earnings call, at year-end 2023, we classified 3 loans secured by a variety of asset classes as held for sale and completed the sales of such loans during the first quarter of 2024 for $262 million. The sales price represented 96% of the loan's UPB. As noted, this loan sale did not impact the first quarter loans held for investment portfolio because these loans were classified as held for sale at year-end. Reflected in our first quarter results and the resolutions of two 4-rated loans, the first $104 million construction loan on a hospitality asset located in New York City have been risk rated 4…

[Operator Instructions] Our first question comes from Rick Shane with JPMorgan.

Look, I think the number one question that comes up is obviously the ability to sustain the dividend or the desirability to sustain the dividend. You guys noted [ DE ] excluding realized losses or excluding losses of $0.20, that's $0.05 below the current dividend run rate, there's obviously a drag from 650, I apologize approximately $650 million of non-accruals. Is the dividend -- does it make sense to sustain it at these levels given the [indiscernible] to preserve liquidity?

Thanks, Rick. This is Mike. Good question. I think this is something that we look at each quarter with our Board. When looking at Q1, I think it's important to keep in mind that the distributable earnings pre-credit were adversely impacted by seasonality of the New York City hotel portfolio. So adjusting that to a normalized level, we get much closer to the $0.25 dividend level. But when we look at this, we're trying to look at really what our dividend paying capacity is over the medium to long term as part of setting a dividend rate. But obviously, we look at this every quarter with our Board and looking at multiple scenarios that we may be facing across the portfolio each quarter. So something that we continue to look at with our Board regularly.

Got it. I appreciate that. And it is a good point on the seasonality on the hotel. Look, the other question that we've received a couple of times from investors is, obviously, there was a very, very quick migration from a 4-rated loan to a realized loss. And again, I appreciate that when you move them to held for sale, that holds things forward, and that's actually helpful in understanding the numbers. But can you just help us understand a little bit about really what the development was there that caused you guys to act so quickly?

Yes. Rick, it's Priyanka. I'll take that one. It was really just new information that was received. So at year-end, we were pursuing a foreclosure on that asset. We were focused on owning it, and we had a foreclosure date that was publicly available. And as we approach that foreclosure date during the first quarter, a number of credible buyers began approaching us and saying, we're interested in buying this loan from you. And so in conjunction with our development team, we spent a lot of time and did a lot of analysis on the trade-offs between taking the discount today, getting the liquidity today versus holding the asset foreclosing on it, developing, stabilizing which would result in a non-earning asset for an extended period of time. And so we concluded that the price talk that we were engaged with and particularly with the credible buyers who could close quickly. It was a really -- it was a good price relative to the amount of profit that could potentially be realized, particularly when you take into account the amount of time and the impact on earnings. So that was really the migration. It was just new information that was available to us.

Priyanka, that's really helpful just in understanding sort of the thought process and frankly, the scenarios that you guys face, and I think that that's probably not unique, you're going to have to make those decisions over and over again. And I appreciate the context on that.

We now turn to Doug Harter with UBS.

Turning back to liquidity. Last quarter, you had modified some of your interest coverage covenants. Can you just give us an update as to kind of where you stand on those covenants there? And then just around your indebtedness covenants, yes, kind of -- does that include all asset level debt and kind of your level of comfort around that covenant as well?

Sure. Thanks, Doug. Good question. Yes, we complied with all of our covenants at the end of Q1 as outlined in our 10-Q, we do expect to have to work with our lenders, in particular, repo lenders, not the TLB investors on a modification of our interest covenant mechanics. We've been having very constructive dialogues with them and expect that we'll be able to work something out. And then we're comfortably passing all of our other covenants at this time as well. So we expect to be able to work through these things in the ordinary course with our counterparties.

Great. Are there any trade-offs that you have to make in those conversations? Or if you just go back to the prior ones, so you don't have to give away what you're currently negotiating?

No. I mean I think it's -- I think a lot of it is really just being a responsible counterparty, maintaining an open and transparent dialogue with our lenders. And as noted, we've been pretty aggressively deleveraging our portfolio, particularly the repo financings over the course of the past 5 quarters. And I think that kind of behavior pays, pays benefits as you're working through these kind of things with your counterparties.

Our next question comes from Don Fandetti with Wells Fargo.

Yes, can you talk about -- it looks like the $400 million multifamily California loan was moved to a 4 this quarter. Can you talk about that migration?

Yes. Don, it's Priyanka. That is -- we had a borrower who had a interest rate cap that they needed to purchase during the first quarter, and as we're seeing with some borrowers, there's hesitancy to protect at the levels that they are at. And so they wanted to approach us about modification discussions. We're in those discussions with the borrower right now. But given that messaging from them, we did migrate them to a 4 and onto the watchlist prior to this, they have been protecting each month and putting in new capital. We're optimistic about the resolution there. It's an excellent asset, high-quality, best-in-class kind of property. So we'll pursue those discussions, we're deep in them right now with the borrower and we'll have some sort of direction or resolution in the coming quarters.

So it sounds like at least as you sit here today, it doesn't feel like it's going to a 5 at this point?

Based on what we know today, no.

We now turn to Steve Delaney with JMP Securities.

Wanted to ask about loan sale activity. We've observed that Claros and TRTX, TPG, have been the 2 commercial mortgage REITs and most active in this market. And it's -- so I wanted to ask about that. The $172 million, Mike, that was on the books at March 31, how many loans does that represent?

That is, it's 2 loans to the same sponsor on some separate pieces of cross-collateralized, so.

Okay. And then you sold 3 in the fourth quarter, I believe, as well?

[indiscernible]. No, I was going to say we put 3 loans into the loans held for sale [indiscernible] Q4. And then we view this other one that we completed the sale in April that's in loans held for sale at the end of Q1 to do that as sort of 1 loan, even though it's 2 loan, same sponsor cross-collateralized.

Got it. Next question is -- this is a bit of a new topic in the -- as part of the asset management, it's part of working through the problems, and I guess working through this down cycle that we're in, in real estate. But if you could just offer your observations, having done this for you and Richard for many years, how deep is this loan sale market? And who are the buyers? Are they credit hedge funds -- or are these real property investors that are looking to use a loan-to-own type of strategy to acquire attractive properties for investment. I just appreciate your big picture thoughts on that topic?

Sure, Steve. You want to go to it, Mike?

You can go ahead, it will be the same.

Okay. So I think it's a combination. There's many different buyers. As it relates to loans that we've sold kind of very close to par and there's been quite a bit of them, or at par. Those are primarily hedge fund type of buyers who really are having a hard time trying to play what they view as a very -- as a distressed real estate market because there's not as much to do in the market as one would expect. As it relates to certainly, the sale that we just made at a significant discount. That was to a family office with a development -- with a developer [indiscernible] and their feeling is this is a way to get into an asset at a significant discount, understanding that they're going to have to cut through quite a bit of hair to make that happen. So I think that there are a lot of people out there searching for really high returning opportunities, and in a market where there's very little transaction volume, we're just -- they're just not that much distress out there. And so the market feels quite deep relative to the product that's available. I think if more assets were available for sale, that might feel a little bit different. But right now, there does seem to be adequate, if not extensive demand to buy loans, whether they be kind of at relatively large discounts or at par.

That's very helpful color. And probably the most encouraging comments I've heard about the capital flows around commercial real estate and the commercial mortgage REITs in some time. So I appreciate the opportunity to discuss it and thank you for your comments.

Our final question comes from Jade Rahmani with KBW.

On the Connecticut office loan totaling $150 million, could you please give an update? It was originated before COVID. So presumably, the underwriting did not factor in today's environment. Additionally, the maturity date was in February of this year. I was wondering also it's $150 million, so sizable loan, which would suggest it's in a large market, perhaps Stanford, Hartford, and also if you could comment on what's going on with the leasing of that asset?

Yes. Jade, thank you for the question. It's Priyanka, I'll take that one. So -- it's in -- it did mature during the quarter. We are very close to extending that loan. There's a lot going on at the sponsorship level where I don't want to disclose too much, but there is a transaction coming down the pike. So are -- our modification with the borrower is likely to be a short-term one, followed by then a more significant modification after that, depending on the status of this transaction that I'm referring to. That said, it has -- leasing clearly has not been in -- on par with what was originally underwritten. That said, they have done a very good job of retaining tenants. Tenants are very happy in the assets and are renewing leases, albeit short term, so the WALT has not been as attractive as we would like to see. But I think that the most important global comment I can make here is that there's a tremendous amount of credit support here, primarily in the form of repayment guarantees from creditworthy loan bodies. So it is a large loan, we're very focused on it, but the sponsor is [indiscernible] as well for the reasons I just mentioned.

And are you able to indicate which market it is?

It is -- it's in Stanford.

Okay. What about other upcoming 2024 maturities. It's quite a number of large ones like the New York condo loan. One of your peers had some issues in that segment, specifically the higher end of the market. There's also New York land loan and on the California hospitality?

Yes. So I'll just speak broadly about just the maturities that we're seeing coming. Most of 2024 is there is very few initial maturities and -- sorry, final maturities. And so on those final maturities, we're in this -- we have a path to pay off here for many of them. We understand the transactions that our borrowers are working on. And we also have line of sight into modifications with some of those where we're going to need to extend beyond that final maturity date. In terms of our initial maturity dates, more than half of those loans are going to meet all of their extension tests as of right. So, we'll have to do a few modifications. We'll work with borrowers, going back to Mike's comment, if they're willing to put some capital in and they have the operational expertise. We're going to work with the borrowers. We're not in the business of owning these assets, but we're happy to modify them for the right, right transactions. In terms of some of the specifics that you mentioned, there are no -- we don't have any high-end condos in New York City. There's a very small condo New York City condo loan that has maturity in 2025 that was extended, but we feel very good about our exposure on the condo front in aggregate.

Okay. And lastly, just on the dividend again. I understand the emphasis in your commentary around long-term earnings potential. But we're in kind of a volatile environment with a lot of uncertainty, and you all seem to be steep in the day-to-day blocking tackling of asset management and also managing liabilities. So why not take the additional step of reducing the dividend to create additional leeway and also protect book value. When you are paying out more in dividends than you're earning, that's downward pressure on book value. So investors clearly project a trough book value. Any comments on those considerations?

Jade, those are discussions we regularly have at the Board level. You raised all good points there, and those are always things we consider.

This concludes our Q&A. I'll now hand back to Richard Mack for closing remarks.

Thank you, and thank you all for joining us. We will reiterate, these are tough times in the real estate market. It's a market where we are facing almost a complete lock up of the market with very little transaction volume. But even amidst this market, we are seeking to be opportunistic as we manage through a cyclical downturn. We are pushing for loan payoffs. We are selling loans, we are modifying loans, we are foreclosing opportunistically, we are deleveraging. And we are getting ready to originate again because we know that this too will pass. So thank you all for joining, and we appreciate your support.

Ladies and gentlemen, today's call has now concluded. We'd like to thank you for your participation. You may now disconnect your lines.