Claros Mortgage Trust, Inc.

Ladies and gentlemen, thank you for your patience. This call is due to start in a couple minutes' time. © transcript Emily Beynon So, Welcome to the Claros Mortgage Trust third quarter 2022 earnings conference call. My name is Elliot and I'll 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, please press star followed by one on your telephone keypad. I would now like to hand over the call to Anne Hine, 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 Claris Mortgage Trust, Mike McGillis, President and Director of Claris Mortgage Trust, and Jay Agarwal, CMTG's Chief Financial Officer. We also have Kevin Cullinan, Executive Vice President, who leads MREX Origination, and Priyanka Garg, Executive Vice President, who leads MREX Portfolio and Asset Management. Prior to this call, we distributed CMTG's earning 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 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 statement made on this call represents 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, such as distributable earnings, which we believe may be important to investors to assess our operating performance. For non-GAAP reconciliations, please refer to the earnings supplement. I would now like to turn the call over to Richard.

Good morning, and thank you everyone for joining us for our third quarter earnings call. It may be an understatement to note that market volatility and uncertainty continue to be the prevailing themes as investors and borrowers grapple with high inflation, rising interest rates, supply chain disruptions, geopolitical risk overseas, and political division and uncertainty at home. Economic data remains mixed and valuations widely distributed as investors across all asset classes assess the Fed's interest rate policy and debate its ability to engineer a soft landing. Despite these factors, we believe that the U.S. economy is stronger and more resilient compared to prior recessions, that it is the healthiest major economy in the world, and that the U.S. property sector will be more resilient than international markets. However, it is now our view that a recession is likely to occur sometime in 2023 as the Fed attempts to resolve the current inflationary environment. Looking ahead over the near term, we anticipate more pressure on real estate valuations, driven by higher interest rates and, in some cases, slower NOI growth. but the impact will be uneven and highly dependent on property type, asset quality, and market. On a positive note, it is important to recognize that there are opportunities for well-capitalized and well-positioned lenders that have demonstrated the ability to manage through challenging economic conditions, like CMTG. Our investment strategy is to focus on transitional lending opportunities secured by high-quality assets with institutional-grade sponsorship. we employ a disciplined approach to underwriting and portfolio construction and are just as focused, if not more so, on asset management. As a result, we believe that our portfolio is well positioned in today's evolving market environment. Our portfolio is comprised of nearly all floating rate loans and therefore has benefited from the current interest rate environment. All else remaining equal, Additional benchmark rate increases could translate into further earnings growth based on the current portfolio, and more than 90% of our floating rate loan portfolio have interest rate caps in place. With regard to asset allocation, we are heavily weighted towards multifamily, which accounts for more than 40% of our portfolio. We have relatively low office exposure and no standalone retail. Today, our portfolio is exclusively focused on U.S. investments, and we do not have any European exposure. For the last two years, we have been diversifying away from the coastal markets, capitalizing on the favorable demographic trends and underlying job and rent growth in select markets that we believe will prove to be more resilient in a scenario involving an economic downturn. To do this, we've leveraged the analysis and insights of the broader MAC Real Estate Group team, which has made recent equity investments in a number of these markets. Moreover, with an average portfolio LTV of 68% and low leverage on our balance sheet by design, we believe that we are well insulated against adjustments in real estate asset values. We have a conservative approach to managing our balance sheet. and have consistently employed relatively low leverage since our formation. In uncertain economic times, our view is that a conservative approach to leverage, adequate liquidity, and access to capital are critical. And we would like to note that we had more than 500 million of liquidity at the end of the third quarter. We believe that our business and strategically constructed portfolio will continue to be resilient despite the uncertain market landscape. Our senior management team has several decades of global real estate investing experience through multiple economic cycles. While each market cycle is unique, our team is recognizing both similar and new factors in the current environment that are informing our focus areas. During the third quarter, we continued to execute on our strategic priorities. Those strategic priorities include targeted originations, proactive asset management, and balance sheet management. Demonstrably, we took advantage of our liquidity position and the market dislocation to originate $878 million of new loans at strong historical spreads while focusing on our high-convection themes in the residential sector, high-growth markets, and in another drive-to hospitality loan. We're pleased to share our non-accrual loans represented less than 1% of the portfolio at the end of the quarter, down from 4% at the beginning of the year. Additionally, despite a challenging capital market environment, we continue to have access to financing. Notably, we entered into a $1 billion non-mark-to-market match-term financing facility with J.P. Morgan. Jay will provide additional color on this exciting closing. In summary, we believe our achievements for the quarter speaks to the strength of our management team, portfolio, and institutional relationships, in addition to our sponsors' integrated real estate lender, owner, operator, developer, and property manager business model. Looking ahead, we expect to selectively target our originations volume to seek to seize upon only those we see as the best risk-adjusted return opportunities while remaining defensive. Our pace of deployment will depend on where we see prudent and accretive leverage, as well as the pace of repayments from the existing portfolio, which could slow due to the overall softening transaction volume and the challenging refinancing climate. It bears repeating that we believe we are well positioned for what lies ahead. There will likely be volatility, uncertainty, and persistent dislocations. that come with economic disruptions. And we believe this environment will present many compelling CRE lending opportunities in the coming year, despite and due to the challenging capital markets. We believe CMTG has the scale, balance sheet, and team to pick and choose our investment opportunities and execute in today's environment. Now, before turning the call over to Mike, I'm pleased to share that our board of directors recently authorized the repurchase of $100 million of the company's common stock. We believe this decision reflects our conviction in our business strategy and long-term financial outlook in addition to our commitment to enhance shareholder value. I would now like to turn the call over to Mike.

Thanks, Richard. CMTG's portfolio based on unpaid principal balance increased 4% quarter over quarter to $7.4 billion as new originations and follow-on fundings outpaced loan repayments. Our cash balance of $461 million at the beginning of the third quarter, coupled with repayments of $559 million, positioned us well to capitalize on a number of attractive investment opportunities during the quarter. As Richard mentioned, we originated $878 million in total loan commitments across six investments. These had a weighted average credit spread of 530 basis points over SOFR with a weighted average LTV of 67%. Sixty percent of our originations by loan commitment represented multifamily investments, which we view as a defensive asset class. Multifamily continues to be our largest asset class concentration, representing over 40% of our portfolio. In addition, during the quarter, we continued our expansion into several high growth markets, with the third quarter marking our entry into the Salt Lake City, Utah MSA. We originated two multifamily loans in Salt Lake City, representing aggregate loan commitments of $252 million at weighted average LTVs below 65%. The larger of the two loans is a $176 million construction loan for a high-rise tower to a well-known and respected sponsor. The second loan is for $76 million of acquisition financing for an existing multifamily asset. These transactions provided opportunities for us to execute at wider than normal credit spreads while further enhancing our portfolio's geographic diversification. The Salt Lake City MSA represents a target market for us as it is one of the fastest growing MSAs in the country and has exhibited strong population, job, and wage growth. While the interest rate environment has benefited our portfolio yields, we recognize that borrowers and operators have been impacted by higher financing costs. In addition to our asset management team closely monitoring our borrowers' ability to pay debt service, we have a number of structural protections in our loan documents designed to mitigate the impact of rising rates on the borrowers' ability to pay debt service. These include interest rate caps, lender-controlled cash management accounts, and interest and carry reserves, among others. I would now like to turn the call over to Jay.

Thank you, Mike, and thank you, Richard. For the third quarter of 22, our distributable earnings were $47.1 million, or 33 cents per share. And gap net income was 42.1 million, or 30 cents per share. Our current quarterly dividend is 37 cents per share, which is an 8.2% yield to book value. Earnings this quarter benefited $3 million, or 2 cents per share, from acceleration of fees on two early repayments. Excluding those two cents, as well as the impact of gains and losses last quarter, our quarter-over-quarter distributable earnings increased nine cents per share, primarily due to the increase in benchmark rates and net portfolio growth. We stand to benefit from the steep forward curve, and based on the static portfolio at quarter end, The 100 basis points increase in rates would generate 4 cents of quarterly earnings. It is important to highlight that benchmark rates are already up 70 basis points since quarter end, and we are currently in a position to cover our dividend. Our general CESA reserve stands at just above 100 basis points of aggregate principal balance Quarter of a quarter, our CECL reserve increased by approximately $2.5 million due to net portfolio growth and worsening macroeconomic indicators. This was offset by seasoning as well as improvement in our credit profile. As a reminder, we have virtually zero specific CECL reserves. Turning to the balance sheet. we continued to maintain a conservative net leverage ratio of 2.0 times, and our target leverage remained at 2.5 to 3 times of equity. Despite a challenging capital market environment, we were able to access the secured financing market in the form of warehouse lines and node-on-node financing. Most notably, as Richard mentioned, subsequent to quarter end, we closed the financing facility of up to $1 billion with JP Morgan and simultaneously financed three loans on it with an aggregate maximum financing commitment of approximately $400 million. This financing is still matched in non-market-to-market. At September 30th, we had $4 billion outstanding under our $5 billion of warehouse lines with six counterparties. It is worth noting that that the weighted average advance rates under these facilities was a conservative 67%. This 67% can be replicated into, one, 75% advance rate on multifamily loans, and two, 60% on all other property types, both weighted average numbers. Lastly, we continue to maintain strong liquidity. At quarter end, We had $507 million of liquidity comprised of $230 million in cash and $277 million of approved and undrawn capacity on our warehouse lots. As of today, we have over half a billion dollars in liquidity. We believe this puts us in a strong position to be both offensive and defensive. I would now like to turn the call over to the operator for questions.

Thank you. If you would like to ask a question, please press star followed by one on your telephone keypad now. If you change your mind, please press star followed by two. When praying to ask your question, please ensure your device is unmuted locally. Our first question comes from Don Fandetti from Wells Fargo. Your line is open.

Hi. Good to hear the comments on the dividend coverage. Can you talk a little bit about what you're seeing in New York City in terms of office and hotel and if that's continuing to improve.

Sure. Let me take the question in general, and I'd like to turn it to Priyanka to talk a little bit about what we're seeing in our hotel portfolio. I think we continue to be surprised by the strength of the overall New York economy. Tourism appears to be back, despite the fact that we aren't seeing as many foreigners. We see multifamily rents and occupancies at all-time highs. But at the same point in time, I think that the office sector continues to underperform. And what we are seeing and what we've called out many times in the past is continuing. The best buildings are doing well, although I think that we're starting to see some pushback even at the best buildings on rents in terms of concessions. And weaker buildings are really struggling. And so it's a have and have not market. We are continuing to see utilization rates well below pre-pandemic levels. and well below utilization rates in the high-growth Sunbelt markets. So I think we remain concerned about the office market in New York, and we feel that there are certain types of buildings that will work and certain types that will not, and that the opportunity and the need to convert a lot of obsolete buildings or tear them down in the office market is going to be ongoing and that New York City as a whole is going to have to work with the government here to figure out how we create 24-hour collaborative communities across New York to make where people work as vibrant as where people live. And that is something that is going to be a long-term transformation that is going to take time. And there are going to be stretches of, New York where office is just not going to make sense anymore. So we are concerned about the office market in New York, and we're much more constructive around hotel. Crack, would you want to talk a little bit about what you're seeing in our portfolio?

Yeah, thanks, Richard. Hi, Don. In our REO hotel portfolio, I mean, the third quarter was very strong. I think we're seeing that across the hospitality sector in New York. We performed very well on the top line. I think, interestingly, hospitality has really reset a new level of ADR, really above the 2019 level. Occupancy was also quite strong throughout the third quarter, being driven largely by leisure transient demand, but we're starting to see some group and corporate come back. We had a large financial institution retain a large block of rooms at one of our hotels during the fall period. So So we're excited to see the compression is back and the last rooms are really selling at huge premiums. So we're very encouraged by the underlying performance of the REO portfolio.

Okay. Thank you.

We turn to Rick Shane from J.P. Morgan. Your line is open.

Thanks, everybody, for taking my questions this morning. Look, I think you guys have highlighted that we're in some ways at a crossroads in terms of the market and fundamentals and given your low leverage and how well positioned you are, you essentially have three choices. You can grow assets, you can repurchase shares, or you can hoard liquidity in light of potential extension of asset duration. How do you think about those three choices? Obviously, three You increase the authorization on the buyback. And how do you think about, you know, increasing leverage on the business at this moment in time?

Thanks, Rick. Let me take a last question first. Go ahead, Jay. On the leverage side, we are conservatively leveraged today at 2.0 times. And like we've said in the past, we do expect leverage to pick up. to around 2.5 times and a max of three times. And to your other question about assets, asset growth, buyback, liquidity, we have that conversation every single day internally. And it's a debate, honestly. In these times, whether we buy back shares, whether we hold liquidity or we invest in assets, we are being very selective in where we deploy capital because the returns are very strong today. but then we also recognize the importance of keeping liquidity. Richard, would you like to add?

Yeah, Rick, I would just say that we're trying to be opportunistic around all three of these sectors. If the market opens up for us to increase our leverage in a manner that we deem accretive, both for offense and defense, we're likely to do that. If the... Market gives us what we believe are outsized risk-adjusted returns. We'll put more money to work. But it's also going to be dependent on how much capital we get from repayments and making sure that we're holding a little bit extra cash. And as it relates to the shares, I think we want to be opportunistic and prudent about where we buy back shares if we buy back shares. So I think it's a constant day-to-day analysis and discussion amongst the team about how to be opportunistic in those three areas. It's a really great question. There's just no perfect answer to it.

Thank you. Yeah, look, it's hard. Think about what we've gone through. Looking at our screens the last 24 hours yesterday was so discouraging. Today the markets are ebullient, and I'm sure it's the same in managing it for you guys when you when you think about your portfolios constructed at today and the opportunities that are out there currently do you is the should the incremental dollar be invested in what you already have or is the incremental opportunity in terms of what's out there

so compelling that it just makes sense to put the next dollar back into the market i mean again that's that's something we're debating every day um and uh we're you know we're staying active in the market so that we can look at the risk adjusted returns around what's in our portfolio and what looks like our portfolio what diversifies our portfolio and uh what those returns look like. So again, it's a kind of an everyday job that we're seeking to maximize the value for shareholders.

Okay, thanks. And again, look, we really appreciate the thematic clarity on the portfolio construction. It makes it a lot easier to understand the risk and sort of position you within the competitive landscape. So thank you for restating that. Thank you.

Our next question comes from Steve Delaney from J&P Securities. Your line is open.

Good morning, everyone. Thank you for taking the question. Well, your stock buyback decision and allocation, your stock's up 10% this morning, so there may have to be a near-term revision in how you view that. I just say that in jest, but it's nice to see. I think the thing that struck me in your report was the new facility from JP Morgan, a billion dollars in very favorable terms and structure to you. I'm thinking back to March of 2020. I mean, since March of 2020 or the spring of 2020, what we've gone through in the last couple months is probably the most unstable and uncertain period. Curious on your thoughts about why the banks are hanging in there this time. It strikes me that maybe in 2020, I think people were concerned about a credit event due to the economic impact of the pandemic. And maybe this time, as you mentioned, Richard, about the New York City economy, people are looking at this as a rates event simply caused by the Fed's posture and tightening of And for some reason, the banks don't seem to be backing off. I would really appreciate views from you, Richard, or Mike, or Jay, whoever's been talking to the banks, and kind of what generally you see the bank's mindset to be about lending to real estate companies like yourself. Thank you very much.

Thanks. I think all three of us will have slightly different thoughts on this. I'll start by saying that... The banks are being a lot more careful about how they're doing business. And it does occur to me, picking who they want to do business with a lot more. And as it relates to JP Morgan, I think we've demonstrated to them that we are who they want to be doing business with. And they're... They want to put out capital at what are higher rates for them as well, but they only want to do it with a select group, and I think that is a very healthy environment for a business like ours, a have-and-have-not environment in terms of who has access to capital. Jay and Mike, do you want to add anything to that?

Steve, I would also add that not all banks... Some banks have said to us they're just not lending in the space anymore. So that is also occurring, but we are in a favorable spot where we continue to have access to capital.

Got it. Thank you for that clarity.

Steve, and Mike's on as well. I mean, I would also add to that sort of the money center banks, I completely agree with Richard and Jay's sentiment, but we continue to see some of the regional banks for the right projects with the right size characteristics continue to be active financing counterparties for us across our business lines. So there really is a difference between the money center banks and the regional banks, particularly those that are very sort of relationship oriented and focused on on who their borrower is. So that's an interesting development here we've seen in the last couple of years.

I appreciate that. And just one final thing. $878 million is a big quarter, given you had sort of a mid $6 billion portfolio, I guess, going into or high six going into the quarter. Is there anything chunky in there about maybe a large sort of portfolio opportunity? And looking at that, I mean, obviously opportunistic with wider spreads, this is a good time to be lending if you have the capital and find the quality deals. But should we expect over the next quarter or so that you could continue to have strong origination quarters? Or is this third quarter just a little chunky? Thanks.

So there's nothing particularly chunky in the third quarter there. That was across six different investments. And we came into the quarter with a really strong balance sheet position and a really strong liquidity position. And I think everyone has probably seen that the market or the transaction volume has pulled back a little bit. and we were set up to step up and fill a little bit of that void. So we're very happy with the positions we put on during the third quarter. I do expect over the course of the fourth quarter for volume to slow down a little bit, but that goes back to what we've been talking about throughout the course of this call where we're balancing the various opportunities that our balance sheet has afforded us to invest, whether that's internally in the company or or continuing to take advantage of what we think is a very strong but a little bit more important opportunity to test the market.

Thank you. Appreciate everyone's comments.

As a reminder, to ask any further questions, please press star 1 on your telephone keypad now. We now turn to Jade Ramani from KBW. Your line is open.

Thank you very much. Can you talk about the upcoming loan maturities? The slide shows $576 million. Is that what you anticipate in 2023? And I'm sure that's just a couple of chunky deals, but are you expecting those to pay off? Anything else you could touch on about credit risk in the portfolio?

Yeah. Hi, Jade. It's Priyanka. I'll take that. Generally, we have a fairly small slug of loans that are repaying and that have fully extended maturities in 2023. It's less than $500 million of UPB and it's across six loans. Some of those, I think, are going to be in a position to pay off. Others are probably going to be some sort of negotiation with the borrower. We're preparing for the worst but hoping for the best with all of our borrowers. But structurally, Mike touched on this earlier, we have really good protections in place. We feel good about the exit risk and our basis and the capital that our borrowers are going to want and need to defend at that point in time. So as I look at the maturities that are upcoming, I don't have any kind of one-off concerns.

Thanks. On the single family for rent and build to rent sectors where you've been active, how are you feeling about the outlook there? I know you're not engaged in this exact type of lending, but hard money lenders, not just Broadmark, which reported this week, but also some others are having difficulty in that space and have seen pretty dramatic deterioration in credit. And of course, home builders are reeling in terms of excess supply. At the same time, some of the single-family rental names are showing some deterioration in NOI. So just want to check in on how that portfolio is doing, and also if you could just contextualize the size of it.

This is Kevin again. Sure, Jade, it's Kevin.

So very good question. We're obviously tracking what you're noticing in the home builder space. I think that can cut both ways. I think that can actually create a little bit more opportunity for larger, well-capitalized and institutional single-family rental owners. Home affordability is certainly on a downward trajectory throughout most of the country. and that is leading to fairly robust fundamentals in the SFR space in the markets that we've been trafficking in. Within the entire CMTG portfolio, it's a relatively small portion of our balance sheet that's invested in the SFR space. It's primarily throughout one portfolio. A lot of that portfolio is still under development, and it's been pre-sold to a large institutional developer as well. There is a schedule of units that are delivering throughout the course of this year and next, but we, and we've been quite happy with the initial lease up of some of the communities, but we're also looking at a forward sale here that is materially de-risked our position as well.

Oh, go ahead. Just one more thing that I think that there is a distinction that has not yet been clear and will probably evolve over time, between the SFR space and the build-to-rent SFR space. And it's important to note that our loans are on built-to-rent SFR, which is much more closely tied to the multifamily market than I think people recognize. And so it's a little bit of an extension of the multifamily market. And we're building this in Phoenix where we see a lot of demand for the product. And it effectively operates like horizontal multifamily. And so some of the pitfalls and strengths of the multifamily market can clearly be exhibited or more clearly be exhibited in these products.

Thank you.

I was just going to ask. Jay, just to clarify, the Phoenix development, Richard mentioned that's in the equity side of our business. So just to be clear on that, it's not. Apologies. It's not in the MTP's portfolio.

What's the dollar of exposure in CMTG?

Yeah, it's a great 11. Yeah. It's around $200 million, Jude. We've disclosed that on page 11 of our funding supplement.

That's 2% of our total commitment. Our UPB right now is quite small, just given that these are all under construction.

Okay, great. Well, thanks very much for taking the questions. Thank you.

Ladies and gentlemen, this concludes our question and answer session. I would now like to turn the conference back over to Richard Mack for any closing remarks.

Thank you, and thanks, everyone, for joining. We feel really good about our last quarter, and I think as per the questions going forward, it's going to be a challenge, one that we think we're up to. to manage the opportunities that present themselves in the market and the difficulties that come with those challenges with those opportunities so we're pretty excited about it we think we're well positioned going forward with liquidity the ability to increase our leverage the ability to buy back stock and you know great access to deal flow and the ability to work through issues and as we've been able to demonstrate in our portfolio, and we'll expect that we'll have a bit more of that to do as we continue to go through this fairly disrupted, dislocated market over the next probably year plus. So thanks, everyone, for joining, and we'll look forward to speaking to you all soon in our next quarterly call.

Today's call is now concluded. I'd like to thank you for your participation. You may now disconnect your lines.