NYSE:CMTG Claros Mortgage Trust Q3 2023 Earnings Report $2.38 +0.11 (+4.67%) Closing price 04/17/2025 03:59 PM EasternExtended Trading$2.37 -0.01 (-0.46%) As of 04/17/2025 04:32 PM Eastern Extended trading is trading that happens on electronic markets outside of regular trading hours. This is a fair market value extended hours price provided by Polygon.io. Learn more. Earnings HistoryForecast Claros Mortgage Trust EPS ResultsActual EPS-$0.16Consensus EPS $0.13Beat/MissMissed by -$0.29One Year Ago EPSN/AClaros Mortgage Trust Revenue ResultsActual Revenue$80.55 millionExpected Revenue$74.53 millionBeat/MissBeat by +$6.02 millionYoY Revenue GrowthN/AClaros Mortgage Trust Announcement DetailsQuarterQ3 2023Date10/31/2023TimeN/AConference Call DateWednesday, November 1, 2023Conference Call Time10:00AM ETUpcoming EarningsClaros Mortgage Trust's Q1 2025 earnings is scheduled for Monday, May 5, 2025, with a conference call scheduled on Tuesday, May 6, 2025 at 10:00 AM ET. Check back for transcripts, audio, and key financial metrics as they become available.Conference Call ResourcesConference Call AudioConference Call TranscriptSlide DeckPress Release (8-K)Quarterly Report (10-Q)Earnings HistoryCompany ProfileSlide DeckFull Screen Slide DeckPowered by Claros Mortgage Trust Q3 2023 Earnings Call TranscriptProvided by QuartrNovember 1, 2023 ShareLink copied to clipboard.There are 9 speakers on the call. Operator00:00:00Hello, everyone, and welcome to Claros Mortgage Trust Third Quarter 2023 Earnings Conference Call. My name is Nadia, and I'll be your conference facilitator today. All participants will be in a listen only mode. After the speakers' remarks, there will be a question and answer period. I would now like to hand over the call to An Lin, Vice President of Investor Relations for Clarus Mortgage Trust. Operator00:00:28Please proceed. Speaker 100:00:31Thank you. I'm joined by Richard Mack, Chief Executive Officer and Chairman of Clarus Mortgage Trust Mike McGillis, President and Director of Clarus Mortgage Trust and Jay Agarwal, CMTG's Chief Financial Officer. We also have Kevin Cullinan, Executive Vice President, who leads MREX Originations and Priyanka Garg, Executive Vice President, who leads MREX 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. Speaker 100:01:10I'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 those 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 equivalents, please refer to the earnings supplement. Speaker 100:01:53I would now like to turn the call over to Richard. Speaker 200:01:56Thank you, An, and thank you, everyone, for joining us for CMTG's 3rd quarter earnings call. At this time last year, the conversation among investors centered around the timing and depth of a 2023 recession. But it now looks like the U. S. May close this year without one. Speaker 200:02:16And while this appears to be positive news, There continues to be much capital market uncertainty as bond rates climb, especially in interest rate sensitive industries. So it's a confusing time where good news about economic growth can be bad news for asset values And where headline economic data is subject to multiple interpretations. Add to this the elevated geopolitical risk Unseen since the depths of the Cold War, punctuated by the ongoing Russia Ukraine war and a renewed and rapidly evolving war in the Middle East. And you have the basis for persistent market volatility. As investors struggle to price capital And underwrite future economic growth, corporate earnings and inflation. Speaker 200:03:07Some in the professional investment space Believe that we are nearing or at the end of interest rate hikes. Some are starting to discuss when and not if the Fed will begin to cut rates. However, it's difficult for us to predict the trajectory of interest rates given the multitude of indicators that may influence Fed actions And the numerous and many cases conflicting variables impacting inflation and economic growth. With this in mind, we at CMTG have been executing our business within the context of a higher for longer rate environment. And this is one of the main reasons we have been so proactive. Speaker 200:03:49We are managing our portfolio with a long term investment perspective towards maximizing shareholder value, While acknowledging the commercial real estate industry's challenges. COVID related demand shifts have been disruptive, Particularly in the office sector, but perhaps not nearly as jarring as the COVID stimulus induced inflation We are dealing with today and the subsequent higher interest rate environment. The combination of these two factors has resulted Capital Markets dislocation that we continue to see throughout the real estate sector. Not surprisingly, amidst these headwinds, sales and transaction volumes have been significantly down over the past several quarters. However, outside of the office market, we have yet to observe many truly distressed trades. Speaker 200:04:49What we are seeing is transaction volume around select high quality assets at only modestly lower values In spite of the challenging environment. Turning past the economic climate, I'll now add a few high level remarks on the Q3 for CMTG. We had an active and productive quarter overall with portfolio management and strategic Focused on Liquidity and Capital Preservation. As mentioned on our last earnings call, We had anticipated significant loan repayments in our portfolio during the back half of the year. And we're pleased to report that we remained on track With 4 loans repaying during the Q3. Speaker 200:05:38Given the limited transaction activity in the broader real estate market, We believe this reflects positively on the institutional quality of the assets and the sponsors within our portfolio. During the quarter, we also executed 2 loan sales. The first loan was a Texas hospitality loan, which was sold at par with the intention of reducing our overall hospitality exposure and bolstering our liquidity. The second loan Was collateralized by a San Francisco multifamily portfolio with a rent regulated component. In the current environment, it's important to be vigilant. Speaker 200:06:18And as part of our asset management process, we evaluate our investments through the lens of optimizing Long term shareholder value balanced against the time and capital required to achieve that value. So in select circumstances, We will consider selling a loan where we no longer have long term conviction in the investment. This was the case with the San Francisco multi and family investment We decided to sell during the Q3. It was a difficult decision due to the resulting realized loss. But ultimately, we believe that this portfolio management decision was prudent given the market and regulatory headwinds the investment was facing. Speaker 200:07:02Mike will provide a more comprehensive portfolio review later on in the call, including details of the loan sales. Lastly, as previously reported, CMTG declared a dividend of $0.25 per share for the 3rd quarter, which represents a reduction from prior quarterly dividend levels of $0.37 per share. We considered a number of factors in resetting the dividend, including acknowledging that the current market disruption Was and is very likely to persist and the desire to take advantage of potential opportunities that may arise within our portfolio. Given these factors, we look to establish the dividend at a level where we believe it will be sustainable And comfortably covered by distributable earnings before realized gains and losses and leave us prepared for future opportunities and potential unknowns. I would now like to turn the call over to Mike. Speaker 300:08:04Thanks, Richard, and good morning, everyone. The 3rd quarter was a dynamic quarter driven by strong repayment activity and 2 loan sales. Notwithstanding this activity, the portfolio composition remained relatively unchanged, although we had a modest decline in office exposure. To quickly recap, CMTG's primarily floating rate portfolio based on carrying value Was $7,100,000,000 at September 30 compared to $7,500,000,000 at June 30. The quarter over quarter decrease was primarily due to loan repayment and loan sale activity during the period, partially offset by follow on Fundings on prior period loan commitments. Speaker 300:08:49During the Q3, we received an aggregate of $475,000,000 in loan proceeds, which comprised $48,000,000 of full loan repayments, about $39,000,000 of partial loan repayments and $188,000,000 From loan sales that Richard mentioned earlier, which I'll touch upon in more detail later. In addition, we made follow on fundings of 174 Turning to the composition of our portfolio. Multifamily continues to represent our largest sector, Representing 41% of the portfolio at September 30. While we are observing borrowers contending with higher interest rates, Our long term outlook for the asset class remains positive. We continue to believe that high quality, well located multifamily We'll perform well on a relative basis given the strong long term underlying supply demand fundamentals favoring the sector As well as the impact of higher interest rates on homeownership affordability. Speaker 300:09:52Hospitality, our 2nd largest allocation, Represented 19% of the portfolio at September 30, relatively unchanged compared to the prior quarter. In terms of office, Historically, we've been highly selective when it comes to office, and as a result, have maintained a low portfolio concentration in this asset class. During the Q3, we further reduced our office exposure to 13% of the portfolio. This was primarily a result of an office Construction loan that repaid during the quarter as anticipated. The loan was $141,000,000 loan commitment And was secured by a newly built Class A high rise office building located in Nashville, Tennessee. Speaker 300:10:38This loan is a good example of high quality office Continuing to be attractive and why we believe construction loans serve as a valuable component of our portfolio, Particularly when asset managed with discipline and built in access to the broader perspective and resources of the Mack Real Estate Group. We believe that when a new asset is delivered, it will frequently represent one of the highest quality and most in demand assets in its submarket. As Richard mentioned, we expected a meaningful number of loans to repay. And during the Q3, we $248,000,000 in full loan repayments, about $39,000,000 in partial loan repayments with additional loan repayments We believe it's important to note how diverse the underlying collateral of these loans were. They represent a cross section of collateral from various markets and property types and primarily assets that were recently delivered to the market. Speaker 300:11:42We believe this suggests that there's still liquidity for high quality assets and sponsors validating the quality of the investments Before turning the call over to Jay, I'd like to discuss the loan sales we completed during the quarter. The first loan was collateralized by a high quality hospitality asset located in Austin, Texas With a UPB of $123,000,000 that had seen significant improvement in operating performance during the long term. We took advantage of an opportunity to sell the investment at par, which we believe speaks to the credit quality of the asset and the investment, Particularly in this capital markets environment. The transaction enabled us to enhance our liquidity, Further bolstering our balance sheet while reducing our leverage and exposure to hospitality. The second loan was $138,000,000 loan originated in 2019, collateralized by a Portfolio of multifamily properties with a rent regulated component located throughout San Francisco. Speaker 300:12:50The borrower continued to support this asset through COVID-nineteen pandemic, but decided to stop making debt service payments In the Q4 of 2022 as a result of increasing interest rates and reduced NOI at the property Given San Francisco market challenges. Since the time of the payment default, the dynamics of the San Francisco real estate market Have continued to deteriorate, which coupled with the expectation of continued regulatory pressure led us to the difficult but clear sighted decision to sell the loan for gross proceeds of 65,000,000 Representing a 53% discount to UPB. While this is a disappointing outcome for the San Francisco loan, It was driven by our belief that there are significantly better uses of this capital, and we were able to use proceeds from the loan sale to reduce leverage, Which will be accretive to distributable earnings given that the loan was on non accrual. We also believe this demonstrates our commitment to strong and efficient portfolio management, even when it requires moving away from an I would now like to turn the call over to Jay. Speaker 400:14:06Thank you, Mike and Richard. For the Q3 of 2023, we reported distributable earnings excluding net realized losses of $0.35 per share, Which comfortably covers our revised dividend of $0.25 per share. Distributable loss including net realized losses The net realized loss of $73,000,000 or $0.52 per share Primarily, it is both of the sale of the previously 5 rated San Francisco multifamily investment that Mike mentioned. We reported GAAP net loss of $0.50 per share. Please refer to our earnings supplement For reconciliation of non GAAP financial measures. Speaker 400:14:54I would now like to discuss the overall credit profile of the portfolio And risk rating migration during the quarter. No new loans were added to the risk rated 4 category. However, 3 4 rated loans were migrated to a 5 rating. These are loans with an aggregate UPB Of $335,000,000 against which we recorded a specific CECL reserve of $71,000,000 These include a land loan in Virginia and office loans in San Francisco and Atlanta. At September 30, our CECL reserve was $155,000,000 or 2.2 percent of UPB. Speaker 400:15:38This is comprised of $72,000,000 of specific $83,000,000 of general CECL reserves. Specific CECL reserves represented 21.3% of the UPB of the underlying loans at quarter end. The general CECL reserve of 1.2% is comprised of 3.6% of the UPB on 4 year loans 0.8 percent of the UPB on the remaining loans. General seasonal reserve Increased during the quarter primarily as a result of deteriorating macroeconomic conditions, offset by seasoning of and a reduction in our loan portfolio. In addition, we placed another $98,000,000 480 loan secured by an office building in Irvine, California Non accrual loans represented 6.1% of our loan portfolio at September 30. Speaker 400:16:39Turning to the balance sheet. As Richard mentioned, preserving liquidity continues to be a priority for the organization. On September 30, we reported $433,000,000 in total liquidity, which includes cash and approved and undrawn credit capacity. Unencumbered loans comprised $438,000,000 which includes $407,000,000 in senior loans, As well as $144,000,000 mixed use New York City REO property. In addition, future funding commitments decreased to $1,300,000,000 at September 30 compared to $1,900,000,000 at December 31, 2022. Speaker 400:17:26Our net debt to equity ratio remained consistent quarter over quarter coming in at 2.3x at September 30. I would now like to open the call for questions. Operator, please go ahead. Operator00:17:40Thank you. When preparing to ask your question, please ensure your phone is unmuted locally. And our first question today goes to Sarah Barkam of BTIG. Sarah, please your line is open. Speaker 500:18:02Hey, everyone. Thanks for taking the question. So on the equity side, We've been hearing that the multifamily supply issue is becoming more prevalent. Developers are perhaps more pressured to Get to breakeven in order to effectuate a sale or more permanent financing. Could you comment on that and what you're Being on the ground in your development portfolio and sponsor behavior there. Speaker 200:18:30Sure. Are we talking about merchant builders Selling at a loss, are we talking about fundamentals from a leasing An occupancy perspective, just to make sure I get the question and thank you for asking it. Speaker 500:18:50Yes, yes. My question, I guess, is coming out of some comments we've been hearing with respect to merchant builders and because That and your concentration in development, just was curious to hear your comments on that and what you're seeing in your portfolio. Speaker 200:19:07Sure. Okay. So, as it relates to kind of the sales market, we are seeing merchant builders Sell at modest losses in order to get off of guarantees that they have on their loans. That is one of the things that we like about our construction loans, especially in the multifamily space. The borrowers are incentivized to take losses because they are generally on the hook to Pay the interest rate guarantees. Speaker 200:19:43And so, we are seeing merchant builders sell at discounts, but modest discounts. And generally what we like about building the best product in the market is even when there is softness in fundamentals, which there are, These are the first assets to lease up and there's always a level, always is a big word, but I've never seen a market where there wasn't a level where you could lease the best asset in the market. And so we feel comfortable, very comfortable with our multifamily development assets. Demand as a general statement is good in most markets, but we're still absorbing supply. And that Absorption is what is dampening rents and bringing concessions back into the market. Speaker 200:20:41Having said that, almost every planned development in the multifamily space has been stopped. So anything that didn't begin more than 6 months ago, really is not getting off the ground. We are also seeing a slowdown in home sales as mortgage rates climb. We believe that over time that will be bullish for multifamily. So we think that the inflation of rents We'll come to the multifamily sector, but it is going to take some time to catch up With the supply, but we are long term quite bullish given the lack of housing Overall in the U. Speaker 200:21:32S. Market, we are undersupplied from a housing perspective. Hopefully, that was That addressed your questions. Speaker 500:21:42Yes. I appreciate the color there. And then my follow-up is Just related to the loan sales, it sounds like from the prepared remarks that you're open to pursuing more loan sales to support liquidity. We saw a watch list loan sale as well as a higher quality 3 rated loan sale during the quarter. Can you speak to where else in your portfolio either with respect to sector or geography or non watch list versus watch list where You see more opportunities to sell and bring in more liquidity? Speaker 600:22:20Hi, Sarah. It's Priyanka. Thank you for that question. I think it's going to be very situational, very asset and borrower specific. So the watch list loan that was sold, I think Mike did a great job of sharing our perspective and how we Arrived at that conclusion. Speaker 600:22:39We're only going to do that if we really feel like we're not capable of stepping in and owning the asset. I think we've done that Successfully twice now in our REO portfolio, and so we're not going to shy away from that. But if we don't think the fundamentals are there, then if we want to Resolve the credit, then it's going to be a loan sale. There's nothing that we're seeing on the horizon that we have slated for that right now, but It's a very dynamic environment, and that remains to be seen. The 3 rated loan that we sold, that was Just more opportunistic, right timing. Speaker 600:23:15We were able to sell it at par, created liquidity. We're not out in the market actively Marketing it, that was also that was not marketed. That was just kind of based on a conversation with a counterparty with whom we do a lot of business. So Again, it was just opportunistic and situational, but there's no programmatic strategy here on loan sales. Speaker 500:23:39Okay. Appreciate the comments. Operator00:23:45Thank you. The next question goes to Rick Shane of JPMorgan. Rick, please go ahead. Your line is open. Speaker 700:23:53Thanks. Can you guys hear me this morning? Speaker 800:23:57Yes. Speaker 300:23:57Yes. Yes. Thanks, Rick. Speaker 700:23:59Okay, great. Sorry, this question won't really come as a surprise To anybody who's been listening to these calls, but would just love to hear a little bit about combination of dividend policy and Appetite for repurchases. I'm assuming that the loan sales were contemplated when you reduced the dividend For the Q3 and going forward, but all things considered and with the stock trading at such a huge discount, Does that dividend policy make sense or should you be more aggressive on the buyback? And I would just observe that You guys own on a relative basis a great deal of stock compared to many of your pure companies. I think the incentives are pretty aligned. Speaker 300:24:57Sure, Rick. It's Mike. Thanks for the question. I think From a dividend perspective, in terms of the decision to reduce it, it wasn't so much tied directly to Decision to sell this loan, but it was really looking at our portfolio, looking at distributable earnings profile On a go forward basis, assuming there was going to be some deteriorate potential deterioration given a higher For longer rate environment, and we're trying to be proactive in making that dividend cut to reflect Where we thought distributable earnings before any net realized gains and losses would be on a forecasted basis And allow us to substantially cover that go forward dividend Given the situation that we'd significantly overpaid our minimum distribution requirements under the REIT rules. So that was those were all critical elements of that decision. Speaker 300:26:07With respect to share buyback, I think right now, Liquidity is key. We really We're focused on preserving and maintaining liquidity and protecting the portfolio in this environment, even though we have the ability to buy back shares. I don't expect that we'd say never, but I don't expect that we'd do it unless we were really, really comfortable that we had a lot of excess And that was the best use of capital relative to redeploying into what we think is a very favorable market right now, but we're being very I think it's also to keep in mind, we do have, as Jay mentioned, significant future funding commitments in our existing loans, Which we're very comfortable with the performance of that portfolio. And it's important to highlight that those loans have a weighted average spread The SOFR of 4 73 basis points over SOFR, so in excess of a 10% current coupon unleverage. So That we feel like is a very good use of excess liquidity as we have it. Speaker 300:27:24So Hopefully, that's responsive to your question. Speaker 700:27:31It is. That's helpful. And When we think about those undrawn commitments, the comment had been made that multifamily Development in a lot of cases has really stopped. Does that suggest to you that In the near term, the draws on against those commitments We'll be relatively modest and so there's a little bit of a that liquidity won't be Drawn until the environment improves a little bit, is that the sort of check and balance there? Speaker 600:28:15Hi, Rick. It's Priyanka. I'm going to jump in here. We I think Richard's comment was more general comment related To the market, in our portfolio, all construction is proceeding as expected on schedule, generally on budget. So I wouldn't expect any change in our future funding commitments as it relates to our multifamily exposure or really across our construction loans. Speaker 600:28:41And I think we've mentioned in past quarters, we have milestones in our loan documents. We have an estoppel, right, every month as we're funding draws. And so we want to keep funding draws, keep the project moving forward And have borrowers continue to rebalance. So we're not seeing a slowdown inside of our portfolio. Projects that have started have continued. Speaker 700:29:06Got it. Okay, thank you. That's a very helpful clarification. Thanks guys. Speaker 200:29:12Thank you, Rick. Speaker 600:29:15Thank you. Operator00:29:22And our next question goes to Jade Rahmani of KBW. Jade, please go ahead. Your line is open. Speaker 800:29:29Hi, this is Jason Saptron on for Jade. So my first question, we're seeing commercial mortgage REITs take 30% to 50% losses on loan sales in some cases. And these are on loans with 60% to 70% reported LTVs. So what do you think is driving that magnitude of loss? How much of it is a look through to price decline at the asset level? Speaker 800:29:52How much of it is the lead business plan and higher cost of carry in? How much of it is lack of ability to leverage what you're buying? Speaker 600:30:04Hi, it's Priyanka. Thanks for that question. I think it's a great question. I think that's something we're all trying to Stand right now, but I think these loan sales, obviously, I can only speak for ourselves, but they're all very situational. And It really just depends on strength of borrower, what people think they can go after, in what jurisdiction It's occurring because that impacts ability to foreclose. Speaker 600:30:30There's obviously underlying asset deterioration like you just said. I think For our situation in particular, given our decision to go ahead and Sell alone, what we wanted to really focus on was very expedient and certain execution. And so we selected a strong buyer who could close quickly, Which minimize both market and execution risk. So we I think it's just a very dependent Situation and in our case, we really wanted to ensure that we got it off our books quickly just given the overall environment in San Francisco and as it and as it related to the continued uncertain rate environment. So I think it's a great question, but I think there's just not a wholesale response. Speaker 200:31:23Let me jump in here just a little bit. Yes, yes. So when you look at the San Francisco sale, For us, we look at what has occurred in San Francisco regulated multi Housing is kind of a perfect storm. California and San Francisco in particular Continues to stagnate and continues to be impacted by work from home, crime, Homelessness, drug use, governance, we can high taxes, we can go on and on with And the prospect of increased regulation, I think we can go on and on with the issues as it relates To that asset. And so given all of that uncertainty, we decided to move on and take a very, very significant loss. Speaker 200:32:20As it relates to other losses like this, in the market, there have not been that many sales. I would imagine very few people want to transact at that type of a level unless They are in asset classes like office and in very weak markets where they feel that the Going forward, opportunity for that asset is vastly diminished. This was a very unusual and we hope a one off situation In terms of just about everything that could go wrong, going wrong, wanting certainty and wanting to move on, So there are multiple factors here. But I don't think other than that outside of office, we're going to continue to see People selling loans at those type of significant discounts. Speaker 800:33:18Great. Thank you. As my follow-up question, the 10 Q provides some commentary around discount rates and terminal cap rates. So generally speaking, what do you think stabilized cap rates should be on office and multifamily? Speaker 200:33:34That's a very tough question. Go ahead, Priyanka. Speaker 600:33:40No, I was going to say the exact same thing actually. Again, I think it's just so market specific, asset specific. I mean, if you're Talking about a leased up asset, it depends on the quality of the rent roll, weighted average lease terms. There's so many things that go into that. I think the reference you made to what's in the 10 Q, these are all related to transitional assets that are in our portfolio That have that lease up and stabilization is going to take time, which is by definition in the transitional asset arena. Speaker 600:34:15And so we have used cap rates that are indicative of more normalized transaction environment rather than cap rates today, which is Obviously, a very capital constrained environment. Speaker 800:34:30Great. Thank you very much. Operator00:34:35Thank you. We have no further questions. And I'll hand back to Richard for any closing comments. Speaker 200:34:43Well, thank you all for joining us. I think that this environment is difficult. It's going to continue to be difficult, And we are ready for it. It may not be fun every day, But we are set up for an environment like this and to work through problems and get to the other side. But it's going to be a very bumpy road for the next year, we think at least. Speaker 200:35:15We think we're very well set up to handle these problems and be ready for a Capital market turnaround, hopefully by 2025. So thank you all for joining us, and I will look forward to speaking to you again at our next Operator00:35:39Thank you. This now concludes today's call. Thank you for joining. You may now disconnect your lines.Read morePowered by Conference Call Audio Live Call not available Earnings Conference CallClaros Mortgage Trust Q3 202300:00 / 00:00Speed:1x1.25x1.5x2x Earnings DocumentsSlide DeckPress Release(8-K)Quarterly report(10-Q) Claros Mortgage Trust Earnings HeadlinesClaros Mortgage price target lowered to $3.50 from $5.25 at UBSApril 17 at 7:39 PM | markets.businessinsider.comInstitutional owners may take dramatic actions as Claros Mortgage Trust, Inc.'s (NYSE:CMTG) recent 29% drop adds to one-year lossesApril 8, 2025 | finance.yahoo.comWarning: “DOGE Collapse” imminentElon Strikes Back You may already sense that the tide is turning against Elon Musk and DOGE. Just this week, President Trump promised to buy a Tesla to help support Musk in the face of a boycott against his company. But according to one research group, with connections to the Pentagon and the U.S. government, Elon's preparing to strike back in a much bigger way in the days ahead.April 19, 2025 | Altimetry (Ad)Claros Mortgage Trust, Inc. Announces 2025 Annual Meeting of StockholdersMarch 26, 2025 | businesswire.comClaros Mortgage rises 12.0%March 13, 2025 | markets.businessinsider.comClaros Mortgage CEO buys $367.2K in common stockMarch 12, 2025 | markets.businessinsider.comSee More Claros Mortgage Trust Headlines Get Earnings Announcements in your inboxWant to stay updated on the latest earnings announcements and upcoming reports for companies like Claros Mortgage Trust? Sign up for Earnings360's daily newsletter to receive timely earnings updates on Claros Mortgage Trust and other key companies, straight to your email. Email Address About Claros Mortgage TrustClaros Mortgage Trust (NYSE:CMTG) operates as a real estate investment trust. It focuses on originating senior and subordinate loans on transitional commercial real estate assets in the United States. The company has elected to be taxed as a real estate investment trust. As a result, it would not be subject to corporate income tax on that portion of its net income that is distributed to shareholders. 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There are 9 speakers on the call. Operator00:00:00Hello, everyone, and welcome to Claros Mortgage Trust Third Quarter 2023 Earnings Conference Call. My name is Nadia, and I'll be your conference facilitator today. All participants will be in a listen only mode. After the speakers' remarks, there will be a question and answer period. I would now like to hand over the call to An Lin, Vice President of Investor Relations for Clarus Mortgage Trust. Operator00:00:28Please proceed. Speaker 100:00:31Thank you. I'm joined by Richard Mack, Chief Executive Officer and Chairman of Clarus Mortgage Trust Mike McGillis, President and Director of Clarus Mortgage Trust and Jay Agarwal, CMTG's Chief Financial Officer. We also have Kevin Cullinan, Executive Vice President, who leads MREX Originations and Priyanka Garg, Executive Vice President, who leads MREX 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. Speaker 100:01:10I'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 those 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 equivalents, please refer to the earnings supplement. Speaker 100:01:53I would now like to turn the call over to Richard. Speaker 200:01:56Thank you, An, and thank you, everyone, for joining us for CMTG's 3rd quarter earnings call. At this time last year, the conversation among investors centered around the timing and depth of a 2023 recession. But it now looks like the U. S. May close this year without one. Speaker 200:02:16And while this appears to be positive news, There continues to be much capital market uncertainty as bond rates climb, especially in interest rate sensitive industries. So it's a confusing time where good news about economic growth can be bad news for asset values And where headline economic data is subject to multiple interpretations. Add to this the elevated geopolitical risk Unseen since the depths of the Cold War, punctuated by the ongoing Russia Ukraine war and a renewed and rapidly evolving war in the Middle East. And you have the basis for persistent market volatility. As investors struggle to price capital And underwrite future economic growth, corporate earnings and inflation. Speaker 200:03:07Some in the professional investment space Believe that we are nearing or at the end of interest rate hikes. Some are starting to discuss when and not if the Fed will begin to cut rates. However, it's difficult for us to predict the trajectory of interest rates given the multitude of indicators that may influence Fed actions And the numerous and many cases conflicting variables impacting inflation and economic growth. With this in mind, we at CMTG have been executing our business within the context of a higher for longer rate environment. And this is one of the main reasons we have been so proactive. Speaker 200:03:49We are managing our portfolio with a long term investment perspective towards maximizing shareholder value, While acknowledging the commercial real estate industry's challenges. COVID related demand shifts have been disruptive, Particularly in the office sector, but perhaps not nearly as jarring as the COVID stimulus induced inflation We are dealing with today and the subsequent higher interest rate environment. The combination of these two factors has resulted Capital Markets dislocation that we continue to see throughout the real estate sector. Not surprisingly, amidst these headwinds, sales and transaction volumes have been significantly down over the past several quarters. However, outside of the office market, we have yet to observe many truly distressed trades. Speaker 200:04:49What we are seeing is transaction volume around select high quality assets at only modestly lower values In spite of the challenging environment. Turning past the economic climate, I'll now add a few high level remarks on the Q3 for CMTG. We had an active and productive quarter overall with portfolio management and strategic Focused on Liquidity and Capital Preservation. As mentioned on our last earnings call, We had anticipated significant loan repayments in our portfolio during the back half of the year. And we're pleased to report that we remained on track With 4 loans repaying during the Q3. Speaker 200:05:38Given the limited transaction activity in the broader real estate market, We believe this reflects positively on the institutional quality of the assets and the sponsors within our portfolio. During the quarter, we also executed 2 loan sales. The first loan was a Texas hospitality loan, which was sold at par with the intention of reducing our overall hospitality exposure and bolstering our liquidity. The second loan Was collateralized by a San Francisco multifamily portfolio with a rent regulated component. In the current environment, it's important to be vigilant. Speaker 200:06:18And as part of our asset management process, we evaluate our investments through the lens of optimizing Long term shareholder value balanced against the time and capital required to achieve that value. So in select circumstances, We will consider selling a loan where we no longer have long term conviction in the investment. This was the case with the San Francisco multi and family investment We decided to sell during the Q3. It was a difficult decision due to the resulting realized loss. But ultimately, we believe that this portfolio management decision was prudent given the market and regulatory headwinds the investment was facing. Speaker 200:07:02Mike will provide a more comprehensive portfolio review later on in the call, including details of the loan sales. Lastly, as previously reported, CMTG declared a dividend of $0.25 per share for the 3rd quarter, which represents a reduction from prior quarterly dividend levels of $0.37 per share. We considered a number of factors in resetting the dividend, including acknowledging that the current market disruption Was and is very likely to persist and the desire to take advantage of potential opportunities that may arise within our portfolio. Given these factors, we look to establish the dividend at a level where we believe it will be sustainable And comfortably covered by distributable earnings before realized gains and losses and leave us prepared for future opportunities and potential unknowns. I would now like to turn the call over to Mike. Speaker 300:08:04Thanks, Richard, and good morning, everyone. The 3rd quarter was a dynamic quarter driven by strong repayment activity and 2 loan sales. Notwithstanding this activity, the portfolio composition remained relatively unchanged, although we had a modest decline in office exposure. To quickly recap, CMTG's primarily floating rate portfolio based on carrying value Was $7,100,000,000 at September 30 compared to $7,500,000,000 at June 30. The quarter over quarter decrease was primarily due to loan repayment and loan sale activity during the period, partially offset by follow on Fundings on prior period loan commitments. Speaker 300:08:49During the Q3, we received an aggregate of $475,000,000 in loan proceeds, which comprised $48,000,000 of full loan repayments, about $39,000,000 of partial loan repayments and $188,000,000 From loan sales that Richard mentioned earlier, which I'll touch upon in more detail later. In addition, we made follow on fundings of 174 Turning to the composition of our portfolio. Multifamily continues to represent our largest sector, Representing 41% of the portfolio at September 30. While we are observing borrowers contending with higher interest rates, Our long term outlook for the asset class remains positive. We continue to believe that high quality, well located multifamily We'll perform well on a relative basis given the strong long term underlying supply demand fundamentals favoring the sector As well as the impact of higher interest rates on homeownership affordability. Speaker 300:09:52Hospitality, our 2nd largest allocation, Represented 19% of the portfolio at September 30, relatively unchanged compared to the prior quarter. In terms of office, Historically, we've been highly selective when it comes to office, and as a result, have maintained a low portfolio concentration in this asset class. During the Q3, we further reduced our office exposure to 13% of the portfolio. This was primarily a result of an office Construction loan that repaid during the quarter as anticipated. The loan was $141,000,000 loan commitment And was secured by a newly built Class A high rise office building located in Nashville, Tennessee. Speaker 300:10:38This loan is a good example of high quality office Continuing to be attractive and why we believe construction loans serve as a valuable component of our portfolio, Particularly when asset managed with discipline and built in access to the broader perspective and resources of the Mack Real Estate Group. We believe that when a new asset is delivered, it will frequently represent one of the highest quality and most in demand assets in its submarket. As Richard mentioned, we expected a meaningful number of loans to repay. And during the Q3, we $248,000,000 in full loan repayments, about $39,000,000 in partial loan repayments with additional loan repayments We believe it's important to note how diverse the underlying collateral of these loans were. They represent a cross section of collateral from various markets and property types and primarily assets that were recently delivered to the market. Speaker 300:11:42We believe this suggests that there's still liquidity for high quality assets and sponsors validating the quality of the investments Before turning the call over to Jay, I'd like to discuss the loan sales we completed during the quarter. The first loan was collateralized by a high quality hospitality asset located in Austin, Texas With a UPB of $123,000,000 that had seen significant improvement in operating performance during the long term. We took advantage of an opportunity to sell the investment at par, which we believe speaks to the credit quality of the asset and the investment, Particularly in this capital markets environment. The transaction enabled us to enhance our liquidity, Further bolstering our balance sheet while reducing our leverage and exposure to hospitality. The second loan was $138,000,000 loan originated in 2019, collateralized by a Portfolio of multifamily properties with a rent regulated component located throughout San Francisco. Speaker 300:12:50The borrower continued to support this asset through COVID-nineteen pandemic, but decided to stop making debt service payments In the Q4 of 2022 as a result of increasing interest rates and reduced NOI at the property Given San Francisco market challenges. Since the time of the payment default, the dynamics of the San Francisco real estate market Have continued to deteriorate, which coupled with the expectation of continued regulatory pressure led us to the difficult but clear sighted decision to sell the loan for gross proceeds of 65,000,000 Representing a 53% discount to UPB. While this is a disappointing outcome for the San Francisco loan, It was driven by our belief that there are significantly better uses of this capital, and we were able to use proceeds from the loan sale to reduce leverage, Which will be accretive to distributable earnings given that the loan was on non accrual. We also believe this demonstrates our commitment to strong and efficient portfolio management, even when it requires moving away from an I would now like to turn the call over to Jay. Speaker 400:14:06Thank you, Mike and Richard. For the Q3 of 2023, we reported distributable earnings excluding net realized losses of $0.35 per share, Which comfortably covers our revised dividend of $0.25 per share. Distributable loss including net realized losses The net realized loss of $73,000,000 or $0.52 per share Primarily, it is both of the sale of the previously 5 rated San Francisco multifamily investment that Mike mentioned. We reported GAAP net loss of $0.50 per share. Please refer to our earnings supplement For reconciliation of non GAAP financial measures. Speaker 400:14:54I would now like to discuss the overall credit profile of the portfolio And risk rating migration during the quarter. No new loans were added to the risk rated 4 category. However, 3 4 rated loans were migrated to a 5 rating. These are loans with an aggregate UPB Of $335,000,000 against which we recorded a specific CECL reserve of $71,000,000 These include a land loan in Virginia and office loans in San Francisco and Atlanta. At September 30, our CECL reserve was $155,000,000 or 2.2 percent of UPB. Speaker 400:15:38This is comprised of $72,000,000 of specific $83,000,000 of general CECL reserves. Specific CECL reserves represented 21.3% of the UPB of the underlying loans at quarter end. The general CECL reserve of 1.2% is comprised of 3.6% of the UPB on 4 year loans 0.8 percent of the UPB on the remaining loans. General seasonal reserve Increased during the quarter primarily as a result of deteriorating macroeconomic conditions, offset by seasoning of and a reduction in our loan portfolio. In addition, we placed another $98,000,000 480 loan secured by an office building in Irvine, California Non accrual loans represented 6.1% of our loan portfolio at September 30. Speaker 400:16:39Turning to the balance sheet. As Richard mentioned, preserving liquidity continues to be a priority for the organization. On September 30, we reported $433,000,000 in total liquidity, which includes cash and approved and undrawn credit capacity. Unencumbered loans comprised $438,000,000 which includes $407,000,000 in senior loans, As well as $144,000,000 mixed use New York City REO property. In addition, future funding commitments decreased to $1,300,000,000 at September 30 compared to $1,900,000,000 at December 31, 2022. Speaker 400:17:26Our net debt to equity ratio remained consistent quarter over quarter coming in at 2.3x at September 30. I would now like to open the call for questions. Operator, please go ahead. Operator00:17:40Thank you. When preparing to ask your question, please ensure your phone is unmuted locally. And our first question today goes to Sarah Barkam of BTIG. Sarah, please your line is open. Speaker 500:18:02Hey, everyone. Thanks for taking the question. So on the equity side, We've been hearing that the multifamily supply issue is becoming more prevalent. Developers are perhaps more pressured to Get to breakeven in order to effectuate a sale or more permanent financing. Could you comment on that and what you're Being on the ground in your development portfolio and sponsor behavior there. Speaker 200:18:30Sure. Are we talking about merchant builders Selling at a loss, are we talking about fundamentals from a leasing An occupancy perspective, just to make sure I get the question and thank you for asking it. Speaker 500:18:50Yes, yes. My question, I guess, is coming out of some comments we've been hearing with respect to merchant builders and because That and your concentration in development, just was curious to hear your comments on that and what you're seeing in your portfolio. Speaker 200:19:07Sure. Okay. So, as it relates to kind of the sales market, we are seeing merchant builders Sell at modest losses in order to get off of guarantees that they have on their loans. That is one of the things that we like about our construction loans, especially in the multifamily space. The borrowers are incentivized to take losses because they are generally on the hook to Pay the interest rate guarantees. Speaker 200:19:43And so, we are seeing merchant builders sell at discounts, but modest discounts. And generally what we like about building the best product in the market is even when there is softness in fundamentals, which there are, These are the first assets to lease up and there's always a level, always is a big word, but I've never seen a market where there wasn't a level where you could lease the best asset in the market. And so we feel comfortable, very comfortable with our multifamily development assets. Demand as a general statement is good in most markets, but we're still absorbing supply. And that Absorption is what is dampening rents and bringing concessions back into the market. Speaker 200:20:41Having said that, almost every planned development in the multifamily space has been stopped. So anything that didn't begin more than 6 months ago, really is not getting off the ground. We are also seeing a slowdown in home sales as mortgage rates climb. We believe that over time that will be bullish for multifamily. So we think that the inflation of rents We'll come to the multifamily sector, but it is going to take some time to catch up With the supply, but we are long term quite bullish given the lack of housing Overall in the U. Speaker 200:21:32S. Market, we are undersupplied from a housing perspective. Hopefully, that was That addressed your questions. Speaker 500:21:42Yes. I appreciate the color there. And then my follow-up is Just related to the loan sales, it sounds like from the prepared remarks that you're open to pursuing more loan sales to support liquidity. We saw a watch list loan sale as well as a higher quality 3 rated loan sale during the quarter. Can you speak to where else in your portfolio either with respect to sector or geography or non watch list versus watch list where You see more opportunities to sell and bring in more liquidity? Speaker 600:22:20Hi, Sarah. It's Priyanka. Thank you for that question. I think it's going to be very situational, very asset and borrower specific. So the watch list loan that was sold, I think Mike did a great job of sharing our perspective and how we Arrived at that conclusion. Speaker 600:22:39We're only going to do that if we really feel like we're not capable of stepping in and owning the asset. I think we've done that Successfully twice now in our REO portfolio, and so we're not going to shy away from that. But if we don't think the fundamentals are there, then if we want to Resolve the credit, then it's going to be a loan sale. There's nothing that we're seeing on the horizon that we have slated for that right now, but It's a very dynamic environment, and that remains to be seen. The 3 rated loan that we sold, that was Just more opportunistic, right timing. Speaker 600:23:15We were able to sell it at par, created liquidity. We're not out in the market actively Marketing it, that was also that was not marketed. That was just kind of based on a conversation with a counterparty with whom we do a lot of business. So Again, it was just opportunistic and situational, but there's no programmatic strategy here on loan sales. Speaker 500:23:39Okay. Appreciate the comments. Operator00:23:45Thank you. The next question goes to Rick Shane of JPMorgan. Rick, please go ahead. Your line is open. Speaker 700:23:53Thanks. Can you guys hear me this morning? Speaker 800:23:57Yes. Speaker 300:23:57Yes. Yes. Thanks, Rick. Speaker 700:23:59Okay, great. Sorry, this question won't really come as a surprise To anybody who's been listening to these calls, but would just love to hear a little bit about combination of dividend policy and Appetite for repurchases. I'm assuming that the loan sales were contemplated when you reduced the dividend For the Q3 and going forward, but all things considered and with the stock trading at such a huge discount, Does that dividend policy make sense or should you be more aggressive on the buyback? And I would just observe that You guys own on a relative basis a great deal of stock compared to many of your pure companies. I think the incentives are pretty aligned. Speaker 300:24:57Sure, Rick. It's Mike. Thanks for the question. I think From a dividend perspective, in terms of the decision to reduce it, it wasn't so much tied directly to Decision to sell this loan, but it was really looking at our portfolio, looking at distributable earnings profile On a go forward basis, assuming there was going to be some deteriorate potential deterioration given a higher For longer rate environment, and we're trying to be proactive in making that dividend cut to reflect Where we thought distributable earnings before any net realized gains and losses would be on a forecasted basis And allow us to substantially cover that go forward dividend Given the situation that we'd significantly overpaid our minimum distribution requirements under the REIT rules. So that was those were all critical elements of that decision. Speaker 300:26:07With respect to share buyback, I think right now, Liquidity is key. We really We're focused on preserving and maintaining liquidity and protecting the portfolio in this environment, even though we have the ability to buy back shares. I don't expect that we'd say never, but I don't expect that we'd do it unless we were really, really comfortable that we had a lot of excess And that was the best use of capital relative to redeploying into what we think is a very favorable market right now, but we're being very I think it's also to keep in mind, we do have, as Jay mentioned, significant future funding commitments in our existing loans, Which we're very comfortable with the performance of that portfolio. And it's important to highlight that those loans have a weighted average spread The SOFR of 4 73 basis points over SOFR, so in excess of a 10% current coupon unleverage. So That we feel like is a very good use of excess liquidity as we have it. Speaker 300:27:24So Hopefully, that's responsive to your question. Speaker 700:27:31It is. That's helpful. And When we think about those undrawn commitments, the comment had been made that multifamily Development in a lot of cases has really stopped. Does that suggest to you that In the near term, the draws on against those commitments We'll be relatively modest and so there's a little bit of a that liquidity won't be Drawn until the environment improves a little bit, is that the sort of check and balance there? Speaker 600:28:15Hi, Rick. It's Priyanka. I'm going to jump in here. We I think Richard's comment was more general comment related To the market, in our portfolio, all construction is proceeding as expected on schedule, generally on budget. So I wouldn't expect any change in our future funding commitments as it relates to our multifamily exposure or really across our construction loans. Speaker 600:28:41And I think we've mentioned in past quarters, we have milestones in our loan documents. We have an estoppel, right, every month as we're funding draws. And so we want to keep funding draws, keep the project moving forward And have borrowers continue to rebalance. So we're not seeing a slowdown inside of our portfolio. Projects that have started have continued. Speaker 700:29:06Got it. Okay, thank you. That's a very helpful clarification. Thanks guys. Speaker 200:29:12Thank you, Rick. Speaker 600:29:15Thank you. Operator00:29:22And our next question goes to Jade Rahmani of KBW. Jade, please go ahead. Your line is open. Speaker 800:29:29Hi, this is Jason Saptron on for Jade. So my first question, we're seeing commercial mortgage REITs take 30% to 50% losses on loan sales in some cases. And these are on loans with 60% to 70% reported LTVs. So what do you think is driving that magnitude of loss? How much of it is a look through to price decline at the asset level? Speaker 800:29:52How much of it is the lead business plan and higher cost of carry in? How much of it is lack of ability to leverage what you're buying? Speaker 600:30:04Hi, it's Priyanka. Thanks for that question. I think it's a great question. I think that's something we're all trying to Stand right now, but I think these loan sales, obviously, I can only speak for ourselves, but they're all very situational. And It really just depends on strength of borrower, what people think they can go after, in what jurisdiction It's occurring because that impacts ability to foreclose. Speaker 600:30:30There's obviously underlying asset deterioration like you just said. I think For our situation in particular, given our decision to go ahead and Sell alone, what we wanted to really focus on was very expedient and certain execution. And so we selected a strong buyer who could close quickly, Which minimize both market and execution risk. So we I think it's just a very dependent Situation and in our case, we really wanted to ensure that we got it off our books quickly just given the overall environment in San Francisco and as it and as it related to the continued uncertain rate environment. So I think it's a great question, but I think there's just not a wholesale response. Speaker 200:31:23Let me jump in here just a little bit. Yes, yes. So when you look at the San Francisco sale, For us, we look at what has occurred in San Francisco regulated multi Housing is kind of a perfect storm. California and San Francisco in particular Continues to stagnate and continues to be impacted by work from home, crime, Homelessness, drug use, governance, we can high taxes, we can go on and on with And the prospect of increased regulation, I think we can go on and on with the issues as it relates To that asset. And so given all of that uncertainty, we decided to move on and take a very, very significant loss. Speaker 200:32:20As it relates to other losses like this, in the market, there have not been that many sales. I would imagine very few people want to transact at that type of a level unless They are in asset classes like office and in very weak markets where they feel that the Going forward, opportunity for that asset is vastly diminished. This was a very unusual and we hope a one off situation In terms of just about everything that could go wrong, going wrong, wanting certainty and wanting to move on, So there are multiple factors here. But I don't think other than that outside of office, we're going to continue to see People selling loans at those type of significant discounts. Speaker 800:33:18Great. Thank you. As my follow-up question, the 10 Q provides some commentary around discount rates and terminal cap rates. So generally speaking, what do you think stabilized cap rates should be on office and multifamily? Speaker 200:33:34That's a very tough question. Go ahead, Priyanka. Speaker 600:33:40No, I was going to say the exact same thing actually. Again, I think it's just so market specific, asset specific. I mean, if you're Talking about a leased up asset, it depends on the quality of the rent roll, weighted average lease terms. There's so many things that go into that. I think the reference you made to what's in the 10 Q, these are all related to transitional assets that are in our portfolio That have that lease up and stabilization is going to take time, which is by definition in the transitional asset arena. Speaker 600:34:15And so we have used cap rates that are indicative of more normalized transaction environment rather than cap rates today, which is Obviously, a very capital constrained environment. Speaker 800:34:30Great. Thank you very much. Operator00:34:35Thank you. We have no further questions. And I'll hand back to Richard for any closing comments. Speaker 200:34:43Well, thank you all for joining us. I think that this environment is difficult. It's going to continue to be difficult, And we are ready for it. It may not be fun every day, But we are set up for an environment like this and to work through problems and get to the other side. But it's going to be a very bumpy road for the next year, we think at least. Speaker 200:35:15We think we're very well set up to handle these problems and be ready for a Capital market turnaround, hopefully by 2025. So thank you all for joining us, and I will look forward to speaking to you again at our next Operator00:35:39Thank you. This now concludes today's call. Thank you for joining. You may now disconnect your lines.Read morePowered by