Terra Property Trust, Inc. 6.00

Welcome to Terra Property Trust's Quarterly Investor Update Conference call. 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. On today's call, I will provide financial and operational details of our performance for the quarter ended December 31, 2024, and will 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 on 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 these expectations will be attained. Factors and risks that could cause actual results to differ materially from those expected 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 US has been uncertain as the Fed, responding to a surge in inflation to levels not seen in more than four decades, embarked upon one of the longest and steepest tightening cycles.

This uncertainty has pervaded even as the Fed finally 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 any 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, reflected broader investor concerns about the US Economy. The Trump administration's aggressive economic policy so far, has exacerbated market volatility.

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 [indiscernible] was several hundred 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 they were when originated. Owners seeking to refinance likely face lower loan proceeds due to lower coverage and need to inject significant additional capital.

In Commercial Real Estate, which is highly sensitive to interest rates, transaction volume has remained depressed. Regional Banks and Publicly Traded Mortgage REITs before the Fed's tightening were two of the most active lender types 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 recently 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 raising remains very difficult and teams remain mired in asset management and workouts.

Many lenders continue to see loan repayments getting delayed, forcing them to increase CECL reserves and cut dividends. While capital rates -- while cap rates have expanded, they are still offering historically low spreads above debt, suggesting that debt is offering significantly more attractive risk adjusted returns than equity.

As it -- 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'll turn the call over to Mike Muscat, Head of Asset Management for Terra Property Trust to discuss our investment portfolio.

Thanks Greg. We have been executing our business strategy through the lens of a higher for longer interest 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 settle. Higher interest rates that 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 and our portfolio and as we look ahead, we remain committed to loan resolutions and optimizing shareholder value.

At December 31, our portfolio, including both our debt and equity Investments, consisted of 23 assets. Industrial and multifamily assets, including student housing represented nearly half our exposure at approximately 45% of our portfolio.

In terms of investment profile, 64% of the portfolio is value add or stabilized and 20% is under construction or in pre development. Investment structure type is composed of 54% debt, which includes Mortgages, Mezzanine Loans and Preferred Equity.

The remaining 46% are equity investments. Eight 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 borrower repayments. 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 outlet of the industrial and multifamily sectors we're in with a particular focus on select high growth markets and our sponsors deep experience as an 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 in certain additional operational matters.

Thanks Mike. For the fourth quarter of 2024, Terra Property Trust reported a GAAP net loss of $15.6 million or $0.64 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 nonprofit [indiscernible] In the fourth quarter, our GAAP net loss included a non-cash charge of $12.9 million or $0.53 per share on an incremental CECL reserve and $2.3 million or $0.095 per share for depreciation and amortization expense. When excluding these and other non-cash items, the loss was approximately $300,000 or $0.01 per share.

Distributions for the quarter on a per share basis were $0.19 per share. Our CECL reserve at quarter end was $46.2 million or $1.90 per share.

This includes approximately $2 million of General Reserves which represents approximately 1% of the outstanding balance of performing loans. The increase in the General Reserve for Q4 was largely due to incremental fundings on some loans in the portfolio.

The macro assumptions in our CECL model remained relatively unchanged as compared to Q3. The increase in the specific CECL reserve for Q4 is mainly related to an incremental provision on two non-performing loans.

As mentioned in our Q3 call, Q3 reflected significant improvement in earnings exclusive of non-cash charges. Q4 reflects this continued improvement of earnings, exclusive of noncash charges as compared to the first half of 2024.

For both Q4 and Q3, the loss per share for each quarter was $0.01 versus a per share loss of $0.10 in Q2. But as mentioned previously, given the impact of non-performing loans on the company's portfolio and 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 December 31, 2024; we've been able to do this through payoffs in Q3 more than $60 million and Q2 more than $55 million and write offs of the property approximately $16 million of two other non-performing loans.

We are working on resolving the other non-performing loans and believe the Company's profitability should improve over time, though the exact timing remains difficult to predict. For further information on Terra Property Trust's performance, we invite you to review the annual report on Form 10-K for the year ended December 31, 2024, filed with the SEC on June 13, 2025, and our other filings, all of which are available on the SEC's website, www.sec.gov.

As we've been discussing, we are in an environment of heightened uncertainty and volatility and remain mindful and judicious about managing liquidity and the balance sheet as a whole. As a point of reference, compared to December 31, 2023, debt has been reduced by approximately $85 million or 20% as of December 31, 2024.

In February of 2020, we communicated that our Board of Directors set a targeted annualized distribution rate of 5% of net asset value to be periodically realigned based on company performance. As a result, the Board of Directors declared a dividend of $0.032 per share payable on April 30, 2025 to stockholders of record as of April 18, 2025.

While we have seen many other companies in our space reduce their distributions over the past year by anywhere from 25% to 100%, the company has endeavored to maintain the monthly distribution. Given how we see the market, we think realigning the distribution at this time is a prudent step in helping to navigate through the current market to a point when market conditions are more favorable.

This realignment of the distribution is being done to preserve capital and create added financial flexibility as we continue to both work to resolve non-performing loans and delever the balance sheet. Our ultimate objective is to enhance stockholder value over the long term and we will continue to evaluate the distribution in consideration of company performance, general market conditions and REIT taxable income.

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 voluntary object 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-sense stock on a national securities exchange or other potential transactions that provide liquidity to our stockholders. On October 1, 2022, we acquired the emergent Terra Income Fund 6 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 acquired 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 8, 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 a 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 interest 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 listing -- a listing not involving a concurrent public offering of newly issued shares. Candidly, the environment for publicly traded mortgage REITs 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 new origination activity.

If market conditions are not supportive of a direct listing that would, in our view, lead to a constructive trading environment for 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.

I will now take a few minutes to address certain questions that were submitted by investors prior to this call.

The first question is what is the latest update on plans and options for providing shareholder liquidity?

As we just discussed, management continues to explore alternative liquidity transactions including strategic business combinations on an opportunistic basis. One of the key considerations around any strategic transaction is 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 a transaction provides us with immediate scale and potential to generate significant long-term value in 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, a direct listing of our shares of common stock on the 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 of 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 one - voluntary registration of TPT's common stock with the SEC to increase Investor visibility and TPT's ability to pursue an IPO or direct listing.

Two TPT's combination with Terra Income Fund six to increase scale and diversification, creating more favorable conditions for successful IPO or direct listing and TPT's attempted acquisition of WMC, which would have provided TPT stockholders with liquidity through a New York Stock Exchange listed security. As mentioned, timing of these potential options is highly sensitive to market conditions which currently are not conducive to 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 becomes available and appropriate to share.

The next question is on our portfolio and is as follows. Has there been any progress with assets in the non performing category?

Greg, I can address this question. It's another good question.

As discussed earlier in the presentation. Because of market conditions, we continue to see limited transaction volume.

This means that borrowers are taking longer to find replacement, financing or transact a sale. When compared to where we were at the end of Q1, non-performing loans have been reduced in half, both in dollar amount and number, which now stands at four.

The reduction was largely achieved by facilitating the sale and refinancing of the underlying properties to recover our full principal across the entire portfolio. We are working hard in a very difficult market to achieve the best outcome for our investors.

We do get borrower requests for extension and where appropriate, have granted short term extensions to give borrowers the room to execute on business plans and work towards our repayment. We think the reduction in our non-performing loans, both in number and dollar amount, is evidence that our approach is resulting in progress in resolving some of these assets.

In the first quarter of 2025, this approach allowed for the sponsor of a non performing loan in maturity defaults to have time to successfully sell the building, the proceeds from which were used to repay our investment plus accrued interest in full.

Thanks Mike. The next question is what is the company's plans to deal with the looming maturity of the $120 million in notes due in Q1 and Q2 of 2026?

So as you're aware, we do have two outstanding baby bond issuances, both of which mature in the first half of 2026. So we still have more than a year of term remaining on both of these issuances and we have already started the process of looking to refinance all of this debt.

We'll be able to provide more information as we have more definitive plans in the coming quarters.

Oh and so with no other questions that I see, this will conclude our Q&A.

I want to thank everyone for attending our Investor Update conference call. As a reminder, we intend to regularly host these calls going forward.

The timing and logistics of each will be announced in advance and open to all investors. I want to reiterate that we're grateful for your loyalty and support as an investor in Terra Property Trust and we look forward to speaking with you and answering your questions or addressing concerns that you may have.

Please contact Investor Relations at [email protected] and thank you very much.