Claros Mortgage Trust Stock

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.

Thanks, John. Appreciate the question. A couple drivers of that. I think it's important to keep in mind that about a third of our interest expense. relates to our corporate term loan financing. And you know, we entered into that financing back in January of this year to take out our old term loan. Our objective on that is to sort of pay that down as quickly as reasonably. Possible along with continuing to. repay financings on our other direct asset financing facilities. So, with that backdrop, I think it's important to highlight that Any time we resolve a watch list loan or an underperforming asset and payoff related financing, that's going to be that'll improve our net interest income by reducing interest expense. any kind of direct deleveraging as well from regular way repayments, even though it may reduce interest on performing loans, may reduce interest income, but by utilizing, you know, the recovery, the aggregate recovery from that to delever, that will also have the impact of reducing interest expense as well. I think. You know that that and it's hard to predict exactly how that's going to lay out, but.

I think as we continue to resolve assets, particularly watch list assets, deleverage the portfolio and get ourselves into a position to rebuild the portfolio and pay off the term loan, that will ultimately be a catalyst for improving net investment income on the loan portfolio in time.

Great really appreciate that detail Mike. That's super helpful. Yes. And then just to follow up for me to kind of tell off my prior question, but. Given the proforma figures you provided on page 5 of your supplemental, you know, we've seen the loan portfolio come down by around a 1Billion dollars to 3.5Billion dollars. $1.1 billion as of the release. So just curious, you know, based on your current plans, current outlook for the rest of the year, how low could we see the portfolio size drop to by the end of 2026? Thank you.

You know, I think I'll start and then I'll let Priyanka chime in. Obviously while we're working through regular way repayments, on a large percentage of the performing loan portfolio. our objective of sort of moving out of some of the four and five rated loans, I think you're going to see the portfolio shrink pretty significantly, whether it's WHETHER THAT OCCURS BY THE END OF THE YEAR OR SOMETIME IN EARLY 2027. remains to be seen, but we've got. You know a number of loans in the performing loan category where borrowers are actively working on refinancing or asset sales, so we would expect to be paid off on those and as As we said, and our priorities are really to try to turn over the portfolio and eliminate the four and five rated loans in time through these various sale processes. So hard to pick a number, but I'm fair to say it will continue to decline until we're back in origination mode. and can start rebuilding the loan portfolio. Yes, the only thing I would add to that is,.

It's almost a billion dollars worth of activity that's either actively being sold or refinanced by our borrowers or lender-driven sales that we've been discussing for the last quarter and a half. So they're... There's a lot that is out there that could occur. We all understand the very volatile environment we're operating in. So I don't think it's all going to happen by end of the year or first quarter 27, but it could be, I certainly agree with Mike that it's going to be a significant decline from where we are.

on a percentage basis. Great, really appreciate the time Priyanka and Mike and that's all for me.

Thank you. Your next question is from the line of Jade Romani with KBW. Please go ahead.

Thank you. Relativity of first quarter expectations, did things get worse or better or maybe not much different during the quarter on credit?.

I'll start on credit. I think the only thing from my perspective that actually that got worse is meeting buyer expectations out in the market. I mean, their return expectations have certainly increased since the beginning of this year and even at the end of the first quarter. So they're underwriting to higher returns, which obviously means that to meet the market, we have to bring our pricing down. And that is what you're seeing reflected in our book value today that we reported. So that has been disappointing, but I would say everything else in terms of pace, you know, billion dollars of resolutions year to date, we had 2.5 billion last year, a very active year so the pace of transactions feels good and particularly since we're saying we are going to meet the market in most cases i you know overall feel like we're we're well positioned to execute on our stated objectives.

Jay, let me just add. Richard, you have a minute. Sorry. Go ahead. I was just going to add one thing, then I'll take questions. Sorry. I was just going to say that on the refinancing side, you know, for our performing loans, that has been very strong. And that's where we receive repayments. So it's kind of one of these bifurcated markets where the things that are performing, there's a lot of capital to refinance them. And the things that are not performing, there's a lot of volatility in the bid.

Sorry, Jake, please go ahead. Do you have a range in mind of where book value might trough?.

I don't know that we want to answer that question, Mike. Maybe you want to.

But no, I think we, Jay, we I'll, I'll give it a, I'll give it a shot. I can't really provide a specific answer to that, Jay, but I think we've, we feel like we've taken some pretty significant steps. write downs based on the active sale processes that we're engaged in right now. Um, and you know, I so I think I feel pretty good about that. Obviously, if we continue to have operating. losses for a few quarters that'll that'll continue to diminish book value. But I feel like we've got a good chunk of this behind us. But until these assets are moved out of the portfolio, I think it's too early to call a bottom. But I think we've taken some pretty aggressive steps this quarter.

How do you feel about multifamily? I think that some of the commercial mortgage REITs have had a decent loss severity in multifamily and yet others either have had minimal losses on their risk four or five rated multifamily loans or maybe in the 5 to 10% range. in general, it's probably lower loss severity than what we've seen in office. But do you think that is about to change because the high rate environment is going to weigh on multifamily valuations? Or do you think that people are seeing more supply absorption? So feeling positive about 2027?.

Okay, that's a very good question and a very difficult one to answer. this is a very market specific issue I think if we look to the Sun Belt And we looked, we are going to continue to have elevated deliveries. 2026 and 2027, you're going to have 400,000 units delivered in the U.S. 60% of that is the Sun Belt. Average deliveries in the U.S. have been about 280,000. So we have elevated deliveries across the U.S., particularly in the Sun Belt. sunbelt, but we have very strong absorption. However, we see deportation and people going, reverse migration. for, especially in the Sun Belt, the lower quality assets, which is weighing on the market. We see markets like Los Angeles and Seattle where they can't get their act together from a government perspective where valuations are down. And yet we see markets like New York where rent increases are incredibly strong and cap rates are very low. It is really, really, be sub market by sub market specific as it relates to demand, rental growth, supply, and as a result cap rates and then you layer on the interest rates which create more volatility.

So I think the reason that you are seeing disparate results in multifamily is that it is a quasi fixed income asset. of volatility in rates and there's also a lot of volatility in the supply and demand picture in all of these various markets. So it's very, very hard to pin this down other than to go market by market and discuss the supply demand issue.

balances or imbalances in each one of those markets. But most of the exposure is in the Sun Belt. And so do you think cap rates in the Sun Belt multifamily are going to be increasing?.

I think that they are if interest rates continue to go up I think you will see increases if we have stable interest rates I think there is at least optimism looking out to the end of 2027 or at really just looking at the starts which have dropped off that the only good news is that starts have dropped off Deliveries continue, but starts have really dropped off. So it's a question of people looking forward to that. People have been more aggressive in looking forward to that drop off in starts when rates have made them optimistic. And as rates make them pessimistic, they're less willing to. So I think it's stable to down until there's rate movement.

rate movement down, I should say. Thanks very much. Appreciate it.

Thank you. This concludes the question and answer session. I will now turn the call over back to Richard Mack for closing remarks.

I want to thank you all again for joining us. It was a tough but productive quarter for CNTG. This year, we had a billion dollars of resolutions already, reflecting the availability of financing in the market, but the still large bid-ask spreads, volatility of production, pricing and concerns around interest rates, which has been keeping transaction volume at a modest level, but hopefully improving. We're going to continue to navigate this environment with hard work and hard decisions to turn the book and get back to the business of capital allocation. Thank you again for joining us.

This concludes today's call. Thank you for attending. You may now disconnect.

This live transcript is auto-generated without human intervention or review.

[Call has ended.]

Good morning, and welcome to Claros Mortgage Trust's First Quarter Earnings Conference Call. My name is Tracy, 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 for 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, Chief Financial Officer and Director of Claros Mortgage Trust. We also have Priyanka Garg, Executive Vice President, who leads Credit Strategies for 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 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, Anh, and thank you all for joining us this morning for CMTG's first quarter earnings call. As we look ahead to the coming year, we believe that despite record highs in the equity markets, uncertainty will remain a defining theme across the broader financial markets as investors continue to navigate concerns around the impact of monetary policy and geopolitical events on the economy.

In particular, real estate capital markets appear to be relatively resilient amid heightened geopolitical risks and renewed concerns around inflation. We continue to see encouraging signals. Transaction volume has improved modestly as compared to a year ago and real estate credit spreads remain tight.

At the asset level, multifamily deliveries and building permits have dropped dramatically nationwide. In the industrial sector, we continue to observe strong tenant demand in many markets. Office is also beginning to emerge from the shadows as fundamentals recover in many markets and reset valuations have started to attract renewed investor interest.

As we look to the broader capital markets, we have been observing the recent repricing in the private credit markets and considering the potential implications of this for real estate. One view is that the pullback in private credit will spill over into real estate. However, real estate has already absorbed a meaningful reset in asset values because of the prolonged high interest rate environment.

This should provide some protection against further declines in asset values. Perhaps at this moment, real estate represents a compelling relative value opportunity. We might even see institutional investors rotating back into real assets as a protection against devaluations in private credit and the stock market generally.

Regardless of how these market dynamics ultimately play out, we intend to build on the progress and momentum we established in 2025. Our strategic priorities continue to be centered on turning over the portfolio, resolving watch list loans, repositioning our REO assets and deleveraging the balance sheet. Successful execution on these priorities will position CMTG to evaluate new capital deployment opportunities towards the end of the year. This may include new originations, additional deleveraging, reinvestment in select REO assets and share repurchases.

I'm pleased to report that we had a strong start to the year in meeting our goals. For the first quarter, we reported $609 million in loan resolutions, representing 5 loans, including 4 watch list loans. In addition, as previously reported, we retired the Term Loan B that was scheduled to mature later this year with a new $500 million senior secured term loan from HPS with 4 years of duration. Mike will provide additional color on our financial and operating results later on the call.

We believe that 2026 will be a pivotal year for CMTG. Our first quarter results have built on the progress we made last year. While uncertainty remains on the horizon, our team has demonstrated our ability to execute and drive outcomes in this environment. In 2026, we will continue to progress the cleanup of our balance sheet while selectively and opportunistically holding and improving REO assets. While generally not something we speak about, we believe our stock is undervalued. We expect that with time, the continued execution of our strategic priorities will ultimately be recognized by the market. Towards that end, we look forward to updating you on our progress throughout the year as we continue to deliver on our stated priorities.

I will now turn the call over to Mike. Mike?

Thank you, Richard. For the first quarter of 2026, CMTG reported a GAAP net loss of $0.39 per share and a distributable loss of $0.52 per share. Distributable loss prior to realized losses was $0.05 per share. CMTG had an active first quarter and continued to execute our strategic priorities, completing approximately $600 million of loan resolutions related to 5 investments, 4 of which were watch list loans.

As discussed on our fourth quarter earnings call, we resolved 2 loans via regular way repayment. The first was a 2-rated $174 million multifamily construction loan in Salt Lake City, which we originated in 2022. The second was a 4-rated watch list loan, a $67 million New York City land loan originated in 2019. We also resolved 2 5-rated loans during the quarter, a $77 million Dallas multifamily loan resolved through foreclosure and a $71 million Seattle office loan resolved by transferring our rights and interest to the financing counterparty.

Our fifth loan resolution in the quarter occurred in March. We completed the sale of a $220 million loan secured by a luxury hotel property located in Northern California. Our loan had matured in August 2025. As of year-end 2025, we had not agreed to modification terms with the borrower, resulting in a downgrade to a 4 risk rating. This is a unique irreplaceable asset located in a highly desirable submarket, which we believe may be worth in excess of our basis over time.

However, given our stated 2026 goals, we ultimately negotiated a quick off-market sale of our loan at 90% of par, which accounting for general reserves we had allocated to the loan at year-end, approximated our carrying value and allowed us to significantly delever one of our financing facilities. We view this as a positive and efficient resolution aligned with our strategic priorities.

Subsequent to quarter end, we resolved one additional watch list loan through foreclosure. The $25 million loan was collateralized by a multifamily property in Dallas, Texas and was previously 5 rated. We believe we can create more value for our shareholders as owners of this asset rather than selling the loan.

As a result of the resolution activity during the quarter, CMTG's held-for-investment loan portfolio continued to decline, decreasing to $3.2 billion at March 31, compared to $3.7 billion at December 31. We reduced our hospitality exposure from $807 million to $592 million and also reduced our land exposure from $187 million to $120 million. With our continued goal of turning over the book, we currently have 8 lender-driven sale processes in various stages across our watch list loan and REO portfolios. These collective measures could result in additional resolutions of approximately $861 million of loans at UPB and REO assets at carrying value and allow us to accretively redeploy repatriated capital.

Turning to portfolio credit. The pace of credit migration has significantly slowed with only 2 loans moving this quarter. During the first quarter, we downgraded 1 multifamily loan from a 3 to a 4 risk rating and placed another 4-rated multifamily loan on nonaccrual. The downgrade is related to $127 million loan collateralized by a portfolio of Texas multifamily assets and is due to the borrower being unwilling to invest additional equity ahead of the loan's June 2026 maturity date.

The loan that was moved to non-accrual status is a $155 million loan collateralized by a Phoenix multifamily property and is related to continued loan delinquency and a lack of progress made on modification terms with the sponsor. CMTG is evaluating a variety of paths to resolution of both of these loans.

As of March 31, 2026, our portfolio consisted of 13 4- and 5-rated loans, down from 24 4- and 5-rated loans at March 31, 2025, demonstrating our commitment to resolving watch list loans. During the first quarter, we recorded a provision for CECL of $31 million. This consisted of a $32 million provision to our specific CECL reserve prior to charge-offs and a $27 million increase in CECL reserves and accrued interest receivable prior to charge-offs, primarily attributable to the previously mentioned loan sale at 90% of par. These items were offset in part by a $28 million decrease in our general CECL reserves, primarily attributable to first quarter loan resolutions.

As a result, our total CECL reserve on loans receivable held for investment decreased from $443 million or 10.9% of UPB at December 31, to $399 million or 11.4% of UPB. Our general CECL reserve decreased from $78 million at December 31, or 2.9% of loans subject to our general CECL reserve to $50 million at March 31, or 2.3% of UPB of loans subject to our general CECL reserves.

As discussed in our prior earnings call, in January, we retired our existing Term Loan B, which was scheduled to mature in August 2026 and replaced it with a $500 million senior secured term loan from HPS. The new term loan is a 4-year term with prepayment flexibility maturing in January 2030 and is priced at SOFR plus 675 basis points. We concurrently align financial covenants across all of our financing facilities, which allows for enhanced flexibility to execute our business plan.

We remain focused on deleveraging the portfolio. During the first quarter, we reduced outstanding financings by $489 million, including $142 million of deleveraging payments. As a result, our net debt-to-equity ratio has decreased meaningfully. At March 31, 2026, our net debt-to-equity ratio was 1.7x compared to 1.9x at December 31, 2025, and 2.4x at March 31, 2025. At quarter end, we had $132 million in liquidity.

In 2026, we continue to prioritize turning over the portfolio, resolving watch list loans, repositioning our REO assets and deleveraging our balance sheet. We look forward to sharing our progress towards the goal of being in a position to make capital allocation decisions later this year.

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

[Operator Instructions]. Your first question comes from the line of Jade Rahmani with KBW.

I was wondering the non-accruals currently totaled $1.55 billion on 11 loans, around 44% of the portfolio. Where do you expect that to trend over the next few quarters? Or is there a year-end target?

Jade, why don't I start and Priyanka can add to that. The expectation -- we have a number of sale processes in process that I mentioned on the call earlier, and that includes a number of these non-accrual loans. We expect to continue to chip away at that. It's hard to give a precise number as to where we're going to be at various points of the year. The overriding objective is to get these non-earning assets as well as sub-earning assets off the books, use proceeds to pay down existing leverage and reduce our interest expense and also generate incremental liquidity. We are actively looking at moving out of a number of these right now.

Okay. I don't know if Priyanka wants to chime in, but maybe if you could just quantify the range of dollars of sale processes that are underway.

I mentioned on the call, there's 8 active sale processes going on as well as other activity. Those 8 active sale processes involve about $860 million of asset value, either UPB with respect to loans or carrying value with respect to REO.

Yes. Jade, it's Priyanka. Just to add to that, half of those, 4 out of 8 are loans, and it's about 3/4 of the $860 million that relates to loans. All 4 are on the watch list and all 4 are on non-accrual. It's a good chunk of the non-accrual number.

I mean, is there a target -- when I look at risk 4, 5 loans, $1.75 billion and then REO $765 million. Is there a target that you want that to get to by, say, year-end or over the next 12 months, that all adds up to about $2.5 billion. How much of that do you think is line of sight into somehow exiting in the next few quarters?

Yes. I mean, as Richard and Mike both said, we're very, very focused on turning over the book. Our watch list loans at January 2025 was at $2.7 billion. We're now down to $1.4 billion on the watch list. I think we've demonstrated over 5 quarters that we're very committed to bringing that number down.

Like I said, we have a number of those loans already on the market in various stages of sale processes. We've been really positively encouraged by the amount of activity, particularly given all the uncertainty going on in the world right now. Hard to handicap how that occurs, but we're very focused on those resolutions. We had the hospitality loan that was on the watch list come off at the end of the first quarter. Again, I think it's really hard to pin ourselves down to a number, but I would say the progress that we made over the last 5 quarters we intend to keep pushing forward in the same way.

[Operator Instructions]. It appears we have no further questions at this time. I would now like to turn the call back over to Richard Mack for closing remarks.

Thank you. Again, thank you all for joining us. I will just reiterate that 2026 is going to be a year of continued execution on our priorities. We've already had a first quarter of quite strong resolutions, and we're going to continue to sell into the market to the extent that we can, make sure that we push borrowers to refinance us now that the financing markets are stronger so that we can clear troubled loans in REO, pay down debt, begin to increase cash and pivot to offense, hopefully by the end of the year.

Again, thank you all for joining, and we look forward to speaking to you all again next quarter. Thank you.

This concludes today's call. Thank you all for attending. You may now disconnect.

Hello, and welcome to the Claros Mortgage Trust Third Quarter 2025 Earnings Conference Call. My name is Becky, and I will be your conference facilitator today. After the speaker's remarks, there will be a question-and-answer period. [Operator Instructions] I would now like to hand the call over 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; and Mike McGillis, President, Chief Financial Officer and Director of Claros Mortgage Trust. We also have Priyanka Garg, Executive Vice President, who leads Credit Strategies for Mac 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 disclosed 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 the nearest GAAP equivalent, 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 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 use to meaningfully delever the portfolio and to reduce corporate debt. This momentum is carried into the new year with $389 million of full loan repayments happening, including a New York City land loan that was a watch list loan that had been on nonaccrual 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 4 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, delevering 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 spreads 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 watch list 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, I have been the most challenging business period of my career and for many others in the real estate industry. And so I want to thank Mike, Priyanka 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 GAAP net loss of $1.56 per share and a distributable loss of $0.71 per share. Distributable earnings prior to realized gains and losses were $0.02 per share. CMTG's held for investment loan portfolio continued to decline in the fourth quarter decreasing to $3.7 billion at December 31 compared to $4.3 billion at September 30 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 stand-alone 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 UPB 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 UPB was primarily the result of 4 loan resolutions consisting of 2 regular way loan repayments, 1 on a multifamily asset and the other in a life science asset, both in Pennsylvania. The other 2 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 law. This transaction did not impact fourth quarter portfolio UPB because it was previously classified as held for sale at the end of the third quarter. The discounted payoff related to $150 million previously 4-rated office loan in Connecticut. Given the valuation of the collateral, we agreed to repayment at approximately 70% of par, which we view as a good outcome given current market values and a challenging submarket in tenancy.

The borrower is 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 reduced 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 CECL reserve.

Additionally, we resolved an $88 million New York City watch list and nonaccrual land loan through a foreclosure process. The underlying collateral is a well-located, undeveloped land parcel adjacent to Hudson Yards that allows for a mixed-use development. After reviewing the facts and circumstances of this loan's history, we concluded that for closing and ultimately marketing the land for sale was the best path to resolving the loan.

Upon foreclosure, we assigned a carrying value of $94 million based on a third-party appraisal, approximately $6 million greater than our UPB, which further supported our decision to foreclose as a means to optimize recovery. We do 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 and resolutions for the year. This progress has continued into the new year with CMTG reporting an additional $389 million in UPB of resolutions across 4 loans, which include 2 regular way repayments. The first repayment was on a $67 million New York City land loan that was previously a 4-rated loan that had been on nonaccrual since 2021.

The other was $174 million loan collateralized by a newly built multifamily property in Salt Lake City, which generated net cash proceeds of 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 5 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 nonrecourse note-on-note financing, we determine 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 4 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 a downgrade to the loan's risk rating. We have also commenced foreclosure proceedings to provide additional optionality of outcomes. We also downgraded 3 loans to a 5 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 multifamily 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 resolved 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 CECL reserve prior to principal charge-offs, and $62 million decrease in our general CECL reserve. The $283 million specific CECL reserve provision was primarily attributable to the 3 loans that were downgraded to a 5 risk rating during the quarter, changes to collateral values of previously 5-rated loans in the previously mentioned $46 million principal charge-off relating to the Connecticut office law.

It's important to note that of the $283 million specific CECL provision, $75 million was related to loans that were resolved during the fourth quarter or in 2026 year-to-date. The decrease in general CECL reserve was primarily attributable to a reduction in the UPB of loans subject to general CECL reserves.

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

Turning to REO assets. We made significant progress with our mixed-use New York City area 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 the sales process for the fully leased retail component of the property. We believe this asset has served as an example of how we can leverage our sponsor's real estate expertise to creatively execute asset level strategies and optimize outcomes.

The New York REO hotel portfolio continues to perform well, with operating results exceeding expectations and annual NOI growth of approximately 14%. This asset has been accretive 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 strengthened 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 deleveraging payments and towards the repayment of the Term Loan B.

As Richard mentioned, at the beginning of 2025, the Term Loan B had a balance of $718 million and was scheduled to mature in August of 2026. In January 2026, we subsequently retired the Term Loan B and replaced it with a $500 million senior secured term loan from HPS, which matures in January 2030. This new senior secured term loan is priced at -- so 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 30, 2026.

In conjunction with the closing of the new term loan, we aligned and relax 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 B maturity, we have strengthened the balance sheet and position 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 Instructions] Our first question comes from Rick Shane from JPMorgan.

Look, I realize there's a lot of progress both in terms of repayments and loan sales and foreclosures. Obviously, the significant reserves allow you guys or put you in a position to be able to negotiate resolutions for the loans. But obviously, the stock is trading at an enormous discount to book. It's a very, very long path to earning -- generating a return that's anywhere near your hurdle rate. I think you guys know where I'm headed, which is we've seen at least 1 transaction in the space where a REIT who is much further along the path in terms of recovery, decided to sell their assets near NAV. Are there opportunities here outside of resolving this portfolio to extract shareholder value or to create -- not extract but to create shareholder value.

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 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. And then to follow that up, NAI has been cut in half throughout the -- over the course of the year. I'm curious, as we head into Q1 '26 and you think about the nonaccruals and the movement in the portfolio, NIA and pure net interest income was about $12.5 million in the fourth quarter. Is it likely that it will be again lower in the first and second quarter of the year, given how the portfolio is marked at this point?

Yes, Rick, I think that's -- this is Mike. I think that's a fair assumption because what's as we resolve loans and delever the book and get regular payoffs, that top line interest income level is going to continue to compress. Deleveraging will offset that to a degree on the interest expense side and then further resolutions of the nonaccrual loans or sub earning assets should give us some capital to delever, which should help further reduce interest expense.

But it's -- I think that's a reasonable assessment, but we are in a process of transitioning the portfolio. So 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 originations.

Got it. And then just 1 last question, and I apologize for asking going first and then asking so many questions. But obviously, you guys are -- because you've indicated that the reserve levels position you to aggressively start to resolve or continue to resolve loans during 2026. When we look at the reserve levels and it's over $400 million, I apologize, I won't look up to the specific number. Realistically, what percentage of that reserve do you think could be translated into losses over the next 12 months? Is it 25%, 50%, 75% just so that we can start to get some sense without knowing specifically what you guys are going to resolve, how quickly you think you're going to start resolving things.

Rick, it's Priyank. 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 3 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, we think we have a really good sense of where the reserve level should be.

Okay. But I appreciate that. The question is more about the timing of those resolutions as opposed to the level of the reserve.

Yes, the timing -- look, I think we was just going to say, I think we've -- 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 realized the value exactly what Richard said earlier, we need to turn over this portfolio. and we need to make very clear where -- to demonstrate our book value. So I don't want to give you specific time frames, but I would hope that 2025 and our progress in 2025 suggests that we're moving very quickly, and we hope 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 strength and speed.

Our next question comes from John Nikodemus from BTIG.

With the Term Loan B refinancing completed several more resolutions completed as well since we last spoke, how are you thinking about liquidity levels here in '26? I know you're looking to improve them and it is up year-over-year, but we did see it come down significantly since November, which is to be expected. Just trying to get a better handle on how we should think about the trajectory there for this year.

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 deleverage the balance sheet, which we expect to continue to do as we continue resolving loans and our REO assets over the course of 2026. 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 a very de minimis amount of future funding 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, we'll continue to look to deleverage the balance sheet. But success for this year, by the end of the year, we're evaluating a variety of capital allocation options for available liquidity whether that's originating new loans, further deleveraging the balance sheet or other kinds of capital allocation alternatives.

Great. That's really helpful. And then for my second question, this kind of goes into what Priyanka was mentioning in response to Rick's last question. But we've heard a lot about improvements for the greater commercial real estate sort of transaction activity, liquidity and also, I have seen some of your peers talk about being more aggressive about resolving challenged loans or REO assets during this round of earnings. Given that backdrop, has that changed your expectations for sort of the pace or timing of sales out of both the REO portfolio as well as resolutions from the watch list?

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 backed. 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 weighted on some of the assets that we're going to be able to resolve this year. And just I think I'm sure Priyanka would like to add something to this.

Yes. Thanks, Richard. The only thing I would add, I agree with everything Richard said. I would add though that -- the -- because of the healthier capital markets, both CMBS banks coming back into the mix, we're just -- we're 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 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 the decision on how to allocate that capital.

[Operator Instructions] Our next question comes from Chris Muller from Citizens Capital Markets.

I guess looking at your REO portfolio, most of the properties have some financing against them. And I see your comment that the hotel portfolio is the most profitable then the aggregate contribution to DE. But can you guys talk about some of the individual NOIs within that REO portfolio?

Yes. 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 100% leased, tenants paying rent. So there's NOI coming off of that. That happens to be 1 that we're holding on levered. In the multifamily assets that we have, REO, 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 foreclosed.

So the point is to come in there and make sure that we're capital in smart ways accretively to market the asset appropriately to potential renters and also be a present owner who's holding the property managers 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 financed, the financing facilities have structure in them. where there is capital being held back for us to spend at the properties, and that's not cash coming off the balance sheet?

Got it. And that's a good segue into my follow-up here. Do you guys expect a lot -- or could you give a ballpark dollar amount of what you're expecting on CapEx for these REO properties.

It's not going to be a meaningful amount. I mean, it's -- 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 accelerating dispositions. You can see that in our earnings supplement on Page 8, we sort of call out where we're accelerating dispositions. And so I think to the extent these are shorter-term holds, we're going to spend less capital. but we want to be prepared to spend more if the hold is longer.

Got it. That makes a lot of sense. And just 1 last quick one, if I could. Does the new term loan allow financing of watch list loans?

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 are -- even though it's senior secured, 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.

Got it. Makes a lot of sense.

Thank you. We currently have no further questions. So I'll hand back over to Richard for closing remarks.

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 watch list loans, enhancing liquidity, deleveraging 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 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 light at the end of the tunnel, and we are getting closer to a clean book that we expect will allow the Street to 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're -- 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 look forward to speaking again at the next quarterly call. Thank you all.

This concludes today's call. This concludes today's call. Thank you for joining us. You may now disconnect.

Welcome to the Claros Mortgage Trust Third Quarter 2025 Earnings Conference Call. My name is Elisa, and I will be your conference facilitator today. I would now like to hand the call over 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; and Mike McGillis, President, Chief Financial Officer and Director of Claros Mortgage Trust. We also have Priyanka Garg, Executive Vice President, who leads Credit Strategies for 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 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 reconciliation 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, Anh, and thank you all for joining us this morning for CMTG's third quarter earnings call. As we approach the end of the year, we are encouraged by the continued signs of stabilization and recovery across the broader real estate market. Liquidity has slowly but steadily returned to the commercial real estate industry, supporting increased transaction volumes and tighter lending spreads.

Recent and perhaps expected rate cuts by the Fed have improved the outlook even as investors consider the uncertainty surrounding the slowing economy. Collectively, these market dynamics have created a more constructive backdrop, enabling CMTG to continue executing on its strategic priorities for the year, in particular, resolving watch list loans, enhancing liquidity and delevering the portfolio.

At the beginning of the year, we stated that we expected approximately $2 billion in total resolutions. I'm pleased to share that we have already exceeded this target with $2.3 billion in total resolutions, which includes partial repayments. As of November 4, we have significantly improved liquidity by $283 million to $385 million, further delevered the portfolio and resolved a total of 9 watch list loans.

As previously reported, we have foreclosed on select cash flowing multifamily assets and have identified additional multifamily assets that are foreclosure candidates. We remain positive on the multifamily sector given the favorable long-term supply-demand dynamics and persistent housing affordability constraints. As we look ahead, we believe that the sharp decline expected in multifamily deliveries over the next few years, coupled with declining base rates should help offset any impact of an economic slowdown.

Given our sponsors' experience as an owner, operator and developer and the progress we have made in our REO portfolio to-date, we believe we are well positioned to think creatively about value enhancement and exit strategies. For many of these multifamily assets, in particular, we have identified opportunities to implement operational and capital improvements, some of which can be executed more quickly than others.

Since foreclosing, we have received strong unsolicited interest from prospective buyers on certain properties, which we believe is a positive reflection of the underlying demand for these assets. Taking into account our business plans, the strong interest we are seeing in the market and the current capital markets environment, we are actively evaluating opportunities to monetize select multifamily REO assets in the coming quarters.

Overall, we feel positive about the progress we've made so far this year. In addition to reporting more than $2 billion of resolutions, we have achieved the following: we resolved 9 watch list loans representing $1.1 billion of UPB, bolstered liquidity by $283 million to $385 million today, reduced total borrowings by $1.4 billion and increased our unencumbered asset pool to $548 million from $456 million. We believe this progress positions us well to achieve our near-term priority of addressing the August 2026 Term Loan B maturity, and we will continue to evaluate our options with respect to this maturity.

Before turning the call over to Mike to discuss CMTG's financial results and the portfolio, I want to note that we will not be addressing the New York Mayoral elections in our prepared remarks. That said, we are happy to take questions in the Q&A portion of this call.

Now I'd like to turn the call over to Mike.

Thank you, Richard. For the third quarter of 2025, CMTG reported a GAAP net loss of $0.07 per share and a distributable loss of $0.15 per share. Distributable earnings prior to realized gains and losses were $0.04 per share. Earnings from REO investments contributed $0.01 per share to distributable earnings net of financing costs. CMTG's held-for-investment loan portfolio decreased to $4.3 billion at September 30 compared to $5 billion at June 30. The quarter-over-quarter decrease was primarily the result of 4 loan resolutions that occurred during the quarter and the reclassification of loan to held for sale.

One resolution was a regular way repayment of a $168 million construction loan collateralized by a mixed-use property in Northern Virginia. Upon construction completion, the asset has experienced strong leasing momentum across its various components. Construction loans have been a valuable component of CMTG's portfolio and a point of differentiation for our firm, given our sponsors' development and asset management expertise.

While our construction exposure has historically performed well, it has also become a smaller component of our portfolio as sponsors have pursued their business plans to refinance such assets upon completion. The other 3 resolutions, all watch list loans were addressed on last quarter's earnings call and consist of the discounted payoff on a $390 million loan collateralized by a New York City multifamily property as well as foreclosures of 2 loans collateralized by multifamily properties in Dallas.

Finally, we reclassified a $30 million Boston land loan from held for investment to held for sale as a result of a third-party buyer prevailing at a mortgage foreclosure auction in September. Subsequent to the third quarter, the sale was executed modestly below carrying value and because the loan was unencumbered, generated $28 million of net cash proceeds. This transaction enabled us to enhance liquidity without incurring carry costs or assuming risks associated with taking title to this asset. To recap, we've had $2.3 billion of total resolutions year-to-date, which includes $81 million in partial repayments and 9 watch list loans totaling $1.1 billion of UPB.

Turning to portfolio credit. During the third quarter, we did not have any loans migrate to a 4 or 5 risk rating. We had one loan moved to non-accrual, a $170 million 4-rated loan collateralized by a Colorado multifamily property. The underlying asset performance has been tracking below our expectations and has also been impacted by new supply in that market. We are evaluating all available options to pursue our remedies as a lender.

Our total CECL reserve on loans at September 30 was $308 million or 6.8% of UPB compared to $333 million or 6.4% of UPB at June 30. Our general CECL reserve increased by $0.6 million to $140 million or 3.9% of UPB of loans subject to our general CECL reserve compared to 3.8% of UPB as of June 30.

During the quarter, we determined that a sale of the New York hotel portfolio is no longer optimal amid evolving market conditions impacted by the New York City mayoral election. As a result, we reclassified the hotel portfolio to held for investment as we continue to evaluate the market. The underlying assets continue to perform well and the strong return on equity generated by the portfolio provides an opportunity to optimize value for our shareholders when market conditions become more favorable, particularly in light of the refinancing executed in June.

We also made progress during the quarter on further sales from the commercial condominiumization of our mixed-use REO asset. To-date, we've sold 9 of the 12 commercial condo units that were created. As Richard mentioned previously, it's our intention to accelerate the sale of some multifamily REO assets given positive market sentiment.

Our focus on loan resolutions has strengthened our balance sheet by significantly reducing leverage and improving liquidity. During the third quarter, outstanding financings decreased by $376 million, which included $52 million of incremental deleveraging, bringing the reduction in financing UPB to $1.2 billion during the first 9 months of 2025 and to $1.4 billion year-to-date through November 4. This activity is reflected in the meaningful decrease in our net debt-to-equity ratio, which was 1.9x at September 30. This compares to 2.2x at June 30 and 2.4x at December 31, 2024.

In terms of liquidity, as of November 4, we've increased our liquidity position by $283 million since year-end 2024. To quickly recap, at September 30, CMTG reported $353 million in liquidity, which has subsequently increased to $385 million as of November 4. At September 30, CMTG's total unencumbered assets were $398 million of loan UPB and $104 million of REO carrying value, which has since increased to a combined $548 million as a result of an additional loan becoming unencumbered, partially offset by the aforementioned loan and REO sales.

We believe our liquidity position and unencumbered asset pool strengthen our position in addressing the upcoming maturity of CMTG's Term Loan B. We continue to explore various paths to a refinancing or extension, and we anticipate being in a position to provide additional details on a solution in the coming months.

Before we open the call to Q&A, I'd like to share some recent news. We entered into an amendment to the terms of our Term Loan B, including the modification and waiver of certain financial covenants through March 31, 2026, including minimum tangible net worth and minimum interest coverage as defined, respectively. Pursuant to the terms of the modification, we're also utilizing a portion of our liquidity to make a principal repayment of $150 million on the Term Loan B.

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

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

Two questions that are related. The first is, what was the impact in the third quarter of reversal of accruals on the loan that was placed on non-accrual so that we can get a sense of what the run rate is. Obviously, there's a recurring impact, but there's also a restatement effectively.

It was about $4.5 million, the reversal of the accrued interest receivable on that particular loan.

Look, the narrative here has been that NII has been declining. Obviously, with that reversal, with the runoff of the portfolio, with the additional non-accrual, it was down again sequentially fairly sharply. When do you think we will see a trough? Are we there at this point? Or is there still going to be more downward pressure on NII?

Thanks, Rick. Great question. I think right now, we are really in the process of transitioning the portfolio and trying to aggressively move out of our 4 and 5-rated loans and non-earning and sub-earning assets. Obviously, with the liquidity we have, we can delever financings, which is helpful to earnings, but we really need to continue to make progress on moving out of the 4 and 5-rated loans, get that capital back and get it earning again. It's going to be a little, what I'll call, lumpy over the near term while we work through that.

I would just add one thing, and that is I feel like the market has come through a trough and the environment in which we are operating in is a lot more constructive for everything we're trying to do. Not exactly -- it is not exactly directly answering your question, but I think it's important to state.

No. Look, it's a totally fair observation. I think there are 2 stages to this. One is the identification stage of challenges within the portfolio, and it feels like we have reached that point or are very, very close. Then there is the resolution stage. This is not like a credit card loan where 180 days later, you charge it off. These resolutions can take years as we've seen. I think we're probably in the midst of that right now.

We absolutely are in the midst of it. I will say that we have been in the midst of it for a while, and we are taking aggressive actions to resolve things. We are really not trying to allow problems to faster or we're not allowing problems to faster.

The next question comes from Jade Rahmani with KBW.

Can you give an update on the term loan? I know you touched on it, but where would liquidity stand post the $150 million repayment? Over what time frame do you expect to consummate a refinancing? Are you considering any equity-like options in conjunction with this to bolster the company's capital base, give it wherewithal to deal with problems in the portfolio and also improve the corporate financeability. Those things might include preferred equity.

Thanks, Jade. Boy, that's a big question, but a good question. Let's see, we continue to have very productive discussions on the term loan refinancing. As noted, we had -- before the impact of this recent modification, the balance outstanding is about $712 million. We'll make a paydown of about $150 million in connection with this modification that will bring cash down to the, call it, $230 million, $235 million range. We do expect some additional sort of monetizations of assets over the relatively near term, which will further improve liquidity and what we would envision is a modest incremental paydown in connection with establishing a new facility or extending the existing facility.

At this point, we do not anticipate going into the market for preferred equity as part of the solution, but obviously, down -- further down the path that that could be an option, but we think the trajectory of the business in terms of liquidity resolving watch list loans is heading in the right direction at this time.

Jade, I would just like to add that the -- yes, the cost of pref equity is still quite high right now. The opportunities in the market to increase the implicit or explicit leverage depending on how you want to view pref equity in order to originate, I think we just don't see the trade-off right now. We're going to keep our eye on it. If we think that changes, certainly, pref equity is an interesting approach for us to take.

Regarding the risk 5 risk 4 loan buckets, which each total about $1 billion, so that's $2 billion in total. Then current REO, can you give some expectations around the risk 5, where does that -- is that going to continue to moderate? Where will that be in 1 to 2 quarters? The risk 4s, do you contemplate any additional adds? Or will those continue to moderate? Will those be improved through modification to risk 3? Then REO, what is the current balance expectation you have, including any monetizations in process and the additional multifamily foreclosures you noted?

Yes. Jade, it's Priyanka. Thank you for the question. I'll start with the REO. We are continuing to monetize some of the REO. We have the mixed-use asset that we condominiumized that Mike discussed earlier. There will be some additional realizations out of that. Richard mentioned the realizations on some of our already REO multifamily. In the near term, we do expect the REO portfolio to increase in size.

On Page 10 of our earnings up, we show our 5 rated loans, and we show 4 of them being anticipated REO. Those are all in the multifamily asset class. This is a tool in the toolkit, and we always want to try to work with our borrowers. If we can't come to a resolution that we think is in the best interest of our shareholders, we are going to foreclose. We do identify those 4s as anticipated foreclosures and coming on REO.

In terms of additional 5s and 4s, we've obviously classified those loans as we see fit today. It's a dynamic environment. don't -- we can't always control borrower decision-making or what happens at the borrower or the market level. Based on what we know today, we think that list is accurate, and we're actively negotiating with borrowers in the 4 category, as you mentioned, to try to come to a reasonable modification, which could result in an upgrade. Also, as we've proven, I think, year-to-date, there's a lot of tools in the toolkit in terms of other ways to monetize the assets to turn over the book, as Mike mentioned earlier.

I think the $640 million of risk 5 rated multifamily loans anticipated REO, that would put the REO portfolio to $1.3 billion and reduce the risk 5 from $1 billion to around $335 million. Then the risk 4, I don't believe that there's REO anticipated out of that. Is that correct?

Yes. At this moment, that is correct on the 4s. On the 5s, I would just say the REO, it doesn't go on to our balance sheet at the UPB, it's going to go on at the carrying value after the specific CECL reserve. The $640 million is a bit inflated. It's lower than that. Yes, there will be growth in the REO portfolio. Like I said, there are -- there's very clear visibility into our current REO portfolio being partially monetized as well.

That would be actually about $1.24 billion, less the $80 million specific reserve? Do you know what the current yield is?

On the REO in total?

Yes. Is it low single-digit, or?

It's a very mixed bag. On the hotels, that is in the low to mid-teens. That is a very good return on equity because of the refinancing that we got done earlier this year as well as just really strong underlying fundamentals. As you can imagine, as we've taken assets REO in the multifamily portfolio, there is a lot of noise in the NOI numbers in terms of just blocking and tackling, like you want to evict the number of non-paying tenants, and that means you're taking a charge-off. We're in this period of transition, so that yield is much lower. Over time, we can -- we see that increasing. I mean it's anywhere between very low single digits to 6% today on an unlevered basis. We'll see if our plan is certainly to improve the yield on some of those. Others, like I said, are ready for monetization now.

The next question comes from John Nickodemus with BTIG.

Somewhat related to James's last question regarding the anticipated REO multifamily 5-rated loans. Noticed that your largest loan, the California multifamily moved into that bucket of anticipated REO versus where it was in the last quarter. Would just love to hear what changed there and being such a significant size, how that process could play out in terms of taking REO?

Thanks, John, for the question. It's Priyanka. Yes, obviously, we're very, very focused on it, given the size, as you said. The reason for the change is really after extensive ongoing discussions with the borrower. It's clear that they are unwilling -- sponsorship is unwilling to support the asset.

At this juncture, I think we've proven our ability to evaluate whether we would like to do loan sales, BPOs, short sales, and when we did all of that, we have determined that the best course of action is actually to take ownership of the asset. One, you immediately create value when you go from a loan to a deed if we wanted to flip and sell it, but more importantly, as we have dug in, we've seen a lot of low-hanging fruit here in terms of ability to improve top line, ability to improve expenses. We think this is really a good opportunity for shareholders in terms of creating additional value.

In terms of the process, it's in California. It's a non-judicial foreclosure state. It should be a pretty clean process, and we're -- the sponsor is well aware of the plan going forward.

Then other one for me. I just wanted to ask about repayments, you've had 3 significant repayments in the second half of the year so far. Two of those were on loans that were on the watch list, a couple of 3-rated loans. Just curious if there's any line of sight on any significant repayments before the end of this year or maybe even early next year, whether that's out of the watch list or just out of the rest of the loan book in general?

Yes. Thanks, John. Yes, absolutely is the short answer. As both Richard and Mike alluded to, capital markets are healthy. We are seeing borrowers in various stages of refinancing plans, both on 3 and 4-rated loans. We alluded to this last quarter. We don't control those outcomes. I can't even put a number on it, but there is -- that is absolutely a possibility going into the balance of the fourth quarter in addition to the first quarter.

Separately, absolutely dual tracking the goal of turning over the book, and we will focus on effectuating transactions even on difficult assets that are less borrower-driven and more lender-driven. That again goes to all the tools in the toolkit. That will be very facts and circumstances based in terms of borrower market asset class, and we have a couple of those in process, and I can see a couple of those getting resolved here in the coming quarters.

There are no additional questions waiting at this time. [Operator Instructions]. There are no additional questions at this time. I'd like to pass the conference back over to Richard Mack for any closing remarks.

Well, I just want to thank everyone for joining and for the questions. I would summarize by saying, we continue to be in a healing capital markets. We're seeing tightening spreads and high demand for assets. This is allowing us to create value in the portfolio by taking over assets when we need to, by accelerating repayments, all to continue to delever the book, reduce our cost of capital and be prepared to refinance our Term Loan B and hopefully get on the other side of that and resume originations and other opportunities.

We thank you all again, and we look forward to speaking to many of you soon and to our next quarterly meeting. Thank you all very much.

That will conclude the Claros Mortgage Trust, Inc. Third Quarter 2025 Earnings Conference Call. Thank you for your participation. You may now disconnect your lines.