Q3 2022 Claros Mortgage Trust Inc Earnings Call
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Ladies and gentlemen, thank you for your patience. This call is due to start in a couple of minutes time.
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Welcome to the closed mortgage Trust third quarter 2022 earnings conference call.
My name is <unk> and I'll be your conference facilitator today.
All participants will be in a listen only mode. After the Speakers' remarks, there will be a question and answer period.
If you would like to ask a question. Please press star followed by one on your telephone keypad.
I would now like to hand over the call to Onboarding, Vice President of Investor Relations for Clarus Mortgage Trust. Please proceed.
Thank you.
Im joined by Richard Mack, Chief Executive Officer, and Chairman of Claris Mortgage Trust me.
Mike Mcgillis, President and director of Claris mortgage Trust.
And Jay Agarwal, <unk>, Chief Financial Officer.
We also have Kevin Cohen Executive Vice President, who leads our direct origination.
Priyanka Garg executive Vice President, who leads IMAX portfolio and asset management.
Prior to this call we distributed <unk>, earning 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 would like to remind everyone that today's call may include forward looking statements within the meaning of the private Securities Litigation Reform Act of 1995.
Actual results may differ materially from those indicated by these forward looking statements as a result of various important factors, including those discussed in our other filings with the SEC.
Any forward looking statements made on this call 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 such as distributable earnings, which we believe may be important to investors to assess our operating performance.
For non-GAAP reconciliation, please refer to the earnings supplement.
I would now like to turn the call over to Richard.
Good morning, and thank you everyone for joining us for our third quarter earnings call.
It may be an understatement to note that market volatility and uncertainty continue to be the prevailing themes as investors and borrowers grappled with high inflation rising interest rates supply chain disruptions.
Political risk overseas.
Political division and uncertainty at home.
Economic data remains mixed and evaluations widely distributed as investors across all asset classes assess the feds interest rate policy.
And debate, it's ability to engineer a soft landing.
Despite these factors, we believe that the U S economy is stronger and more resilient compared to prior recessions.
That is the healthiest major economy in the world and that the U S property sector will be more resilient than international markets.
However, it is now our view is that a recession is likely to occur sometime in 2023 as the fed attempts to resolve the current inflationary environment.
Looking ahead over the near term, we anticipate more pressure on real estate valuations driven by higher interest rates and in some cases slower NOI growth.
But the impact will be uneven and highly dependent on property type asset quality and market.
On a positive note. It is important to recognize that there are opportunities for well capitalized and well positioned lenders that have demonstrated the ability to manage through challenging economic conditions like CMT Jay.
Our investment strategy is to focus on transitional lending opportunities secured by high quality assets with institutional grade sponsorship.
We employ a disciplined approach to underwriting and portfolio construction and are just as focused if not more so on asset management.
As a result, we believe that our portfolio is well positioned in today's evolving market environment.
Our portfolio is comprised of nearly all floating rate loans and therefore has benefited from the current interest rate environment.
All else remaining equal additional benchmark rate increases could translate into further earnings growth based on the current portfolio and more than 90% of our floating rate loan portfolio have interest rate caps in place.
With regard to asset allocation, we are heavily weighted towards multifamily, which accounts for more than 40% of our portfolio.
We have relatively low office exposure and no standalone retail.
Today, our portfolio is exclusively focused on U S investments and we do not have any European exposure.
For the last two years, we have been diversifying away from the coastal markets capitalizing on the favorable demographic trends and underlying job and rent growth.
Select markets that we believe will prove to be more resilient in a scenario and evolving economic downturn.
To do this we've leveraged the analysis and insights of the broader lack real estate group team.
Which has made recent equity investments and a number of these markets.
Moreover, with an average portfolio LTV of 68% and low leverage on our balance sheet by design.
We believe that we are well insulated against adjustments in real estate asset values.
We have a conservative approach to managing our balance sheet and is consistently employed relatively low leverage since our formation.
And uncertain economic times, our view is that a conservative approach to leverage adequate liquidity and access to capital are critical and we would like to note that we had more than $500 million of liquidity at the end of the third quarter.
We believe that our business.
Changes to be constructed portfolio will continue to be resilient, despite the uncertain market landscape.
Our senior management team had several decades of global real estate investing experience through multiple economic cycles, while each market cycle is unique our team is recognizing both similar in new factors in the current environment that are informing our focus areas.
During the third quarter, we continued to execute on our strategic priorities those.
Those strategic priorities include targeted originations proactive asset management and balance sheet management.
Demonstrably, we took advantage of our liquidity position and the market dislocation to originated $878 million of new loans had strong historical spreads while focusing on our high conviction themes in the residential sector.
High growth markets.
And another drive to hospitality loans.
We're pleased to share our non accrual loans represented less than 1% of the portfolio at the end of the quarter down from 4% at the beginning of the year.
Additionally, despite a challenging capital market environment, we continue to have access to financing.
Notably we entered into a $1 billion non mark to market match term financing facility with JP Morgan.
Jay will provide additional color on this exciting closing.
In summary, we believe our achievements for the quarter speaks to the strength of our management team portfolio and institutional relationships. In addition to our sponsors integrated real estate lender owner, operator developer and property manager business model.
Looking ahead, we expect to selectively target our originations volume to seek to seize upon only those we see as the best risk adjusted return opportunities while remaining defensive.
Our pace of deployment will depend on where we see prudent and accretive leverage as well as the pace of repayments from the existing portfolio, which could slow due to the overall softening transaction volume and a challenging refinancing climate.
It bears repeating that we believe we are well positioned for what lies ahead.
There will likely be volatility uncertainty and persistent dislocations.
That come with economic disruptions.
And we believe this environment presents many compelling CRE lending opportunities in the coming year, despite and due to the challenging capital markets.
We believe <unk> has the scale balance sheet and team to <unk>.
Pick and choose our investment opportunities and execute in today's environment.
Now before turning the call over to Mike I am pleased to share that our board of directors recently authorized the repurchase of $100 million of the company's common stock.
We believe this decision reflects our conviction in our business strategy and long term financial outlook. In addition to our commitment to enhance shareholder value.
I would now like to turn the call over to Mike.
Thanks, Richard CMT Ge's portfolio based on unpaid principal balance increased 4% quarter over quarter to seven $4 billion as new originations and follow on fundings outpaced loan repayments, our cash balance of $461 million at the beginning of the third quarter coupled with.
Repayments of $559 million positioned us well to capitalize on a number of attractive investment opportunities during the quarter.
As Richard mentioned, we originated 878 million and total loan commitments across six investments.
<unk> had a weighted average credit spread of 530 basis points over sulfur with a weighted average LTV of 67%.
60% of our originations by loan commitment represented multifamily investments, which we view as any defensive asset class.
Multifamily continues to be our largest asset class concentration representing over 40% of our portfolio.
In addition, during the quarter, we continued our expansion into several high growth markets with the <unk>.
Third quarter, marking our entry into the Salt Lake City, Utah MSA.
We originated two multifamily loans in Salt Lake city, representing aggregate loan commitments of $252 million.
At weighted average ltvs below 65%.
The larger of the two loans is $176 million construction loan for high rise tower to a well known and respected sponsor.
The second loan is for $76 million of acquisition financing for an existing multifamily asset.
These transactions provided opportunities for us to execute a wider than normal credit spreads while further enhancing our portfolio's geographic diversification.
The Salt Lake City MSA represents a target market for us as it is one of the fastest growing msas in the country.
And has exhibited strong population job and wage growth.
While the interest rate environment has benefited our portfolio yields we recognize that borrowers and operators have been impacted by higher financing costs.
In addition to our asset management team closely monitoring our borrower's ability to pay debt service, we have a number of structural protections in our loan documents designed to mitigate the impact of rising rates on the borrower's ability to pay debt service.
These include interest rate caps lender control cash management accounts and the interest in carry reserves among others.
I would now like to turn the call over to Jay.
Thank you, Mike and thank you Richard.
For the third quarter of 2002.
Distributable earnings were $47 $1 million.
<unk> per share.
And GAAP net income was $42 1 million or <unk> 30 per share.
Our current quarterly dividend.
<unk> seven per share, which is an eight 2% yield to book value.
Earnings this quarter benefited $3 million or <unk> <unk> per share from acceleration of fees.
Early repayments.
Excluding this too.
As well as the impact of gains and losses last quarter.
Quarter over quarter distributable earnings increased <unk> <unk> per share primarily due to the increase in benchmark rates and Mexico portfolio growth.
We stand to benefit from the steep forward curve and.
Based on the static portfolio at quarter end, the 100 basis point increase in rates would generate four cents of quarterly earnings.
It is important to highlight that benchmark rates are already up 70 basis points since quarter end.
And we are currently in a position to cover our dividend.
Our agenda pieces reserve stands at just above 100 basis points.
The principal balance.
Quarter over quarter <unk> increased by approximately two and a half million dollars due to net portfolio growth and worsening macroeconomic indicators.
This was offset by seasoning as well as improvement in our credit profile.
As a reminder, we have virtually zero specific system deserves.
Turning to the balance sheet.
We continue to maintain a conservative net leverage ratio of two point times.
And our target leverage remains at two five to three times of equity.
Despite a challenging capital markets environment, Youre able to access the secured financing market in the form of warehouse lines.
To note financing.
Most notably as Richard mentioned subsequent to quarter end, we closed the financing facility of up to $1 billion.
JP Morgan.
Simultaneously financed three loans on it.
With an aggregate maximum financing commitment of approximately $400 million.
This financing is still matched non mark to market.
At September 30, we had 4 billion outstanding under our $5 billion of <unk>.
Those lines with six Counterparties.
It is worth noting.
The weighted average advance rate under these facilities was a conservative 67%.
The 67% can be bifurcated into one.
75% advance rate on multifamily loans.
Two.
60% on all of the property types.
Weighted average numbers.
Lastly, we continue to maintain strong liquidity.
At quarter end, we had $570 billion of liquidity comprised of $230 million in cash.
<unk> hundred $77 million of approved and Undrawn capacity on our warehouse nuts.
As of today.
Half a billion in liquidity.
We believe this puts us in a strong position to be both offensive and defensive.
I would now like to turn the call over to the operator for questions.
Thank you.
To ask a question. Please press star followed by one on your telephone keypad now.
If you change your mind just please press star followed by two.
When friends asking a question. Please ensure your devices on mute locally.
Our first question comes from Don <unk> from Wells Fargo. Your line is open.
Okay.
Good to hear the comments on the dividend coverage.
Could you talk a little bit about what Youre seeing in New York City in terms of office and hotel.
If that is continuing to improve.
Sure let me take.
The question in general and I'd like to turn to Priyanka to talk a little bit about what we're seeing in our hotel portfolio.
I think we continue to be surprised.
By the.
Strength of the overall, New York economy.
<unk>.
Tourism appears to be back.
Despite the fact that we aren't seeing as many foreigners.
We see multifamily rents and Occupancies at all time highs.
But at the same point in time.
I think that the.
Office sector.
Continues to underperform.
And what we are seeing and what we've called out many times in the past is continuing the best buildings are doing well, although I think that we're starting to see some pushback even at the best buildings on on rents in terms of concessions.
And weaker buildings are.
Really struggling and so.
It's a haven't have not market.
We are continuing to see utilization rates.
Well below pre pandemic levels.
And well below.
Utilization rates in the high growth Sunbelt markets. So I think we are we remain concerned about the office market.
In New York.
We feel that there are certain types of buildings that will work.
Types that will not.
And then the opportunity to it too and the need to convert a whole lot of obsolete buildings or tear them down in the office market.
He is going to be ongoing and that we're gonna have to that.
New York City as a whole is going to have to work with its got with with the government here to figure out how we recreate 24 hour collaborative communities across New York to make where people work as vibrant as where people live.
And that is something that is going to be a long term transformation that is going to take time and there are going to be stretches of New York, where office is just not going to make sense anymore. So we're concerned about the office market.
New York.
And we're much more constructive around hotel.
Do you want to talk a little bit about what youre seeing in our portfolio.
Yeah. Thanks, Thanks Richard.
Hi, Don.
<unk> hotel portfolio I mean, the third quarter with very strong I think we're seeing that across the hospitality sector in New York.
We performed very well on the top line.
Interestingly hospitality has really.
We set a new level of ADR really above the 2019 level.
Occupancy was also quite strong throughout the third quarter being driven largely by leisure transient demand, but we're starting to see some group and corporate come back we had a large financial financial institution retain a large market brands that at one of our hotels during the fall period. So.
So we're excited to see the compression is back and the last rooms are really selling at huge premiums. So we're very encouraged by the underlying performance in the Oreo portfolio.
Okay. Thank you.
We tend to Rick Shane from Jpmorgan. Your line is open.
Thanks, everybody for taking my questions. This morning.
Look.
I think you guys have highlighted that we're in some ways at a crossroads in terms of the market and fundamentals and given your low leverage and how well positioned you are you essentially have three choices you can.
Can grow assets.
Can repurchase shares.
Or you can core liquidity in light of potential.
Extension of direct of asset duration.
How do you think about those three choices obviously.
You increased the authorization on the buyback.
Yeah.
And how do you think about increasing leverage on the business at this moment in time.
Thanks, Rick.
Last question for Sanjay.
Oh on the Levered side, we are conservatively leveraged today at two <unk> times and like we've said in the past, we do expect leverage to tick up to around two five times.
A few times and.
To your other question about assets asset growth buyback liquidity.
We have that conversation every single day internally.
And.
It's a debate honestly.
In these times whenever you buy back shares with it whether it be hood liquidity or we invest in assets, we are being very selective in where we deploy capital.
Because the returns are very strong today.
But then we also we also recognize the importance of keeping liquidity.
Richard would you like to add.
Yes, Rick I would just say that we.
We're trying to be opportunistic around all three of these sectors.
If the market opens up.
For us to increase our leverage in a manner that we deem.
Accretive both for offense and defense, we're likely to do that.
The.
Market gives us what we believe are outsized risk adjusted returns.
We will put more money to work.
But it's also going to be dependent on how much capital we get from repayments.
And making sure that we're holding a little bit extra cash and as it relates to the share is I think we won't be want to be operating statistic and prudent about where.
We buy back shares if we buy back shares.
It's a constant day to day.
Dallas's and discussion amongst the team about how to be opportunistic in those three areas.
A really great great question, there's just no perfect answer to it.
Thank you, yes, it look it's hard.
Think about what we've gone through looking at our screens in the last 24 hours yesterday was.
So discouraging today the markets are fabulous.
And I'm sure. It's the same in managing it for you guys. When you when you.
Think.
About your.
Portfolios constructed at today and the opportunities that are out there currently.
Do you.
Is the should be incremental dollars being invested in what you already have or is the incremental opportunity in terms of what's out there. So compelling that it just makes sense to put the next dollar back into the market.
Again, that's something we're debating everyday.
And we are we're staying active in the market. So that we can look at the risk adjusted returns around what's in our portfolio and what looks like our portfolio, what diversifies our portfolio and.
What those returns look like so.
Again, it's a kind of an everyday job that we're seeking to maximize the value for shareholders.
Okay. Thanks.
And again look we really appreciate the thematic clarity on the portfolio construction. It makes it a lot easier to understand.
The risk and.
Sort of position you within the competitive landscape. So thank you.
Restating that.
Thank you.
Our next question comes from Steve Delaney from JMP Securities. Your line is open.
Good morning, everyone. Thank you for taking the question what are your stock buyback decision and allocation.
Your stock is up 10% this morning so.
They may have to be a near term revision and how you view that.
I would just say that adjusts, but it's nice to see.
I think the thing that struck me of in your report was the new facility from J P. Morgan $1 billion in <unk>.
Very favorable terms and structure to you.
Thinking back to March of 2020, I mean since March of 2020 or the spring of 2020, what we've gone through in the last couple of months is probably the most unstable and uncertain period.
Curious on your thoughts about why the banks.
Hanging in there this time.
It strikes me that maybe.
In 2020, I think people were concerned about a credit event due to the economic impact of the pandemic and maybe this time as you mentioned Richard about the New York City economy people are looking at this as our rates have been simply caused by the fed's posture and tightening and for summary.
The banks don't seem to be backing off I would really appreciate views from you Richard or Mike.
Jay Whoever's been talking to the banks and kind of generally you see the banks mindset to be about lending to real estate companies like yourself. Thank you very much.
Actually I think I think all three of us will have slightly different thoughts on that so I'll start by.
Saying that.
Because the banks are being a lot more careful about how theyre doing business.
And there.
It does occur to me picking who they want to do business with a lot more.
And as it relates to J P I.
I think.
<unk> demonstrated to them.
That we or who they want to be doing business with and.
Is there.
They want to put out capital at what are higher rates for them as well.
But they only want to do with a select group.
Thank.
That is a very healthy environment for a business like ours.
Haven't have not environment in terms of who is actually <unk> capital.
Understood Jay and Mike do you want to add.
Steve I would also add that evidence.
So add that not not all banks are open some banks are some banks.
To us, they're just not lending in this space anymore, so well okay.
That is also growing but we are we are.
Favorable spot, where we continue to have access to capital.
Got it thank you particularity, Steve and Mike and Mike Sohn as well I mean, I would also add to that.
The money center banks I completely agree with Rick.
Richard J sentiment, but we continue to see some of the regional banks.
Right on the right projects with the right size characteristics continue to be active financing counterparties for us across our business lines.
So.
There really is a difference between the.
The money center banks and the regional banks, particularly those that are very sort of relationship oriented and focused on.
On who their borrowers so like that.
Interesting.
Development here, we've seen in the last couple of years.
I appreciate that and just one final thing.
$878 million is a big quarter.
Given you had sort of a mid $6 billion portfolio I guess going into <unk>.
Hi, <unk> going into the quarter.
Is there anything chunky in there about maybe a large sort of portfolio opportunity.
And looking at that I mean, obviously opportunistic with wider spreads is a good time to be lending if you have the capital and find the quality deals.
But should we expect over the next quarter or so that you could continue to have.
Strong origination quarters or was this third quarter, just a little chunky. Thanks.
Steve and Kevin do you want to Kevin call. It I wanted to know why don't I take that.
So theres nothing kind of regularly chunky in the third quarter, there that was across six different investments and we came into the quarter with a really strong balance sheet position and a really strong liquidity position and I think everyone has probably seen that the <unk>.
Market or the transaction volume has pulled back a little bit.
We're set up to step up and fill a little bit of that void.
Happy with.
The positions we put on during the third quarter I do expect over the course of the fourth quarter for volume to slow down a little bit.
But that.
That goes back to what we've been talking about throughout the course of this call where we're balancing.
The various opportunities that our balance sheet has afforded us to invest whether that's.
Internally in the company or continuing to take advantage of what we think is a very strong, but a little bit more opportunity to test the market.
Okay.
Thank you appreciate everyone's comments.
As a reminder to ask any further questions. Please press star one on your telephone keypad now.
We know that Jay Romani from K B W. Your line is open.
Thank you very much.
Can you talk about the upcoming loan maturities.
The.
Slide shows $576 million is that would you anticipate in 2023.
And I'm sure. That's just a couple of chunky deals, but are you expecting those to pay off.
Anything else you could touch on about.
Credit risk in the portfolio.
Yeah.
Yeah.
Hi, Jade its priyanka I'll take that.
Generally are we.
We have a fairly small slug of loans that are repaying and alright that have fully extended maturities in 2023, it's about it's less than $500 million of ETB and to cross six loans. So.
We you know.
Some of those I think are going to be in a position to pay off others are probably going to be some sort of negotiation with the borrower.
We were preparing for the worst, but hoping for the best with all of our borrowers and that.
No.
Structurally you know Mike touched on this earlier, we have really good protections in place we feel good about the exit raskin our basis and the capital that our borrowers are they not want and need to defend at that point in time. So as I look at the maturities that are upcoming I don't have any kind of one off concerns.
Thanks.
Single family for rent and build to rent sectors, where you've been active how are you feeling about the outlook there.
I know youre not engaged in this exact type of lending, but hard money lenders not just broad mark which reported this week, but also some others are having difficulty in that space and have seen pretty dramatic.
Deterioration in credit and of course homebuilders are reeling in terms of excess supply at the same time some of the single family rental names are showing some deterioration in NOI. So just wanted to check in on how.
That portfolio is doing and also if you could just contextualize the size of it.
Scott do you want it it's Kevin again.
Got it.
Right.
Sure Chad it's Kevin.
So very good question, we're obviously tracking.
What you are noticing in the homebuilder space.
That can cut both ways I think that can actually create.
A little bit more opportunity for larger well capitalized and institutional single family rental owners.
Cuomo home affordability is certainly on a downward trajectory throughout most of the country.
And that is leading to two.
Fairly robust fundamentals in the <unk> space in the markets that we've been trafficking.
Within the entire CPG portfolio, it's a relatively small portion of our of our balance sheet. That's invested in the <unk> space, it's primarily throughout one portfolio.
A lot of that portfolio is still under development and it's.
It's been pre sold to a large institutional developers well so there are.
There is a schedule of units that are delivering throughout the course of this year and next.
But we.
And we've been quite happy with the initial lease up of some of the communities.
But we're also looking at a forward sale here that has materially derisked our position as well.
Okay.
Oh go ahead.
Just one more thing that I think that there is a distinction.
That has not yet been clear and we will probably evolve over time.
<unk>, the <unk> space and the build to rent asset for space.
And it's important to note that our loans are on the on built to rent a set for <unk>.
Which is much more closely tied to the multifamily market.
Then.
I think people recognize and so there's a little bit of an extension of the multifamily market and we're building. This in Phoenix, where we see a lot of demand for the product.
Effectively operates like horizontal multifamily.
So some of the some of the pitfalls and strength of the multifamily market can clearly be exhibited.
More clearly be exhibited in these product.
Yes. Thank you I was just going to add Jay.
Jay just to just to clarify.
Phoenix.
And Richard mentioned Thats in the equity side of our business. So.
Just to be clear on that so I apologies.
These portfolio.
What's the dollar of exposure and CMT G.
Yes.
At 11.
200, <unk>, it's around $200 million Dude, we've disclosed that on page 11.
<unk>.
Alright, great.
Our total commitment our U P. B right now is quite small it's just getting them given that these are all under construction.
Okay great.
Well, thanks, very much for taking the questions.
Thank you.
Ladies and gentlemen, this concludes our question and answer session.
Now I'd like to turn the conference back over to Richard Mack for any closing remarks.
Thank you.
Thanks, everyone for joining.
We don't.
Feel really good about our last quarter.
And I think as per the questions.
Going forward, it's going to be a challenge when do we think we're up to manage the opportunities that present themselves in the market.
And.
The difficulties that come with those challenges.
With those opportunities. So we're pretty excited about it we think we're well positioned going forward.
With liquidity the ability to increase our leverage the ability to buyback stock.
And great access to deal flow and the ability to work through issues as we've been able to demonstrate in our portfolio.
We'll expect that we'll have a bit more of that to do as we continue to go through this.
Early disruptive dislocated market.
Over the next.
Probably year plus.
So thanks, everyone for joining and we'll look forward to speaking to you all soon and.
Our next quarterly call.
Today's call is now concluded.
Thank you for your participation you may now disconnect your lines.
Yeah.