MiMedx Group Q1 2024 Earnings Call Transcript

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May 7, 2024

There are 12 speakers on the call.

Operator

Thank you. I'm joined by Richard Mack, Chief Executive Officer and Chairman of Clarus Mortgage Trust and Mike McGillis, President and Chief Financial Officer and Director of Clarus Mortgage Trust. 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 CMGG's earnings release and supplement. We encourage you to reference these documents in conjunction with the information presented on today's call.

Operator

If you have any questions, 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 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.

Operator

For reconciliations of non GAAP measures to their nearest GAAP equivalent, please refer to the earnings supplement. I would now like to turn the call over to Richard.

Speaker 1

Thank you all for joining us this morning for CNTG's Q1 earnings call. The meaningful decline in inflation at the beginning of the year provided rate sensitive investors much optimism. Unfortunately, the last several months have revealed a different narrative. Recent inflation frames have been volatile and generally come in higher than expectations, making what seemed to be all but certain Fed rate cuts now very uncertain. As it relates to commercial real estate, we believe the general outlook for the industry will remain challenging for the remainder of the year and into 2025.

Speaker 1

We expect continued headwinds in the higher rate environment and because of the lack of clarity around the direction of interest rates. In addition to trying to handicap election year Fed actions, a number of variables also add further complexity to the outlook, including U. S. Economic uncertainty, growing U. S.

Speaker 1

Debt levels and geopolitical tensions in Ukraine, the Middle East and in East Asia. In our view, it is this uncertain environment, especially around interest rates that has placed the real estate capital markets in stasis. No one wants to acknowledge value declines if interest rate cuts are just around the corner. Against this backdrop, we have been observing slowly increasing cap rates and decreasing real estate valuations that to date reflect not where short term rates are, but where investors expect them to sell. Sellers and buyers are dancing, but not committing to each other, resulting in vastly lower transaction volumes that have not only limited investors' ability to refinance and recapitalize properties, but have also resulted in less new loans issued and bonds available.

Speaker 1

This lack of product has been driving down lending spreads for many types of real estate financing despite valuation uncertainties. While this is helpful, it does not yet reflect a recovery. Similar to previous cycles, real estate investors are awaiting the reemergence of real transaction volume and an active real estate capital market to provide confidence and a much needed liquidity infusion. This may be starting as evidenced by tightening spreads and investors looking to the revalued real estate sector for attractive risk adjusted returns, that is by no means conclusive. Real estate transactions across almost all asset classes remain muted relative to historical norms.

Speaker 1

As you know from prior calls, CMTG has been executing our business strategy through the lens of a higher for longer rate environment. We continue to believe that a conservative and defensive stance is prudent given the uncertainty around where interest rates and loan spreads will ultimately settle. Higher interest rates have translated into higher financing costs for borrowers with many continuing to contend with negative leverage. Therefore, we expect repayments to be slow and repayment timing less predictable. Further, it is likely that these trends will continue to impact our borrowers and portfolio.

Speaker 1

And as we look ahead, we remain committed to loan resolutions and optimizing shareholder value. During this period, we anticipate that proactive asset management will remain a key focus for our team. As we work with borrowers, we expect them to not only demonstrate an operational commitment to their assets, but a financial commitment to them. For example, during the Q1, we received repayments on 2 construction loans, notably one of which was a 4 rated loan. We believe that this not only speaks to the liquidity that is starting to return to the market, but also to the quality of the sponsorships and the assets underlying our loans.

Speaker 1

I would now like to turn the call over to Mike.

Speaker 2

Thank you, Richard. For the Q1 of 2024, CMTG reported a GAAP net loss of $0.39 per share and a distributable loss of $0.12 per share. Distributable earnings per share prior to realized losses were $0.20 per share compared to $0.31 per share for the prior quarter. The quarter over quarter change is primarily a result of the impact of seasonality on the New York City REO Hotel portfolio, which accounted for an $0.08 per share swing as well as 3 loans placed on non accrual during the Q1, which negatively impacted earnings by $0.03 per share. We'll discuss the non accrual loans in more detail later on the call.

Speaker 2

As previously discussed, the Q1 is generally the weakest quarter for New York City Hotels, particularly compared to traditionally strong performance in the Q4. CMTG's loans held for investment portfolio decreased to $6,700,000,000 at March 31st from $6,900,000,000 at December 31. The quarter over quarter change is attributable to follow on fundings of $143,000,000 dollars more than offset by the impact of loan repayments totaling $146,000,000 and the reclassification of a 216,000,000 dollars 4 rated loan to held for sale. Additionally, as mentioned on our last earnings call, at year end 2023, we classified 3 loans secured by a variety of asset classes as held for sale and completed the sales of such loans during the Q1 of 2024 for $262,000,000 The sales price represented 96% of the loans UPB. As noted, this loan sale did not impact the 1st quarter loans held for investment portfolio because these loans were classified as held for sale at year end.

Speaker 2

Reflected in our first quarter results are the resolutions of 2 4 rated loans. The first, a $104,000,000 construction loan on a hospitality asset located in New York City had been risk rated for since 2020. During the quarter, we received a full repayment of this loan, including all contractual interest as well as some default interest and late fees. Despite the borrower's delay in executing its business plan, the borrower was able to identify and transact with another lender to refinance our position. We believe that PMTG's successful outcome with this loan speaks well to our conviction on collateral values and also suggest potential signs of a more normalized capital markets environment.

Speaker 2

The second loan, a $216,000,000 construction loan secured by 2 multifamily assets in Southern California with a remaining unfunded commitment of $45,000,000 had been downgraded to a 4 risk rating in the Q2 2023 and placed on non accrual status last quarter. After careful consideration, we concluded the loan sale was the best course of action. And in April, we completed the sale of the loan at 80% of UPB. Our Q1 balance sheet reflects this loan is held for sale, net of a $42,000,000 principal charge off. Executing the sale enabled us to add liquidity, reduce debt levels and reduce our future funding obligations.

Speaker 2

While our sponsor has the multifamily development expertise to take over these types of assets, after careful consideration, we decided that there were more effective uses of the capital and resources required to complete construction and stabilize and sell these assets. At March 31, multifamily assets represented our largest exposure at 40% of our portfolio. We continue to have conviction in the long term outlook of the sector with a particular focus on select high growth markets. As previously mentioned, we're seeing some borrowers navigating the pressures of negative leverage and we are actively monitoring these loans and working with our borrowers. During the quarter, we placed 3 multifamily loans with a combined UPB of 186,000,000 dollars on non accrual status.

Speaker 2

The first is a $97,000,000 loan collateralized by a 376 unit multifamily complex located in the Las Vegas MSA. The second is a $50,000,000 loan collateralized by a 206 unit multifamily complex located in Phoenix, Arizona. And the third is a $39,000,000 loan collateralized by a 370 Unit multifamily complex located in Dallas, Texas. We continue to maintain a long term favorable outlook on the multifamily sector and our sponsors' deep experience as an owner, operator and developer has informed our asset management approach with regard to these non accrual loans. We have been aggressively pursuing our remedies and want to highlight that compared to the multifamily construction loan we sold, these 3 new non accrual loans, which all share the same sponsor, are vastly different.

Speaker 2

These 3 new non accrual loans are all cash flowing operating properties with solid occupancy, which were downgraded primarily as a result of the borrower's inability to contend with the impact of higher financing costs on their ability to execute their business plan. By comparison, pursuing foreclosure for these assets requires much less capital resources than the in process construction loans and may translate to improved earnings relative to holding the loans on non accrual status in the near term. With this in mind, we believe there may be select opportunities to foreclose on multifamily assets within place cash flow and execute the borrower's original business plan, but at a much lower cost basis and leverage levels. Total CECL reserves as a percentage of UPB increased to 2.6% compared to 2.2% for the prior quarter. Specific CECL reserves represented 22.9% the UPB of our loans with a specific CECL reserve.

Speaker 2

The general CECL reserve of 1.6% was comprised of 3.1% of the UPB on full rated loans and 0.9% of the UPB on the remaining loans. During the quarter, we recorded provisions for CECL reserves of $70,000,000 of which $42,000,000 relates to the realized loss on the previously mentioned loan that was transferred to held for sale and sold in April 2024. Now turning to financing and liquidity. At March 31, we reported $265,000,000 in total liquidity, which includes cash and approved and undrawn credit capacity. Unencumbered loans totaled $419,000,000 of which 93% were senior loans.

Speaker 2

Compared to last quarter, our portfolio's unfunded loan commitment declined from $1,100,000,000 to 890,000,000 dollars Of the $890,000,000 of unfunded loan commitments, approximately $115,000,000 relates to loans, which we do not believe the borrower will be able to meet conditions precedent to funding, reducing our expected future funding levels to 7 $75,000,000 To fund this, we have $453,000,000 of in place financing commitments, leaving a projected equity or net funding requirement of $321,000,000 which we expect to fund over the course of approximately 2 point 7 years. At March 31, we had total financing capacity of 7,200,000,000 dollars with aggregate outstanding balances of $5,500,000,000 Our overall financing balance declined $226,000,000 from the prior quarter, primarily due to a combination of loan sales and loan repayments as well as proactive voluntary deleveraging of specific assets. During the quarter, we made voluntary deleveraging payments of $82,000,000 bringing this total to $439,000,000 dollars since the Q1 of 2023. As a result, at March 31, 4 rated loans and 5 rated loans maintained materially lower financing advance rates of 59% 47%, respectively, compared to 66 percent for loans with a 3 risk rating. As Richard mentioned, we continue to manage the portfolio in the context of a higher for longer rate environment.

Speaker 2

We believe that our management team has deep industry and multi cyclical experience to navigate through this challenging capital markets and credit environment. In addition, we believe that our sponsors' experience as an owner, operator and developer provides us with additional market insights to effectively evaluate and pursue a broader range of alternatives and maximize recovery in various situations. Looking ahead, our priorities continue to be focused on liquidity, proactive deleveraging, loan resolutions and proactive asset management. Over the past several quarters, we've demonstrated our commitment to liquidity management and loan resolutions from loan sales to pursuing our remedies, executing with an objective of maximizing recoveries in a challenging environment. Operator, I would now like to open the call for questions.

Speaker 3

Thank Our first question comes from Rick Shane with JPMorgan. Your line is open. Please go ahead.

Speaker 4

Thanks for taking my questions this morning, guys. Look, I think the number one question that comes up is obviously the ability to sustain the dividend or the desirability to sustain the dividend. You guys noted DA excluding realized losses or excluding losses of $0.20 that's a nickel below the current dividend run rate. There's obviously drag from 650,000,000 and I apologize, approximately 650,000,000 of non accruals. Is the dividend, does it make sense to sustain it at these levels given the efforts to preserve liquidity?

Speaker 5

Thanks, Rick. This is Mike. Good question. I think this is something that we look at each quarter with our Board. When looking at Q1, I think it's important to keep in mind that the distributable earnings pre credit were adversely impacted by seasonality of the New York City hotel portfolio.

Speaker 5

So adjusting that to a normalized level, we get much closer to the $0.25 dividend level. But when we look at this, we're trying to look at really what our dividend paying capacity is over the medium to long term as part of setting a dividend rate. But obviously, we look at this every quarter with our Board and looking at multiple scenarios that we may be facing across the portfolio each quarter. So something that we continue to look at with our Board regularly.

Speaker 6

Got it. I appreciate that. And it is

Speaker 4

a good point on the seasonality on the hotel. Look, the other question that we've received a couple of times from investors is, obviously, there was a very, very quick migration from a 4 rated loan to a realized loss. And again, I appreciate that when you move them to held for sale that pulls things forward and that's actually helpful in understanding the numbers. But can you just help us understand a little bit about really what the development was there that caused you guys to act so quickly?

Speaker 7

Yes. Hi, Rick. It's Priyanka. I'll take that one. It was really just new information that was received.

Speaker 7

So at year end, we were pursuing a foreclosure on that asset. We were focused on owning it. We had a foreclosure date that was publicly available. And as we approach that foreclosure date during the Q1, a number of credible buyers began approaching us and saying, we're interested in buying this loan from you. And so in conjunction with our development team, we spent a lot of time and did a lot of analysis on the trade offs between taking the discount today, getting the liquidity today versus holding the asset, foreclosing on it, developing, stabilizing, which would result in a non earning asset for an extended period of time.

Speaker 7

And so we concluded that the price that the price talk that we were engaged with and particularly with the credible buyers who could close quickly, It was a really it was a good price relative to the amount of profit that could potentially be realized, particularly when you take into account the amount of time and the impact on earnings. So that was really the migration. It was just new information that was available to us.

Speaker 4

Priyanka, that's really helpful just in understanding sort of the thought process and frankly the scenarios that you guys face. And I think that that's probably not unique. You're going to have to make those decisions over and over again. And I I appreciate the context on that. Thank you, guys.

Speaker 7

Thanks, Rick.

Speaker 3

We now turn to Doug Harter with UBS. Your line is open. Please go ahead.

Speaker 8

Thank you. Turning back to liquidity, last quarter you had modified some of your interest coverage covenants. Can you just give us an update as to kind of where you stand on those covenants there? And then just around your indebtedness covenants, kind of does that include all asset level debt and kind of your level of comfort around that covenant as well?

Speaker 5

Sure. Thanks, Doug. Good question. Yes, we complied with all of our covenants at the end of Q1. As outlined in our 10 Q, we do expect to have to work with our lenders, in particular repo lenders, not the TLB investors on a modification of our interest.

Speaker 5

Covenant mechanics, we've been having very constructive dialogues with them and expect that we'll be able to work something out. And then we're comfortably passing all of our other covenants at this time as well. So we expect to be able to work through these things in the ordinary course with our counterparties.

Speaker 8

Great. Are there any trade offs that you have to make in those conversations? Or if you just go back to the prior ones, so you don't have to give away what you're currently negotiating?

Speaker 2

No, I mean, I think it's I think a lot

Speaker 5

of it is really just being a responsible counterparty maintaining an open and transparent dialogue with our lenders. And as noted, we've been pretty aggressively deleveraging our portfolio, particularly the repo financings over the course of the past 5 quarters. And I think that kind of behavior pays benefits as you're working through these kind of things with your counterparties.

Speaker 8

Very helpful. Thank you.

Speaker 3

Our next question comes from Don Fandetti with Wells Fargo. Your line is open. Please go ahead.

Speaker 9

Yes. Can you talk about it looks like the $400,000,000 multifamily California loan was moved to a 4, this quarter. Can you talk about that migration?

Speaker 7

Yes. Hi, Don, it's Priyanka. That is we had a borrower who had a interest rate cap that they needed to purchase during the Q1. As we're seeing with some borrowers, there's not a hesitancy to protect at the levels that they are at. And so they wanted to approach us about modification discussions.

Speaker 7

We're in those discussions with the borrower right now. But given that messaging from them, we did migrate them to a foreign onto the watch list prior to this. They have been protecting each month and putting in new capital. We're optimistic about the resolution there. It's an excellent asset, high quality, best in class kind of property.

Speaker 7

So we'll pursue those discussions. We're deep in them right now with the borrower and we'll have some sort of direction or resolution in the coming quarters.

Speaker 9

So it sounds like at least as you sit here today, it doesn't feel like it's going to a 5%

Speaker 2

at this point?

Speaker 7

Based on what we know today, no.

Speaker 2

Okay. Thanks.

Speaker 3

We now turn to Steve Delaney with JMP Securities. Your line is open. Please go ahead.

Speaker 10

Good morning and thank you for taking my questions. I wanted to ask about loan sale activity. We've observed that Claros and TRTX, TPG have been the 2 commercial mortgage REITs most active in this market. And it's so I wanted to ask about that. The $172,000,000 Mike that was on the books at March 31, how many loans does that represent?

Speaker 5

That is, it's 2 loans to the same sponsor on 2 separate pieces of cross collateralized.

Speaker 10

Okay. And then you sold 3 in the 4th quarter, I believe, as well. Yes. So, yes. Yes.

Speaker 10

We have 3 loans is Go ahead. Go ahead.

Speaker 5

Now I was going to say we put 3 loans into loans held for same Q4 And then we view this other one that we completed the sale in April that's in loans held for sale at the end of Q1. To do that as sort of one loan even though it's 2 loans, same sponsor cross collateralized. So

Speaker 10

Got it. I guess the question is, since this is a bit of a new topic in the as part of the asset management, it's part of working through the problems and I guess working through this down cycle that we're in, in real estate. But if you could just offer your observations, having done this for you and Richard for many years, how deep is this loan sale market and who are the buyers? Are they credit hedge funds Or are these real property investors that are looking to use a loan to own type of strategy to acquire attractive properties for investment. I just appreciate your big picture thoughts on that topic.

Speaker 10

Thank you.

Speaker 11

Sure.

Speaker 10

Sure, Steve.

Speaker 11

Go ahead. You want to go to it, Mike? Okay.

Speaker 10

You can go ahead. Both will be the same. Okay. So I

Speaker 11

think it's a combination. There's many different buyers. As it relates to loans that we've sold kind of very close to par and there's been quite a bit of them or at par. Those are primarily hedge fund type of buyers who really are having a hard time trying to play what they view as a distressed real estate market, because there's not as much to do in the market as one would expect. As it relates to, certainly the sale that we just made at a significant discount, That was to a family office with a developer in tow.

Speaker 11

And their feeling is this is a way to get into an asset at a significant discount, understanding that they're going to have to cut through quite a bit of hair to make that happen. So I think that there are a lot of people out there searching for really high returning opportunities. And in a market where there's very little transaction volume, there's just not that much to stress out there. And so the market feels quite deep relative to the product that's available. I think if more assets were available for sale, that might feel a little bit different.

Speaker 11

But right now, there does seem to be adequate, if not extensive demand to buy loans, whether they be kind of at relatively large discounts or at par.

Speaker 10

That's very helpful color. And probably the most encouraging comments I've heard about the capital flows around commercial real estate and the commercial mortgage REITs in some time. So appreciate the opportunity to discuss it and thank you for your comments.

Speaker 11

Thanks, Steve.

Speaker 3

Our final question comes from Jade Rahmani with KBW. Your line is open. Please go ahead.

Speaker 6

Thank you very much. On the Connecticut office loan totaling $150,000,000 could you please give an update? It was originated before COVID, So presumably, you know, the underwriting did not factor in today's environment. Additionally, the maturity date was in February of this year. I was wondering also it's $150,000,000 so sizable loan, which would suggest it's in a large market, perhaps Stanford, Hartford.

Speaker 6

And also if you could comment on what's going on with the leasing of that asset?

Speaker 7

Yes. Hi, Jade. Thank you for the question. It's Priyanka. I'll take that one.

Speaker 7

So it's in it did mature during the quarter. We are very close to extending that loan. There's a lot going on at the sponsorship level where I don't want to disclose too much, but there's a transaction coming down the pike. So our modification with the borrower is likely to be a short term one followed by then a more significant modification after that depending on the status of this transaction that I'm referring to. That said, it has leasing clearly has not been in on par with what was originally underwritten.

Speaker 7

That said, they have done a very good job of retaining tenants. Tenants are very happy in the assets and are renewing leases, albeit short term. So the waltz has not been as attractive as we would like to see. But I think that the most important global comment I can make here is that there's a tremendous amount of credit support here, primarily in the form of repayment guarantees from creditworthy, warm bodies. So, it is a large loan.

Speaker 7

We're very focused on it, but, the sponsor is focused on it as well for the reasons I just mentioned.

Speaker 6

And are you able to indicate which market

Speaker 7

It is it's in Stanford.

Speaker 6

Okay. What about other upcoming 2024 maturities? There's quite a number of large ones like the New York condo loan. One of your peers had some issues in that segment, specifically the higher end of the market. There's also New York land loan and finally California Hospitality.

Speaker 7

Yes. So I'll just speak broadly about just the maturities that we're seeing coming. Most of 2024 is there's very few initial maturities and or sorry, final maturities. And so on those final maturities, we're in just we have a path to pay off here for many of them. We understand the transactions that our borrowers are working on.

Speaker 7

And we also have line of sight to modifications with some of those where we're going to need to extend beyond that final maturity date. In terms of our initial maturity dates, more than half of those loans are going to meet all of their extension tests as of right. So we'll have to do a few modifications. We'll work with borrowers. Going back to Mike's comment, if they're willing to put some capital in and they have the operational expertise, we're going to work with the borrowers.

Speaker 7

We're not in the business of owning these assets, but we're happy to modify them for the right transactions. In terms of some of the specifics that you mentioned, there are no we don't have any high end condos in New York City. There's a very small condo New York City condo loan that has maturity in 2020 5 that was extended. But we feel very good about our exposure on the condo front in aggregate.

Speaker 6

Okay. And lastly, just on the dividend again. I understand the emphasis in your commentary around long term earnings potential, but we're in kind of a volatile environment with a lot of uncertainty and you all seem to be steeped in the day to day blocking talent tackling of asset management and also managing liabilities. So why not take the additional step of reducing the dividend to create additional leeway and also protect book value. When you are paying out more in dividends than you're earning, that's downward pressure on book value.

Speaker 6

So investors clearly project a trough book value. Any comments on those considerations?

Speaker 5

Jade, those are discussions we regularly have at the Board level. You raise all good points there and those are always things we consider.

Speaker 6

Thanks a lot.

Speaker 3

This concludes our Q and A. I'll now hand back to Richard Mack for closing remarks.

Speaker 11

Thank you and thank you all for joining us. We'll reiterate these are tough times in the real estate market. It's a market where we are facing almost a complete lock up of the market with very little transaction volume. But even amidst this market, we are seeking to be opportunistic as we manage through a cyclical downturn. We are pushing for loan payoffs.

Speaker 11

We are selling loans. We are modifying loans. We are foreclosing opportunistically. We are deleveraging. And we are getting ready to originate again because we know that this too will pass.

Speaker 11

So thank you all for joining and we appreciate your support.

Speaker 3

Ladies and gentlemen, today's call has now concluded. We'd like to thank you for your participation. You may now disconnect your lines.

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