Claros Mortgage Trust (CMTG) Q4 2025 earnings call transcript

Thank you. I'm joined by Richard Mack, Chief Executive Officer and Chairman of Clara's Mortgage Trust. And Mike McGillis, President, Chief Financial Officer and Director of Clara's Mortgage Trust. We also have Priyanka Garg, Executive Vice President who leads credit strategies for MAC real estate groups.

Prior to this call, we distributed CMTG's earnings releases 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 disclosed in our other filings with the SCC.

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-GAP 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-GAP measures to the nearest GAP equivalents, please refer to the earnings supplement.

I would now like to turn the call over to Richard.

Thank you on, and thank you all for joining us this morning for CMTG's fourth quarter earnings call. CMTG made a meaningful amount of progress last year, executing on several critical path items. In 2025, we accomplished the priorities we established at the start of the year, including resolving watch list loans, enhancing liquidity, and further deleveraging the portfolio. One year ago, we established a 2 billion total resolution target for 2025, and I'm pleased to report that we meaningfully exceeded this target, closing the year with 2.5 billion of total resolutions.

This included the resolution of 11 watch list loans representing an aggregate UPB of 1.3 billion. This activity reflects our commitment to repositioning the portfolio by transitioning out of watch list loans through thoughtful and decisive action.

We also generated significant liquidity over the course of the year, which we used to meaningfully delever the portfolio and to reduce corporate debt. This momentum has carried into the new year, with $389 million of full-own repayments happening, including a New York City land loan that was a watch list loan that had been on nonacruals since 2021. More importantly, subsequent to year end, we retired the term loan B that was scheduled to mature in August of 2026.

The term loan had a balance of $718 million in the first quarter of 2025, and was replaced with a new $500 million senior secured loan from HPS. This facility has four years of duration.

Mike will provide additional color on this financing later in the call. We view this financing agreement with HPS as a positive for CMTG as it extends the maturity of our corporate debt to 2030 and provides the necessary flexibility to continue executing our business plan of resolving watch list loans, delivering our balance sheet, and reducing our capital costs over time.

Looking ahead to the coming year, we remain optimistic, but mindful of the macroeconomic backdrop and the uncertainty that has been a defining theme across the broader financial markets. With regard to real estate, we do not believe there will be a single catalyst that will drive an overnight recovery. Rather, we anticipate a period of gradual and steady improvement that will support transaction volume and investor confidence over time, especially if the bond market rally holds and rate cuts continue as expected.

As it relates to property market fundamentals, we continue to observe encouraging indicators, including a reduction in new supply, tightening credit spread, and improving financing costs for new originations. We also see increased demand for industrial space and significant investments in areas such as artificial intelligence and domestic manufacturing. We believe that investments in domestic manufacturing will support job growth and incremental demand for real estate over time.

While AI investments are likely to support future productivity gains, the impact on commercial real estate excluding data centers is still quite uncertain.

Overall, we see a constructive backdrop for commercial real estate and CMTG in the years ahead, but in 2026, our focus will remain on asset management and decisive execution as we continue to resolve watchless loans and work through our REO assets.

Our goal is to position the company to begin to evaluate new lending opportunities towards the end of 2026 and lay the groundwork for portfolio growth in subsequent years. Before turning the call over to Mike, I want to acknowledge that the last 24 months have been the most challenging business period of my career and for many others in the real estate industry.

I want to thank Mike Prionka and our entire team for their dedication and hard work during this difficult time and their commitment to overcoming the remaining challenges that are still ahead. I look forward to providing an update on our continuing progress in the coming quarters, and now I would like to turn the call over to Mike.

Thank you, Richard. For the fourth quarter of 2025, CMTG reported a gap net loss of $1.56 per share and a distributable loss of 71 cents per share. Distributable learnings prior to realize gains and losses were two cents per share.

CMTG's held for investment loan portfolio continued to decline in the fourth quarter, decreasing to $3.7 billion at December 31st, compared to $4.3 billion at September 30th and $6.1 billion at year end 2024. Over the course of 2025, we reduced our exposure to select asset types that have generally been experienced secular headwinds. As of the end of 2025, the portfolio no longer includes standalone life science, office exposure decreased from 859 million to 589 million, and land exposure decreased from 489 million to 187 million. It's worth noting, however, that the decline in portfolio UPP over the past year was an inherent result of our strategy to turn over the portfolio and prepare for an eventual return to originations.

Specific to the fourth quarter, the quarter over quarter decrease in UPP was primarily the result of four loan resolutions, consisting of two regular way loan repayments, one on a multi-family asset and the other on a life science asset, both in Pennsylvania. The other two were resolved by way of a discounted payoff and a foreclosure. In addition, as previously reported, we executed a sale of a $30 million Boston land loan.

This transaction did not impact fourth quarter portfolio UPP because it was previously classified as held for sale at the end of the third quarter. The discounted payoff related to $150 million previously four rated office loan in Connecticut. Given the valuation of the collateral, we agreed to repayment an approximately 70% of par, which we view as a good outcome given current market values in a challenging sub-market intensity.

The borrower was motivated to arrive at a resolution due to additional credit support that had been provided. This transaction enabled us to resolve a watch list loan, reduce CMTG's office exposure, and generate approximately $35 million in net liquidity for CMTG, which was then used to reduce outstanding debt.

The discounted payoff resulted in a $46 million principal charge off. However, it's worth noting that the impact of fourth quarter book value was marginal as the potential loss had been previously contemplated within our general Cecil reserve.

Additionally, we resolved an $88 million New York City watch list and nonacrual land loan through a foreclosure process. The underlying collateral is a well located undeveloped land parcel adjacent to Hudson Yards that allows for mixed use development.

After viewing the facts and circumstances of this loan's history, we concluded that foreclosing and ultimately marketing the land for sale was the best path to resolving a loan.

Upon foreclosure, we assigned a carrying value of $94 million based on the third party appraisal, approximately $6 million greater than our UPB, which further supported our decision to foreclose as a means to optimize recovery. We did not anticipate being long term holders of this land and expect to seek an exit sometime in 2026. As Richard mentioned last year, we exceeded our $2 billion loan UPB resolution target, achieving $2.5 billion of UPB in resolutions for the year.

This progress has continued into the new year with CMPG reporting an additional $389 million in UPB of resolutions across four loans, which include two regular way repayments. The first repayment was on a $67 million New York City land loan that was previously a four rated loan that had been on non accruals since 2021. The other was $174 million loan collateralized by a newly built multifamily property in Salt Lake City, which generated net cash proceeds and approximately $52 million.

This asset delivered last fall, which allowed the borrower to secure refinancing to lower its cost of capital. In addition, in line with our previously mentioned plans, we foreclosed on a multifamily property in Dallas with $77 million of UPB that was previously five rated previously the loan had a carrying value of $49 million and was written down to $37 million upon foreclosure. And last, we resolved a $71 million loan collateralized by a newly completed but vacant office property located in Seattle.

Given the collateral value relative to our equity position, net of non-recourse note on note financing, we determined the most prudent path was to transfer our rights and interests in our loan and the underlying collateral to the financing counterparty.

Turning to portfolio credit during the fourth quarter, the portfolio experienced a mix of ratings, upgrades and downgrades. We downgraded a $220 million loan collateralized by a luxury hotel property located in Northern California to a four risk rating. We continue to have conviction in the asset given the exceptional asset quality and highly desirable location and meaningful year-over-year improvement in operating performance.

That said, the loan matured in August of 2025, and we have not reached terms in a modification with the borrower, which resulted in the downgrade to the loan's risk rating. We have also commenced foreclosure proceedings to provide additional optionality of outcomes.

We also downgraded three loans to a five risk rating. In each case, the downgrades primarily reflect our decision to take a more aggressive approach in turning over the portfolio. I'd like to provide some color on these loans. The first loan is $170 million loan collateralized by a multi-family property located in Denver. We're actively pursuing a near-term resolution for this loan and are currently in the process of executing our plans related to the asset.

While we are limited in what we can share at this time, we have adjusted the carrying value of the loan as of December 31, 2025 to appropriately reflect our expectations for the anticipated resolution.

We look forward to providing an update on this loan in the near future. The second loan is a $225 million loan collateralized by an office property located in Atlanta, Georgia, which matures in March. This asset, similar to other office assets in the area, continues to experience the challenges that have generally weighed on the office sector. We're currently evaluating our options for this loan.

The last loan was the Seattle office loan that I just spoke to that we resolve subsequent to the quarter.

During the fourth quarter, we recorded a provision for current expected credit losses of $212 million, which primarily consisted of $283 million provision to our specific Cecil Reserve prior to principal charge loss and $62 million decrease in our general Cecil Reserve. The $283 million specific Cecil Reserve provision was primarily attributable to the three loans that were downgraded to a five risk rating during the quarter.

Changes to collateral values of previously five rated loans. And the previously mentioned $46 million principal charge off relating to the Connecticut office loan. It's important to note that of the $283 million specific Cecil provision, $75 million was related to loans that were resolved during the fourth quarter or in 2026 year to date. The decrease in general Cecil Reserve was primarily attributable to reduction in the UPB of loans subject to general Cecil reserves.

As a result, our total Cecil Reserve on loans receivable held for investment increased from 308 million per 6.8% of UPB at September 30th to 443 million per 10.9% of UPB at year end. Our general Cecil Reserve decreased from $140 million per 3.9% of loan subject to our general Cecil Reserve to $78 million for 2.9% of UPB of loan subject to our general Cecil Reserve.

Turning to REO assets, we made significant progress with our mixed use New York City REO asset during the quarter. As a reminder, we completed the commercial condominiumization of the building in May and as of year end, we've sold all of the office floors as well as the signage component, generating total gross proceeds of $67 million, which was generally in line with our carrying value.

We now intend to conduct a sale process for the fully least retail component of the property. We believe this asset is served as an example of how we can leverage our sponsors real estate expertise to creatively execute asset level strategies and optimized outcomes. The New York REO hotel portfolio continues to perform well with operating results exceeding expectations in the annual NOI growth of approximately 14%. This asset has been a creative to earnings and given the refinancing we executed last year, we will continue monitoring the market for an opportunity time to pursue an asset sale.

Over the course of 2025, we strengthen the balance sheet by focusing on generating liquidity and reducing leverage by $1.7 billion. We continued this focus into the new year by reducing leverage by an additional $300 million, of which $90 million was applied to asset level de-leveraging payments and towards the repayment of the terminal on B. As Richard mentioned at the beginning of 2025, the terminal on B had a balance of $718 million and was scheduled to mature in August of 2026.

In January 2026, we subsequently retired the terminal on B and replaced it with a $500 million senior secured terminal from HPS, which matures in January 2030.

This new senior secured terminal on is priced at sole for plus 675 basis points. And in connection with this financing, CMTG issued 10 year detachable warrants to purchase approximately 7.5 million shares of its common stock at an exercise price of $4 per share, which represents a 46% premium to the closing price for CMTG's common stock on January 30th, 2026.

In conjunction with the closing of the new term loan, we aligned and relaxed financial covenants across all of our financing facilities, which provides additional flexibility to execute our business plan going forward. Over the course of 2025, we decreased our net debt to equity ratio from 2.4x at December 31, 2024 to 1.9x at December 31, 2025. Following the closing of the senior secured term loan, we now have $153 million in liquidity, representing a $51 million increase compared to the prior year end, despite the significant deleveraging that occurred in 2025.

We accomplished a great deal in 2025 and we recognize there is more work ahead by resolving watch list loans, generating liquidity, reducing leverage and subsequently addressing the term loan be maturity. We have strengthened the balance sheet and positioned the company well for the coming year. We look forward to building on this progress as we continue to execute across the portfolio.

I would now like to open the call up to Q&A operator.

Rick, thank you for that question. We are clearly always open to everything. But our goal right now has to be cleaning the book up so that it is a much more transparent and easier to understand business.

And I think we have to wait until we're able to deliver that before we can really understand if the market can evaluate our business properly. And so I think that's where we're headed at the moment.

Okay. Thank you.

Yeah, Rick. I think that's this mic. I think that's a fair assumption because what's this is we resolve loans and deliver the book and get regular weight payoffs. That top line interest income level is going to continue to compress.

The leveraging will offset that to a degree on the interest expense side. And then further resolutions of the non accrual loans or sub earning assets should give us some capital to deliver, which should help further reduce interest expense. But I think it's a, I think that's a reasonable assessment.

But, you know, we are in a portfolio in a process of transitioning the portfolio. That net interest income line is going to be choppy until we sort of turn the corner on the book and can get back to origination.

Hey, Rick. It's Priyanka. I'll take that one. I'll start. We look, we're reserving based on what we think is appropriate at this time. We've resolved a tremendous number of loans in 2025. Half of them are on our watch list. And year to date, we've already resolved three additional loans on our watch list. So we think we have a good sense of the reserves that we need to take in order to accelerate resolutions and turn over the book. And so we think we're appropriately reserved for that. Now there can be new information and we might have changes in this really dynamic environment depending on where negotiations with borrowers or financing counterparties or anything may go, but we think we're appropriately reserved today.

And we have a lot of data points in a lot of different ways in terms of loan sales, which have really tapered off throughout 2025, more doing DPOs and other transactions for closures. I think we have a really good sense of where the reserve level should be.

Yeah. The timing. Look, I think we. Go ahead.

Okay.

I was just going to say, I think we. Go ahead.

Can I call on somebody.

Okay.

I'm going to start. So I think that the pace. I mean, we're really, really focused on accelerating the pace of dispositions. I mean, both within the loan book as well as in the REO book. We were we realized the value exactly what Richard said earlier. We need to turn over this portfolio. And we need to make very clear where, you know, to demonstrate our book value. So I can't, I don't want to give you specific timeframes, but I would hope that 2025 and our progress in 2025 suggests that we're moving very quickly. And we hope, you know, we're continuing to accelerate that. And furthermore, the stability of our balance sheet after the transaction that we just closed in January really helps us do that with even more, more strength and speed.

Sure. Thanks for the question. Well, I think a lot of the liquidity that was generated over the course of the year was used to deliver to the balance sheet, which we expect to continue to do as we continue resolving loans and our reo assets over the course of 2026.

We given the deleveraging that we've done, we now have a pretty significant level of liquidity cushion over a minimum liquidity requirements. And faced with that and the very de minimis amount of future funding on our that we expect to occur on our existing loan portfolio. We feel that our liquidity is in a very good position right now.

And to the extent we generate incremental liquidity above those levels will continue to look to deleveraged balance sheet. But, you know, success for this year, by the end of the year, we're evaluating, you know, a variety of capital allocation options for available liquidity, whether that's originating new loans, further deleveraging the balance sheet or other, other kinds of capital allocation alternatives.

So John, thanks for that. This is Richard. I think we're in a much more constructive environment such that things that we had held off resolving, we're going to have much better performance out of.

However, I want to say that the market is not fully back. Transaction volume is still lower than we had anticipated. We'd be by this time. So I think we are trying to both react to the market and make the best execution that we can while being mindful that we need to quickly clean up our book. So it's a balance, I think, on the whole, we are more focused on execution and delivering a clean book than we are waiting for the market to recover.

But we're getting a little bit of the benefit of having waited on some of the assets that we're going to be able to resolve this year. And I think I'm sure Pranakad would like to add something to this.

Yeah, thanks, Richard. The only thing I would add, I agree with everything Richard said, I would add though that because of the healthier capital markets, both CMBS banks coming back into the mix, we're just seeing more regular way repayments on larger loans. So I think that the theme we're going to see in this coming year are fewer extensions and modifications and more repayments, which, you know, on performing loans, which will then have an impact on NII as we talked about during Rick's question. But it will still help turn over the book, getting that excess cash, and then having, you know, the decision on how to allocate that capital.

Yeah. Hi, Chris. I'll take that one. It's Priyanka. NOI. So in the, we have the mixed use asset, which we're now, the only thing we're retaining is the fully leased retail. And so that's a hundred percent lease tenants paying rent. So there's, you know, NOI coming off of that. That happens to be one that we're holding on levered.

In the multifamily assets that we have REO, it is, it is a mixed bag. There are some that are generating real NOI. Others that are a little bit more challenged from an NOI standpoint. But that is all part of the plan to foreclose. The ones that are now generating NOI weren't generating NOI when we foreclose. So the point is to come in there and make sure that we're spending capital in smart ways, accretively to, you know, market the asset appropriately to potential renters.

And also be a present owner who's holding the property manager's accountable. So I think that to the extent that assets don't have positive NOI or meaningful NOI, it's all part of the plan and certainly was expected. And the last thing I would say is that capital that we're putting in there, you mentioned that these are finance, the financing facilities have structure in them where there is capital being held back for us to spend at the properties. And that's, you know, not cash coming off the balance sheet.

It's not going to be a meaningful amount. I mean, I hesitate to give you a specific number because a lot of that is going to depend on our hold periods. So again, we are, we're, you know, accelerating dispositions. You can see that in our earnings supplement on page eight. We sort of call out where we're accelerating dispositions. And so I think these are shorter term holds. We're going to spend less capital, but we want to be prepared to, to spend more if the, the hold is longer.

It's, we have a, we already have a facility that allows us to finance those loans. The new term loan is more of a corporate debt facility.

So those aren't even though it's senior secured. It's, it's more of a corporate mezzanine loan kind of structure as opposed to an asset specific asset specific financing structure, which is what we use at the direct asset level.

Well, I want to thank everyone for joining and for the questions and maybe summarize some of the things that we've mentioned today.

2025 and beginning of 2026 have been about resolving watchlist loans, enhancing liquidity, leveraging the book by $2 billion. In 2025, there was 2.5 billion of resolutions, 2026 almost 400 so far. We got the TLB retired. We now have a relationship with HBS, who's part of BlackRock, the largest asset manager in the world. All of this amidst a constructive and improving real estate credit market and real estate capital market in general.

And so while we're not here to declare victory, we are seeing life at the end of the tunnel and we are getting closer to a clean book that we expect will allow the streets more appropriately value our stock. And that's really our goal every day when we come to the office. And so it's been hard. It's been a long road, but we are really excited to be feeling like we can see the light at the end of the tunnel and that the capital markets are cooperating with us.

So we thank you for joining us and for monitoring our progress and for the questions. And we'll look forward to speaking again at the next quarterly call.