Q2 2022 Claros Mortgage Trust Inc Earnings Call
Welcome to today's Clara Smorgic Trust second quarter, 2022 earnings conference call. My name is Cadiz and I will be operator.
for today's conference or
The disciplines will be unlisted only mode. After the speakers remarks, there will be a question and answer period. Online will be muted during this presentation, put portion of the call. With an opportunity for question and answer.
at the end. If you'd like to ask a question, please press start followed by 1 on your telephone keypad. I would now like to hand the call over to Anne Wim, Vice President of Investor Relations for the Carlos Mortgage Trust.
Please proceed.
Thank you. I'm joined this morning by Richard Mack, Chief Executive Officer and Chairman of Claris Mortgage Trust.
Mike McGillis, President and Director of Clareus Mortgage Trust. And Jay Aguilal, CMTG's Chief Financial Officer. Makehouse.
We also have Kevin Cullenin, Executive Vice President who leads Emrex Originations and Priyanka Garg, Executive Vice President who leads Emrex Portfolio and Affid 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 call may include for looking statements within the meeting of private securities litigation reform act of 1995. Actual results made it from materially composed indicated by these for looking statements as a result of various important factors.
including those discussed in our other filings with the FCC. 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-guet financial measures on today's call, such as distributable earnings, which we believe may be important to investors to express our operating performance.
For non-GAB reconciliation, please refer to the Erning Femplement.
I would now like to turn the call over to Richard.
Good morning and thank you everyone for joining us for CMTG's second quarter earnings call. CMTG delivered another strong quarter as we continue to gain momentum across our strategic priorities in originations, asset management, and capital markets activity. During the second quarter, we originated approximately one billion of new loans, reflecting our continued focus on the residential sector and high growth markets such as Dallas and Atlanta.
Our asset management team also made significant progress during the quarter. As noted on our last call, we successfully resolved our largest non-acrual loan driving a positive outcome for our stakeholders and significantly reducing non-acrual loans to approximately 2% of the portfolio. And we continue to make progress towards future resolution of these remaining non-acruals.
I'm also happy to report that despite the choppiness in the capital markets, we further enhanced our financing capabilities by securing an additional $150 million bridge acquisition facility.
As I look to the broader markets, Satan market uncertainty has become the prevailing theme challenging investors across asset classes. students.
Record inflation levels, disrupted supply chains, tightening monetary policy, and geopolitical challenges had until recently dominated headlines.
But now mixed economic data is part of the analysis.
Considerations include sectors of slowing economic growth, areas of rapid inflation, areas of minor inflation, higher borrowing costs, weakening corporate margins, a strengthening dollar, declining or volatile commodity prices, and inconsistent corporate commentary.
These are conflicting signals, and they cloud the economic picture and further complicate the narrative for potential economic outcomes.
And so it's no surprise that there's still much debate about whether the Fed can engineer a swap lending.
Here at CMTG we think a modest recession is the likely outcome, but it's far from a certain one.
What is certain is that the discussion continues to evolve and broaden in scope and complexity as we further contemplate the interconnectedness of the US economy and other major economies. And what that means for our economic outlook here in the US and in real estate more specifically. And in real estate more specifically.
On a positive note, transitional real estate lending continues to be a bright spot in today's investing environment as the opportunity set for alternative lenders has become increasingly attractive, particularly for floating rate strategies like the one that CMTG employs. Over the past several months, we've observed credit spreads widen dramatically as banks in the securitization market reduced their appetite for risk.
On top of this, interest rates are also increasing at a record pace.
This has set up our new originations for potentially better total returns for the same amount or less risk than what was possible just six months earlier.
Further, it seems that recent rate hikes and potential future increases will continue to provide to our sector and greater returns. Further, it seems that recent rate hikes and potential future increases will continue to provide to our sector and greater returns. Further, it seems that recent rate hikes and potential to provide to our sector and greater returns. Further, it seems that recent rate hikes and potential
Longer term, however, we could see some credits spread tightening as absolute turns continue to climb to a place where we believe capital flows will be reported into our sector. Thank you for joining us. Thank you for joining us. Thank you for joining us.
Amidst this positive environment for transitional real estate lending, it is important to acknowledge that rising benchmark rates and widening credit spreads are creating uncertainty surrounding equity valuations.
which we believe need to adjust downward for any asset with medium to long-term leases with modest and no rent escalations or lying outside quickly inflating rental markets. With modest and no rent escalations or lying outside quickly inflating rental markets.
Thus, it is not surprising to note that the public equity read markets are all ready reflecting a decrease in property valuations. In
Given this backdrop, CMTG has been focused on lending to rental housing assets with short-term leases and high growth under supplied markets, where cash flows are likely to increase more rapidly.
When real estate values are uncertain and assets of stable cash flow may be devaluing, we believe that CMTG's strategy of participating in the capital stack as a debt provider, specifically at an attachment point where our position as significant, subordinate capital to protect our investment, is as relevant as ever.
And I believe that this is one of the best times to be a lender in the property sector that I've seen in my career.
But it is not just being in the light sector at the light time that allows CMTG to operate the opportunity to succeed. The opportunity to succeed.
It is the institutional nature of our platform.
Its established investment processes and procedures combined with the multi-generational and multi-cyclical experience that the MAC real estate group has as an owner, operator, manager and developer.
We believe these factors will continue to be essential drivers of our performance.
Our investment strategy focuses on transitional lending opportunities secured by high quality assets backed by institutional grade sponsors. We originate primarily floating rate senior loans at compelling LTVs targeting major markets and select high growth markets.
As one of the largest commercial mortgage REITs, we have the scale to provide lending solutions to some of the most well-capitalized real estate sponsors in the world. In addition, our reputation and experience have enabled us to develop trusted and durable financing relationships as we have scaled our business.
We believe that the access to liquidity enabled by these relationships will become increasingly important as certain commanding counterparts become more conservative or even choose to sit on the sidelines.
Our recent $150 million bridge acquisition facility closing amid the capital markets turmoil demonstrates our ability to access incremental capital during a period of stress and speaks to the strength of CMTG's credit quality and our capital markets team.
As we look ahead, it's the sum of these parts that we believe will drive our success, experience capabilities, relationships, access to capital, the strength of our balance sheet, its low leverage and access to the nantsum.
We are fortunate that prudence has allowed us to carry a higher cash balance at a time when spreads and rates are increasing new lender friendly. We are fortunate that prudence has allowed us to carry a higher and we are fortunate that prudence has allowed us to carry a higher cash balance at a time when spreads
Therefore, we believe we are well positioned right now to be highly selective and opportunistic in this dynamic market as opportunities continue to unfold.
I would now like to turn the call over to Mike McGillis to discuss the portfolio.
Thank you Richard. We have been migrating our portfolio to asset classes that we view as defensive in nature and the sectors exhibiting strong underlying supply demand fundamentals.
to support continued revenue growth at the asset level. In addition, we continue to deploy capital to select high growth markets, demonstrating favorable demographic trends and job and wage growth.
Our second quarter originations activity reflects our continued focus on these high conviction themes.
During the second quarter we originated approximately $1 billion in total loan commitments across eight investments. That's all for now.
bringing year-to-date 2022 originations to $2.2 billion.
Approximately half of our second quarter of originations were the multi-family sector, which resulted in a 9% increased quarter over quarter in our multi-family exposure. In our multi-family exposure.
In addition, we continue to add build-to-rent and industrial investments to the portfolio while capitalizing on attractive opportunities that we source in the hospitality and mixed use sectors.
Multi-family continues to represent our largest property type, comprising 41% of the portfolios UPD at June 30th, and we expect multi-family to continue to be an overweight allocation for us.
For example, we originated a $152 million floating rate loan collateralized by a portfolio of multifamily assets in Dallas, Texas.
the borrower here
is well known for its extensive value add experience and significant presence in this market.
The business plan is responsive to the demand for renovated multi-family product and a desirable sub market in Dallas. The company is working on a design for the company's development and the company is working on a design and the company is working on a design
that has demonstrated strong double digit rent growth in low-bake and two rates.
Our portfolio UPD has remained relatively unchanged, at $7.1 billion.
Initial and follow-on fundings offset the elevated volume of repayment activity we experienced during the quarter.
of the $782 million in repayments.
including alone-sale proceeds from the not-a-cool alone-richer mentioned.
562 million were collateralized by assets located in New York, which contributed to 8% quarter of a quarter decrease in our New York exposure.
The reduction in New York exposure represented a mix of property types including hospitality, office, or sale condo, mixed use, and land. The reduction in New York exposure represented a mix of hospitality, and client.
As previously mentioned, one of our priorities is to prevent the further diversify our portfolio by GI with you. We believe we've made excellent progress on that form. We believe we've made excellent progress on that form.
As of June 30th, New York represented 25% of the portfolio compared to 44% for the same period a year ago.
and with the exception of California.
comprising 21% of the portfolio in the DC metro area, comprising 12% of the portfolio, no other state represented more than 10% of the portfolio.
In addition, we've been deploying capital and increasing our presence in Texas and Georgia, which represented 10% and 8% of the portfolio respectively at June 30th. I'll give all those members the numbers of your operations under them. Happy New Year. If you look up at the 44-month fund, you'll see Franchetta call soon.know what we're doing. Thank you so much, mental soul. Thank you so much. Thank you so much, Thank you so much. Please leave a comment if you enjoyed this deferred video and Jenga. Please take the time to?ra$ See you in the next video. you
As Richard mentioned, we successfully resolved our logist non-a-cool alone during the second quarter, $160 million New York land loan.
Given our ownership mindset approach towards lending, we believe we can benefit from taking a longer duration view on certain investments given our conviction and our underwriting.
and the quality and basis of the underlying collateral.
This land loan provides a good example of how our investment NASA management approach enables us to deliver an attractive outcome for our stockholders.
The investment generated a leverage gross return of approximately 12.5% and we recorded a $30 million or 21 cent per share gain during the second quarter as a result of this resolution.
I would now like to turn the call over to Jay.
Thank you Mike and Richard and good morning everyone.
For the second quarter, we reported distributed learning through the realized losses of 71.5 million of 51 cents per share.
This compares to the prior quarter of 33.5 million or 24 cents per share.
Gap net income costs 63.2 million or 45 cents per share.
The quarter of a quarter increase in distributable learning was primarily due to one.
21 cents per share again.
resulting from the resolution of the non-atruable led loan.
continue.
improved operating performance of our New York City REO Hotel portfolio
that contributed three cents per share to distributed learnings. to distributed learnings.
compared to a loss of 3 cents per share last quarter.
Which.
So a swing of six cents per share.
We also recorded it, Jardhav, 11.5 million dollars, for 800 per share.
against a $15 million loan that is of non-accrual status.
This loan is secured against the estate of his former borrower.
and previously had a $6 million CSA reserve against the loan.
This quarter, based on a proposed settlement offer, we recorded an additional 5.5 million T-seroserve in charge of the total 11.5 million reserve and is realized loss from a gas standpoint.
We now expect to collect three and a half million dollars against this loan.
Our general CIFAS reserves stand at 73 million or 1% of our outstanding principal balance.
This is an increase of 3 million over the last quarter.
primarily due to portfolio growth and macroeconomic assumptions.
Turning to liquidity.
We ended the quarter with over $461 in cash.
in 735 million in unimcombered loan assets.
We entered into a 150-minute-dollar bridge acquisition facility that enables us to close loans unlevered.
giving us up to six months to seek optimal therapy.
We continue to carry excess liquidity for both offense and defense.
with respect to interest rates.
After the recent increases in interest rates, we are now asset sensitive.
as we pass the coffee or point.
where our portfolio earnings are positively correlated with increases in benchmark rates.
We estimate that 100 basis for increasing rates of a spot rates and a junior diet. We estimate that 100 basis for increasing rates of a spot rates and a junior diet.
would result in an annual increase in net interest income from our existing portfolio by 12 cents per share.
Race have already increased and continue to rise since June 30th.
At quarter end, 11 remained at 1.9 times.
which is one of the lowest in the industry.
We expect this to increase as we deploy additional capital and still maintain a target leverage level of 2.5 to 3 times.
Lastly, the CMTG stock will add it to the Russell family and receive 2 ¼.
as we continue to see an increase in daily trading volumes in our stock.
So now I would like to open the call for questions. Operator, please go ahead.
Thank you. If you would like to ask a question, please press start followed by 1 on your telephone keypad. If for any reason you'd like to remove your question, please press start followed by 2. Again, to ask a question, it is start followed by 1. As a reminder, if you are using a speakerphone, please remember to pick up your handset before asking your question.
So our first question comes from the line of Rick Cain of JP Morgan. Your line is now open. Please go ahead.
Good morning, everybody. Can you hear me?
Yeah.
Excellent. Hey Richard, so I think I'm hearing in some ways two things from you and I'd love to sort of reconcile them. In one way, I think you're saying, hey,
The markets are dislocated. When investors are scared, it's a good time to be putting capital to work. And you position yourself well to do that. And I realize that.
fur and it can be a little bit unnerving, but I think it makes sense. At the same time, when we look and think back about what we've heard in earnings calls this quarter, the sort of consensus trade continues to be multi-family sunbelt. How do you reconcile the idea of being contrarian with also how crowded potentially that particular niche could be?
Well, thanks for the question, Ray Antenna. And I think...
I don't think there's actually a reconciliation.
Need it.
we are perhaps not being as opportunistic as we could be.
because what we're able to do is...
Invest in a consensus that as a lender,
but make returns in cash flowing assets that we might have previously had to make a construction loan to achieve a similar return.
So we are basically because of the backup in the market.
Taking a pretty conservative approach to what we're lending on.
and the LTV, LTC that we're lending.
And because of the backup in the market are able to achieve returns that are very similar for less risk than we were doing before.
So...
It may be that we're not being as opportunistic as we can be at all times. We're going to be selective about construction and alpha generating trades. But we feel pretty good that we can move down in risk.
and make
similar to better returns.
So that's kind of the way we've been playing the market here. And I think we will continue to kind of barbell this more conservative cash flowing sunbelt multi.
where we see the demographic demand as being very strong and we think as close to recession-proof as we see and also with short-term leases that can take advantage of the inflating market and protect you against interest rate moves. And so we'll continue to do that where there's a capital shortage and be opportunistic when we really think we're getting paid to take more risk. Thank you.
Hopefully that was responsive.
It's very helpful and gives a lot of insight and helps me understand what's going on much better. Thank you.
Thank you.
Thank you.
Our next question comes from the line of Don Fandetti of Wells Fargo. Your line is now put, please go ahead.
Yes, can you talk a little bit about your expectations for net portfolio growth over the next few quarters? It looks like Q3, the portfolio may have declined a bit and kind of how this all ties into your ability to cover the dividend with core earnings.
Jay or Kevin? Look, it's kind of a... Yeah, it just function of repayments done. You know, the more repayments we get, the more we can grow the portfolio. But in terms of your second question about covering the dividend, we feel good about covering the dividend, especially where if you look at the forward curve on so far and if you look at base 16 of our deck, we are no as sensitive.
and any increases in interest rates go straight to the bottom line. So based on a combination of, or in spite of slower deployment pace and slower repayment pace. and slower repayment pace.
We expect to cover the dividend for the year.
But in terms of net portfolio growth, you shrunk a little bit this quarter and it looks like based on what we've seen for Q3, it declined a little bit more. Do you expect that to continue to moderate? And then can you just talk a little bit about the oil flow and the ground is there are enough activity to kind of replace the repayments.
I'll start. We are sitting on $460 million of cash.
So we are being very selective in where we're deploying. There are lots of opportunities that we are seeing and Kevin can add more color on market. But if repayments also will drag on, meaning outstanding loans on the ground, will, if they do not take, those loans might extend and that will help us generate further earnings.
Sure. And this is Kevin Cullen here. I'll chime in on sort of the opportunity set at hand. It continues to remain very robust in our perspective and there are a lot of opportunities that we're constantly and regularly evaluating to redeploy capital as we are receiving repayments. And I would go so far as to say, and this kind of mirrors or echoes what Richard had said earlier, that we feel like we can do that at an accretive level.
in this spread and interest rate environment to some of the repayments that we are receiving at this point in time. So we remain bullish on being able to recycle capital and turn into a creative and perhaps even less execution risk.
That's it.
Yeah, no, and definitely look, it's great to see the repayments.
particularly given the New York exposure in the history. So I was just trying to get a sense if you think you can, you know, get back to a growth mode. So, thanks.
Thank you.
Our next question comes from the line of Jade Rahami of KBW. Your line is now open. Please go ahead.
Thank you very much. Away from a multi-family in the Sunbelt, which you characterize as a defensive, where are you seeing the best opportunities? Can you give any color on the types of situations? Can you give any color on the types of situations?
Kevin, why don't you take it out? Sure, Kevin. I can take that. So away from the multifamily trade, which we've obviously been very active in, we have closed on and are working on a few what we would refer to as higher-end, leisure-driven hospitality assets where we think there's still really good relative value. That's notwithstanding the structural protections and the underwriting that we're implementing to reflect.
what could be some meaningful economic uncertainty over the terms of the loans that we're working on right now. But that is a spot in the market that the assets are performing well, they're recovering very well, coming out of the pandemic. We see fairly consistent ADR-RIV-PAR occupancy growth throughout 2022 and forward bookings importantly, and it's a little bit of a less crowded space in terms of......in terms of......in terms of...
our competition. So we do expect to continue to look at those and evaluate those, but be very selective not only on the assets, but also at the levels that we're willing to invest in in those particular capital stacks. And then another one which we feel like we have a little bit of an edge on is certainly the industrial sector. We did close an asset in the second quarter in the industrial space that's heavily structured and sort of map the tables because our
Credit enhanced by not only the borrower, but a partner that has a forward takeout of that asset down the road. So we're very happy with the risk-adjusted nature of that and working on some similar type investments where we're generating some alpha meaningful credit enhancement by virtue of deposits on hand, cash on hand, as well as forward takeouts of some of those assets. So I would say away from multi-family where we see some very attractive relative value if you can...
period of extremely robust.
inflation and rent growth as well as the multifamily sector being, it would say, the Darling-Affat class over the last 10 plus years.
So as your underwriting deals, how do you account for a correction in multi-family values that I believe is underway and also moderating rent growth outlook in your underwriting?
Thanks for taking the questions. Thank you.
No, great question, Jay, and I'm happy to take that as well. I'd say twofold. We're fully expecting rent growth at a minimum decelerate in many of the markets that we're working on and that we're looking at. And we're underwriting those assets accordingly. I'd say more importantly, at the levels that we are lending at and investing at, we are going in at debt yields or capital to our position that we feel are protected day one and not relying on future rent growth.
year to be when we're looking at whether it's initial maturity or beyond that. So we're eyes wide open to it and we feel like we're picking our spots appropriately and not relying on that. But type of future growth is everyone can come to the conclusion that it's difficult staying in the log term. We need to go log term. We need to go log term.
Thank you.
Thank you, Adda Ramindo. If you'd like to ask a question, please press the star followed by one.
Our next question comes from the line of Steve Delaney of JMP Securities, please go ahead.
Good morning, thanks for taking my question. We're starting to hear some signs because of re-pricing of credit in the marketplace for, you know, comparable assets, say, today versus six months or go. Can you comment on that and that your spreads overlie more that you're achieving, you know, on comparable loans? Where would you say that has moved, say, in the last six to 12 months? Thank you.
Thanks, Steve. I can take that again. I would say, I'll focus on the last six months because in this market and in this environment, 12 months feels like a pretty distant memory at this point. Exactly. Apple's risk on Apple's asset classes and business plans. We would say over the last. We would say over the last. We would say over the last.
six months or perhaps since the end of the year we could say spread they're probably out a minimum of 100 basis points.
Yeah.
And but, you know, unfortunately, and we should say this, you know, some of that is being driven by the bank financing market or the lack of securitizations that have become a little bit available in the market. So that's not all RLE but, but, sure.
We're seeing a lot of lead growth or net interest income on those underlying assets that is accretive to our position and accretive to the portfolio in the long term. But we're definitely having to work harder on the liability, but inside of the balance sheet we're putting together the optimal capital stack.
got it got it so obviously had a billion come in uh... and then six seven hundred or so go out and new loans so it i assume which are the way you're describing that kevin is pretty much the new alone is going out you know have have the stronger spread versus what paid up so now on the left hand side of the balance sheet anyway your your returns room improving uh...
That's 12 percent answer, right?
The whole look, okay, you'll definitely going out in new investments at higher levels and and then retain it's generally speaking and you know we're very focused on making sure that we're optimizing the capital stack. The whole look, okay, you'll definitely go out in new investments at higher levels and you'll be going out in new investments at higher levels and you'll be going out in new investments.
The re-placing that you're having to negotiate on your financing, would you describe that as broad? Is this sort of a market driven thing or is it a particular bank who's reducing, trying to tighten up their credit box?
Or is it just all the banks or kind of been lost on that? I can digress, Steve. Yes, Steve. Thanks, Jack. It's reprising, it's reprising, it's just to be clear, it's reprising of credits on new financing, not existing financing. Oh, yes. Exactly. It's a function of, it varies bank by bank, say, because one or two banks who are just not doing any new business, but for the most part banks are coding loans, just a wider spreads than they were previously.
And we've been in a good position to obtain finance things both from our warehouse kind of parties but also from note and note format. So we are in a good position. There are banks have become more selective in terms of who they will lend to. And I think banks are concentrating their lending platform to larger players like ourselves.
position to obtain financing both from our warehouse counterparties but also from note and note format. So we are in a good position. There are banks. Banks have become more selective in terms of who they will lend to and I think banks are concentrating their lending platform to larger players like ourselves. Thank you both for your comments. Thank you.
Thank you.
As there are no more questions registered at this time, I would now like to turn the conference over to Wicked Max for closing remarks.
Thank you and I just want to thank everyone for joining.
In response to some of the questions, I would finish off by saying we have capital to deploy and with repayments, we'll have more. It's a really good time to be a lender. It's I think in many ways a tough time to be a borrower. And I think we're in an environment where we can be in growth mode and also reducing our risk in terms of the...
the amount of cash flow assets that we're lending to, and diversifying our portfolio.
particularly by lending to multifamily in high growth markets at cap rates where we don't need much rent growth at all. And these are assets that follow our mantra. They're assets that we want to own in markets where we have a lot of experience and expertise at a basis we find compelling which is kind of the way we look at the world. And we're getting spreads that previously have been associated with heavy transitional for light transitional. We really like that trade.
As Kevin mentioned, we also have an ability to get industrial exposure in a way that we haven't in the past.
And we are going to continue the pepper our portfolio with alpha generation in terms of continuing to exploit our capabilities around development and making some construction loans, particularly in the industrial sector. And also making loans in the hospitality sector to create alpha where we really see this priced opportunity. And so I think it's a quite exciting time to be a lender despite concerns.
around asset valuations given the amount of support nation of capital that we are able to get because of the backup in the capital markets.
So I want to thank you all for listening and just give you a sense of how bullish we are right now about the environment.
look forward to talking everyone again on the next quarterly call.
Ladies and gentlemen, that concludes today's conference.