Executive Summary / Key Takeaways

• Claros Mortgage Trust is strategically pivoting towards aggressive balance sheet optimization, prioritizing liquidity generation and accelerated resolution of watch list loans over maximizing value on every single asset in the immediate term.
• Recent and anticipated loan realizations, including sales and discounted payoffs, are expected to generate significant liquidity, with management targeting just under $2 billion in gross proceeds and anticipating 40% of finalized proceeds to boost cash reserves in the coming quarters.
• The company is selectively pursuing taking ownership of cash-flowing multifamily assets as Real Estate Owned (REO), leveraging its sponsor's operational expertise and a new dedicated financing facility to manage and enhance value in a sector believed to have strong long-term fundamentals.
• Despite recent GAAP losses driven by credit loss provisions and valuation adjustments, management focuses on Distributable Earnings prior to realized losses as a key performance indicator and views the stock as significantly undervalued relative to its book value and expected recoveries.
• Future performance and the ability to meet financial covenants depend on successful execution of the resolution strategy, market conditions, and the ability to manage unfunded commitments and upcoming debt maturities, including the Term Loan B in 2026.

A Pivotal Moment in Transitional CRE Lending

Claros Mortgage Trust, Inc. (CMTG) was established in 2015 with a clear mandate: to build a diversified portfolio of income-producing loans collateralized by institutional quality transitional commercial real estate (CRE) in major U.S. markets. Operating as a REIT and externally managed by an affiliate of Mack Real Estate Credit Strategies, L.P., CMTG positioned itself as a specialist lender leveraging its sponsor's deep real estate development and operational expertise. The core strategy centered on originating senior and subordinate loans, intending to hold them to maturity, and financing these investments through various secured facilities.

The past few years have tested this model, as the CRE market grappled with the dual pressures of elevated interest rates and shifting property fundamentals. This environment led to slower loan repayments, increased borrower stress, and a rise in watch list and non-accrual loans, impacting financial performance and liquidity. In response, CMTG has entered a pivotal phase, strategically shifting its focus from patient, value-maximizing workouts on every asset towards a more aggressive approach centered on balance sheet optimization, liquidity enhancement, and accelerated resolution of challenged positions.

In the competitive landscape of commercial mortgage REITs, CMTG operates alongside larger, more diversified players like Starwood Property Trust (STWD) and Blackstone Mortgage Trust (BXMT), as well as more specialized lenders like Arbor Realty Trust (ABR) and broader mortgage market participants like Annaly Capital Management (NLY). While precise, directly comparable market share figures for all niche competitors are not publicly detailed, CMTG holds an estimated 5-10% aggregate market share in U.S. commercial mortgage REITs. Its strengths lie in its focused niche on transitional U.S. CRE, its REIT structure offering tax advantages that can translate to attractive dividend yields (though currently paused), and established borrower networks that can facilitate faster deal closures. However, it faces disadvantages in scale compared to giants like STWD and BXMT, potentially leading to higher operating costs per loan and less access to the most sophisticated technological platforms for underwriting and asset management that larger firms or those with institutional backing might possess. While some competitors are noted for advanced digital platforms or AI underwriting, specific details on CMTG's proprietary technology or its quantifiable advantages in this area are not available. The company's competitive response in this challenging market is to lean heavily on its sponsor's fundamental real estate expertise and actively manage its portfolio and financing relationships.

Portfolio Evolution and Performance Under Pressure

As of March 31, 2025, CMTG's held-for-investment loan portfolio stood at $5.98 billion (unpaid principal balance), down from $6.20 billion at December 31, 2024. This decrease reflects the accelerating pace of resolutions. The portfolio remains concentrated in multifamily (44% of carrying value), followed by hospitality (19%) and office (15%). Geographically, the West (33%), Northeast (24%), and Mid-Atlantic (13%) represent the largest exposures.

The challenging market has led to credit migration. As of March 31, 2025, 36% of the portfolio's carrying value was rated 4 ("High Risk - Potential for Loss") and 10% was rated 5 ("Impaired - Loss Likely"). This compares to 36% rated 4 and 9% rated 5 at December 31, 2024. The weighted average risk rating stood at 3.50 at March 31, 2025, a slight improvement from 3.60 at December 31, 2024, weighted by unpaid principal balance. Loans on non-accrual status represented 17.0% of the held-for-investment portfolio by carrying value at March 31, 2025, up from 15.3% at December 31, 2024.

The company's current expected credit loss (CECL) reserve reflects these pressures. As of March 31, 2025, the total CECL reserve was $260.8 million, representing 4.4% of the total unpaid principal balance of held-for-investment loans. This is an increase from $266.4 million (4.3% of UPB) at December 31, 2024, and a significant rise from $180.4 million (2.6% of UPB) at March 31, 2024. The provision for current expected credit losses was $41.1 million for the three months ended March 31, 2025, compared to $29.9 million for the three months ended December 31, 2024, and $70.0 million for the three months ended March 31, 2024. The Q1 2025 provision included a $3.9 million reversal of the general CECL reserve (attributed to changes in historical loss rates, portfolio seasoning, and reduced portfolio size) and a $45.0 million increase in the specific CECL reserve (attributed to changes in collateral values and protective advances).

Recent portfolio activity highlights the strategic shift. In Q1 2025, the company completed the sale of a $101 million senior hotel loan at par and executed a discounted payoff of a $183 million New York land loan at 90% of par. While the discounted payoff resulted in a $22.3 million charge-off, it generated approximately $95 million in liquidity and reduced exposure to land in New York City. Subsequent to Q1 2025, additional realizations included a full repayment of a $225 million hotel loan and a discounted payoff of an $88 million Houston office loan at 72% of UPB, further reducing office and hospitality exposure and contributing to liquidity.

The company also holds real estate owned (REO) assets acquired through loan resolutions. The New York hotel portfolio, acquired via foreclosure in 2021, was classified as held-for-sale at December 31, 2024, with an $80.5 million loss recognized based on anticipated sale price, less costs. An additional $49 thousand loss was recognized in Q1 2025 due to capital expenditures. A New York mixed-use property, acquired via assignment-in-lieu in 2023, had a carrying value of $143.1 million at March 31, 2025, and was pledged as collateral to a term participation facility. Subsequent to Q1 2025, a binding agreement was reached to sell approximately 77,000 square feet of office and retail space within this asset for $28.8 million.

Financials Reflect Strategic Transition

CMTG reported a GAAP net loss of $78.6 million, or $0.56 per share, for the three months ended March 31, 2025. This follows a net loss of $100.7 million, or $0.72 per share, for the three months ended December 31, 2024, and a net loss of $52.8 million, or $0.39 per share, for the three months ended March 31, 2024.

Net interest income decreased to $28.8 million in Q1 2025 from $32.5 million in Q4 2024 and $44.9 million in Q1 2024. This decline was primarily driven by a decrease in interest income ($118.0 million in Q1 2025 vs. $132.6 million in Q4 2024 and $160.8 million in Q1 2024) resulting from decreased average loan balances and an increase in non-accrual loans. This was partially offset by a decrease in interest expense ($89.2 million in Q1 2025 vs. $100.1 million in Q4 2024 and $115.9 million in Q1 2024) due to lower average borrowing levels as the company deleverages.

Revenue from real estate owned was $14.6 million in Q1 2025, down from $27.8 million in Q4 2024 (due to seasonality at the hotel portfolio) but up from $13.9 million in Q1 2024 (due to higher performance at the hotel portfolio). Total net revenue was $43.4 million in Q1 2025, down from $60.2 million in Q4 2024 and $58.8 million in Q1 2024.

Expenses totaled $37.6 million in Q1 2025, a decrease from $42.6 million in Q4 2024 and $39.2 million in Q1 2024. This was mainly due to lower operating expenses and depreciation on the hotel portfolio (classified as held-for-sale) and lower management fees, partially offset by higher general and administrative expenses.

Beyond core revenue and expenses, the significant GAAP losses were driven by non-cash items and credit-related adjustments. The provision for current expected credit loss reserve ($41.1 million in Q1 2025) and valuation adjustment for loan receivable held-for-sale ($42.6 million in Q1 2025) were major contributors to the net loss.

Management emphasizes Distributable Earnings/Loss as a key performance metric. For Q1 2025, Distributable Loss was $35.7 million, or $0.25 per share. Distributable Earnings prior to realized gains and losses (which excludes credit provisions, charge-offs, and valuation adjustments) was $11.6 million, or $0.08 per share. This compares to Distributable Loss of $83.2 million ($0.59/share) and Distributable Earnings prior to realized gains and losses of $25.4 million ($0.18/share) in Q4 2024. The Q1 2025 Distributable Loss includes $46.7 million in principal charge-offs and charge-offs of accrued interest/exit fees.

Book value per share was $13.60 at March 31, 2025, down from $14.12 at December 31, 2024. Adjusted book value per share (excluding general CECL reserve and REO depreciation/amortization) was $14.64 at March 31, 2025, compared to $15.17 at December 31, 2024.

Liquidity, Financing, and the Path Forward

Enhancing liquidity and reducing leverage are central to CMTG's strategy in 2025. As of March 31, 2025, total liquidity (cash and approved/undrawn credit capacity on existing collateral) was $135.6 million, up from $101.7 million at December 31, 2024.

The company's financing structure includes repurchase agreements ($3.04 billion outstanding), a term participation facility ($487.0 million outstanding), notes payable ($165.5 million outstanding), a secured term loan ($709.1 million net carrying value), and debt related to real estate owned ($275.2 million outstanding). The weighted average spread on these financings was SOFR plus 3.14% at March 31, 2025. The secured term loan matures in August 2026 and will become current in August 2025. Management is evaluating options for this facility, including an amend and extend or private credit solutions, expecting to make a meaningful principal paydown as part of the transaction.

CMTG is actively working with its financing counterparties. In Q2 2024, the company significantly expanded a relationship with its largest counterparty and completed covenant modifications on repurchase facilities, reducing minimum required interest coverage and tangible net worth levels to provide flexibility. As of March 31, 2025, the company was in compliance with all financial covenants, but future compliance depends on operating results and market conditions.

Unfunded loan commitments totaled $457.4 million at March 31, 2025. While the company has $266.8 million in-place financings for these, $132.5 million of net commitments are subject to borrowers meeting future funding conditions. Management expects these net commitments to be funded over a weighted average future funding period of 1.7 years.

A key strategic initiative is the selective acquisition of cash-flowing multifamily assets as REO. Management believes these assets, particularly those currently rated 4 or 5, have substantial upside under their management, leveraging the sponsor's expertise. In Q1 2025, CMTG closed a $214 million facility specifically to finance non-performing loans through the REO stage. This facility is structured so that the advance rate upon foreclosure is consistent with current financing levels, avoiding a liquidity outflow for the initial asset pool conversion. Management expects to convert at least two loans into REO using this facility in Q2 2025.

The company has identified sales and refinancing transactions underway with the potential to generate just under $2 billion in gross realization proceeds. Management anticipates finalizing between one-third and two-thirds of this total in the coming quarters, with approximately 40% of those proceeds expected to increase liquidity for accretive redeployment. This aggressive pursuit of realizations through loan sales, discounted payoffs, and foreclosures is a core component of the strategy to enhance liquidity, reduce watch list loans, and deleverage, including targeting higher-cost debt.

The decision to pause the common stock dividend starting in Q4 2024 was made to preserve capital and enhance financial flexibility, having met the 2024 REIT distribution requirements. This preserved capital is intended for strategic allocation, including investing in REO, paying down debt, and potentially buying back debt or stock, rather than being solely tied to expected distributable earnings.

Risks and Outlook

CMTG faces significant risks, including continued market volatility and uncertainty stemming from macroeconomic conditions, interest rate fluctuations, and geopolitical events. These factors can impact property values, borrower ability to repay, and the availability and cost of financing. The concentration of risk in multifamily, hospitality, and office sectors, as well as specific geographic locations, adds vulnerability. The ability to successfully execute the resolution strategy, including achieving anticipated sale prices or managing REO assets effectively, is crucial. Future compliance with financial covenants and the ability to refinance or repay upcoming debt maturities, particularly the Term Loan B, are also key concerns.

Despite these challenges, management expresses confidence in its strategic pivot. The focus on accelerating resolutions and generating liquidity is seen as a necessary response to the current environment. The selective REO strategy, leveraging the sponsor's operational expertise and dedicated financing, is viewed as an opportunity to create value from distressed assets. The expected acceleration in realizations and the potential for significant liquidity generation provide a clearer path to strengthening the balance sheet and positioning the company for potential future market improvements.

Conclusion

Claros Mortgage Trust is undergoing a significant strategic transformation, shifting its primary focus to aggressive balance sheet management and liquidity generation in a volatile CRE market. While recent financial results reflect the ongoing challenges through credit losses and valuation adjustments, the company's proactive approach to resolving watch list loans through sales, discounted payoffs, and selective REO conversions aims to stabilize the portfolio and enhance financial flexibility. The success of this strategy, particularly the ability to execute planned realizations and manage REO assets effectively, will be critical. Investors should monitor the pace of these resolutions, the impact on liquidity and leverage, and the company's ability to navigate upcoming debt maturities. The current valuation, viewed by management as significantly undervalued, hinges on the successful execution of this pivot and the potential for value creation from the optimized portfolio and REO assets as market conditions evolve.