Claros Mortgage Trust, Inc. (CMTG) Earnings Call Transcript & Summary

Thank you. Welcome to Claris Mortgage Trust's second quarter 2026 earnings conference call. My name is Elodie and I will be your conference facilitator today. All participants will be in a listen-only mode. After today's prepared remarks, we will host a question and answer session session. If you would like to ask a question, please press star 1 to raise your hand. To withdraw your question, press star 1 again. will now hand the conference over to Anwen, Vice President of Investor Relations for Clarus Mortgage Trust. Please proceed.

Thank you. I'm joined by Richard Magg, 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 Garg, who serves as Executive Vice President of CMTG and President of Mack Real Estate Group. 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 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 their operating performance. reconciliation of non-GAAP measures to their nearest GAAP equivalents, please refer to the Earnings Supplement. I would now like to turn the call over to Richard.

Thank you, Ann, and thank you all for joining us this morning for CMTG's second quarter 2026 earnings call. The broader macroeconomic environment continues to present investors with both opportunities and challenges. Inflation has remained above targeted levels, interest rates remain elevated, and geopolitical developments continue to contribute to periods of volatility across financial markets. At the same time, commercial real estate fundamentals have generally improved, supported by limited new construction, healthy levels of capital seeking deployment, and improving transaction activity. With this as a backdrop, CMTG second quarter results represent continued progress, albeit painful progress, towards returning to originating loans on transitional real estate. As we have highlighted previously, our strategic priorities for 2026 have been turning over the portfolio, resolving watch list loans, repositioning our REO assets, and deleveraging the balance sheet. Our second quarter results and activity to date in July reflect this commitment to working towards these goals. Highlights include another $482 million of loan and REO resolutions, including three watch list loans. These resolutions reduced leverage, generated additional liquidity, and reduced watchlist loan exposure while moving us closer to the point where we can make capital allocation decisions. Last quarter, we mentioned eight lender-driven sale processes that were being held across our portfolio. These processes have yielded pricing discovery on liquidation values versus our view of the inherent value of the underlying assets over a longer-term horizon. While demand in these sales processes has generally been strong, in certain cases, pricing levels have fallen short of our expectations, especially in the multifamily sector, which we would have expected to be more resilient given demand we see from investors in that asset class. Therefore, and consistent with our stated goals, we took additional specific CISO reserves during the quarter on certain office and Sunbelt multifamily loans to reflect and select anticipated near-term resolutions. We also reduced the carrying value of two REO assets that we moved to held for sale. These adjustments resulted in a Q2 2026 book value of $8.58 per share. This reduction in book value is primarily attributable to nine loan and REO positions in the portfolio. The balance of the portfolio can be divided into three categories. First are 15 loans on accrual subject to general CECL reserves. Two of these repaid in July, and we currently anticipate the remaining 13 loans to repay in full, similar to the $464 million of UPB that have had full repayments in this calendar year. Second, there are only four loans subject to specific CECL reserves that have not yet been subject to price discovery and are likely to be longer-term resolutions. And finally, there are seven additional REO assets with appropriate carrying values and perhaps some upside. These provisions reflect our commitment to turning over the portfolio, resolving watch list loans and REO assets, deleveraging the balance sheet, and building liquidity in order to reallocate capital to more accretive uses in the near future. As we continue to make progress in our strategic priorities, we hope to cause the disconnect between our book value and our stock price to become less pronounced. That said, we acknowledge that our goals of returning to a largely performing loan portfolio, Executing on other accretive transactions such as share buybacks and ultimately resuming a dividend will take time. continued focus on executing our strategic priorities should position us well to meet those objectives. As you've heard me say before, we've had to make difficult decisions over the last two years. And although we still have work to do, based on the progress to date, we believe we have largely turned the corner. and now expect to be in a position to make capital allocation decisions in the coming quarters, which may include new loan originations, additional deleveraging, investment in select REO assets, and share repurchases. We are committed to these strategic priorities because they are necessary for us to capitalize on what we believe will be an increasingly attractive investment environment for CMTG over time.

I'll now turn the call over to Mike. Thank you, Richard. For the second quarter of 2026, CMTG reported a gap net loss of $1.81 per share and distributable loss of $0.63 per share. Distributable loss prior to realized gains and losses was $0.07 per share. During the quarter and through July, we remained focused on executing the strategic priorities Richard discussed, completing another $482 million of total loan and REO resolutions, including $223 million of regular way repayments. The proceeds from these resolutions were used to reduce leverage by $346 million, while overall liquidity increased from $116 million on May 5 to $168 million at July 24. During the second quarter, we resolved one watch list loan through foreclosure. This was a $25 million, five rated loan collateralized by a multifamily property in the Dallas MSA. We also completed the sale of one of our Dallas multifamily REO assets, originally foreclosed upon in July 2025 for gross proceeds of approximately $47 million, which was slightly above our carrying value. Subsequent to quarter end, we've had an active July. We resolved a watch list loan through a loan sale yielding gross proceeds of 70.7 million. As of June 30th, the loan was classified as held for sale. This was a San Francisco office loan originated in February 2020, which has faced significant challenges. The loan had been on our watch list since early 2022. As part of our strategy to turn over the book, we determined this was the right time to sell, given the recovery in the San Francisco market. Also subsequent to quarter end, we resolved the watch list loan through a discounted payoff for gross proceeds of $70 million versus a 75 million UPB or 94% of PAR. The loan was secured by a multifamily property in the Salt Lake City MSP. The loan was downgraded to a five during the quarter once the discounted payoff was agreed upon. Finally, subsequent to quarter end, we were repaid in full on two loans totaling $223 million of UPB. Both loans were collateralized by multifamily assets, one in Seattle and one in Chicago. In summary, since the beginning of the second quarter, we've resolved five loans totaling $435 million of UPB prior to principal charge-offs, of which three were watch list loans totaling $212 million of UPB. Year-to-date, we've resolved 10 loans totaling $1 billion of U.P.B. prior to principal charge-offs, of which seven were watch list loans, totaling 647 million of U.P.B. Watchlist loans have been steadily coming down from $2.7 billion at year-end 2024 to $1.7 billion at year-end 2025 to $1.1 billion today. Following July resolutions, our portfolio is now comprised of 23 loans or 3.1 billion of UPB and nine REO assets with a total carrying value of $724 million. Turning to portfolio credit. As Richard alluded to, our loan and REO asset sale marketing processes, along with our goal of turning over the portfolio, has led to downgrades on four loans, increased specific reserves on three loans, and reclassification of two REO assets to help for sale. Three loans with a combined UPB of $372 million were downgraded from risk rating 4 to 5, primarily due to price discovery in our lender-driven sales processes. In order to resolve the loans today, CMTG needs to meet purchase or return thresholds which remain elevated in the current interest rate environment. As a result of the downgrades, we took specific CECL provisions on these loans of $109 million or 75 cents per share, which reflects our commitment towards executing our stated goals and reflects our willingness to transact at today's levels. The fourth one being downgraded is $75 million Utah multifamily loan previously mentioned. This one was downgraded from a risk rating of three to a risk rating of five during the quarter after negotiating the 94% discounted payoff that occurred subsequent to quarter end. As Richard mentioned, in addition to these four downgrades, we increased specific CECL reserves on three other previously five-rated loans to reflect real-time market feedback from our lender-driven sales processes. As a result of feedback from our sales processes, we took additional specific CECL provisions of $74 million or $0.51 per share during Q2, which again reflects our commitment towards executing our stated goals and willingness to transact at today's levels. Our overall specific CECL reserve at quarter end was $517 million, averaging 32% of related UPB. While there may be greater collateral value in certain of these watch list loans on a longer term basis, we believe these risk ratings and reserve levels are appropriate. given our stated objective of turning over the book in the near term and generally aligning our book value with such objectives. Our general CESA reserve and gross dollar terms remained relatively static quarter over quarter at approximately $50 million. However, as a percentage of UPB relating to loans subject to the general reserve, the reserve increased from 2.3% to 2.9% of UPB. Turning to REO, at quarter end we reclassified our mixed-use REO asset and one of our multifamily REO assets to help for sale at carrying values that we expect to transact at in the coming months. As a result, we recognized a loss upon reclassification to help for sale of $30 million or 21 cents per share for the quarter. As expected, our New York City hotel portfolio yielded improved performance quarter on quarter due to expected seasonality. portfolio contributed $0.03 per share of distributable earnings, representing an improvement of $0.05 per share compared to the first quarter and an improvement of $0.02 per share compared to Q2 2025. Our multifamily REO portfolio operating performance remained in line with Q1 results. We continue to focus on enhancing property performance, completing targeted capital improvements where appropriate, and actively evaluating monetization opportunities across the multifamily portfolio. We remain encouraged by the level of buyer interest for several of our REO assets, and while market clearing prices at times have been lower than anticipated, we continue to believe that in most cases taking these assets REO has created incremental value beyond what could have been achieved in a loan sale. Turning to the balance sheet, during the quarter we reduced outstanding financings net by approximately 66 million, including 20 million of deleveraging payments. Despite this, our net debt to equity ratio increased to 2.0x compared to 1.7x at March 31st, primarily driven by declines in book value as a result of additional CECL provisions and losses on REO help for sale taken during the quarter. Following resolutions to date in July and additional financing repayments of $299 million, our net debt to equity ratio has decreased to 1.7x on a pro forma basis. Liquidity at quarter end totaled 103 million, including cash of 90 million. As of July 24th, our liquidity increased to 168 million. In addition, our unencumbered asset pool totaling 509 million of the loan UPB and REO carrying value continues to provide financial flexibility and we're in the process of executing sales of certain of those assets assets, which we believe will generate approximately $140 million of additional liquidity. Overall, we've made solid progress in achieving our stated objectives, turning over the portfolio, resolving watch list loans, repositioning our REO assets, and deleveraging the balance sheet. Our strategy has been deliberate and consistent. As we continue executing against those priorities, We expect CMTG to be well positioned for the company's next phase. I would now like to open the call for questions. Operator?.

We will now begin the question and answer session. If you would like to ask a question, please press star 1 on your telephone keypad. To withdraw your question, press star 1 again. Please pick up your handset when asking a question. If you are muted locally, please remember to unmute your device. Please stand by while we compile the Q&A roster. Your first question comes from the line of Rick Shane with J.P. Morgan. Please go ahead. Thank you.

Hey guys, thanks for taking my questions this morning and I appreciate you guys laying out so much detail here. Look, you are in the market with property sales, you're in the market with loan sales. I am curious what types of investors, what types of buyers do you see out there? And also, it's interesting, we had a call in an adjacent sector yesterday where a very large company talked about lower volumes in the second quarter as a function of rate volatility and it sort of froze their markets a little bit. I am curious, since you guys are in the market as net sellers right now, how behavior and how feedback has changed and is there any chilling effect as a function of the rate volatility we've seen?.

Hi, Rick. It's Priyanka. I'll start off and then maybe Richard will want to add some thoughts. Yet, really pertinent question, something we've been talking about a lot. we are, to answer the first question, what kinds of investors? I mean, you know, given that some of these assets are require a lot of operational focus. We're seeing a lot of like local guys who are going to work out assets, both multifamily and office, the local GP players who are then looking to partner with LP Capital. that LP is coming from a variety of sources, but a lot of like private family offices and private investors. We're seeing less so in the more private equity hedge fund space. And that's a good segue into the second part of your question. Yes, we are definitely seeing volatility. A lot of that volatility is informing the CECL, the additional CECL reserves we took this quarter, as well as some of those downgrades. investors simply have higher return thresholds, and that's being driven by rate volatility, but also the availability of LP capital, because I think that that LP capital that has a wider array of investment options, they're allocating differently, and they are waiting for what they perceive to be better opportunities consistently. coming down the pike. But I'll summarize my comments by saying we are very committed to turning over the book. We're meeting the market. That's reflected in our book value that we just reported. And we think we can achieve those levels.

I'm sorry, Richard. Richard Richard Westerhoff, Chief Financial Officer, I'm sorry, Richard. Richard Westerhoff, Chief Financial Officer, yes. Rick, let me just add one thing, Rick, and thank you for the question. What's very interesting is that we see a very deep market of buyers. Sometimes we'll see 20 people. show up for a bid list. And as Priyanka suggests, the volatility is extreme. Sometimes we see a price that's much better than we thought, and sometimes it's much worse. And so it reflects, I think, a lot of people out there the high cost of capital, different underwriting perspective, and the volatility of rates. And so when we put something on the market, we're trying to be conservative about it. and also opportunistic. So when we get bids that we feel are valuable, we wanna take them. And when we don't, we feel like we really get a bid that is on the other end of the volatility spectrum, especially given what's going on in rates every day. There's an oftentimes we wanna maybe take them make a Cecil Reserve, hold it, try to add a little value and then go back out. So it's just a market with a tremendous amount of volatility in pricing. And I think that's reflects a little bit of a negative leverage environment in some asset classes and just a tremendous amount of debt capital available, but not as much equity.

So hopefully that's a fulsome response. Got it. And actually Richard that dovetails into my follow-up question, which is that, look as you guys move towards the period of a, condition of a little bit more liquidity and starting to deploy some capital again. Um, is there, how are you guys thinking about providing seller financing on some of those, some of those property sales and realizing there is skepticism in the market about that, but At the same time, it does reduce some frictions for you and potentially allows you to lend in situations you understand pretty well.

Yes, look, I'm going to turn this to Priyanka in a minute, but we are going to be opportunistic about it. As a general statement, there's a lot of capital out there for people to buy. We've got reset bases on these stocks. assets and capital at pretty low spreads being driven by very low cost of capital on warehouse lines from the banks. So we don't often have to do that. But if someone says, hey, take back some junior paper or subsidize. something that will get you something that we believe on a present value basis is more attractive for our investors. We'll absolutely look at that, of course. Pranaka, I'm just going to hand it to you.

Okay, thanks Richard. Yes, Rick, another topic that comes up quite a lot on our end as we run through these processes. What we have found is our seller financing isn't necessarily going to be accretive to the pricing in terms of what our goals are. So the the sale price isn't necessarily going to go up because we are so focused on releasing the embedded book value and the equity that is in each of those positions. And frankly, because we are much lower leveraged than a lot of our peers who are offering seller financing, there is a lot of embedded equity on the sale. So when we do the math, it doesn't usually pencil to provide seller financing.

Terrific. Thank you guys very much for answering our questions this morning. Thank you.

Your next question is from Marisa Lobo with UBS. Please go ahead.

Good morning. Thanks for taking the question. Just speaking about resuming originations, can you review the timeline for that, you know, in context of the five risk-rated population and, you know, the current rate environment? And what are you looking for in terms of balance sheet performance to what are the milestones before you resume originations?.

David Wiltshire- Why don't I, thanks Marisa for the question. I don't know if Priyanka or Richard chime in, but I think as we've said before, before we get in a position to evaluate other capital allocation opportunities, including new origination, we really want to reduce the level of watch list assets in the portfolio. continue to execute on our REO monetization activities, deleverage the balance sheet, including, you know, not just our asset level financings, but our term financing facility at the corporate level. The combination of all those things is going to put us in a position to start evaluating new origination opportunities and. you know it's hard to pick a timeline so we don't unilaterally control certainties actions, but we think it's somewhere in the latter part of this year and early next year is when we think we'll be in a position to. start redeploying capital into new originations. Okay, thank you for that.

OK. And just just looking at the resolution of this, the San Francisco office loan, 63 cents in the dollar. Can you speak to that relative to the other office? five rated credits and just on the adequacy of reserves on those. Yes.

Thanks for that question. In so as we said in our prepared remarks, that was a February 2020 origination. So as we all know in this industry, timing is most everything. So it was a very, you know, very high basis and it just the timing really could not be more challenging i think what we did really well though was exhibit some patience because if we had sold this loan a year ago I think market clearing price was probably half of what it ultimately was. And our goal was, as San Francisco was improving, we wanted to get out on the front end of a lender-driven sale process to really garner interest. And, you know, Richard alluded to this earlier, the bid sheet on this was so deep and it that just simply wouldn't have been the case prior. Maybe there potentially we left some dollars on the table if we had waited a little bit, but I think really getting in early and having everybody interested in one of the more early lender driven opportunities was really helpful to us. So I think that this, that asset was very unique because of the market it's in. You will notice that we did take specific additional reserves on two of the other office buildings. Those are informed by us being able in the market today, those were very live updates. So we think we're appropriately reserved on those. And then that really leaves only two other office assets in our entire portfolio. And those are very unique in each of their markets and really fall in the have versus have not categories. It falls very much into the haves. in terms of newly renovated amenity base that tenants require. So overall, we think we're well-reserved. That San Francisco loan was just a unique situation because of timing.

I appreciate the detailed answer. Thank you. Thank you for the question.

Your next question comes from the line of Bjorn Nicodemus with BTIG. Please go ahead.

Hello, and thanks for the time today. So I know there were some ups and downs in the quarter on the leverage side. Sounds like that's coming down post-quarter end. Also noticed net interest and income dipped slightly negative during the quarter. Given some of the deleveraging efforts that have already occurred in the third quarter thus far and what's planned to be underway for the second quarter, I'm curious if you half of the year, how could we see net interest income trend as we head toward the end of 2026? Thank you.