Claros Mortgage Trust Inc (CMTG) (Q2 2026) Earnings Call Highlights: Navigating Credit ...

Q & A Highlights

Q: What types of investors are buying your loan and REO assets, and how has rate volatility affected buyer behavior and pricing? A: Priyanka Garg, Executive Vice President - Portfolio and Asset Management: We are seeing a lot of local GP players who are going to work out assets, partnering with LP capital from private family offices and private investors. We are seeing less from the private equity hedge fund space. Yes, we are definitely seeing volatility, which informed the additional CECL reserves we took this quarter. Investors simply have higher return thresholds, driven by rate volatility and the availability of LP capital, which is allocating differently and waiting for better opportunities. We are committed to meeting the market, which is reflected in our reported book value.

Q: Can you review the timeline for resuming originations in the context of the risk-rated population and the current rate environment? What milestones are you looking for? A: J. Michael McGillis, President, CFO, and Director: To be in a position to evaluate capital allocation opportunities like new originations, we need to reduce the level of watchlist assets, continue REO monetization, and de-leverage the balance sheet, including our corporate term loan. It's hard to pick a timeline as we don't unilaterally control all actions, but we think it will be in the latter part of this year or early next year.

Q: How do you feel about multifamily? Do you think higher rates will weigh on valuations, or is there optimism for 2027? A: Richard Mack, CEO and Chairman: This is a very market-specific issue. In the Sun Belt, we will continue to have elevated deliveries through 2027, but we also have strong absorption. However, we see depopulation and reverse migration in lower-quality Sun Belt assets. Markets like L.A. and Seattle are down, while N.Y. is very strong. It is sub-market specific. If interest rates continue to go up, cap rates will likely increase. If rates are stable, there is optimism looking forward to the drop-off in new starts.

Q: Relative to your first-quarter expectations, did credit conditions get worse, better, or stay the same during the quarter? A: Priyanka Garg, Executive Vice President - Portfolio and Asset Management: The only thing that got worse is meeting buyer expectations. Their return expectations have increased since the beginning of the year, meaning we have to bring our pricing down to meet the market, which is reflected in our book value. However, the pace of resolutions feels good, with billions of dollars in resolutions year-to-date, and we feel well-positioned to execute on our stated objectives.

Q: Regarding the resolution of the San Francisco office loan at $0.63 on the dollar, can you speak to that relative to other office 5-rated credits and the adequacy of reserves? A: Priyanka Garg, Executive Vice President - Portfolio and Asset Management: That was a February 2020 origination with a very high basis and challenging timing. We exhibited patience, as selling a year ago would have yielded half the price. The bid sheet was very deep due to the improving San Francisco market. We took specific additional reserves on two other office buildings based on live market feedback, and we think we are appropriately reserved. The remaining two office assets are very unique and fall into the "have" category.

Q: Given the de-leveraging efforts and the dip in net interest income, how could we see net interest income trend toward the end of 2026? A: J. Michael McGillis, President, CFO, and Director: About a third of our interest expense relates to our corporate term loan, which we aim to pay down. Resolving watchlist loans and paying off related financing will improve net interest income by reducing interest expense. Direct de-leveraging from regular repayments will also reduce interest expense. As we resolve assets and de-leverage, it will be a catalyst for improving net investment income over time.

Q: How low could the loan portfolio size drop to by the end of 2026 based on your current plans? A: J. Michael McGillis, President, CFO, and Director: The portfolio will shrink significantly as we work through regular way repayments on performing loans and move out of 4 and 5-rated loans. It's hard to pick a number, but it will continue to decline until we are back in origination mode. Priyanka Garg added that there is nearly $1 billion of activity either being sold or refinanced, which could occur by year-end or early 2027, leading to a significant percentage decline.

Q: Do you have a range in mind of where book value might trough? A: Richard Mack, CEO and Chairman: We don't want to answer that directly, but we feel we have taken some pretty significant write-downs based on active sale processes. We feel good about getting a good chunk of this behind us, but until these assets are moved out of the portfolio, it's too early to call a bottom. We took some very aggressive steps this quarter.

Q: Are you considering providing seller financing on property sales to reduce frictions? A: Priyanka Garg, Executive Vice President - Portfolio and Asset Management: We have found that seller financing isn't necessarily accretive to pricing for our goals. Because we are much lower leveraged than peers, there is a lot of embedded equity on the sale, and the math usually doesn't pencil to provide seller financing. Richard Mack added that they would look at it if it made the present value more attractive for investors.

For the complete transcript of the earnings call, please refer to the full earnings call transcript .