Terra Property Trust, Inc. 6.00

Thank you, and good morning, everyone. Welcome to Terra Property Trust's quarterly investor update conference call.

As mentioned, I'm Gregory Pinkus, Terra Property Trust's Chief Financial Officer. I'm joined by Michael Muscat, Head of Asset Management for Terra Property Trust.

And on today's call, I will provide financial and operational details of our performance for the quarter ended March 31st, 2025. And we'll then provide an update on Terra Property Trust's liquidity plans.

Finally, we will address selected questions submitted by investors in advance of this call. We will limit items discussed in this call to information that has already been made public.

We would also like to inform you that certain statements made during this call may constitute forward-looking statements. And while we believe the statements are based on reasonable assumptions, we can give no assurance that the expectations will be attained.

Factors and risks that could cause actual results to differ materially from those expressed or implied by forward-looking statements are detailed in our filings with the SEC. And we do not undertake any duty to update any forward-looking statements.

Before discussing our financial results and operational matters, we thought it helpful to discuss our general market overview and Terra's investment strategy. For the last three years, economic sentiment in the U.S.

has been uncertain as the Fed, responding to a surge in inflation to levels not seen in more than four decades, embarked on one of the longest and steepest tightening cycles. This uncertainty has pervaded even as the Fed began easing.

The Fed has not cut rates as quickly or by as much as the markets originally anticipated, and it has remained wary of potential second wave of inflation. The surge in the 10-year Treasury yield, which was highly unusual during the first months of a cutting cycle, reflect broader investor concerns about the U.S.

economy. The market's reactions to the recent tariff battle reflect just how uncertain the current environment is.

We've seen how much human emotion continues to govern investment behavior, and how quickly and broadly a market contagion could spread. The rapid recovery after the worst of the potential tariffs were de-escalated may be the latent uncertainty that remains in the system, ready to rear its head at any given moment.

As far as commercial real estate is concerned, the greatest remaining uncertainty, the Fed's mutual rate policy, remains as muddled as ever. Even optimistic projections for significant rate cuts may not be enough for most properties.

The $1 trillion of commercial real estate loans maturing over the next couple of years were mostly originated when SOFR was 700 basis points lower than it is today. As such, these loans will mature in an environment where rates are projected to be substantially higher than when they were originated.

Owners seeking to refinance will also likely face lower loan proceeds due to lower coverage and need to inject significant additional capital. In CRE, which is highly sensitive to interest rates, transaction volume has remained depressed.

Regional banks and publicly traded mortgage REITs, who before the Fed's tightening were two of the most active lenders in our space of middle-market commercial real estate bridge loans, have been almost completely dormant. The mortgage REITs are trading at significant discounts to book value, can't deploy or raise capital accretively, and are cutting their dividends.

While some lenders have spoken about turning back on their origination efforts after pausing for more than two years, we expect this to be a slow recovery as equity capital markets remain very difficult and teams remain mired in asset management and workouts. Many lenders continue to see loan payments get delayed, forcing them to increase CECL reserves and cut dividends.

While cap REITs have expanded, they are still offering historically low spreads above debt, suggesting that debt is offering significantly more attractive risk-adjusted returns in equity. As this relates to commercial real estate, we believe the general outlook for the industry will remain challenging this year as rates generally remain significantly elevated compared to a few years ago, and borrowers are no longer able to kick the can down the road.

Now I will turn the call over to Mike Muscat, Head of Asset Management for Terra Property Trust, to discuss our investment portfolio.

Thanks, Greg. We continue to execute our business strategy through the lens of a higher-for-longer rate environment.

We continue to believe that a conservative and defensive stance is warranted, given the uncertainty around where interest rates and loan spreads will ultimately stabilize. Higher interest rates have translated into higher financing costs for borrowers, with many continuing to contend with negative leverage.

We have experienced repayments to be slow and repayment timing to be less predictable. Further, it is likely that these trends will continue to impact our borrowers in our portfolio, and as we look ahead, we remain committed to loan resolutions and optimizing shareholder value.

As of March 31st, our portfolio, including both our debt and equity investments, consisted of 20 assets. Industrial and multifamily assets, including student housing, represented nearly half our exposure at approximately 48% of our portfolio.

In terms of investment profile, 61% of the portfolio is value-add or stabilized, and 22% is under construction or in pre-development. The rest is corporate-level debt.

Investment structure type is composed of 50% debt, which includes Mortgages, Mezzanine Loans, and Preferred Equity. The remaining 50% are equity investments.

Seven of our investments have contractual maturities over the next 12 months, which we expect to either repay via refinance or exercise a contractual extension option. As noted earlier, as a result of current market conditions, we have been experiencing delays in borrow repayments.

However, we did see three of our investments successfully repay in full via refinance or sale in the first quarter. Our team continues to focus on proactive asset management, and we are in close and continual contact with the sponsors in our portfolio.

As we work with borrowers, we expect them to not only demonstrate an operational commitment to their assets, but a financial commitment to them as well. We continue to have conviction in the long-term outlook of the industrial and multifamily sector, with a particular focus on select high-growth markets and our sponsors' deep experience as a co-owner, operator, and developer has informed our asset management approach.

Now, I will turn the call back over to Greg to discuss our financial results and certain additional operational matters.

Thanks, Mike. For the first quarter of 2025, Terra Property Trust reported a GAAP net loss of $1.3 million, or $0.05 per share, both basic and fully diluted.

As noted in our prior quarter investor update calls, there has been a decrease in interest income as a result of non-performing loans. In the first quarter, our GAAP net loss included a non-cash charge of $2.1 million, or $0.087 a share, on an incremental CECL reserve and a $1.9 million, or $0.08 per share, for depreciation and amortization expense.

When excluding these and other non-cash items, distributable earnings for the quarter was approximately $2 million of profit, or $0.07 per share. Distributions for the quarter on a per-share basis were $0.19 per share.

Our CECL reserve at quarter end was $48.4 million, or $1.90 per share. This includes approximately $1.5 million of general reserves, which represents approximately 1% of the outstanding balance on performing loans.

The decrease in the general reserve for Q1 was largely due to partial paydowns on some of the outstanding balances and amortization of term on some longer-term loans in the portfolio. The macro assumptions in our CECL model remain relatively unchanged as compared to year-end.

The increase in the specific CECL reserve in Q1 is mainly related to incremental provisions on two non-performing loans. As highlighted in the previous quarterly calls, we continue to make improvement in earnings exclusive of non-cash charges.

Q1 reflects this continued improvement as compared to the first half of 2024. Q1 of 2025 includes approximately $2.5 million of default interest collected on repayment of a loan that had been categorized as non-performing since Q1 of 2024.

Although we had other options for exiting this investment sooner, we chose a path to best increase the amount realized, which included working with the borrower to facilitate a sale as we exercised our rights. But as mentioned previously, given the impact of non-performing loans on the company's profitability, we expect our earnings to be below our dividend in the near term.

As mentioned, we continue to make progress in this regard, having reduced the number of non-performing loans at the end of 2023 from six to four as of March 31st, 2025. We have approximately $150 million of payoffs on non-performing loans over the past year and are working on resolving the other non-performing loans, and believe the company's profitability should improve over time, although the exact timing remains difficult to predict.

As we've been discussing, we're in an environment of heightened uncertainty and volatility and remain mindful and judicious about managing liquidity and the balance sheet as a whole. This includes a systematic reduction of debt, which over the course of Q1 of 2025 was reduced by approximately $39 million or 10% as compared to December 31st, 2024, and by more than $105 million or 26% less as compared to December 31st of 2023.

Additionally, we have two issuances of unsecured baby bonds coming due with the TFSA issuance maturing on March 31st, 2026, and the TPTA issuance maturing on June 30th of 2026. We are currently working on efforts to refinance or repay both.

For further information on Terra Property Trust's performance, we invite you to review the quarterly report on Form 10-K for the quarter ended March 31st, 2025, filed with the SEC on May 9th, 2025, and our other files, all of which are available on the SEC's website, www.sec.gov. Just to briefly touch upon distributions, in line with last month's dividend, the Board of Directors declared a dividend of $0.032 per share, payable on May 31st, 2025, to stockholders of record as of May 21st, 2025, and $0.032 cents per share, payable on June 30th, 2025, to stockholders of record as of June 20th, 2025.

I would now like to review the steps we have taken to date to best position ourselves to ultimately provide liquidity to our stockholders. In 2016, Terra Property Trust voluntarily registered its common stock with the SEC and became a public reporting company.

Terra Property Trust chose to voluntarily subject itself to the SEC's public reporting requirements, in part to provide our investors with enhanced visibility and transparency, and to improve our ability to efficiently pursue an IPO, direct listing of our common stock on a national securities exchange, or other potential transactions that would provide liquidity to our stockholders. On October 1st, 2022, we acquired via merger, Terra Income Fund 6, Inc., or Terra BDC, a specialty finance company that invested in commercial real estate loans, preferred equity real estate investments, and select commercial real estate-related debt securities.

We acquire Terra BDC primarily because the transaction enhanced our diversification and scale, thereby creating more favorable conditions for a successful IPO or direct listing of our common stock on a national securities exchange. In June of 2023, we entered into a merger agreement with Western Asset Mortgage Capital Corporation, or WMC.

On August 8th, 2023, WMC terminated the merger agreement in accordance with its terms to pursue what the WMC Board of Directors deemed a superior unsolicited acquisition proposal. If completed, the merger with WMC would have resulted in our stockholders ultimately receiving shares of common stock that were listed on the New York Stock Exchange and freely transferable, thus providing them with path to liquidity.

Our voluntary registration with the SEC, our acquisition of Terra BDC, and, although ultimately not successful, our diligent pursuit of the WMC merger are indicative of our continued focus on the maximization of value and pursuit of liquidity on behalf of our stockholders. Today, Terra Property Trust continues to evaluate a variety of potential liquidity transactions that would be in the best interests of our stockholders, including a listing of our shares of Class A common stock on a national securities exchange, an adoption of a share repurchase plan, or a merger or other strategic business combination.

One of the potential liquidity transactions that we continue to evaluate is a direct listing of our Class A common stock on a national securities exchange. That is, a listing not involving a concurrent public offering of newly issued shares.

Candidly, the environment for publicly traded mortgage rates has remained challenging for the past two years, as even the largest names have traded at material discounts to book value and remain almost completely dormant in terms of origination activity. If market conditions are not supportive of a direct listing that would, in our view, lead to constructive trading of our Class A common stock, we will continue to explore alternative paths to pursue our investment strategy and provide liquidity to our investors, including converting into a traditional non-traded REIT.

As part of a potential conversion to a non-traded REIT, we would adopt a customary share repurchase plan, pursuant to which our investors could request to have their shares redeemed for cash. To this end, Terra Property Trust has amended its articles of amendment and restatement to provide its Board of Directors with greater flexibility to pursue a direct listing.

Terra Property Trust's amended and restated articles also incorporate the provisions generally required by state regulators in order to become a non-traded REIT and publicly sell shares of stock not listed on an exchange. These non-traded REIT provisions will spring into effect if we ultimately decide to register and sell our shares in a non-traded REIT format.

As mentioned, management continues to explore alternative liquidity transactions, including strategic business combinations on an opportunistic basis. One of the key considerations around any strategic transactions pricing, as mentioned earlier in the call, market conditions are not particularly favorable right now, with comps trading on average at close to 60% of book value.

So, as we think about potential transactions, we must consider both the value we would get for TPT's equity and if such transaction provides us with immediate scale potential to generate significant long-term value and liquidity for our stockholders. In this vein, I want to note that TPT has previously disclosed in its SEC filings that it will explore alternative liquidity transactions.

As a reminder, examples of alternative liquidity transactions, which may be available to us, include an IPO, the direct listing of our shares of common stock on a national securities exchange, the adoption of a share repurchase plan or a strategic business combination in each case, which may include the further in-kind distribution of our shares of common stock indirectly owned by certain of our affiliate funds to the ultimate investors in such affiliate funds. And as we have discussed, the timing and success of any such transaction will depend on market conditions and the assessment of our management.

We believe we have demonstrated our commitment to delivering value, transparency and liquidity to our stockholders, including through the voluntarily registration of TPT's common stock with the SEC to increase investor visibility and TPT's ability to pursue an IPO or direct listing. TPT's combination with Terra Income Fund 6 Inc to increase scale and diversification, reading more favorable conditions for a successful IPO or direct listing and TPT's attempted acquisition of WMC, which would have provided TPT stockholders with liquidity through an NYSE listed security.

So as mentioned, the timing of these potential options is highly sensitive to market conditions, which currently are not conducive to a transaction that we believe appropriately values TPT. We continue to diligently explore mechanisms available and look forward to providing you with information on future liquidity transactions as it becomes available and appropriate to share.

The next question is, what is the company's plans to deal with the looming maturity, the $120 million of notes due in Q1 and Q2 of 2026? And as I've mentioned earlier, we have two baby bond issuances maturing in the first half of 2026.

So, at this point, we have approximately a year of term remaining on these and have already started the process of looking to refinance this debt. We'll provide more information to investors as information becomes available and appropriate to share.

And with that, no other questions. This will conclude our Q&A.

Thank you for attending our investor update conference call. And as a reminder, we intend to regularly host these calls going forward.

The timing and logistics of each call will be announced in advance and open to all investors. We're grateful for your loyalty and support as an investor in Terra Property Trust.

We look forward to speaking with you and answering any questions or addressing your concerns you may have. Please contact Investor Relations at 212-753-5100 or via email at [email protected] with any questions.