Q1 2022 Claros Mortgage Trust Inc Earnings Call

May 11, 2022

Welcome to collateral mortgage trust first quarter 'twenty 'twenty earnings Conference call. My name is Jordan and I'll be your conference facilitator today.

Operator: Welcome to Claros Mortgage Trust Q1 2020 Earnings Conference Call. My name is Jordan, and I'll be your conference facilitator today. All participants will be in a listen-only mode. After the speaker's remarks, there will be a question-and-answer period. You may register a question by pressing star followed by one on your telephone keypad. I'd now like to hand the call over to Anh Huynh, Vice President of Investor Relations for Claros Mortgage Trust. Please proceed.

All participants will be in a listen only mode. After the Speakers' remarks, there'll be a question and answer period. You May Register a question by pressing star followed by one on your telephone keypad.

I'd now like to hand, the call over to Nguyen Vice President of Investor Relations for Clorox Mortgage Trust. Please proceed.

Thank you and good morning.

Anh Huynh: Thank you and good morning. I'm joined by Richard Mack, Chief Executive Officer and Chairman of Claros Mortgage Trust, Mike McGillis, President and Director of Claros Mortgage Trust, and Jai Agarwal, CMTG's Chief Financial Officer. We also have Kevin Cullinan, Executive Vice President, who leads MRECS Origination, and Priyanka Garg, Executive Vice President, who leads MRECS Portfolio and Asset Management. Prior to this call, we distributed CMTG's earnings supplement. We encourage you to reference these documents in conjunction with the information presented on today's call. If you have any questions following today's call, please contact me. I'd like to remind everyone that today's calls 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.

I'm joined by Richard Mack, Chief Executive Officer, and Chairman of Claris Mortgage Trust.

Mike Mcgillis, President and director of Claris mortgage Trust.

And Jay I O L. P M P G Chief Financial Officer.

We also have Kevin Cullinan Executive Vice President who leads IMAX origination.

And Priyanka Garg Executive Vice President, who leads Iraq portfolio and asset management.

Prior to this call we distributed C N teachers, earning supplement.

Heard you to reference these documents in conjunction with the information presented on today's call. If you have any questions. Following today's call. Please contact me.

I'd like to remind everyone that today's call may include forward looking statements within the meaning of the private Securities Litigation Reform Act of $19 95.

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.

Anh Huynh: 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 net distributable earnings, which we believe may be important to investors to assess our operating performance. For non-GAAP reconciliations, please refer to the earnings supplement. I would now like to turn the call over to Richard Mack.

Any forward looking statements made on this call represents our views only as of today and we undertake no obligation to update them.

We will also be referring to certain non-GAAP financial measures on today's call such as net distributable earnings, which we believe may be important to investors to assess our operating performance.

non-GAAP reconciliations please refer to the earnings supplement.

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

Good morning, everyone. Thank you for joining us today for <unk> first quarter earnings call I.

Richard Mack: Good morning, everyone. Thank you for joining us today for CMTG's Q1 earnings call. I'm pleased to share that the Q1 and the beginning of the Q2 were excellent from an asset management and originations perspective. Our Q1 originations volume of $1.2 billion drove portfolio growth, resulting in CMTG ending the quarter with an all-time portfolio high of $7.2 billion of total loans and $8.7 billion of loans and commitments. Our strong originations, however, come at a time of great market volatility. Today, we find ourselves at an intersection of events that individually and collectively have created significant financial uncertainty and volatility across the equity and credit markets.

I am pleased to share that the first quarter and the beginning of the second quarter were excellent from an asset management and originations perspective.

Our first quarter origination volume of one 2 billion drove portfolio growth.

<unk> and CMT G ending the quarter with an all time portfolio high of $7 2 billion of total loans and $8 7 billion of loans and commitments.

Our strong originations however come at a time of great market volatility.

Today, we find ourselves at an intersection of events that individually and collectively have created significant financial uncertainty and volatility across the equity and credit markets.

Richard Mack: War, inflation, rising interest rates, a backed up securitization market, and the possibility of an economic slowdown continue to make economic outcomes unpredictable, to say the least, but also create originations opportunities for the strongly positioned. Although there are a range of opinions about what may unfold in the coming year, we believe there will continue to be attractive investment opportunities in transitional real estate lending for well-capitalized and scaled lenders like CMTG. Short-term rates and lending spreads are rising, increasing our lending returns. While this usually creates real estate value reductions, at this moment, rent inflation is also increasing, keeping asset values stable to up in the high growth markets and asset sectors that CMTG has the greatest exposure. In light of this environment, we are particularly pleased with the asset classes and markets that defined our origination activity in Q1 and Q2.

Or.

<unk> rising interest rates have backed up securitization market.

Possibility of an economic slowdown.

You didn't make economic outcomes unpredictable to say the least.

But also create originations opportunities for the strongly positioned.

Although there are a range of opinions about what may unfold in the coming year. We believe there will continue to be attractive investment opportunities and transitional real estate lending for well capitalized and scaled lenders like CMT Jay.

Short term rates and lending spreads are rising increasing our lending returns.

And while this usually creates real estate value reductions at this moment.

Rent inflation is also increasing keeping asset values stable to up in the high growth markets and asset sectors that she MTG has the greatest exposure.

In light of this environment, we are particularly pleased with the asset classes and markets.

Find our origination activity in the first and second quarters.

Richard Mack: We have been focused on markets that continue to demonstrate strong growth, such as Dallas, Miami, Phoenix, Seattle, and Nashville. It's been instructive to follow the lead of our equity business into many of these markets. Deploying capital in these markets has resulted in enhanced portfolio diversification with stable asset values in this rising interest rate environment. Additionally, we've been focused on sectors that we consider to be defensive. Multifamily and build-to-rent homes represented 76% of our Q1 originations. Both supply-demand dynamics and shortages in materials and labor should continue to create valuation tailwinds there. Further, the sector has historically benefited in an inflationary environment. Annual lease renewals provide operators with the opportunity to reprice rents on a yearly basis amid strong demand, and an inflationary backdrop should keep these asset values stable with potential upside.

We've been focused on markets that continue to demonstrate strong growth.

Such as Dallas, Miami, Phoenix, Seattle, Nashville, and had been instructed to follow the lead of our equity business into many of these markets.

Deploying capital in these markets has resulted in enhanced portfolio diversification with stable asset values in this rising interest rate environment.

Additionally, we have been focused on sectors that we consider to be defensive.

Multifamily and build to rent homes represented 76% of our first quarter originations.

Supply demand dynamics and shortages of materials and labor should continue to create valuation tailwind there.

Further the sector has historically benefited in an inflationary environment.

Lease renewals provide operators with the opportunity to reprice rents on a yearly basis I'd make strong demand and an inflationary backdrop should keep these asset value stable with potential upside.

The single family for rent sector share similar fundamental drivers to multifamily.

Richard Mack: The single family for rent sector shares similar fundamental drivers to multifamily, but may benefit even more from the decrease in for-sale single-family affordability that we are seeing as a result of supply constraints and interest rate increases. We remain opportunistic as it relates to lending on out-of-favor asset classes such as office and hospitality. The reasons we are generally bearish on office are the same reasons why we like high growth cities that offer high quality of life. Work is no longer a place. People are migrating and increasingly are working from home. That said, we are seeing certain class A office and select markets outperform on a relative basis. In the hospitality sector, we are finding attractive risk-adjusted returns in the luxury segment of the market. Besides hotels reliant on corporate travel, we are seeing the hospitality sector rebounding well.

Benefit even more from the decrease in for sale single family affordability that we are seeing as a result of supply constraints and interest rate increases.

We remain opportunistic as it relates to lending on out of favor asset classes, such as office and hospitality.

The reasons, we are generally bearish on office or the same reasons why we like high growth cities that offer high quality of life.

Work is no longer a place.

People are migrating and increasingly are working from home.

That said, we are seeing certain class a office in select markets outperform on a relative basis.

In the hospitality sector, we are finding attractive risk adjusted returns in the luxury segment of the market.

And besides hotels rely on corporate travel we are seeing the hospitality sector rebounding well.

Given the economic backdrop today, we believe that an allocation to real estate credit continues to be prudent however.

Richard Mack: Given the economic backdrop today, we believe that an allocation to real estate credit continues to be prudent. However, not all real estate credit managers will perform equally well when stress tested. We believe that a platform like ours will outperform because of our deep experience, our equity ownership mindset, and equity infrastructure. Our team at CMTG focuses on attracting experienced borrowers who have meaningful equity subordination and invest in high quality institutional assets, leveraging our significant equity infrastructure and experience in many of today's strongest markets. Q2 is so far shaping up to be another strong originations quarter for us, with approximately $400 million in originations executed through May 6. Our asset management also continues to drive value for our stockholders, having made significant progress during Q2 in resolving our non-accrual loans.

However, not all real estate credit managers will perform equally well when stress test it.

We believe that a platform like ours will outperform.

Because of our deep experience at our equity ownership mindset and equity infrastructure.

Our team at CMT G focuses on attracting experienced borrowers who had meaningful equity subordination and invest in high quality institutional asset.

Leveraging our significant equity infrastructure and experience in many of today's strongest market.

The second quarter has so far shaping up to be another strong originations quarter for us with approximately 400 million in originations executed through may six.

Our asset management also continues to drive value for our stockholders, having made significant progress during the second quarter in resolving our non accrual loans.

Richard Mack: Jai will touch on this in further detail later on the call, and while I don't want to steal his thunder, I would like to highlight that we will be recognizing a sizable gain on sale in Q2 while reducing our non-accrual percentage to approximately 2%. I would now like to turn the call over to Mike.

Jay will touch on this in further detail later on the call and while I don't want to steal his thunder I would like to highlight that we will be recognizing a sizeable gain on sale in the second quarter, while reducing our non accrual percentage to approximately 2%.

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

Thank you Richard.

J. Michael McGillis: Thank you, Richard, and thank you all for joining us this morning. During Q1, we originated $1.2 billion of senior floating rate transitional loans across 14 investments. Multifamily comprised 64% of our Q1 origination activity, driving a 7% quarter-over-quarter increase in our multifamily exposure to 37% of the portfolio's UPB at 31 March 2022. In addition, our New York exposure continues to decline and ended the quarter at 33% and has declined even further this quarter as a result of loan repayments. The pullback in the CLO and securitization markets we observed late last year continued through Q1 2022, which provided us an opportunity to step in and deploy capital in the multifamily sector that yields wide of what they would have been priced at in a more normal securitization market.

Michael McGillis: Thank you, Richard, and thank you all for joining us this morning. During Q1, we originated $1.2 billion of senior floating rate transitional loans across 14 investments. Multifamily comprised 64% of our Q1 origination activity, driving a 7% quarter-over-quarter increase in our multifamily exposure to 37% of the portfolio's UPB at 31 March 2022. In addition, our New York exposure continues to decline and ended the quarter at 33% and has declined even further this quarter as a result of loan repayments. The pullback in the CLO and securitization markets we observed late last year continued through Q1 2022, which provided us an opportunity to step in and deploy capital in the multifamily sector that yields wide of what they would have been priced at in a more normal securitization market.

Thank you all for joining us this morning during the first quarter, we originated $1 2 billion of senior floating rate transitional loans across 14 investments.

Multifamily comprised 64% of our first quarter origination activity driving a 7% quarter over quarter increase in our multifamily exposure to 37% of the portfolio is U P. B at March 31.

In addition, our New York exposure continues to decline and ended the quarter at 33% and has declined even further this quarter as a result of loan repayments.

The pullback in the CLO and securitization markets. We observed late last year continued through the first quarter of 2022, which provided us an opportunity to step in and deploy capital in the multifamily sector yields wide of what they would have been priced out in a more normal securitization market.

J. Michael McGillis: Construction loans represented roughly a third of our Q1 multifamily originations. In addition to liking the fundamentals of the multifamily sector, we believe we're uniquely positioned to manage this asset class given our sponsor's long history in multifamily development and management. During the quarter, we also originated several loans related to build-to-rent single-family home portfolios. Build-to-rent loan commitments represented more than $150 million or 12% of our Q1 origination activity. As Richard mentioned, we have a positive outlook on the BTR sector, and we've been looking at the sector for some time now. The Q1 provided us an entry point to participate in the sector in size via portfolio financing format. In addition, we've been rounding out our portfolio over the past year by focusing on select asset types such as life sciences and industrial.

Michael McGillis: Construction loans represented roughly a third of our Q1 multifamily originations. In addition to liking the fundamentals of the multifamily sector, we believe we're uniquely positioned to manage this asset class given our sponsor's long history in multifamily development and management. During the quarter, we also originated several loans related to build-to-rent single-family home portfolios. Build-to-rent loan commitments represented more than $150 million or 12% of our Q1 origination activity. As Richard mentioned, we have a positive outlook on the BTR sector, and we've been looking at the sector for some time now. The Q1 provided us an entry point to participate in the sector in size via portfolio financing format. In addition, we've been rounding out our portfolio over the past year by focusing on select asset types such as life sciences and industrial.

Construction loans represented roughly a third of our first quarter multifamily originations.

And additional liking the fundamentals of the multifamily sector. We believe we're uniquely positioned to manage this asset class given our sponsors long history and multifamily development and management.

During the quarter. We also originated several loans related to build to rent single family home portfolios.

The rent loan commitments represented more than $150 million or 12% of our first quarter origination activity.

As Richard mentioned, we have a positive outlook on the BTR sector and we've been looking at the sector for some time now.

First quarter provided us an entry point to participate in the sector inside the portfolio financing format.

In addition, we've been rounding out our portfolio over the past year by focusing on select asset types, such as life Sciences and industrial.

J. Michael McGillis: As an example, during the quarter we originated a $130 million loan for a life sciences development in the University City sub-market of Philadelphia. The sponsor is an institutional borrower with extensive development experience, and the investment represents an attractive risk-adjusted return at relatively low LTVs in a sector with strong demand and rent growth. Before turning the call over to Jay, I would like to highlight that we have significant available investment capacity in the form of cash on balance sheet, under-leveraged or unlevered assets, available financing capacity on our lines, as well as a low leverage balance sheet. That collectively should provide us with capacity to originate loans in a period of market uncertainty, which should provide us the ability to originate new loans at favorable risk-adjusted returns due to spread widening and benchmark rate increases.

Michael McGillis: As an example, during the quarter we originated a $130 million loan for a life sciences development in the University City sub-market of Philadelphia. The sponsor is an institutional borrower with extensive development experience, and the investment represents an attractive risk-adjusted return at relatively low LTVs in a sector with strong demand and rent growth. Before turning the call over to Jay, I would like to highlight that we have significant available investment capacity in the form of cash on balance sheet, under-leveraged or unlevered assets, available financing capacity on our lines, as well as a low leverage balance sheet. That collectively should provide us with capacity to originate loans in a period of market uncertainty, which should provide us the ability to originate new loans at favorable risk-adjusted returns due to spread widening and benchmark rate increases.

As an example during the quarter, we originated $830 million for.

For life Sciences development in the University City Submarket of Philadelphia.

The sponsor is in institutional borrower with extensive development experience in the investment represents an attractive risk adjusted return at relatively low ltvs in our sector with strong demand and rent growth.

Before turning the call over to Jay I would like to highlight that we have significant available investment capacity in the form of cash on balance sheet under leveraged our unlevered assets.

Available financing capacity on our lines as well as a low leverage balance sheet.

That collectively should provide us with capacity to originate loans.

Period of market uncertainty, which should provide us the ability to originate new loans at favorable risk adjusted returns due to spread widening and benchmark rate increases.

J. Michael McGillis: I would now like to turn the call over to Jai to review our financial results. Jai?

Michael McGillis: I would now like to turn the call over to Jai to review our financial results. Jai?

I'd now like to turn the call over to Jay to review our financial results Jay.

Thank you, Mike and good morning, everyone.

Jai Agarwal: Thank you, Mike McGillis, and good morning, everyone. For Q1, we reported GAAP net income of $29.4 million or 21 cents per share, and distributable earnings of $33.5 million or 24 cents per share. Book value per share, excluding the general CECL reserve, was $18.76, a slight decline from year-end. Our specific CECL reserve remains unchanged at approximately $6 million. Our total CECL reserve increased by $2.1 million quarter-over-quarter to $75.6 million or 1% of the portfolio. Subsequent to quarter end, our asset management team successfully resolved our largest nonaccrual loan in April. This was a $116 million land loan in New York City that was delinquent since Q1 2020.

For the first quarter, we reported GAAP net income of $29 4 million or 21 per share.

And distributable earnings of $33 5 million or <unk> 24 per share.

Book value per share excluding the general reserve was $18.76.

A slight decline from year end.

Our specific season reserve remains unchanged at approximately $6 million.

Our total pizza dessert increased by $2 1 million quarter over quarter to $75 $6 million or 1% of the portfolio.

Subsequent to quarter end, our asset management team successfully resolved a largest nonaccrual loan in April .

This was a $116 million land loan in New York City that was delinquent since the first quarter of 2020.

The investment generated a levered return of approximately 12, 5% and a gain of $30 million.

Jai Agarwal: The investment generated a levered return of approximately 12.5% and a gain of $30 million, or $0.22 per share based on shares outstanding at March 31. This amount will be reported in our Q2 numbers as a gain on sale. The resolution significantly reduces nonaccrual loans to 2.2% of the portfolio compared to 4.1% at the end of the year. We believe the resolution speaks to the strength of our business model. The manager's roots as an owner, operator, and developer provides us a competitive advantage in the underwriting and managing transitional loans. Moving back to Q1 numbers.

<unk> 22 per share based on shares outstanding at March 31.

This amount will be reported in our second quarter numbers as a gain on sale.

Resolution significantly reduces non accrual loans to 2.2% of the portfolio.

Four 1% at the end of the year.

We believe the resolution speaks to the strength of our business model.

The managers route as an owner operator and developer.

It provides us a competitive advantage.

Alrighty and managing transitional loans.

Moving back to the first quarter numbers.

During the first quarter, our loan portfolio increased by $631 million to $17 2 billion.

Jai Agarwal: During Q1, our loan portfolio increased by $631 million to $7.2 billion, driven by initial fundings on new loans of $685 million as originations and loan fundings outpaced repayments. We had liquidity of over $450 million at Q1 end and unencumbered assets of $615 million. We upsized warehouse facilities with two banks by $700 million, bringing our total capacity to $5 billion with availability of approximately $1 billion. Our leverage ratio was low at 1.9 times at Q1 end, and as we deploy additional capital, this ratio is expected to increase to the 2.5 to 3 times range over time and will be more in line with the industry. In terms of interest rates, our earnings profile has benefited from loans with in-place floors.

Driven by initial fundings of new loans of $685 million.

Originations and loan funding outpaced repayments.

We had liquidity of over $450 million a quarter end.

Unencumbered assets of $650 million.

Re upsides warehouse facilities with two banks.

About $700 million, bringing a total capacity of two 5 billion.

With availability of approximately $1 billion.

Our leverage ratio was low at one nine times at quarter end.

And as we deploy additional capital.

The ratio is expected to increase to the two and a half to three times range overtime and would it be more in line with the industry.

In terms of interest rates.

Our earnings profile has benefited when loans with in place floors.

Jai Agarwal: Today, we continue to benefit from outsized yields on loans originated prior to 2020 and estimate that our earnings will become positively correlated with rising interest rates in the latter part of the year as a result of the forward curve, new originations, and repayments. Looking ahead, we can see several drivers that could boost earnings. One, we have $450 million of cash at quarter end. Two, we resolved the nonaccrual assets I just referenced. Three, potential ramp up in performance of our REO assets. Four, potential resolution of our two remaining nonaccrual assets. I would now like to open the call for questions. Operator, please go ahead.

We continue to benefit from outsized yields on loans originated prior to 2020.

And estimate the earnings will become positively correlated with rising interest rates in the latter part of the year.

As a result of the forward curve the originations and repayments.

Looking ahead.

You can see several drivers that could boost earnings.

One we have $450 million of cash at quarter end.

Two.

The non accrual assets just referenced.

Great.

The ramp up in performance of our Oreo assets.

And for potential.

Illusion of our two remaining non accrual assets.

I would now like to open the call for questions. Operator. Please go ahead.

As a reminder, if you'd like to register a question. Please press star followed by one on your telephone keypad. If you change your mind. Please press star followed by two and please ensure you're a muted when speaking.

Operator: As a reminder, if you'd like to register a question, please press star followed by one on your telephone keypad. If you change your mind, please press star followed by two, and please ensure you're unmuted when speaking. Our first question comes from Rick Shane of JP Morgan. Rick, the line is yours.

Our first question comes from Rick Shane of J P. Morgan right because the line is yours.

Good morning, guys. Thanks for taking my question.

Rick Shane: Good morning, guys. Thanks for taking my question. Really, two things. One, and thank you for the disclosure on the floors. Is your view that with forward rates, that as we sort of move through Q2, you start to revert to asset sensitivity? Is that the timeframe? Second, so much of the story really is about your available liquidity and your opportunity to grow the balance sheet and lever up a little bit. What do you think is a realistic horizon to achieve what you would consider to be optimal leverage?

Really.

Two things one and thank you for the disclosure on the floors.

Is your view that with forward rates that is we sort of.

Move through the second quarter, you start to revert to asset sensitivity is that the timeframe and then second so much of the story really is about your available liquidity and your opportunity to.

Grow the balance sheet and lever off a little bit.

What do you think is a realistic horizon to achieve what you would consider to be optimal leverage.

Jai Agarwal: This is Jai. You know, I'll take the second part first.

This is a J.

Jai Agarwal: This is Jai.

Michael McGillis: You know, I'll take the second part first.

Firstly.

Rick Shane: Okay.

Michael McGillis: Okay.

Sure Yeah, Yeah, I'll take the first one first I guess in terms of interest rates.

Jai Agarwal: Sure. Yeah. I'll take this first one first, I guess. In terms of interest rates, I'd say based on the static portfolio, if you look at a static portfolio as of March 31, and there's a chart in our supplement on page 16 that explains this well, I think. If you juxtapose that with the forward curve, I would say somewhere at the end of Q2 or beginning of Q3 is when we become asset sensitive, but that's just based on a static portfolio. If you add in new loans, it could be somewhere towards the end of Q2 when we become asset sensitive.

I'd say.

Based on the static portfolio. If you look at the static portfolio as of March 31st and there's a chart in our in our.

Supplement on page 16 that explains as well I think.

If you if you juxtapose that with the forward curve I would say.

We're at the end of the second quarter beginning of the third quarter is when we become asset sensitive, but that's just based on the static portfolio. If you add in new new zones. It.

It could be somewhere towards the end of the second quarters, when we become we have become asset sensitive.

Yeah.

Great and then.

Rick Shane: Great. In context of

And contact risk out of it relates to your skin.

J. Michael McGillis: Rick, as it relates to your question. Just to answer the second question. I think, you know, it just depends on what the market gives us from an opportunity perspective. Now, we've stepped in with the backed up securitization market and been able to significantly increase our allocation to cash flowing multi. I think that's been very positive. If that trend continues, then we will likely slowly increase our leverage as we deploy capital as a result of lower risk assets and trying to create equivalent returns as we scale. However, it is likely that we may see some improvement in the CLO market, and therefore we might shift where we're investing.

Richard Mack: Rick, as it relates to your question. Just to answer the second question. I think, you know, it just depends on what the market gives us from an opportunity perspective. Now, we've stepped in with the backed up securitization market and been able to significantly increase our allocation to cash flowing multi. I think that's been very positive. If that trend continues, then we will likely slowly increase our leverage as we deploy capital as a result of lower risk assets and trying to create equivalent returns as we scale. However, it is likely that we may see some improvement in the CLO market, and therefore we might shift where we're investing.

Rick just to answer the second question I think.

It just depends.

On.

What the market gives us from an opportunity perspective that we've stepped in and with a backed up securitization market and been able to them to significantly increase our allocation to cash flowing multi.

I think that's been very positive.

If that trend continues.

We will likely.

Slowly increase our leverage as we deploy capital as a result of lower risk assets and trying to create equivalent returns as we scale.

However, it is likely.

That we're going to do that we may see some improvement in the CLO market.

And therefore, we might shift.

Where we're investing we are actually seeing as it relates and Kevin may want to comment on this.

J. Michael McGillis: We are actually seeing as it relates, and Kevin may wanna comment on this, the originations market as it relates to certain heavier transitional loans. That seems where spreads are widening the most at the moment. We're gonna try to be opportunistic given our level of experience in all these types of assets and loans about where we invest. Clearly, if we do heavier transitional loans, we will more slowly increase leverage on the balance sheet as we scale.

Richard Mack: We are actually seeing as it relates, and Kevin may wanna comment on this, the originations market as it relates to certain heavier transitional loans. That seems where spreads are widening the most at the moment. We're gonna try to be opportunistic given our level of experience in all these types of assets and loans about where we invest. Clearly, if we do heavier transitional loans, we will more slowly increase leverage on the balance sheet as we scale.

The originations market as it relates to.

Certain heavier transitional loans that seems where spreads are widening the most at the moment and we're going to try to be opportunistic.

Given our level of experience in all of these types of assets and loans about where we invest and clearly if we do heavier transitional loans.

Will more slowly increase leverage.

On the balance sheet as we scale.

Got it that's helpful and again I appreciate that it's it is opportunity driven not sort of objective driven in terms of <unk>.

Rick Shane: Got it. That's helpful. Again, I appreciate that it is opportunity driven, not sort of objective driven in terms of leveraging the balance sheet simply for the sake of leveraging the balance sheet. Then, last comment, Jai, nice to hear your voice in this context and look forward to working with you again.

Leveraging the balance sheet simply for the sake of leveraging the balance sheet and then last common chain nice to hear your voice in this context and look forward to working with you again.

Jai Agarwal: Thank you. Yeah, likewise.

Thank you yeah likewise.

Our next question comes from Steve Delaney of JMP Securities. Steve. Please go ahead.

Operator: Our next question comes from Steve DeLaney of JMP Securities. Steve, please go ahead.

Steve DeLaney: Thanks. Good morning, everyone. The first question I have is the sequential decline in net interest income from about $56 million in Q4 to $51 million. Just curious if you could comment on what drove that. You know, my suspicion is that maybe you just had heavier repayment-related income in the Q4, but I'd love to hear your comments on that Q1 NII. Thank you.

Thanks, Good morning, everyone. So the first question I have is the sequential decline in net interest income from about 56 million and <unk> to 51.

Just curious if you could.

Comment on what drove that my suspicion is that maybe you've just had heavier repayment related income in the <unk>, but I'd love to hear your comments on on that first quarter NII. Thank you.

Steve This is Jay.

Jai Agarwal: Steve Delaney, this is Jai Agarwal. I think that-

J. Michael McGillis: Jai, Mike, do you want to take this?

Michael McGillis: Jai, Mike, do you want to take this?

Sure Yeah, I'll start and Mike do you want to add Steve that that's exactly right. It is we had we had loans being off in the first quarter or excuse me in the fourth quarter. Some of those were subordinate loans similar high somewhat loans with high LIBOR floors and high coupons.

Jai Agarwal: Sure, yeah, I'll start and Mike, if you wanna add. Steve, that's exactly right. It is. We had loans paying off in Q1, or excuse me, in Q4. Some of those were subordinate loans. Some were loans with high LIBOR floors and high coupons. As those loans paid off in Q4, that was the biggest culprit in terms of lower NII in Q1. As we continue to redeploy capital and as the interest rate curve benefits us, we should be able to catch up towards H2 of this year.

Loans paid off.

In Q4.

That was the biggest culprit in terms of lower NII in the first quarter, but as we continue to redeploy capital and as the interest rate curve benefits us, we should be able to catch up towards the latter half right.

Steve DeLaney: Right. Credit seems to be healing, so I just wanted to make sure that it wasn't some impact of you didn't have any new non-accruals or reversals of previously accrued interests or something like that.

Credit seems to be healing. So I just wanted to make sure that it wasn't some impact of you didn't have any new non accruals or reversals of previously accrued interest or something like that.

Jai Agarwal: That's exactly right. We are our non-accruals actually decreased after the-

That's exactly right.

Our non accruals actually decreased after the right land loan resolution.

Steve DeLaney: Right.

Jai Agarwal: one large land loan resolution. There were no new non-accruals.

Yeah on accruals, Okay, great and my follow up would be just bigger picture question, you know strong net loan growth it sounds like the opportunities youre seeing especially now in multifamily with CLO market kind of shutting down.

Steve DeLaney: Okay, great. My follow-up would be, you know, just in a bigger picture question. You know, strong net loan growth, it sounds like opportunities you're seeing, especially now in multifamily with CLO market kind of shutting down, that you expect to continue to grow the portfolio. My question is, when do you envision needing to acquire more capital? And what do you see as your options, as far as different types of capital, as you move forward to finance the portfolio? It looks like you just have one small $143 million of notes payable, and maybe you could comment on that as to, you know, what type of notes payable are they? Thank you.

But you're going to you expect to continue to grow the portfolio. So my question is when do you envision needing to acquire more capital and what do you see as your options on as.

As far as different types of capital as you move forward to finance the portfolio. It looks like you just have one small <unk>.

$143 million of notes payable and maybe you could comment on that as to do you know what type of notes payable our day. Thank you.

Okay, you want me to cover this one.

J. Michael McGillis: Jai, you want me to cover this one?

Michael McGillis: Jai, you want me to cover this one?

Jai Agarwal: Sure. Sure.

Like you said yesterday.

J. Michael McGillis: Mike, you should. Yeah.

Richard Mack: Mike, you should. Yeah.

Jai Agarwal: Thanks.

J. Michael McGillis: Yeah, sure. Thanks, Steve. Nice to hear your voice again.

Michael McGillis: Yeah, sure. Thanks, Steve. Nice to hear your voice again.

Sure. Thanks, Steve Nice to hear your voice again, yes.

Steve DeLaney: Yes, Mike.

Yes, Mike.

J. Michael McGillis: I think a few things. I'll address the notes payable item first. Typically the notes payable are those asset specific financings on certain of our heavier transitional loans. We tend not to finance those on repo lines. To the extent-

Michael McGillis: I think a few things. I'll address the notes payable item first. Typically the notes payable are those asset specific financings on certain of our heavier transitional loans. We tend not to finance those on repo lines. To the extent-

Things I'll address the notes payable item first so typically the note payable are those are asset specific financings on certain of our heavier transitional loans.

So we tend not to finance those on repo lines. So.

Got it.

Steve DeLaney: Got it.

J. Michael McGillis: We started shifting to more heavier transitional assets. We may see more of that activity, although we are working with a bank capital source to sort of create a facility to finance some of those items. But we're in the early stages of working through that at this point. I think

Michael McGillis: We started shifting to more heavier transitional assets. We may see more of that activity, although we are working with a bank capital source to sort of create a facility to finance some of those items. But we're in the early stages of working through that at this point. I think

Started shifting to more heavier transitional assets, we may see more of that activity. Although we are working with a.

Bank capital source to sort of.

To create a facility to finance some of those items, but we're in the early stages of working through that at this point.

Steve DeLaney: Got it.

I think on it obviously, we have a significant amount of capacity on our repo lines.

J. Michael McGillis: Obviously we have a significant amount of capacity on our repo lines. You know, we have seen some of the counterparties start to pull back, but as Jay highlighted, we've been able to increase our capacity on those over the course of the quarter due to our low leverage balance sheet. I think the comfort level that our bank partners have with us, with our ability to work through some of these situations as they emerge. I think we have assembled as well a collateral pool that I think would work effectively in a CRE CLO financing structure.

Michael McGillis: Obviously we have a significant amount of capacity on our repo lines. You know, we have seen some of the counterparties start to pull back, but as Jay highlighted, we've been able to increase our capacity on those over the course of the quarter due to our low leverage balance sheet. I think the comfort level that our bank partners have with us, with our ability to work through some of these situations as they emerge. I think we have assembled as well a collateral pool that I think would work effectively in a CRE CLO financing structure.

And we you know we have seen some of the counterparties start to pull back, but as Jay highlighted we've been able to increase our capacity.

Those over the over the course of the quarter due to our low leverage balance sheet and I think the comfort level that.

Our bank partners have with us with our ability to work through some of these situations as they emerge.

We are we have assembled.

Well, a collateral pool that I think would work.

Secondly, and a CRE CLO financing structure.

Steve DeLaney: Mm-hmm.

J. Michael McGillis: to the extent the market comes back there.

Michael McGillis: to the extent the market comes back there.

To the extent the market comes back there.

Richard Mack: Those are three engines right there. The other things that we continue to keep an eye on are the corporate bond market and the TLB market.

So those are those are three engines right there the other the other things that we continue to keep keep an eye on.

Michael McGillis: Those are three engines right there. The other things that we continue to keep an eye on are the corporate bond market and the TLB market.

The.

The corporate bond market and a T. L. P market, obviously, you don't want a great right now, but we continue to mark.

Steve DeLaney: Yes.

Richard Mack: Obviously, we want it great right now, but we continue to monitor opportunities there, as a source of incremental capital. I don't see us going to the common equity market anytime in the near future, but never say never.

Michael McGillis: Obviously, we want it great right now, but we continue to monitor opportunities there, as a source of incremental capital. I don't see us going to the common equity market anytime in the near future, but never say never.

Manav your opportunities there.

As a as a source of incremental capital, whether I don't see us go into the common equity market.

Anytime in the near future, but never say never.

Steve DeLaney: Yeah.

Yep.

But I think there's that sounds like you have plenty of options.

Richard Mack: I think there's other sources.

Michael McGillis: I think there's other sources.

Steve DeLaney: Sounds like you have plenty of options.

Richard Mack: Other sources of more cost financing that we can certainly tap as the portfolio evolves and grows.

Michael McGillis: Other sources of more cost financing that we can certainly tap as the portfolio evolves and grows.

Other sources.

Financing that we can certainly tap as the portfolio evolves and grows.

Jai Agarwal: Yes, Steve, I would also add, you know, we also have significant amount of cash on the balance sheet.

Steve I would also add you know we don't have significant amount of cash on the balance sheet and yes. We don't have any near term maturity is coming up so we're not in we're not.

Steve DeLaney: Yes.

Jai Agarwal: We don't have any near-term maturities coming up, so we're not desperate to raise cash.

Desperate to raise cash.

Steve DeLaney: Yeah. Well, it sounds like you can self-fund, which you're gonna see in portfolio growth for the next couple of quarters anyway. Thank you both for your comments. Appreciate it.

Yeah.

It sounds like you can self fund, which youre going to see in portfolio growth for the next couple of quarters anyway. Thank you both for your comments I appreciate it.

Richard Mack: Steve, I might remark that we feel pretty good about where we're sitting, and it does feel like there's a lot of opportunities given what's going on in the market and the cash on our balance sheet right now.

I might remark that we are.

We feel pretty good about where we're sitting and it does feel like there's a lot of opportunities given.

What's going on in the market.

And the cash on our balance sheet right now.

Thanks Richard.

Steve DeLaney: Thanks, Richard.

Our next question comes from Jade Rahmani of Keefe, Bruyette <unk> Woods Jade the line is yours.

Operator: Our next question comes from Jade Rahmani of Keefe, Bruyette & Woods. Jade, the line is yours.

Jade Rahmani: Thank you very much. Richard, could you expand your comments on the market? Sounds like you indicated you're not expecting cap rates to widen based on where rent inflation is, but then you also mentioned in the growth sectors that you're targeting, which primarily is on the residential side. Could you please just elaborate on your comments? You know, what are you expecting for overall commercial real estate prices in light of the interest rate outlook?

Thank you very much Richard could you expand your comments on the market. It sounds like you indicated you're not expecting cap rates to widen based on where rent inflation is but then you also mentioned in the growth sectors that you're targeting.

It primarily is on the residential side could you. Please just elaborate on your comments what are you expecting for overall commercial real estate prices in light of the interest rate outlook.

Yeah. So this is fairly.

Richard Mack: Yeah. This is fairly complicated and any answer would be nuanced and long. Let me try to do my best with it. I think that we are seeing cap rate expansion to the extent that cash flows associated with an asset are relatively static. If you were to take multifamily in a lower growth market, and right now, multifamily, just about every place is seeing, you know, really strong rent appreciation. In the lower growth areas, there's the battle between rent growth and interest rate moves. I think cap rates are expanding. Values are coming down a bit, especially in markets where rent growth is less expansive. This is really location by location, asset by asset.

Complicated and and any any answer would be nuanced and long. So let me try to do my best with it.

Think that we are seeing cap rate expansion.

To the extent that.

Cash flows associated with an asset or relatively static.

So if you were to take multifamily in a lower growth market in all right now multifamily just about every every places seeing really strong rent appreciation, but in the lower growth areas.

There's the battle between rent growth and interest rate moves and so I think.

Cap rates.

Our expanding values are coming down a.

A bit.

Especially in <unk>.

Markets, where rent growth is.

Less expensive and so this is a this is really location by location asset by asset.

Richard Mack: I think if you wanna just be simple about it, assets that can mark-to-market quickly where there's rent inflation in high-growth markets, those cap rates are generally stable. You know, I think people's assumptions of value probably have to come down a little bit because it's hard, I think, for rents to keep up with the acceleration and where the yield curve is going. Part of this is, if you believe the yield curve or not, you know, that's going to impact how you think about cap rates, and where you see rent growth, supply, and demand in each sub-sub-market and category of asset. I hope that's a helpful answer. It's very, very hard to broad-brush the market.

But I think if you want to just be simple about it.

Assets that can mark to market quickly, where there's rent inflation and high growth markets.

Those cap rates are generally stable.

Got it.

I think people's assumptions of value.

Probably have to come down a little bit because it's hard I think for rents to keep up with the acceleration and where the yield curve is going and so part of this is.

If you believe the yield curve or not.

That's going to impact how you think about cap rates.

And where you see rent growth in supply and demand in each sub sub market and category of asset.

So I hope that is that that's a helpful answer it's a it's very very hard to broadbrush the market.

Yeah.

Jade Rahmani: In terms of magnitude, are you talking and thinking about for those asset classes with less pricing power, less rent growth? Are you thinking about something like 25 to 50 basis points, which I believe would imply probably something around a 5 to 10% correction in prices or something more severe than that?

And in terms of magnitude are you talking and thinking about for those asset classes with less pricing power.

Less rent growth are you thinking about something like 25 to 50 basis points, which I believe would imply probably something around a 5% to 10% correction in prices or something more severe than that.

I think that that's absolutely right, it's probably going to be you know.

Richard Mack: I think that's absolutely right. It's probably gonna be, you know. Let's say it's between 5% and 15% on those type of assets. You know, to me, I think it's very hard to be an equity investor today given all these dynamics. Given the equity subordination that we have in our loans and given that spreads are rising, I really like where we're sitting as a transitional lender, much better than I like equity investment right now. Equity investment as a broad brush is very, very hard because of these dynamics. With the equity subordination that we have, I think the risk-adjusted returns in transitional lending right now look really, really strong to me, relative to equity, given all this interest rate risk and the risk of recession that's out there as well.

Let's say, it's between five and 15%.

And those type of assets.

To me I think it's very hard to be an equity investor today.

Given all these dynamics.

Given the equity subordination that we have in our loans given that spreads are rising.

Really like where we're sitting as a transitional lender are much better than that.

<unk>.

Equity investment right now equity investing is a broad brush is very very hard on.

Because of these dynamics, but with the equity subordination that we have that could be the risk adjusted returns in transitional lending right now look really really strong to me relative to equity given.

All of this interest rate risk and the risk of recession that that's out there as well.

Jade Rahmani: Thank you for that. I know you bring a you know fresh perspective to the mortgage REIT space, commercial mortgage REIT in particular. I think as Barry Sternlicht often says, you know, it's the liability structure that usually is the main cause of what puts these companies out of business. As you think about the leverage profile and the balancing act of increasing leverage to get fully deployed, alongside the sources of financing available, will you lean toward sources that are non-mark-to-market, non-repurchase focused? And where do A-note sales stack in that calculus?

Thank you for that I know you bring a fresh perspective to the to the mortgage REIT space commercial mortgage Reits in particular, and I think as a battery starting like.

Often.

As you know it's the liability structure that usually is the main cause of what puts these companies out of business.

So as you think about the leverage profile and the balancing act of increasing leverage to get fully deployed.

Alongside the sources of financing available will you lean toward sources that are non mark to market on repurchase focused and well do a note sales stack in that calculus.

So a J.

Richard Mack: Jai, look, I want to hand part of this off to Mike. Let me say that when we started the business, where we thought we were gonna be was 25% warehouse and 75% A-notes. The warehouse lines today are generally much more favorable than they have been in the past, number one. Number two, the cost of A-notes for anything other than, you know, super heavy transitional has just not made a lot of economic sense. I think that that's because the banks have regulatory incentives to push to warehouse lines as opposed to A-notes.

I want a hand part of this off.

But let me say that when we when we started the business.

But what we what we what we where we thought we were gonna be with 25% warehouse and 75% of any notes but.

The warehouse lines today are generally much more favorable than they have been in the paas.

But and number two the cost of Adas for anything other than you know Super heavy transitional is just not made a lot of economic sense and I think that's because the banks have regulatory incentives to push.

Two warehouse lines as opposed to a notes and so we are worried about the liability.

Richard Mack: You know, we are worried about the liability part of the equation every day because if we had the capacity to do everything with A-notes in a way that was more financially viable, we would do so. We're. It's a careful balance. I do think that Mike has done a tremendous job and Jai will continue to make sure that our warehouse lines have the absolute best provisions possible to avoid a meltdown. We further don't want to use all the capacity in our warehouse lines from a leverage perspective. We tend to want to use less than what's available to us on a deal-by-deal basis. We're gonna continue to try to run our business with modest leverage.

Part of the equation every day, because if we had the capacity to do everything with a notes in a way that was more financially viable we would do so so we're it's a careful balance but I do think that Mike has done a tremendous job and Jay.

We'll continue to to.

Make sure that our warehouse lines have the absolute best provisions possible to avoid a meltdown and we've further don't want to use all the capacity in our warehouse lines from a leverage perspective, we tend to want to use less than what's available to us.

On a deal by deal basis, and we're going to continue to try to run our business with modest leverage and yes look for where we can get long term fixed capital.

Richard Mack: Yes, look for where we can get long-term fixed capital, either fixed rate or floating rate, but long term from a duration perspective where we don't have to worry about the liability side, being a problem. It is absolutely right. The liability side is where you get hurt, and Mike's lived through this. Mike, can I turn it over to you?

Either fixed rate or floating rate, but long term from a duration perspective, where we don't have to worry about the liability side.

Being a problem, but it is absolutely right. The liability side is where you get hurt in Mike's lived through this so Mike can I turn it over to you.

Sure. Thanks, Richard Nice to hear from you Yeah. So I think just by way of background. When we've gone back to when we started started this business. We really are financing philosophy has always been to really look at the risk profile of each individual asset on finance it based on the merits of.

J. Michael McGillis: Sure. Thanks, Richard. Jai, nice to hear from you. I think just by way of background and going back to when we started this business, we really, our financing philosophy has always been to really look at the risk profile of each individual asset and finance it based on the merits of the risk profile, whether it's loan to cost, loan to value, stabilized debt yields with a cushion for a decline, and really try to finance that, let's call it the senior position on the whole loan in a way where even in the event that our sponsor doesn't hit sort of their projected stabilized debt yields, we still can effectively sort of service that senior financing. It's very deal-by-deal specific.

Michael McGillis: Sure. Thanks, Richard. Jai, nice to hear from you. I think just by way of background and going back to when we started this business, we really, our financing philosophy has always been to really look at the risk profile of each individual asset and finance it based on the merits of the risk profile, whether it's loan to cost, loan to value, stabilized debt yields with a cushion for a decline, and really try to finance that, let's call it the senior position on the whole loan in a way where even in the event that our sponsor doesn't hit sort of their projected stabilized debt yields, we still can effectively sort of service that senior financing. It's very deal-by-deal specific.

The risk profile, whether it's a loan to cost loan to value.

Stabilized debt yields without with a cushion for a decline and really try to finance that let's call. It the senior position on the whole loan.

In a way where even in the event that our sponsor.

It doesn't hit sort of their projected stabilized debt yields we still have.

We still can effectively sort of service that senior financing.

So it's very.

Deal by deal specific if we do lighter.

J. Michael McGillis: If we continue to do more lighter transitional loans, I think you'll see our leverage increase. Obviously, we have a lot of capacity, I think, to increase our leverage in the current environment, and drive incremental returns. If there are great opportunities in the heavier transitional space that we see, we'll probably apply less leverage in those situations. The leverage ramp may be slower, but we'll still be trying to achieve the same ROEs on those loans or slightly higher ROEs. It's gonna be a function, Jay, of really what the opportunity set looks like at any point in time in terms of how we're financing those positions.

Michael McGillis: If we continue to do more lighter transitional loans, I think you'll see our leverage increase. Obviously, we have a lot of capacity, I think, to increase our leverage in the current environment, and drive incremental returns. If there are great opportunities in the heavier transitional space that we see, we'll probably apply less leverage in those situations. The leverage ramp may be slower, but we'll still be trying to achieve the same ROEs on those loans or slightly higher ROEs. It's gonna be a function, Jay, of really what the opportunity set looks like at any point in time in terms of how we're financing those positions.

I need to do more lighter transitional loans, I think you'll see our leverage.

Increase obviously, we have a lot of capacity I think to increase our leverage.

In the current environment and drive incremental returns, but if there are great opportunities in the heavier transitional space.

That we see will probably apply less leverage in those situations and the leverage ramp may be slower, but we'll still be trying to achieve the same power always on those loans are slightly higher at higher royalties.

So it's gonna be a function of really what the opportunity set looks like at any point in time in terms of how we're financing those positions.

Jade Rahmani: Thank you very much. I'll get back in the queue.

Thank you very much I'll get back in the queue.

Thanks Jay.

J. Michael McGillis: Thanks, Jai.

Michael McGillis: Thanks, Jai.

Operator: Our next question comes from Brock Vandervliet of UBS. Brock, please go ahead.

Our next question comes from Brock Vandervliet of UBS. Please.

Operator: Our next question comes from Brock Vandervliet of UBS. Brock, please go ahead.

Please go ahead.

Brock Vandervliet: Good morning. Thank you. Jay, if you could just talk about kind of the cadence between, you know, the fundings and the commitments. You know, fundings are kind of pretty volatile. Just wondering if we should be thinking, you know, something similar to this level of funding going forward or it's gonna step back up to, you know, over $1 billion plus.

Good morning, Thank you.

Jay if you could just talk about kind of the cadence between.

The fundings.

And the commitments.

Fundings are.

And I have a pretty volatile and just wondering if we should be thinking.

Something similar to this level of funding going forward or it's going to step back up to over 1 billion plus.

Richard Mack: You know, that's kind of a hard question to answer just because, you know, we don't buy things off a Bloomberg screen. Right? Our loans take somewhere between, you know, 60 to 90 days to close. You know, we had a very strong Q4 and a reasonably strong Q1 of this year. Q2 is turning out to be fairly strong thus far. As a cadence, you can think about for a full year, we just deploy somewhere between $4 to 5 billion. It's hard to break it down in quarterly bite sizes just because of the amount of time it takes to close something, and we can't predict or control the timing of closing.

Jai Agarwal: You know, that's kind of a hard question to answer just because, you know, we don't buy things off a Bloomberg screen. Right? Our loans take somewhere between, you know, 60 to 90 days to close. You know, we had a very strong Q4 and a reasonably strong Q1 of this year. Q2 is turning out to be fairly strong thus far. As a cadence, you can think about for a full year, we just deploy somewhere between $4 to 5 billion. It's hard to break it down in quarterly bite sizes just because of the amount of time it takes to close something, and we can't predict or control the timing of closing.

That's kind of how that's kind of a hard question to answer just because you know we don't buy things off of Bloomberg screen.

Don't stick somewhere between you know.

60 to 90 days to close.

We had as you know.

Very strong fourth quarter.

A reasonably strong first quarter of this year and the second quarters, turning out to be fairly strong thus far.

So as a cadence you can think about for your photo.

For the full year, we just deploy somewhere between $4 billion to $5 billion.

Hard to break it down in quarterly by sizes.

Just because just because of the amount of time it takes to close something and we can't predict or control the timing of clothing.

Richard Mack: For a full year, you should think of us as $4 to 5 billion run rate. I don't know if that helps from a modeling perspective.

Jai Agarwal: For a full year, you should think of us as $4 to 5 billion run rate. I don't know if that helps from a modeling perspective.

But for a full year you should think of those as full to four to 5 billion run rate.

I don't know if that helps them godling perspective.

Brock Vandervliet: Okay. Sure. You know, going back to one of the other questions on NII, just to take another crack at it. You know, you're kind of backing into your loan yield and such. What's driving what appears to be the lower loan yield? Is that just, you know, payoffs of higher yielding paper or an asset mix shift? What's driving that?

Sure.

And going back to one of the other questions on NII just to take another crack at it.

I'm kind of backing into your <unk>.

Your loan yield and such was there.

What what's driving what appears to be the lower a lower loan yield is that just you know.

Payoffs of higher yielding.

Paper or a an asset asset mix shift.

What's driving that.

Jai Agarwal: Yeah, sure. In the first quarter, we did a whole bunch of cash flowing multifamily loans, which as you can imagine, will have a lower asset level yield. As we reported in a supplement, the weighted average yield on those was 4.7%. Now, it's fair to mention that those loans had lower LIBOR floors because LIBOR was very low. Those don't have the high LIBOR floors that our 2020 or 2019 vintage loans had. Those loans will catch up as the forward curve steepness actually goes through, and the yield should naturally increase.

Yeah sure so in the first quarter, we did it.

Whole bunch of cash flowing multifamily loans, which as you can imagine.

Having lower asset level yield so as we reported in our supplement as a supplement.

The average yield on those was four 7% and I would just say you mentioned that those loans had.

Lower LIBOR floors, because LIBOR was very low.

So those doing have the high LIBOR floors that are 2000 22019 vintage loans had.

So those.

Those loans will catch up as the forward curve.

As the forward curve steepness.

Actually goes to the end.

And then you should naturally increase.

Jai Agarwal: The first part is also right that the loans that paid off in Q4 had higher yields. This is a transitional period, if you will.

And the first part is also right that the loans that paid off in the fourth quarter had higher yields.

Jai Agarwal: The first part is also right that the loans that paid off in Q4 had higher yields. This is a transitional period, if you will.

This is a transitional period, if you will.

Got it Okay. Let me, let me I'll just provide a little bit of additional color. Yeah. So Brock if we look at our originations in Q4.

Brock Vandervliet: Got it. Okay.

J. Michael McGillis: Jay, let me I'll just provide a little bit of additional color. Yeah. Brock, if we look at our originations in Q4 and Q1, that was heavily weighted towards lighter transitional multifamily loans. Obviously those are lower yielding but much more much lower risk financings. We had a lot of higher yielding subordinate loans with that had higher yields due to in-place LIBOR floors that were significant, as well as pretty high spreads given the risk profile of some of those subordinate loans that paid off at the end of Q4.

Michael McGillis: Jay, let me I'll just provide a little bit of additional color. Yeah. Brock, if we look at our originations in Q4 and Q1, that was heavily weighted towards lighter transitional multifamily loans. Obviously those are lower yielding but much more much lower risk financings. We had a lot of higher yielding subordinate loans with that had higher yields due to in-place LIBOR floors that were significant, as well as pretty high spreads given the risk profile of some of those subordinate loans that paid off at the end of Q4.

Q1 that was heavily weighted towards lighter transitional multifamily loans.

So obviously those are lower yielding but much more.

Much lower risk.

Financings and we had a lot of higher yielding.

Subordinate loans.

That had higher yields due to.

In place LIBOR floors that were significant as well as pretty high spreads given the risk profile of the some of those subordinate loans that paid off at the end of the fourth quarter. So it is Jay highlighted it is a function of repayments we received.

J. Michael McGillis: As Jay highlighted, it is a function of the repayments we received at the end of Q4, combined with the portfolio shift to a heavier component of lighter transitional multifamily deals that occurred over Q4 and through Q1 of 2022.

Michael McGillis: As Jay highlighted, it is a function of the repayments we received at the end of Q4, combined with the portfolio shift to a heavier component of lighter transitional multifamily deals that occurred over Q4 and through Q1 of 2022.

During the year and at the end of the fourth quarter combined with.

The portfolio shift to a heavier.

Ponant of lighter transitional multifamily deals that occurred over the fourth quarter and through the first quarter of 2022.

Okay got it appreciate the color.

Brock Vandervliet: Okay. Got it. Appreciate the color.

Yep.

J. Michael McGillis: Yep.

Michael McGillis: Yep.

Yeah.

Operator: I believe we have a follow-up question from Jade Rahmani of Keefe, Bruyette & Woods. Jade, please go ahead.

I believe we have a follow up question from Jade Rahmani <unk>.

Keefe Bruyette <unk> Woods Jade. Please go ahead.

Jade Rahmani: Thank you very much. The single-family rental space is very interesting, something I followed for quite a while. Build to rent is one of the flavors of the day. Just given the company's background in multifamily, how did you get comfortable with that? Can you give any color on the types of sponsors you are lending to in the build to rent space?

Thank you very much.

Your family rental space.

It's very interesting something I, followed for quite a while and build to rent is.

One of the flavors of the day, just given the company's background in multifamily.

How did you get comfortable with that and can you give any color on the types of sponsors you are lending to it.

The build to rent space.

So Jonathan do you want me to take.

J. Michael McGillis: Jai, do you want me to take the first part of that one, and maybe Kevin can do the second? Jade, most of what we are lending on could be considered horizontal multifamily. We're not lending on disparate homes. They're kind of purposeful rental housing on a horizontal basis. We're building two of those projects ourselves on the equity side in Phoenix right now. Actually, one we're building and one is still an entitlement. We have a pretty good sense as to what how these things should look when they're built, how they need to be operated, and they really feel very much like multifamily. Kevin, do you wanna take the second, talk a little bit about

Richard Mack: Jai, do you want me to take the first part of that one, and maybe Kevin can do the second? Jade, most of what we are lending on could be considered horizontal multifamily. We're not lending on disparate homes. They're kind of purposeful rental housing on a horizontal basis. We're building two of those projects ourselves on the equity side in Phoenix right now. Actually, one we're building and one is still an entitlement. We have a pretty good sense as to what how these things should look when they're built, how they need to be operated, and they really feel very much like multifamily. Kevin, do you wanna take the second, talk a little bit about

Part of that one.

And maybe Kevin can do the second so.

Jay.

Most of what we are lending on could be considered horizontal multifamily.

We're not lending on disparate homes.

They're kind of purposeful.

Rental housing on a horizontal basis and we're building two of those projects ourselves on the equity side in Phoenix right now actually one where we're building and one is still an entitlement.

We have a pretty good sense as to what how these things should look when they're built how they need to be operated and they they really.

Very much like multifamily Kevin do you want to take the second is it talk a little bit about why not sure. What we're allowed to say about our star sponsors but.

J. Michael McGillis: Well, I'm not sure what we're allowed to say about our sponsors, but maybe you wanna just talk a little bit about that.

Richard Mack: Well, I'm not sure what we're allowed to say about our sponsors, but maybe you wanna just talk a little bit about that.

Just talk a little bit about what.

Kevin Cullinan: Yeah. What, Jade, what I would say to that is, obviously we've added some of that to the portfolio in Q1. We expect to add more in that space in Q2. To sort of broad brush who we're doing that with, in every instance, it's with a very experienced local operator developer that has, you know, meaningful infrastructure in the markets that they're developing these assets and meaningful portfolios. Both the two transactions that I'm talking about have significant private equity backing as well. One in the form of a forward purchase agreement, upon stabilization of the assets with no sort of, you know, mark to market risk.

Jay what I would say to that is obviously, we've added some of that to the portfolio in the first quarter, we expect to add more in that space in the second quarter two.

Two sort of broad brush, who we're doing that with them.

Every instance, its with a very experienced local operator developer.

That has meaningful infrastructure in the markets that theyre developing these assets and meaningful portfolios.

Both.

Both the two transactions that I'm talking about kind of significant private equity backing as well one in the form of a forward purchase agreement.

Upon stabilization of the assets with no sort of mark to market risk, it's really a group that that didn't they they've amassed and put together some pretty significant capital formation for the space. They don't want the development risk.

Kevin Cullinan: It's really a group that they've amassed and you know put together some pretty significant capital formation for this space. They don't want the development risk. They've agreed to a forward takeout of the portfolio. The other is a long-term holder that is really, I would say, at the beginning or middle stages of you know trying to scale up a significant exposure to this asset class. We think we've aligned ourselves with a really strong combination of local on the boots on the you know development expertise, as well as very deep-pocketed private equity backers.

So there the degree to a forward takeout.

The portfolio.

And the other is a long term holder that is really I would say at the beginning or middle stages of turnouts scale up has a significant exposure to this asset class. So we think we've aligned ourselves with it with a really strong combination of local on the boots on the.

The development expertise as well as very deep pocketed private equity backers.

And do you believe that the CLO market.

Jade Rahmani: Do you believe that the CLO market, wider pricing creates an opportunity to lend in the SFR space?

Wider pricing creates an opportunity to learn.

In the <unk> space.

Sure.

Kevin Cullinan: The short answer to that is yes, but the little bit more nuanced answer to that is some of the things that we're doing in the BTR space right now are more development-oriented, so not quite stabilized. View everything that we're doing in that space as, you know, very likely to be either taken out through long-term agency financing or monetized, not long after completion. You know, we certainly see spreads move in that space as a result of the backup in the securitization market, but it hasn't necessarily impacted directly the transactions that we're working on right now.

The short answer to that is yes, but a little bit more nuanced answer to that is some of the things that we're doing in the BTR space right now are more development oriented so not quite stabilized.

But but view everything that we're doing in that space is very likely to be.

Either taken out through long term agency financing or monetize not long after completion.

So.

We certainly see spreads move in that space as a result of the backup in the securitization market, but it hasn't necessarily impacted directly the transactions that we're working on right now.

Kevin Cullinan: More broadly, we have seen heavier transitional or development or the cost of development capital become a little bit more scarce in the market, and that's led to an opportunity for us to tie these up or close these at what we view to be very attractive all-in yields. The one maybe thing I'd add, which isn't necessarily directly relevant to your question, I think when we're looking at the BTR space, because, you know, it's fairly nascent relative to multifamily, and a difficult thing to scale, we are able to size these positions to, you know, without underwriting any future rent growth. If we're looking at untrended yields to our position or to our borrower's position, I still think we're getting a fairly healthy premium to where we're seeing more traditional multifamily get developed.

But more broadly we have seen heavier transitional or development or the cost of development capital will become a little bit more scarce in the market and that has led to an opportunity for us to tie. These upper closes out at what we view to be very attractive all in yields.

So the one maybe thing I'd add which isn't necessarily directly relevant to your question I think when we're looking at the BTR space because.

It's fairly nascent relative to multifamily.

And the difficult thing to scale, we are able to size these positions to without underwriting any future rent growth. So for looking at unfunded yields to our positioning or to our borrowers position I.

Still think we're getting a fairly healthy premium to where we're seeing.

More traditional multifamily get developed so we like that sort of additional buffer between what how we expect things to perform and before it's something that is of concern to us as well.

Kevin Cullinan: We like that sort of additional buffer between, you know, how we expect things to perform and before it's something that's of concern to us as well. You know, said differently, sponsors can absorb fairly meaningful cost inflation, muted rent growth, and still be at a very comfortable position in the capital stack.

So said differently sponsors can can absorb fairly meaningful cost inflation muted rent growth and still be at a very comfortable position in the capital stack.

Thank you very much for the additional color.

Brock Vandervliet: Thank you very much for the additional color.

Jade Rahmani: Thank you very much for the additional color.

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

Operator: Ladies and gentlemen, this concludes our question-and-answer session. I'd like to turn the conference back over to Richard Mack for any closing remarks.

Yeah.

Richard Mack: Well, I just want to thank everyone for joining us today. As you can probably tell from the team, we're pretty excited about where we sit right now. We're thrilled to get our non-accrual down and to be looking forward to a lot of great opportunity given what the market is showing us, and given where the company and how the company is positioned. We really appreciate your support and everyone being here. I just want to compliment the team for continuing to do a great job every day and very proud of what we're doing. Thank you all for joining us.

Well I just wanted to thank everyone.

For for joining us today as you can probably tell from the team we're pretty excited.

Cited about where we sit right now.

We're thrilled.

To get our non accrual down and to be looking forward to a lot of great opportunity given what the market is showing us and given where the company and how the company is positioned and we really appreciate your support of everyone being here and Oh I just wanted to complement the team.

For continuing to do a great job every day and I'm very very proud.

Of what we're of what we're doing so thank you all for joining us.

Thank you for joining today's call you may now disconnect your lines.

Operator: Thank you for joining today's call. You may now disconnect your lines.

Uh huh.

Yeah.

Yes.

Okay.

Yes.

Okay.

Yeah.

Q1 2022 Claros Mortgage Trust Inc Earnings Call

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