CMTG

Good morning, and welcome to Claros Mortgage Trust first quarter earnings conference call. My name is Tracy, and I will be your conference facilitator today. All participants will be in a listen only mode. After the speaker's remarks, there will be a question and answer period. If you would like to ask a question at that time, please press star 1 to raise your hand. To withdraw your question, press star 1 again. 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 Michael 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, multi-family 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. 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, and 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 watchlist loans, repositioning our REO assets, and de-leveraging 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 de-leveraging, 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 watchlist 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, and 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 five investments, four of which were watch list loans. As discussed in our fourth quarter earnings call, we resolved two loans via regular way repayment. The first was a 2-rated $174 million multi-family 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 two 5-rated loans during the quarter.

A $77 million Dallas multi-family loan resolved through foreclosure and a $71 million Seattle office loan resolved by transferring our rights and interests to the financing counterparty. Our fifth loan resolution of 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 sub-market, 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 de-lever 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 1 additional watch list loan through foreclosure. The $25 million loan was collateralized by a multi-family 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 31st compared to $3.7 billion at December 31st. 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 watchlist 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 one multi-family loan from a three to a four risk rating and placed another four-rated multi-family loan on non-accrual. The downgrade is related to a $127 million loan collateralized by a portfolio of Texas multi-family 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 multi-family 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 four and five-rated loans, down from 24 four and five-rated loans at March 31, 2025, demonstrating our commitment to resolving watchlist 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 on 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 31st to $399 million, or 11.4% of UPB. Our general CECL reserve decreased from $78 million at December 31st, or 2.9% of loans subject to our general CECL reserve, to $50 million at March 31st, 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 watchlist 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?

Thank you. We will now begin the question and answer session. If you would like to ask a question, please press star and 1 now to raise your hand. To withdraw your question, press star 1 again. We ask that you pick up your handset when asking a question to allow for optimum sound quality. If you're muted locally, please remember to unmute your device. Please stand by now while I compile the Q&A roster. Your first question comes from the line of Jade Rahmani with KBW. Your line is open. Please go ahead.

Thanks very much. Considering, the non-accruals currently total $1.55 billion on 11 loans, around 44% of the portfolio, you know, 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? You know, 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, you know, moving out of a number of these right now.

Okay. I don't know if Priyanka wants to chime in, maybe if you could just quantify the range of-

Yeah

of dollars of sale processes that are underway.

Yeah, I think, Jade-

Yeah. Hi, hi, Jade. It's Priyanka.

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 in with respect to loans or carrying value with respect to REO.

Yeah. Hi, Jade. It's Priyanka. Just to add to that, half of those, 4 out of 8 are loans, and it's about three quarters of the $860 million that relates to loans. All 4 are on the watchlist, and all 4 are on non-accrual. It's a, it's a good chunk of the non-accrual number.

Okay. I mean, is there a target when I look at risk 4 or 5 loans, $1.75 billion and then REO 765? 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, you know, about $2.5 billion. How much of that, you know, do you think there's line of sight into somehow exiting in the next few quarters?

I mean, as Richard and Mike both said, we're very, very focused on turning over the books. Our watchlist loans 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 five 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. We, you know, hard to handicap how that occurs, 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.

Okay. Thanks very much.

A reminder that if you would like to ask a question or a follow-up at this time, please press star one on your telephone keypad now to do so. I will pause for a moment to compile the Q&A roster. 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 1st 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 and 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 Fourth Quarter 2025 Earnings Conference Call. My name is Becky, 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's 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, Anh, 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 watchlist 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 watchlist loans, representing an aggregate UPB of $1.3 billion. This activity reflects our commitment to repositioning the portfolio by transitioning out of watchlist loans through thoughtful and decisive action. We also generated significant liquidity over the course of the year, which we used to meaningfully delever the portfolio and to reduce corporate debt. This momentum has carried into the new year with $389 million of full loan repayments happening, including a New York City land loan that was a watchlist 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 (sic) [ $712 ] 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 watchlist 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 watchlist loans and work through our REO assets. Our goal is to position the company to begin to evaluate new lending opportunities towards the end of 2026 and lay the groundwork for portfolio growth in subsequent years. Before turning the call over to Mike, I want to acknowledge that the last 24 months have been the most challenging business period of my career and for many others in the real estate industry. 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, one on a multifamily asset and the other on 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 loan. 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 and tenancy. The borrower was motivated to arrive at a resolution due to additional credit support that had been provided. This transaction enabled us to resolve a watchlist loan, reduce CMTG's office exposure and generate approximately $35 million in net liquidity for CMTG, which was then used to reduce outstanding debt. The discounted payoff resulted in a $46 million principal charge-off. However, it's worth noting that the impact to 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 watchlist 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 foreclosing 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 determined the most prudent path was to transfer our rights and interests in our loan and the underlying collateral to the financing counterparty. Turning to portfolio credit. During the fourth quarter, the portfolio experienced a mix of ratings, upgrades and downgrades. We downgraded a $220 million loan collateralized by a luxury hotel property located in Northern California to a 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 the 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 a $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 and the previously mentioned $46 million principal charge-off relating to the Connecticut office loan. It's important to note that of the $283 million specific 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 REO asset during the quarter. As a reminder, we completed the commercial condominiumization of the building in May. And as of year-end, we've sold all of the office floors as well as the signage component, generating total gross proceeds of $67 million, which was generally in line with our carrying value. We now intend to conduct a sale process for the fully leased retail component of the property. We believe this asset has served as an example of how we can leverage our sponsors' 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 opportune 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 SOFR 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 relaxed financial covenants across all of our financing facilities, which provides additional flexibility to execute our business plan going forward. Over the course of 2025, we decreased our net debt-to-equity ratio from 2.4x at December 31, 2024, to 1.9x at December 31, 2025. Following the closing of the senior secured term loan, we now have $153 million in liquidity, representing a $51 million increase compared to the prior year-end despite the significant deleveraging that occurred in 2025. We accomplished a great deal in 2025, and we recognize there is more work ahead. By resolving watchlist loans, generating liquidity, reducing leverage and subsequently addressing the Term Loan B maturity, we have strengthened the balance sheet and positioned the company well for the coming year. We look forward to building on this progress as we continue to execute across the portfolio. I would now like to open the call up to Q&A. Operator?

[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 one transaction in the space where a REIT who was 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 a much more transparent and easier to understand business. And I think we have to wait until we're able to deliver that before we can really understand if the market can evaluate our business properly. And so I think that's where we are headed at the moment.

Okay. And then to follow that up, [ NAI ] has fall -- has been cut in half throughout the -- over the course of the year. I am curious as we head into Q1 '26 and you think about the nonaccruals and the movement in the portfolio, NII just 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 way 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 I think 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 one last question. I apologize for asking -- going first and then asking so many questions. But obviously, you guys are -- 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, and I apologize, I won't look up 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 Priyanka. I'll take that one. I'll start. 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 watchlist. And year-to-date, we've already resolved 3 additional loans on our watchlist. 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, foreclosures, 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 -- I was just going to say, I think we -- 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 realize 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 can't -- 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 Nickodemus 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 REO assets over the course of 2026. We -- given the deleveraging that we've done, we now have a pretty significant level of liquidity cushion over a minimum liquidity requirement. And faced with that and a very de minimis amount of future funding on our -- that we expect to occur on our existing loan portfolio, we feel that our liquidity is in a very good position right now. And to the extent we generate incremental liquidity above those levels, 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 watchlist?

So John, thanks for that. This is Richard. I think we're in a much more constructive environment such that things that we had held off resolving, we're going to have much better performance out of. However, I want to say that the market is not fully back. Transaction volume is still lower than we had anticipated we'd be by this time. So I think we are trying to both react to the market and make the best execution that we can while being mindful that we need to quickly clean up our book. So it's a balance. I think on the whole, we are more focused on execution and delivering a clean book than we are waiting for the market to recover, but we're getting a little bit of the benefit of having waited on some of the assets that we're going to be able to resolve this year. And 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 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 than 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. The 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 one that we're holding unlevered. 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 spending 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 one last quick one, if I could. Does the new term loan allow financing of watchlist 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 aren't -- even though it's senior secured, it's more of a corporate mezzanine loan kind of structure as opposed to an asset-specific financing structure, which is what we use at the direct asset level.

Got it. Makes lot of sense.

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 watchlist loans, enhancing liquidity, deleveraging the book by $2 billion. In 2025, there was $2.5 billion of resolutions. 2026, almost $400 million so far. We got the TLB retired. We now have a relationship with HPS, 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 markets in general. And so while we're not here to declare victory, we are seeing life at the end of the tunnel, and we are getting closer to a clean book that we expect will allow the [ 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. Thank you for joining us. You may now disconnect.