Claros Mortgage Trust, Inc.

Welcome to Clara's Mortgage Trust Third Quarter 2021 Earnings Conference Call. My name is Alex 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. To ask a question, you can press star 1 on your telephone keypads. I would now like to hand over the call to Arne Wynne, Vice President of Investor Relations for Claris Mortgage Trust. Please proceed.

Thank you. I'm joined by Richard Mack, Chief Executive Officer and Chairman of Claris Mortgage Trust, and Mike McGillis, Chief Financial Officer and Director of Claris Mortgage Trust. We also have Kevin Cullinan, Executive Vice President, who leads Emrex Originations, and Priyanka Garg, Executive Vice President who leads MREX Asset Management. Prior to this call, we distributed CMTG's earnings supplement. We encourage you to reference these documents in conjunction with the information presented on today's call. If you have any questions following today's call, please contact me. I'd like to remind everyone that today's call may include forward-looking statements which are uncertain and outside of CMTG's control. Forward-looking statements imply risk and uncertainty, and actual results may differ materially from expectations. You should not place undue reliance on these forward-looking statements, and we do not undertake any obligation to update or correct any forward-looking statements if later events prove them to be inaccurate. In addition, we will also refer to certain non-GAAP financial measures. For non-GAAP reconciliations, please refer to the earnings supplement. I would now like to turn the call over to Richard.

Thank you, Ann, and good morning, everyone, and thank you for joining us. As many of you know, Clarus Mortgage Trust recently completed its initial public offering, marking an important milestone in our evolution. During the company's formative years, we made the strategic decision to scale the business before going public. We did that to provide our initial investors with a non-mark-to-market investment with a steady dividend, but more importantly, we believe that debuting as a public company with both scale and a multi-year track record with best position clariffs, or CMPG, with a lower cost of capital to fuel dividend growth. Since this is our first earnings call as a public company, I'd like to welcome our new investors and recognize and thank our foundational investors for getting us here. We appreciate all of your support and we look forward to sharing our progress with you in the quarters and years ahead. Let me begin today with a quick background on our company for those of you who may be new to CMTG. Our investment strategy is to focus on lending opportunities in the transitional commercial real estate sector that are secured by high quality assets with institutional grade sponsorship. Transitional CRE lending was dominated largely by banks, pretty .frank. However, today, non-bank alternative lenders such as CMTG are increasingly providing capital for this segment of the market. Transitional properties are assets that require some level of repositioning, renovation, leasing, development, or redevelopment in order to maximize value. Currently, we lend on assets located in the United States, where our sponsor, Mac Real Estate Group, has a significant presence, either through boots on the ground or existing infrastructure and or deep experience. One of CMTG's key differentiators is that we are affiliated with Mac Real Estate Group, a commercial real estate owner, operator, property manager, developer, investor, and lender associated roots dating back to the 1960s. Mack Real Estate Group, or MREG, has a proven track record and established a scaled platform with more than 220 employees across the U.S. CMTG is distinct from many alternative lenders in that we employ an ownership mindset towards lending. Our sponsors roots as an owner, operator, and developer with decades of real estate experience enables us to fully appreciate and understand our borrowers' collateral and business plan. We believe this vantage point enables us to underwrite transitional loans more effectively and ultimately be better capital partners to our borrowers. Our investment portfolio primarily comprises assets owned by premier commercial real estate institutions in addition to many repeat borrowers who choose us for the following reasons. we have proven ourselves time and again to be a dependable, reliable source of debt capital. We understand complexity and we can participate in large-scale institutional projects. And lastly, we have the expertise to create bespoke lending solutions for our borrowers. Our ownership mindset also serves as the foundation for how we manage risk and our investment portfolio. What this means is, in part, that we only lend on assets that we would want to own in markets we know well and a basis we find compelling. Fundamentally, we believe that taking an appropriate level of execution risk rather than basis risk and excess financial leverage by levering our balance sheet too much provides for better risk-adjusted returns to our investors. Past cycles have proven to us time and time again that it is extremely difficult to resolve problems that stem from excessive lending or excessive balance sheet leverage. At the loan level, we drive our underwriting process with a focus on assessing execution risk. It involves extensive analysis and due diligence that is reviewed by a cross-functional executive team from across our platforms. We also place an emphasis on structuring our loans in a way that allows us to mitigate risk and identify problems early. Finally, given our focus on basis, we often require borrowers to have significant subordinate capital to protect. This proactive approach to asset management also provides us with a competitive advantage in that it is continuous, comprehensive, and is supported across the broader MRAG organization throughout the life of the loan. Our asset management team is integrated into the originations process and monitors and holds our borrowers accountable to their business plans as reflected in the loan documents. When there are planned variances, our asset management team often collaborates with the broader MRAG platform in order to work with our borrowers to help effectuate positive outcomes. And because of our significant local management and development presence on the ground, we usually know about potential problems at the asset before the borrower reports them to us. Since commencing operations in 2015, we have originated over $12.6 billion of investments, which reflects the strength of our business model and origination's capabilities. Since our formation, we have not incurred any credit losses, and we have only taken over one loan out of the 95 we have originated. Lastly, CNTG has a weighted average IRR of 13.2% on our realized loans, which we are very proud of. Now turning to the quarter. During third quarter, we significantly increased CNTG's origination activity, closing more than $900 million in floating rate transitional loans which represents an annualized origination run rate in line with the $4 billion of originations CNTG achieved in 2018 and 2019 pre-COVID on a smaller capital base. We originated loans in several high-growth markets, such as Austin, Texas, and Atlanta, Georgia. Historically, we've been very active in coastal gateway markets, And recently, we've been capitalizing on the favorable demographic trends and underlying job and rent growth in other select markets. We have the benefit of following our equity investment groups lead into these markets. This is where we are most active on the equity side now, given our pre-COVID pivot and more recent acceleration of investments into these markets. We believe these high-growth markets offer attractive returns on a relative basis while providing CMTG with an opportunity to further diversify its portfolio. Back to our portfolio, during the quarter we also added industrial exposure and capitalized on attractive opportunities in certain out-of-favor asset classes such as the hospitality and office sectors. The largest loan we originated during the quarter was the refinancing of a $225 million loan on a hotel located in Savannah, Georgia. The collateral is a drive-to leisure asset that is duly constructed, luxury branded, and it is reporting strong occupancy at ADR despite the uneven recovery across the hospitality sector. We also closed a $167 million construction loan for an industrial project located in Atlanta that is fully leased to a global e-commerce firm for 15 years on a triple net basis. The borrower is a repeat borrower of ours who provide us with an exclusive opportunity to provide the lending solution on this project. And we were able to provide a solution because there were unique attributes related to the deal that we were able to effectively underwrite by working alongside our internal industrial development team. We believe that this investment is yet another illustration of the advantages of the AMAC Real Estate Group platform and our ability to cultivate deep, repeat borrower relationships and to underwrite complex transactions. Most of our recent investments speak to our ability to understand and price large, complex transactions. And because of our balance sheet capacity, we can serve as a capital provider to sophisticated borrowers on major institutional projects. CMTG seeks to originate loan balances of size, which is what we did during the quarter. Not only does this segment of the market play to our strengths, but there are only a handful of market participants who can originate transitional loans of this size. There continues to be healthy demand for transitional CRE loans and continued support from the banks who prefer to lend to us than to make these loans directly. As transaction activity has picked up and capital markets have stabilized, we've seen an increase in equity sponsors with dry powder looking to execute on transitional development and construction business plans, especially in many of the high-growth markets where supply is not currently able to keep up with demand. We expect this dynamic to continue in the medium term, increasing the demand for transitional lending for the foreseeable future. We have a robust investment pipeline that we anticipate closing in the coming weeks and into the first quarter of 2022. As we look to the future, we will continue to execute our investment strategy and proactively manage our portfolio with the objective of delivering an attractive dividend to our stockholders. On that note, we are pleased to share that we recently announced a fourth quarter 2021 dividend of $0.37. I would now like to turn the call over to Mike McGillis. Thank you again for your support and for listening. Thank you, Richard. For the third quarter of 2021, CMPG reported GAAP net income of $52.9 million, or $0.40 per share, and net distributable earnings of $45.3 million, or $0.34 per share. We paid a third quarter dividend of $0.37 per common share, At September 30, 2021, CMTG's book value per common share was $18.78. The four reflecting reserves for CECL book value per share was $19.28. As of September 30, CMTG's loan portfolio based on UPB was $6.4 billion with a weighted average all-in yield of 6.4%. During the quarter, we originated 905 million of loans with initial fundings of 745 million. For existing loans, total fundings during the period were 248 million. We also received 676 million in full or partial repayments, which is indicative of the strong transaction volume we're currently seeing in the market. We have constructed a well-diverse portfolio that reflects our ownership mindset our ability to price complexity, and our platform's experience as an owner, operator, and developer. Our portfolio is comprised primarily of transitional floating rate senior loans. As of quarter end, senior loans represented 93% of the portfolio, with the balance being subordinate loans, and the weighted average LTV of our loan portfolio is 66%. We are highly selective when it comes to our subordinate loan exposure as we look to be compensated for the risk associated with this structure. Our subordinate loans have a lower detachment point and a meaningfully higher all-in yield than the portfolio average. As of September 30th, 2021, the LTV and all-in yield for our subordinate loans was 63.5% and 11.3% respectively. The portfolio is highly diversified by collateral type as no single property type exceeds 20% of the portfolio. Loans against multifamily and for sale condo commercial real estate collectively represent 28% of the portfolio and have been a strategic focus for us. Coming out of the pandemic, we expect that concentration to increase as a percentage of the portfolio in the near term. Not only do we view these loans to be lower on the risk spectrum, but we also believe that we have the expertise to reduce risks associated with this asset type given our platform's expertise in residential development, ownership, and management. It's also worth noting that we do not originate loans secured by standalone retail assets, which is by design. Our collective view is that retail is overbuilt throughout the U.S., and the available returns do not sufficiently outweigh the secular risk associated with this asset class. As Richard mentioned, we've been diversifying our portfolio by geography, adding select high-growth markets to the portfolio, and reducing exposure to the New York City market. While we anticipate this trend to continue, New York will always be a core component of our portfolio. Our investment strategy is to lend on large transitional and complex assets, and New York City offers an abundance of these opportunities. We also have deep expertise in this market and organizationally have a large team here. Turning now to our internal risk ratings, our asset management team conducts a rigorous loan-by-loan quarterly review to determine a risk rating for each investment on a five-point scale. During the quarter, CMTG's weighted average risk rating improved to 3.0 compared to 3.1 for the prior quarter. With respect to certain loans, we've been observing favorable trends in the performance of the underlying collateral, supported by continued improvements in the broader economy. we take a conservative stance towards leverage. As a quarter end, our net debt to equity ratio and total leverage ratios were 1.8 times and 2.1 times our equity base, respectively. As you are aware, subsequent to the quarter end, we executed an IPO, resulting in gross proceeds of approximately $103 million. As a result of the IPO, 7.3 million shares of redeemable common stock were converted into common stock. During our IPO process, we identified several key catalysts that we believe will help us increase our earnings and dividend profile over the next couple of years. First was repricing of our $763 million term loan B financing, which we were able to reprice a couple weeks ago, reducing the coupon rate by 1%, thereby reducing our cash interest expense by about $7.5 million per year. and shortening the next potential repricing period from one year to six months. The transaction meaningfully reduced our overall cost of financing and will benefit our net distributable earnings going forward. Looking ahead, we believe that leveraging our strong performance and track record as a public company will provide additional opportunities to further optimize our capital structure and reduce our cost of capital. Second, capital deployment. The excess liquidity we held as a defensive measure during the COVID-induced market disruption has adversely impacted Memphis' remittable earnings. With more than $300 million in cash and available liquidity at quarter end coupled with the proceeds from the IPO, we have ample liquidity to close in our robust pipeline and to continue to grow our portfolio. Lastly, continued progress resolving non-accrual loans as well as improved operating performance of our REO portfolio of New York City limited service hotels provide us with strong potential for increases to future earnings. Thank you for giving us an opportunity to provide you with a summary of our third quarter results. Our team is looking forward to updating you on our progress in the coming quarters, in addition to delivering attractive risk-adjusted returns to our stockholders. I would now like to open the call up for Q&A.