NYSE:CMTG Claros Mortgage Trust Q2 2024 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$0.17Consensus EPS $0.07Beat/MissBeat by +$0.10One Year Ago EPSN/AClaros Mortgage Trust Revenue ResultsActual Revenue$64.49 millionExpected Revenue$64.25 millionBeat/MissBeat by +$240.00 thousandYoY Revenue GrowthN/AClaros Mortgage Trust Announcement DetailsQuarterQ2 2024Date8/5/2024TimeN/AConference Call DateTuesday, August 6, 2024Conference Call Time9:00AM 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 Q2 2024 Earnings Call TranscriptProvided by QuartrAugust 6, 2024 ShareLink copied to clipboard.There are 9 speakers on the call. Operator00:00:00Welcome to the Clarus Mortgage Trust Second Quarter 2024 Earnings Conference Call. My name is Jaquita, and I will be your conference facilitator today. All participants are in a listen only mode. After the speakers' remarks, there will be a question and answer period. I would now like to hand the call over to Anh Nguyen, Vice President of Investor Relations for Clarus Mortgage Trust. Operator00:00:30Please proceed. Speaker 100:00:32Thank you. I'm joined by Richard Mack, Chief Executive Officer and Chairman of Clarus Mortgage Trust and Mike McGillis, President, Chief Financial Officer and Director of Clarus Mortgage Trust. We also have Priyanka Garg, Executive Vice President, who leads MREC's Portfolio and Asset Management. 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. Speaker 100:01:03If 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. Speaker 100:01:47For reconciliation of non GAAP measures to their nearest GAAP equivalent, please refer to the earnings supplement. I would now like to turn Speaker 200:01:55the call over to Richard. Speaker 300:01:58Thank you, An, and thank you everyone for joining us this morning for CMTG's 2nd quarter earnings call. It's been more than 2 years since the Fed started raising interest rates in response to rising inflation, and it's not been an easy run for the commercial real estate industry to say the least. When we take a step back and look at the broader picture, we can see many variables at play. Property owners have not had the pricing power of other industries that were able to pass on rising costs to consumers. Falling demand for office space and additional supply coming online in multifamily and industrial have coincided with dramatic increases in real estate expenses and capital costs. Speaker 300:02:41This has translated into real estate values falling rapidly across the board. Commercial real estate takes time to build and time to stop building, so it lags the economy. And in the short term, the industry has been disproportionately hurt by inflation and rate movements, but it can also result in outsized benefits when this pattern reverses. New construction has been dramatically reduced against the backdrop that features a generally resilient consumer, cooling inflation and a broad based market expectation that the Fed is poised to begin cutting rates. Furthermore, many investors are also predicting a resumption of rent increases in both multifamily and industrial given limited new supply and sustained demand just as rates may start to fall. Speaker 300:03:35This double benefit impact has some investors calling the bottom, especially since construction costs have also risen significantly. Not surprisingly then, we are starting to see green shoots in the commercial real estate market, suggesting a more positive trajectory for the industry could be on the horizon. While it's still too early to declare a sea change in investor sentiment, large and noteworthy transactions are getting done. Lenders are slowly returning to the market as new sources of private credit emerge. With this gradual increase in liquidity, albeit still muted from recent historical levels, we've seen borrowers successfully and willingly secure financing even in light of the elevated rate environment. Speaker 300:04:21With regard to our portfolio, we continue to be constructive on the long term outlook of the multifamily sector, which remains our largest portfolio concentration. We expect population growth, migration to many of our current and target MSAs and limited housing supply will continue to drive the overall fundamental picture we are seeing in rental housing. Additionally, we have made meaningful progress towards improving value in our 2 REO assets and we attribute this success to our management team's experience and hands on asset management approach. Looking ahead, many in the real estate industry expect that rate relief will reenergize the real estate capital markets, providing valuation tailwinds for most asset classes. And while we remain focused on liquidity, we also believe that the optimism around the Fed reducing rates provides us a compelling opportunity to reevaluate how we are deploying and directing our capital in expectation of asset value increases. Speaker 300:05:26Although the number of assets on non accrual and the watch list increased this quarter, the rate of increase decelerated implying an improving cycle. In such an environment, we do not believe that the current portfolio designations reflect the inherent value of our portfolio over the medium to long term. With all of these factors in mind, our Board of Directors has decided to adjust our quarterly dividend to $0.10 per share beginning in the Q3 of 2024. We believe this decision enables us to pursue capital allocation strategies with the objective of preserving and enhancing book value, while also positioning the portfolio for earnings growth. Those capital allocation decisions may include investing in our current and potential future significantly undervalued at current price levels. Speaker 300:06:25I would now like to turn the call over to Mike. Speaker 400:06:29Thank you, Richard. For the Q2 of 2024, CMTG reported a GAAP net loss of $0.09 per share and distributable earnings of $0.20 per share. Distributable earnings per share prior to realized losses were $0.21 per share, which was in line with the Q1 result of $0.20 per share. The New York City REO Hotel Portfolio had a stronger second quarter due to expected seasonality, which resulted in a $0.05 per share improvement in earnings compared to last quarter. This was partially offset by the impact of a New York land loan placed on non accrual during the quarter. Speaker 400:07:10I'll provide additional information on the non accrual loan later in the call. Beginning with the left side of the balance sheet, CMTG's loan portfolio grew slightly to 6 $800,000,000 at June 30 compared to $6,700,000,000 at March 31. The quarter over quarter change is attributable to follow on fundings of $143,000,000 offset by the impact of partial loan repayments totaling 41,000,000 dollars At quarter end, our multifamily portfolio was unchanged compared to prior quarter, representing our largest exposure at 40% of the portfolio. As Richard mentioned, the supply demand imbalance continues to benefit the housing market and we remain bullish on the long term fundamentals of the sector. However, borrowers continue to experience challenges as they are adversely affected by higher interest rates, elevating their cost of carry among other items. Speaker 400:08:10As a result, during the quarter, we downgraded 3 loans to a 4 risk rating, representing a total carrying value of 370,000,000 dollars 2 of these loans with a UPB of $161,000,000 are collateralized by multifamily assets located in the Dallas MSA with the same sponsor. The current interest rate environment has placed significant pressure on the sponsor's ability to effectively operate their broader portfolio. The downgrades of these loans are driven primarily by this pressure on the sponsor rather than by underlying long term real estate fundamentals. We are likely to take ownership of these assets along with other 4 rated multifamily loans in the coming quarters. The 3rd loan, which is unencumbered that was downgraded this quarter was collateralized by a for sale condo project in California. Speaker 400:09:05In this instance, the sponsor who relied on offshore capital sources has experienced financial difficulty outside of this particular investment. Prior to defaulting on the loan, the sponsor successfully sold a number of condo units at levels well above CMTG's basis per square foot. However, the sponsor has experienced financial difficulty and we have been working with them to find a path to resolving this loan, including a loan restructuring, loan sale or REO. There were no new 5 rated loans this quarter. We did, however, place an existing 4 rated land loan on non accrual status. Speaker 400:09:44The loan has a carrying value of $88,000,000 dollars and is collateralized by a development site in New York City that is owned from mixed use building. This loan has been risk rated of 4 since Q4 of 2023 as the borrower has failed to make progress towards its business plan and has been delinquent in paying interest. At June 30, total CECL reserves as a percentage of UPB increased to 3.1% compared to 2.6% for the prior quarter. Specific CECL reserves represented 23.1% of the UPB of our loans with specific CECL reserves. The general CECL reserve of 2.1% of UPB was comprised of 3.3 percent of the UPB on 4 rated loans and 1.5% of the UPB on the remaining loans. Speaker 400:10:38During the quarter, we recorded provisions for CECL reserves of $34,000,000 or $0.24 per share. The increase in the general CECL reserve is primarily a result of increases in expected loan duration, increases in 3rd party historical loss rate data on similar loans and to a lesser extent changes in risk ratings and accrual status of loans in our portfolio. Now turning to financing and liquidity. At June 30, we reported $191,000,000 in total liquidity, which includes cash and approved and undrawn credit capacity based on existing collateral. Unencumbered assets were comprised of loans totaling $490,000,000 of UPB, of which 94% were senior loans and our mixed use REO with a carrying value of $146,000,000 These unencumbered assets provide us with additional flexibility in maintaining our desired levels of liquidity. Speaker 400:11:39Subsequent to quarter end, repayment activity continues to accelerate. We've received full repayments of 3 loans totaling $244,000,000 of UPB, a $22,000,000 loan collateralized by a build to rent portfolio, a $99,000,000 loan collateralized by an industrial asset and finally a $123,000,000 loan collateralized by a 4 rated New York City office loan. This loan had been risk rated of 4 since the Q4 of 2023. The transaction reduced our office exposure and reduced our overall leverage. Year to date, we have received a total of $873,000,000 of loan proceeds through payoffs or loan sales. Speaker 400:12:26Of that amount, loans totaling approximately $646,000,000 were construction loans. In addition, loans totaling approximately $400,000,000 were risk rated 4, demonstrating continued progress in resolving watch list loans. Before turning the call to the operator, I'd also like to provide some additional color with regard to certain of our financing arrangements with the most restrictive financial covenants. During the Q2, we significantly expanded our relationship with our largest financing counterparty, while also completing covenant modifications on each of our repurchase facilities. Overall, we reduced our minimum required interest coverage levels and tangible net worth covenant levels. Speaker 400:13:14We believe that these changes provide us with needed flexibility to preserve and enhance book value while also demonstrating our ability to work constructively with our various financing counterparties through challenging market conditions. Operator, I would now like to open the call for questions. Operator00:13:33Absolutely. We will now begin the question and answer The first question comes from the line of Rick Shannon with JPMorgan. Your line is now open. Speaker 500:14:04Good morning, guys. Thanks for taking my question. Look, I'd like to talk a little bit about the strategy on REO in the past when you've had foreclosures, you've taken different paths, sometimes selling the property, sometimes managing them. And I think a lot has to do with the potential investment required. It sounds like you have some additional REOs coming your way. Speaker 500:14:35You've reduced the dividend in order to enhance liquidity. And Richard made a comment about having capital to invest in the REO. I'm curious if that strategy is changing or if the REO that you intend to keep on balance sheet is going to be cash flowing positive? Speaker 300:14:58Yes. So let me let Priyanka discuss some of the details of the asset. But let me Rick, thank you for your question. This is Richard. Let me respond to the macro. Speaker 300:15:11Our view at this moment is that we should be opportunistic around REO. I think in the past, we've been more focused on creating liquidity, but we now feel like this is the moment in time where we've got especially the cash flowing multi, we want to be aggressive with borrowers. And if they're not able to manage the property as well as we are and they're not putting cash in, we want to take those assets and ride the value back up. We've only taken 2 assets back. That has been the right decision on both of those. Speaker 300:15:58We've been really careful about it. We're going to continue to be careful. I think we're feeling at this moment that again while it's hard to call the bottom, this is about as good a time to be acquiring assets at a discount. I know it's not exactly acquiring assets, but this is a pretty good time to take advantage of opportunities on our own balance sheet and improve value significantly. Priyanka, do you want to just respond on the specific assets? Speaker 200:16:34Sure. Thanks, Richard. The only thing, Rick, that I would add to what Richard said is if you look at from a credit migration standpoint, the last couple of quarters, it's really been focused on residential assets. And in that sector, we truly believe that there's not been a secular shift in value. It's more of a moment in time. Speaker 200:16:54So the ability to bring these assets onto our balance sheet, like Richard said, do a much better job managing them than the sponsors in many cases and then riding the value up as we see rates come down, cap rates come in. So we think that there's a particularly compelling opportunity at the moment. Speaker 500:17:15And I will make the Speaker 300:17:18sorry. Sorry, Rick. Speaker 600:17:21Let me add one more thing. Speaker 500:17:22No, I was just Speaker 700:17:22going to make the observation, Speaker 500:17:24Richard, that oh, go ahead. Sorry. Speaker 300:17:28The delay is difficult. Yes, I would only say that we could also see borrowers surprise us and find rescue capital and pay us off as we take more aggressive action because we see the real value in these otherwise we wouldn't be taking them. So, that's not our expectation, but I think it's now is the time to act relatively aggressively. Speaker 400:18:01Got it. Speaker 500:18:01Okay. And sorry for talking over each other. I apologize for that. Look, I think the reality is that is more a more consistent approach with your historic strategy. And I realize we've been through a pretty challenging period where the focus instead of optimizing outcome by managing it has been focused on liquidity, but it does seem like you're going back to what your original intent was. Speaker 300:18:31That's absolutely right. I think we've tried to manage to with the expectation that rates would be higher for longer and coming to what we believe is the end of that rate increase cycle for certain and very likely could be a significant cut here. It's time to pivot back to our original strategy as it relates to assets and our capacity and ability to create value, I think, is going to be demonstrated over the next few quarters here. Speaker 500:19:10Great. Thank you. Speaker 400:19:12Thank you, Rick. Operator00:19:14Thank you. The next question comes from the line of Doug Hutter with UBS. Your line is now open. Speaker 800:19:22Hi, thanks. You talked about working with your lenders about adjusting covenants. Can you just talk about whether there was any anything you had to any concessions you had to give to them in order to get those or just kind of how those negotiations went? Speaker 400:19:43Sure, Doug. This is Mike. I'll take this one. I would say we've always had a very constructive relationship with our repo counterparties And it's been very collaborative. And as we've looked at sort of the state alone portfolio, we've been very much ahead of the curve in terms of working through assets that are have been demonstrating challenges, reducing leverage on those assets to be more reflective of what the current environment was looking like. Speaker 400:20:30So the I would just because of the fact, I think we've been very proactive in deleveraging our balance sheet. We were very transparent with our lenders in terms of where we saw the world heading over the course of over the next year or so and demonstrated to them that having some covenant relief while we work through some of these things, including taking certain loans to REO and improving cash flow. It's not going to happen overnight, but it will happen over time. Those the covenant relief that we were going to need to execute on those strategies from both an interest coverage and tangible net worth perspective was recognized and we were able to work through those modifications. Speaker 800:21:27And then just as a follow-up, kind of where do you stand with covenants on your term loan and just how should we think about the other parts of the debt stack? Speaker 400:21:40Sure. So term loan has a similar interest coverage covenant, but it's a different mechanic that is involved in calculating that. So we continue to comply with that interest coverage covenant on our term loan. Now that we've sort of worked through certain of these repurchase agreement facilities, recognizing our term loan expires or matures in August of 2026, over the latter part of this year, we'll pivot into having discussions with them around modification, extension, potential pay downs necessary to extend the term of that facility, but too early to know where it's going to go just yet, but trying to stay well ahead of it before the maturity in a couple of years. Speaker 800:22:40Great. Appreciate the answer. Thank you. Operator00:22:45Thank you. The next question comes from the line of Pram Catterwood with B. BTIG. Your line is now open. Speaker 600:22:54Thank you and good morning everybody. Richard, you mentioned in your remarks the expectation of lower rates and higher real estate values driving a real valuation of where you want to allocate capital and you listed a number of potential options. I'd assume that that evaluation takes time. Obviously, taking some more stuff on balance sheet and investing in that takes time. Are there parts of those investment options that could be executed sooner rather than later as far as whether it's stock buybacks or debt buybacks? Speaker 600:23:25And what are other ones that are more likely to be medium term options? Speaker 300:23:31Sure. Thank you. Excellent question. Some of what is in front of us, we're going to execute on rapidly because we have been expecting this market turn. I don't want to say that we were expecting the dramatic sell off or shot across the bow that the market is sending to the Fed. Speaker 300:24:00That's what it is. But we were expecting that there was going to be a bit of change because we're seeing it in the real estate capital markets. We're seeing liquidity come back. So we were already expecting this. The move is likely to be much greater than maybe any of us had anticipated just a week ago. Speaker 300:24:25So, we were really set up and ready to go and kind of getting ahead of these events. So, we do think that there are things that we can execute on quite rapidly. Of course, everything is on the table and the more payoffs we get, the more likely it is that we pivot away from REO, or we'll see what component REO will be of it towards other things like new origination, paying off debt as well as buying stock. We want them all to be on the table because the pace of repayments has been accelerating while the pace of problems has been decelerating. And so really everything is on the table. Speaker 300:25:19Here, we've just come to the point where we're ready and it's we've been waiting to see something that felt like a bottom to take those steps. I hope that was reasonably responsive. Speaker 600:25:34That's very helpful, Richard. And that actually kind of ties into kind of next question we're thinking about, which maybe this one for Mike. Given the accelerated activity level around repayments, especially post 2Q, what are your expectations in terms of repayments for the balance of this year? And how are you thinking of allocating those potential proceeds between committed fundings that you have to meet this year versus building liquidity for those more opportunistic investments that Richard mentioned? Speaker 400:26:10Sure. And I think we have pretty good line of sight in the pretty significant amounts of repayments through the rest of this year and into the early part of 2025. And it's always just a capital allocation decision when we have excess capital, what are we going to do with it. As Richard highlighted, we do expect to take assets back into REO. That is a judicial process. Speaker 400:26:43So there's time considerations that you have to work through to get there. But frequently, we control that timing. Obviously, there's some fairly accretive uses of that liquidity in buying back some of our higher cost debt and paying down leverage, as well as potential share buybacks or new originations, but it's going to be a decision at that point in time what to do with that capital. A lot of those things sort of fed into our decision to cut the dividend this quarter. And I don't think it should be viewed solely as an indicator of where we think distributable earnings will be. Speaker 400:27:28We sort of looked at it more around what dividend level do we need to meet to maintain our REIT status. And given that we've paid out pretty much everything we need to pay out from a dividend perspective to maintain our REIT status, we thought it was best to keep that capital in the system and use it for purposes that would help us grow earnings or grow book value. Speaker 600:28:07Understood. And then Mike, last one for me. You had mentioned office loan repayment post 2Q. For the non cash consideration part of that, was the discounted loan a slice of the senior position or a mezz position? And what were the 2 equity interests that came along with that repayment? Speaker 400:28:30Why don't I Priyanka, do you want to handle that one? Speaker 200:28:35Yes. Sure. Hi, Tom, it's Priyanka. So we I'll take a step back real quick just to explain how we thought about that transaction. We were basically trading out of a vacant office building in Brooklyn, reducing New York City office exposure, which just going back to the earlier comment, when we think about shifts in value, what's a fundamental shift versus a capital market shift. Speaker 200:29:02And we view that asset exposure that we traded out of as more of a fundamental shift in value that's not likely to come back. And we, to answer your direct question, traded in with improving performance, positive trajectory in an asset class that is improving, retail has become an improving asset class. And then, as we mentioned, with additional credit support on, other assets that are owned by that sponsor. So view it as a very positive trade from an asset quality standpoint and visibility to pay off versus the asset that we were in Speaker 600:29:50prior. And will those equity positions show up as REO or they just be kind of bundled into other in your Speaker 400:30:01holdings? Speaker 200:30:05Mike, do you want to take that? That's just going to be other income based on just yes, go ahead. Speaker 400:30:12Yes, we'll expect to recognize won't reflect any basis for that in our financials is the current expectation. And to the extent we receive distributions, it will be cash basis. That's the expectation, right? Speaker 200:30:27It's just additional collateral it's just additional credit support. That's all it is. It's bolstering the underlying asset. Speaker 600:30:37Yes. Understood. Thanks everyone. Speaker 300:30:41Thanks, Tom. Operator00:30:43Thank you. The next question comes from the line of Jay Romani with KBW. Your line is now open. Speaker 700:30:59Thank you very much. What's the dollar amount of loans you expect to take into REO? Speaker 200:31:09Hey, Jade, it's Priyanka. I think that's hard to put a number on it just given that we are working with borrowers in certain instances and it's just unclear where we're going to end up on in that. But this specific sponsor where we've had a lot of credit migrations from 3 to 4 over the prior quarters, that in and of itself is about 5% of our UPB. So I would say that's those are likely to become REO. But that said, just depending on where we end up with other sponsors, there might be additional loans. Speaker 700:31:48The 5% is beyond the Dallas, multifamily? Speaker 200:31:54No. That's inclusive of the Dallas multifamily. Speaker 300:31:58Okay. Speaker 700:32:01That's somewhat helpful. Turning to risk ratings. I'm curious why do you have risk rated 4 loans that you expect to take in Tareo? Shouldn't those be risk 5? Speaker 400:32:17Well, Jade, it's a function of whether or not you Priyanka, you can handle it. Part of the question, I think, is more around GAAP accounting requirements. But just because a loan is expected to go to REO, doesn't mean that a specific reserve is required. There may be a specific reserve required based on closure. Based on the appraisal we get on the asset prior to foreclosure. Speaker 400:32:49But I think in all of these, we feel very comfortable with the long term collateral value that we'll be stepping into. Priyanka, I don't know if you want to add anything to that. Operator00:33:02Nope. I think that's exactly right. Thank you. There are no additional questions waiting at this time. So I would now like to pass the conference back to management for any additional or closing remarks. Speaker 300:33:28Well, I just want to thank everyone for joining us on the call to answer the questions and conclude really with the main theme of today's call and that is that we think the momentum is likely to continue to swing towards more repayments and more liquidity in the market. And against this background, that's the background which we feel confident that now is the time to be even more decisive and opportunistic with our capital. And we are kind of looking forward with optimism to a bit more of an upmarket and to being able to take advantage of the opportunities that are in front of us. So, thank you all for joining. I'm sure we'll have follow-up sessions with some of you and we appreciate your questions. Speaker 300:34:18Thank you all.Read morePowered by Conference Call Audio Live Call not available Earnings Conference CallClaros Mortgage Trust Q2 202400:00 / 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.comTrump’s treachery Trump’s Final Reset Inside the shocking plot to re-engineer America’s financial system…and why you need to move your money now.April 19, 2025 | Porter & Company (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. 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There are 9 speakers on the call. Operator00:00:00Welcome to the Clarus Mortgage Trust Second Quarter 2024 Earnings Conference Call. My name is Jaquita, and I will be your conference facilitator today. All participants are in a listen only mode. After the speakers' remarks, there will be a question and answer period. I would now like to hand the call over to Anh Nguyen, Vice President of Investor Relations for Clarus Mortgage Trust. Operator00:00:30Please proceed. Speaker 100:00:32Thank you. I'm joined by Richard Mack, Chief Executive Officer and Chairman of Clarus Mortgage Trust and Mike McGillis, President, Chief Financial Officer and Director of Clarus Mortgage Trust. We also have Priyanka Garg, Executive Vice President, who leads MREC's Portfolio and Asset Management. 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. Speaker 100:01:03If 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. Speaker 100:01:47For reconciliation of non GAAP measures to their nearest GAAP equivalent, please refer to the earnings supplement. I would now like to turn Speaker 200:01:55the call over to Richard. Speaker 300:01:58Thank you, An, and thank you everyone for joining us this morning for CMTG's 2nd quarter earnings call. It's been more than 2 years since the Fed started raising interest rates in response to rising inflation, and it's not been an easy run for the commercial real estate industry to say the least. When we take a step back and look at the broader picture, we can see many variables at play. Property owners have not had the pricing power of other industries that were able to pass on rising costs to consumers. Falling demand for office space and additional supply coming online in multifamily and industrial have coincided with dramatic increases in real estate expenses and capital costs. Speaker 300:02:41This has translated into real estate values falling rapidly across the board. Commercial real estate takes time to build and time to stop building, so it lags the economy. And in the short term, the industry has been disproportionately hurt by inflation and rate movements, but it can also result in outsized benefits when this pattern reverses. New construction has been dramatically reduced against the backdrop that features a generally resilient consumer, cooling inflation and a broad based market expectation that the Fed is poised to begin cutting rates. Furthermore, many investors are also predicting a resumption of rent increases in both multifamily and industrial given limited new supply and sustained demand just as rates may start to fall. Speaker 300:03:35This double benefit impact has some investors calling the bottom, especially since construction costs have also risen significantly. Not surprisingly then, we are starting to see green shoots in the commercial real estate market, suggesting a more positive trajectory for the industry could be on the horizon. While it's still too early to declare a sea change in investor sentiment, large and noteworthy transactions are getting done. Lenders are slowly returning to the market as new sources of private credit emerge. With this gradual increase in liquidity, albeit still muted from recent historical levels, we've seen borrowers successfully and willingly secure financing even in light of the elevated rate environment. Speaker 300:04:21With regard to our portfolio, we continue to be constructive on the long term outlook of the multifamily sector, which remains our largest portfolio concentration. We expect population growth, migration to many of our current and target MSAs and limited housing supply will continue to drive the overall fundamental picture we are seeing in rental housing. Additionally, we have made meaningful progress towards improving value in our 2 REO assets and we attribute this success to our management team's experience and hands on asset management approach. Looking ahead, many in the real estate industry expect that rate relief will reenergize the real estate capital markets, providing valuation tailwinds for most asset classes. And while we remain focused on liquidity, we also believe that the optimism around the Fed reducing rates provides us a compelling opportunity to reevaluate how we are deploying and directing our capital in expectation of asset value increases. Speaker 300:05:26Although the number of assets on non accrual and the watch list increased this quarter, the rate of increase decelerated implying an improving cycle. In such an environment, we do not believe that the current portfolio designations reflect the inherent value of our portfolio over the medium to long term. With all of these factors in mind, our Board of Directors has decided to adjust our quarterly dividend to $0.10 per share beginning in the Q3 of 2024. We believe this decision enables us to pursue capital allocation strategies with the objective of preserving and enhancing book value, while also positioning the portfolio for earnings growth. Those capital allocation decisions may include investing in our current and potential future significantly undervalued at current price levels. Speaker 300:06:25I would now like to turn the call over to Mike. Speaker 400:06:29Thank you, Richard. For the Q2 of 2024, CMTG reported a GAAP net loss of $0.09 per share and distributable earnings of $0.20 per share. Distributable earnings per share prior to realized losses were $0.21 per share, which was in line with the Q1 result of $0.20 per share. The New York City REO Hotel Portfolio had a stronger second quarter due to expected seasonality, which resulted in a $0.05 per share improvement in earnings compared to last quarter. This was partially offset by the impact of a New York land loan placed on non accrual during the quarter. Speaker 400:07:10I'll provide additional information on the non accrual loan later in the call. Beginning with the left side of the balance sheet, CMTG's loan portfolio grew slightly to 6 $800,000,000 at June 30 compared to $6,700,000,000 at March 31. The quarter over quarter change is attributable to follow on fundings of $143,000,000 offset by the impact of partial loan repayments totaling 41,000,000 dollars At quarter end, our multifamily portfolio was unchanged compared to prior quarter, representing our largest exposure at 40% of the portfolio. As Richard mentioned, the supply demand imbalance continues to benefit the housing market and we remain bullish on the long term fundamentals of the sector. However, borrowers continue to experience challenges as they are adversely affected by higher interest rates, elevating their cost of carry among other items. Speaker 400:08:10As a result, during the quarter, we downgraded 3 loans to a 4 risk rating, representing a total carrying value of 370,000,000 dollars 2 of these loans with a UPB of $161,000,000 are collateralized by multifamily assets located in the Dallas MSA with the same sponsor. The current interest rate environment has placed significant pressure on the sponsor's ability to effectively operate their broader portfolio. The downgrades of these loans are driven primarily by this pressure on the sponsor rather than by underlying long term real estate fundamentals. We are likely to take ownership of these assets along with other 4 rated multifamily loans in the coming quarters. The 3rd loan, which is unencumbered that was downgraded this quarter was collateralized by a for sale condo project in California. Speaker 400:09:05In this instance, the sponsor who relied on offshore capital sources has experienced financial difficulty outside of this particular investment. Prior to defaulting on the loan, the sponsor successfully sold a number of condo units at levels well above CMTG's basis per square foot. However, the sponsor has experienced financial difficulty and we have been working with them to find a path to resolving this loan, including a loan restructuring, loan sale or REO. There were no new 5 rated loans this quarter. We did, however, place an existing 4 rated land loan on non accrual status. Speaker 400:09:44The loan has a carrying value of $88,000,000 dollars and is collateralized by a development site in New York City that is owned from mixed use building. This loan has been risk rated of 4 since Q4 of 2023 as the borrower has failed to make progress towards its business plan and has been delinquent in paying interest. At June 30, total CECL reserves as a percentage of UPB increased to 3.1% compared to 2.6% for the prior quarter. Specific CECL reserves represented 23.1% of the UPB of our loans with specific CECL reserves. The general CECL reserve of 2.1% of UPB was comprised of 3.3 percent of the UPB on 4 rated loans and 1.5% of the UPB on the remaining loans. Speaker 400:10:38During the quarter, we recorded provisions for CECL reserves of $34,000,000 or $0.24 per share. The increase in the general CECL reserve is primarily a result of increases in expected loan duration, increases in 3rd party historical loss rate data on similar loans and to a lesser extent changes in risk ratings and accrual status of loans in our portfolio. Now turning to financing and liquidity. At June 30, we reported $191,000,000 in total liquidity, which includes cash and approved and undrawn credit capacity based on existing collateral. Unencumbered assets were comprised of loans totaling $490,000,000 of UPB, of which 94% were senior loans and our mixed use REO with a carrying value of $146,000,000 These unencumbered assets provide us with additional flexibility in maintaining our desired levels of liquidity. Speaker 400:11:39Subsequent to quarter end, repayment activity continues to accelerate. We've received full repayments of 3 loans totaling $244,000,000 of UPB, a $22,000,000 loan collateralized by a build to rent portfolio, a $99,000,000 loan collateralized by an industrial asset and finally a $123,000,000 loan collateralized by a 4 rated New York City office loan. This loan had been risk rated of 4 since the Q4 of 2023. The transaction reduced our office exposure and reduced our overall leverage. Year to date, we have received a total of $873,000,000 of loan proceeds through payoffs or loan sales. Speaker 400:12:26Of that amount, loans totaling approximately $646,000,000 were construction loans. In addition, loans totaling approximately $400,000,000 were risk rated 4, demonstrating continued progress in resolving watch list loans. Before turning the call to the operator, I'd also like to provide some additional color with regard to certain of our financing arrangements with the most restrictive financial covenants. During the Q2, we significantly expanded our relationship with our largest financing counterparty, while also completing covenant modifications on each of our repurchase facilities. Overall, we reduced our minimum required interest coverage levels and tangible net worth covenant levels. Speaker 400:13:14We believe that these changes provide us with needed flexibility to preserve and enhance book value while also demonstrating our ability to work constructively with our various financing counterparties through challenging market conditions. Operator, I would now like to open the call for questions. Operator00:13:33Absolutely. We will now begin the question and answer The first question comes from the line of Rick Shannon with JPMorgan. Your line is now open. Speaker 500:14:04Good morning, guys. Thanks for taking my question. Look, I'd like to talk a little bit about the strategy on REO in the past when you've had foreclosures, you've taken different paths, sometimes selling the property, sometimes managing them. And I think a lot has to do with the potential investment required. It sounds like you have some additional REOs coming your way. Speaker 500:14:35You've reduced the dividend in order to enhance liquidity. And Richard made a comment about having capital to invest in the REO. I'm curious if that strategy is changing or if the REO that you intend to keep on balance sheet is going to be cash flowing positive? Speaker 300:14:58Yes. So let me let Priyanka discuss some of the details of the asset. But let me Rick, thank you for your question. This is Richard. Let me respond to the macro. Speaker 300:15:11Our view at this moment is that we should be opportunistic around REO. I think in the past, we've been more focused on creating liquidity, but we now feel like this is the moment in time where we've got especially the cash flowing multi, we want to be aggressive with borrowers. And if they're not able to manage the property as well as we are and they're not putting cash in, we want to take those assets and ride the value back up. We've only taken 2 assets back. That has been the right decision on both of those. Speaker 300:15:58We've been really careful about it. We're going to continue to be careful. I think we're feeling at this moment that again while it's hard to call the bottom, this is about as good a time to be acquiring assets at a discount. I know it's not exactly acquiring assets, but this is a pretty good time to take advantage of opportunities on our own balance sheet and improve value significantly. Priyanka, do you want to just respond on the specific assets? Speaker 200:16:34Sure. Thanks, Richard. The only thing, Rick, that I would add to what Richard said is if you look at from a credit migration standpoint, the last couple of quarters, it's really been focused on residential assets. And in that sector, we truly believe that there's not been a secular shift in value. It's more of a moment in time. Speaker 200:16:54So the ability to bring these assets onto our balance sheet, like Richard said, do a much better job managing them than the sponsors in many cases and then riding the value up as we see rates come down, cap rates come in. So we think that there's a particularly compelling opportunity at the moment. Speaker 500:17:15And I will make the Speaker 300:17:18sorry. Sorry, Rick. Speaker 600:17:21Let me add one more thing. Speaker 500:17:22No, I was just Speaker 700:17:22going to make the observation, Speaker 500:17:24Richard, that oh, go ahead. Sorry. Speaker 300:17:28The delay is difficult. Yes, I would only say that we could also see borrowers surprise us and find rescue capital and pay us off as we take more aggressive action because we see the real value in these otherwise we wouldn't be taking them. So, that's not our expectation, but I think it's now is the time to act relatively aggressively. Speaker 400:18:01Got it. Speaker 500:18:01Okay. And sorry for talking over each other. I apologize for that. Look, I think the reality is that is more a more consistent approach with your historic strategy. And I realize we've been through a pretty challenging period where the focus instead of optimizing outcome by managing it has been focused on liquidity, but it does seem like you're going back to what your original intent was. Speaker 300:18:31That's absolutely right. I think we've tried to manage to with the expectation that rates would be higher for longer and coming to what we believe is the end of that rate increase cycle for certain and very likely could be a significant cut here. It's time to pivot back to our original strategy as it relates to assets and our capacity and ability to create value, I think, is going to be demonstrated over the next few quarters here. Speaker 500:19:10Great. Thank you. Speaker 400:19:12Thank you, Rick. Operator00:19:14Thank you. The next question comes from the line of Doug Hutter with UBS. Your line is now open. Speaker 800:19:22Hi, thanks. You talked about working with your lenders about adjusting covenants. Can you just talk about whether there was any anything you had to any concessions you had to give to them in order to get those or just kind of how those negotiations went? Speaker 400:19:43Sure, Doug. This is Mike. I'll take this one. I would say we've always had a very constructive relationship with our repo counterparties And it's been very collaborative. And as we've looked at sort of the state alone portfolio, we've been very much ahead of the curve in terms of working through assets that are have been demonstrating challenges, reducing leverage on those assets to be more reflective of what the current environment was looking like. Speaker 400:20:30So the I would just because of the fact, I think we've been very proactive in deleveraging our balance sheet. We were very transparent with our lenders in terms of where we saw the world heading over the course of over the next year or so and demonstrated to them that having some covenant relief while we work through some of these things, including taking certain loans to REO and improving cash flow. It's not going to happen overnight, but it will happen over time. Those the covenant relief that we were going to need to execute on those strategies from both an interest coverage and tangible net worth perspective was recognized and we were able to work through those modifications. Speaker 800:21:27And then just as a follow-up, kind of where do you stand with covenants on your term loan and just how should we think about the other parts of the debt stack? Speaker 400:21:40Sure. So term loan has a similar interest coverage covenant, but it's a different mechanic that is involved in calculating that. So we continue to comply with that interest coverage covenant on our term loan. Now that we've sort of worked through certain of these repurchase agreement facilities, recognizing our term loan expires or matures in August of 2026, over the latter part of this year, we'll pivot into having discussions with them around modification, extension, potential pay downs necessary to extend the term of that facility, but too early to know where it's going to go just yet, but trying to stay well ahead of it before the maturity in a couple of years. Speaker 800:22:40Great. Appreciate the answer. Thank you. Operator00:22:45Thank you. The next question comes from the line of Pram Catterwood with B. BTIG. Your line is now open. Speaker 600:22:54Thank you and good morning everybody. Richard, you mentioned in your remarks the expectation of lower rates and higher real estate values driving a real valuation of where you want to allocate capital and you listed a number of potential options. I'd assume that that evaluation takes time. Obviously, taking some more stuff on balance sheet and investing in that takes time. Are there parts of those investment options that could be executed sooner rather than later as far as whether it's stock buybacks or debt buybacks? Speaker 600:23:25And what are other ones that are more likely to be medium term options? Speaker 300:23:31Sure. Thank you. Excellent question. Some of what is in front of us, we're going to execute on rapidly because we have been expecting this market turn. I don't want to say that we were expecting the dramatic sell off or shot across the bow that the market is sending to the Fed. Speaker 300:24:00That's what it is. But we were expecting that there was going to be a bit of change because we're seeing it in the real estate capital markets. We're seeing liquidity come back. So we were already expecting this. The move is likely to be much greater than maybe any of us had anticipated just a week ago. Speaker 300:24:25So, we were really set up and ready to go and kind of getting ahead of these events. So, we do think that there are things that we can execute on quite rapidly. Of course, everything is on the table and the more payoffs we get, the more likely it is that we pivot away from REO, or we'll see what component REO will be of it towards other things like new origination, paying off debt as well as buying stock. We want them all to be on the table because the pace of repayments has been accelerating while the pace of problems has been decelerating. And so really everything is on the table. Speaker 300:25:19Here, we've just come to the point where we're ready and it's we've been waiting to see something that felt like a bottom to take those steps. I hope that was reasonably responsive. Speaker 600:25:34That's very helpful, Richard. And that actually kind of ties into kind of next question we're thinking about, which maybe this one for Mike. Given the accelerated activity level around repayments, especially post 2Q, what are your expectations in terms of repayments for the balance of this year? And how are you thinking of allocating those potential proceeds between committed fundings that you have to meet this year versus building liquidity for those more opportunistic investments that Richard mentioned? Speaker 400:26:10Sure. And I think we have pretty good line of sight in the pretty significant amounts of repayments through the rest of this year and into the early part of 2025. And it's always just a capital allocation decision when we have excess capital, what are we going to do with it. As Richard highlighted, we do expect to take assets back into REO. That is a judicial process. Speaker 400:26:43So there's time considerations that you have to work through to get there. But frequently, we control that timing. Obviously, there's some fairly accretive uses of that liquidity in buying back some of our higher cost debt and paying down leverage, as well as potential share buybacks or new originations, but it's going to be a decision at that point in time what to do with that capital. A lot of those things sort of fed into our decision to cut the dividend this quarter. And I don't think it should be viewed solely as an indicator of where we think distributable earnings will be. Speaker 400:27:28We sort of looked at it more around what dividend level do we need to meet to maintain our REIT status. And given that we've paid out pretty much everything we need to pay out from a dividend perspective to maintain our REIT status, we thought it was best to keep that capital in the system and use it for purposes that would help us grow earnings or grow book value. Speaker 600:28:07Understood. And then Mike, last one for me. You had mentioned office loan repayment post 2Q. For the non cash consideration part of that, was the discounted loan a slice of the senior position or a mezz position? And what were the 2 equity interests that came along with that repayment? Speaker 400:28:30Why don't I Priyanka, do you want to handle that one? Speaker 200:28:35Yes. Sure. Hi, Tom, it's Priyanka. So we I'll take a step back real quick just to explain how we thought about that transaction. We were basically trading out of a vacant office building in Brooklyn, reducing New York City office exposure, which just going back to the earlier comment, when we think about shifts in value, what's a fundamental shift versus a capital market shift. Speaker 200:29:02And we view that asset exposure that we traded out of as more of a fundamental shift in value that's not likely to come back. And we, to answer your direct question, traded in with improving performance, positive trajectory in an asset class that is improving, retail has become an improving asset class. And then, as we mentioned, with additional credit support on, other assets that are owned by that sponsor. So view it as a very positive trade from an asset quality standpoint and visibility to pay off versus the asset that we were in Speaker 600:29:50prior. And will those equity positions show up as REO or they just be kind of bundled into other in your Speaker 400:30:01holdings? Speaker 200:30:05Mike, do you want to take that? That's just going to be other income based on just yes, go ahead. Speaker 400:30:12Yes, we'll expect to recognize won't reflect any basis for that in our financials is the current expectation. And to the extent we receive distributions, it will be cash basis. That's the expectation, right? Speaker 200:30:27It's just additional collateral it's just additional credit support. That's all it is. It's bolstering the underlying asset. Speaker 600:30:37Yes. Understood. Thanks everyone. Speaker 300:30:41Thanks, Tom. Operator00:30:43Thank you. The next question comes from the line of Jay Romani with KBW. Your line is now open. Speaker 700:30:59Thank you very much. What's the dollar amount of loans you expect to take into REO? Speaker 200:31:09Hey, Jade, it's Priyanka. I think that's hard to put a number on it just given that we are working with borrowers in certain instances and it's just unclear where we're going to end up on in that. But this specific sponsor where we've had a lot of credit migrations from 3 to 4 over the prior quarters, that in and of itself is about 5% of our UPB. So I would say that's those are likely to become REO. But that said, just depending on where we end up with other sponsors, there might be additional loans. Speaker 700:31:48The 5% is beyond the Dallas, multifamily? Speaker 200:31:54No. That's inclusive of the Dallas multifamily. Speaker 300:31:58Okay. Speaker 700:32:01That's somewhat helpful. Turning to risk ratings. I'm curious why do you have risk rated 4 loans that you expect to take in Tareo? Shouldn't those be risk 5? Speaker 400:32:17Well, Jade, it's a function of whether or not you Priyanka, you can handle it. Part of the question, I think, is more around GAAP accounting requirements. But just because a loan is expected to go to REO, doesn't mean that a specific reserve is required. There may be a specific reserve required based on closure. Based on the appraisal we get on the asset prior to foreclosure. Speaker 400:32:49But I think in all of these, we feel very comfortable with the long term collateral value that we'll be stepping into. Priyanka, I don't know if you want to add anything to that. Operator00:33:02Nope. I think that's exactly right. Thank you. There are no additional questions waiting at this time. So I would now like to pass the conference back to management for any additional or closing remarks. Speaker 300:33:28Well, I just want to thank everyone for joining us on the call to answer the questions and conclude really with the main theme of today's call and that is that we think the momentum is likely to continue to swing towards more repayments and more liquidity in the market. And against this background, that's the background which we feel confident that now is the time to be even more decisive and opportunistic with our capital. And we are kind of looking forward with optimism to a bit more of an upmarket and to being able to take advantage of the opportunities that are in front of us. So, thank you all for joining. I'm sure we'll have follow-up sessions with some of you and we appreciate your questions. Speaker 300:34:18Thank you all.Read morePowered by