Claros Mortgage Trust (CMTG) 1 Nov 232023 Q3 Earnings call transcript

Hello, everyone, and welcome to Claros Mortgage Trust Third Quarter 2023 Earnings Conference Call. [Operator Instructions] I would now like to hand over the call to Anh Huynh, Vice President of Investor Relations for Claros Mortgage Trust. Please proceed.

Thank you. 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.

this Cullinan, Garg, President, leads Executive and Management.Prior Kevin Originations; leads MRECS have CMTG's Asset Priyanka distributed and Vice to also Executive and who Vice MRECS Portfolio earnings We release we supplement. call, President, who to you in documents on these information conjunction call. reference the presented encourage We with today's

today, Actual SEC. today's of made measures obligation have forward-looking forward-looking XXXX. statements include to statements important no any me.I'd may distributable the investors to the also in represent to If may Act on update discussed may with our we Securities them.We results our please you performance. call, important referring Reform today's Any like earnings, financial we our to of including as factors, from by non-GAAP the and meaning materially which to call contact certain questions, believe remind operating Private will Litigation other undertake those as call filings various as of everyone such those be that forward-looking on those differ within this views a of assess indicated only result statements be

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

market industries.So a news can economic as in be news good and appears continues last of evolving in may the you, economic Russia-Ukraine and the bond a to close geopolitical confusing the by much timing unseen among Cold a uncertainty time, to year, Add of East, market depths ongoing time for headline that quarter growth year to and conversation everyone, be it's U.S. the Middle without underwrite basis thank you where believe this and rate-sensitive in subject War, to war earnings call.At positive for data risk investment to you, persistent earnings war at this especially joining centered where rate XXXX professional the bad Thank looks one. rapidly are rates this this since space Anh, corporate it of or the future and like have depth now interest third us the climb, for nearing and elevated the the be interest for as recession, punctuated values capital the asset we CMTG's price inflation.Some investors there is And investors economic and and end the capital volatility multiple interpretations. renewed while growth, but about hikes. around news, struggle

to starting Some the if, are discuss to when, and rates. Fed not begin will cut

inflation for have at this And impacting growth.With of However, CMTG it's so of environment. us predict variables the in that rate economic in interest context higher-for-longer we multitude influence many Fed business and, the rates cases, of to our conflicting been this one been actions the reasons we executing and trajectory indicators numerous the within main difficult a given may proactive. and have the mind, of is

industry's has down been surprisingly, the rate transaction we investment sector.Not estate interest significantly stimulus-induced real not perhaps sector, shifts long-term value, throughout the as maximizing continue a dealing perspective today commercial resulted We while as nearly with managing are volumes towards of that dislocation see the jarring capital acknowledging office we but challenges.COVID-related disruptive, portfolio been the estate The these higher headwinds, to environment. the in our factors COVID subsequent with several are the and shareholder particularly have quarters. over demand combination past have markets inflation sales in these amidst X and real

strategic track, management only call, on quarter we modestly execution volume high-level a climate, back third during And the office market, on transaction focused challenging that remarks our around we many in I'll half we third productive with on quarter. remained assets are the add economic of values, truly loans last observe and significant portfolio earnings to to distressed preservation.As X However, repayments repaying trades. liquidity few and lower mentioned active seeing capital What an of at spite now the pleased is the during the the had had and we loan our outside overall, for portfolio anticipated report of environment.Turning quarter We we're yet in select the have past high-quality year. on with CMTG.

positively of Given estate our reflects we market, believe assets the the loan quality on in portfolio.During the we this transaction and X institutional quarter, within also broader the real limited sales. the executed the activity sponsors

a was at overall loan, par liquidity. The intention our of with and sold bolstering was the hospitality Texas our loan first exposure hospitality which reducing

asset San to The second current the part the vigilant. long-term management investments required evaluate we of by component.In important that rent-regulated environment, capital be lens through loan with was a balanced value. multifamily our And as collateralized a and Francisco achieve process, optimizing shareholder the against value portfolio our to time of it's

it during the market that share regulatory we circumstances, including was difficult will later decision long-term prudent third call, given realized resulting believe the review due on reported, in the we multifamily arise reduction portfolio the as like may per conviction these will within unknowns.I loan we more potential that likely third the earnings and quarter. decision to no take a the was our facing. San a management comprehensive was and the potential and losses in at details the for prior prepared of quarterly dividend sustainable $X.XX call share. and distributable previously portfolio to a and dividend was the investment select CMTG the turn of by a the Mike is current declared realized this over We selling we Mike. of sales.Lastly, factors, a that factors per the disruption will a persist have ultimately, investment.This provide $X.XX for represents in establish very But considered to gains investment headwinds number covered which of dividend and was would consider the market case dividend, Francisco the comfortably from to longer looked portfolio.Given So we It levels before the loan now future to level quarter, and acknowledging to resetting loss. us decided to we opportunities including be advantage in opportunities with a where leave believe sell where of desire

loan more $XXX activity offset in prior and relatively by third had a about repayment XX. loan on sales quarter-over-quarter follow-on Notwithstanding during composition recap, sales. and and the in Richard, carrying $XX although everyone.The strong based quarter Thanks, repayment was of decrease and morning, this loan comprised in loan sale full loan unchanged, which an repayments X September the we fundings dynamic mentioned loan activity proceeds, received loan loan the driven decline period, later. portfolio third remained touch XX, by partial commitments.During good quarter, primarily a quickly million $XXX primarily due $X.X portfolio $XXX upon at period CMTG's The at $X.X exposure.To modest that billion floating-rate earlier, billion I'll to on office we of of which value million June quarter, partially detail was repayments, to million aggregate was Richard million compared from activity,

fundings our composition multifamily representing at follow-on of $XXX addition, we our to largest the continues portfolio, the September of XX% represent made million.Turning portfolio XX. of In sector, to

are remains observing our While positive. long-term interest higher we asset the borrowers with class contending rates, outlook for

the portfolio perform allocation, higher multifamily well well-located We the will XX, believe long-term a as strong sector relatively asset given to ownership the of second we've largest office on our class. a unchanged fundamentals that have terms rates represented XX% highly affordability.Hospitality, continue of favoring high-quality, low portfolio supply-demand as the prior interest in to historically, when been as relative compared quarter.In basis, it concentration on impact result, of home and, maintained well comes office, September a underlying the selective this to at

a million loan underlying loans were. submarket.As about to assets occur high-quality there's still the assets to meaningful I'd that one continuing validating the in note the office in believe additional component of we Richard with to represent a quality full the will construction building the portfolio.Before believe recently it's example quarter as new loans the cross-section broader of over repaid portfolio, Jai, of secured office turning primarily quarter. construction we and anticipated. suggests of is sales diverse a loan partial quality received to quarter, commitment loan completed delivered our newly over further markets market. mentioned, the of was quarter, located reduced the a repay, sponsors, that delivered, high-rise during of when and it built that the valuable important the investments highest Nashville, to attractive result We that and our was from collateral of in during assets medium discipline to particularly expected $XXX Class loan by types were of loan The represent in believe to a near be the and $XX in when most an asset-managed third serve office the a loan we During with liquidity million loan $XXX million exposure Tennessee.This perspective term.We resources of high-quality repayments, a loans the its Estate to asset the and repayments They discuss property believe office and good repayments, access portfolio. expected various to primarily number This we of A a Group. these third why we to We loan frequently collateral how like Mack this Real XX% in-demand is and and as built-in our was the for during and call

loan, located collateralized leverage in component performance UPB.While which Francisco use borrower disappointing investment, belief by located by representing payment deteriorate, the million, liquidity, the rent-regulated a of uses a of interest The for speaks environment. a of credit loan enabled outcome were able loan a result the for significantly The support is given second $XXX reducing the to while We investment given San stop accretive sell continued the asset UPB be and it took advantage hospitality significant markets making San multifamily through rates default, have improvement this the real to to market reduced debt there dynamics an high-quality Austin, proceeds property during loan we a us to expectation that a service coupled XXXX, seen loan San exposure and as market was million, particularly from the had throughout proceeds of in will collateralized this portfolio XX% the the led distributable originated the Francisco to the we fourth the a but difficult to in was of balance XXXX sale of the operating the continued was the are pandemic decided challenges.Since to with asset better driven estate COVID-XX on to hospitality.The discount enhance par, that bolstering quality loan term. of at of of million increasing loan sell San which, our which NOI first our to capital Francisco. Francisco us with decision nonaccrual. gross to believe the to in capital, asset of earnings but sheet, transaction a $XX loan was $XXX this continued and Texas, reduce with that the our this opportunity at by to properties quarter of leverage, in to regulatory clear-sighted The pressure, time payments our and further

would believe this an efficient it management, over from to demonstrates the Jai. like requires when to call We strong thesis.I to moving commitment turn now portfolio also even away and our investment

losses, third revised which were Thank $X.XX you, $X.XX our of discuss migration Mike the share. mentioned.We of dividend loss credit quarter. profile previously and category. to share, supplement financial a of the share. loss $X.XX losses, or share, million, distributable $X.XX per Mike was net would of were the earnings, reconciliation comfortably including realized loans share.The earnings added Richard.For $X.XX the the refer XXXX, reported non-GAAP our result Distributable $XX net of and loss, of rating excluding quarter for of per the realized multifamily to to primarily per No like sale of per a overall now X-rated that per measures.I investment net covers realized we GAAP portfolio net risk of the San reported Please new risk-rated X Francisco during

California, XX, which However, reserve loans of $XXX against million. and quarter-end. in of in CECL X reserves X.X% million This office general of $XXX $XX San UPB represented a CECL we million, our Virginia specific reserves. of Atlanta.At a loans of million of underlying land aggregate X was offset or The a were CECL general of loans loan loans UPB. of include XX.X% to comprised the X-rated X-rated loan, million, reserve is an loans. the seasoning September X.X% X.X% $XX These Irvine, by on at conditions, specific on the $XX a UPB is [indiscernible] status. reduction CECL loans of Specific reserve and reserve by and our the migrated a the quarter, loan sheet. recorded UPB of rating, and and with Francisco balance portfolio comprised office result the primarily represented at loans the in of remaining in September UPB as CECL placed portfolio.In XX.Turning loan nonaccrual General million X-rated X.X% of of of addition, of Nonaccrual $XX increased to X.X% building secured an macroeconomic CECL we on another deteriorating during our

cash liquidity $XXX preserving $XXX continues reported property. loans million we credit million capacity.Unencumbered priority includes City XX, a organization. for $XXX which the and undrawn mentioned, Richard mixed-use includes comprised loans total liquidity, million $XXX be senior September York as At and in approved As in New as well REO million, to which

debt-to-equity billion for now consistent remained December compared please ahead. call $X.X In open decreased net quarter-over-quarter, addition, at XXXX.Our at XX, future to XX, at the funding would Operator, to coming like at XX.I ratio commitments billion X.Xx in September $X.X September to go questions.

Instructions] Barcomb, [Operator question And our BTIG. of Sarah to first goes today

we've effectuate you permanent breakeven equity you're more sponsor to side, issue to get or your financing. pressured prevalent. a on So order Could hearing ground perhaps the supply more seeing that Developers on and more the portfolio development that on is the are been multifamily to there? in what in comment sale and behavior becoming

loss? about get about Sure. and and for Are a we thank fundamentals talking we Just Are merchant sure make asking perspective? to at occupancy I leasing the it. you selling builders from question, a talking

hearing that portfolio. your coming hear seeing out with merchant is to concentration some of because what guess, I development, curious you're question, to My your and been respect comments was that builders. of your comments we've on and in And in just

Sure.

Okay.

modest market, So our multifamily of that as it get relates to builders merchant is construction in generally the incentivized off are about the we we pay borrowers of That the to one kind because loans. losses of losses are order The to guarantees. the they seeing the that at sell sales things guarantees interest on take rate loans, especially have on space. like they are in hook to their

the are, which builders are the these like in sell And is a modest seen market but seeing you in -- merchant so the what a always is a we where at first we "always" word, product are generally, assets there there the lease softness even I've to lease in best market. fundamentals, asset never level but level wasn't there up. when building market discounts, a big where best discounts.And the is about And could there's

is but so feel as in we that general absorption said every stopped. dampening planned multifamily development markets, market.Having bringing in is concessions multifamily very And with the what has almost supply, and comfortable, space comfortable, good been absorbing a still into and statement, development our back is the we're most that, assets.Demand, rents

will of will inflation long bullish come the time U.S. take bullish in is X anything are over the not housing but to rates also as supply. sector, of with home is slowdown months be a it up time we the multifamily.So catch going to multifamily rents that term some in getting are that ground.We We mortgage more the the lack ago the sales given think than for believe that So that to climb. we begin off really overall seeing didn't market. quite But

housing -- that undersupplied from a questions. addressed are your was We that perspective.Hopefully,

as sector like to you higher sales. sale there. more sounds your We Can a X-rated the and to you quarter. the else support opportunities during non-watch liquidity. that liquidity? with or more see the geography just It to saw Yes. to portfolio, versus And speak sale you're follow-up more open to prepared list in list loan the bring well as related is loan I loan quality, sales watch appreciate loan from respect where color in pursuing either sell my then a or where list, watch to remarks

Thank you question. it's that Priyanka. Sarah, for

specific. to going asset be it's think situational, very borrower very and I

I list owning think how do stepping our watch great was arrived We're did we conclusion. if the of So not job loan and to we in sold, of at in capable asset. only sharing like Mike that really we're perspective the that that feel a going

done in we've now our think I that successfully twice REO portfolio.

in loan we with that to counterparty able to It par. right whom conversation sell we shy to that sale. We be not marketing it on to going environment horizon marketed. a we we're seeing then We're loan it. That That based seen.The and from lot it's was the do so opportunistic, have then timing. want to of going kind but not that at resolve that we credit, There's just the we But liquidity. slated created And of were be that. was market more don't a we're the remains not the a fundamentals there, sold, away that out if very just it's are for that actively with think if dynamic on was X-rated business. now, right nothing a a

on but situational, and there's no loan opportunistic just strategy was sales. it here again, So programmatic

Shane, question of to JPMorgan. Rick next goes The

calls, just who's come the going love to about appetite reduced you a and little but but Or these And dividend loan for a dividend assuming stock bit you should you combination great were would forward, quarter that a trading a basis surprise contemplated to of companies. that all things does be that relative to the Sorry, deal the and aggressive anybody repurchases. stock with huge as would considered own compared your this been listening dividend policy at hear won't to for on I'm guys really question when observe sales peer on such sense? discount, and policy a just I of of makes buyback? many more the the third

think pretty the are I aligned. incentives So

Mike. Sure, for question. Thanks the Rick. It's

and a wasn't terms the tied but on of environment. loan, dividend, the reduce there that losses really given substantially under to us dividend much perspective, overpaid be at in would rate this before higher-for-longer a on it we minimum potential from portfolio, realized rules. think net our to be significantly trying And dividend looking deterioration distributable in to proactive was we making some cut assuming reflect the that were decision allow be cover we'd distribution given that forecasted and situation I basis going gains at the our a directly it, to distributable to basis was go-forward to earnings requirements profile where it REIT so thought decision a sell any earnings looking to go-forward

that think don't that expect ability is in "never," those this comfortable buy do I to we on a commitments we our We of we're the liquidity. is of portfolio use buyback, best what have respect right SOFR of in highlight conservative.I preserving XXX I funding into do focused we'd market were that the have of very as important were spread it's think, now, we'd had And think comfortable we're portfolio. and shares. protecting loans don't all that mind, unless keep weighted-average that lot think very very, to loans, excess key. to future to elements it of really, but we which liquidity critical environment, redeploying over but really significant being that existing to I the back with capital expect even And on I and that was decision.With that have, those basis SOFR. are the favorable mentioned, also a points though So a -- it's was really we right relative liquidity we to maintaining now share Jai performance say

current like to that very XX% have question. your it.So a unleveraged.So is liquidity of use excess we feel hopefully, coupon good excess responsive we in of that's as So a

modest? think undrawn that you a of development It a the near made liquidity be little those the cases improves against helpful. has lot the that and And bit? a sort until drawn the suggest had in been that be the that about bit commitments, draws really commitments those environment is. won't Is little stopped. a so to there? That's we And when multifamily there's of -- will of Does check balance in relatively term comment that

in here. Rick, it's going Priyanka. I'm to jump

comment to Richard's think more I all as construction market. portfolio, generally a our on general is proceeding budget. schedule, In the was related expected, comment on

expect wouldn't funding our our across we've change in construction future I in we any our loans.And our to milestones So quarters have documents. in commitments really relates or past exposure loan mentioned multifamily it I as think

month effectively every we're have draws. an estoppel funding right We as

we slowdown so portfolio. started funding we're have keep project have moving Projects to seeing continued. inside forward had our want And continue that to and draws, of borrowers the a rebalance.So not keep

KBW. next our goes Rahmani, Jade to of And question Instructions] [Operator

Jason This on is for Jade. Sabshon

commercial and are some losses on loans loan LTVs. on question, first with to REITs cases, mortgage seeing my to XX% we're So sales take XX% XX% XX% reported these in

look-through So is decline price and higher is of How the of what is driving cost a you level? it is business lack you're of do much of How buying? And much to it to think asset of it magnitude leverage loss? of carry? ability what at how that much plan

for It's question. Priyanka. Thanks that

question. it's think I great a

to right it sell situation, ahead trying for to obviously on of you loan, what in our all on I they think think but for focus ability really decision we're now. But just what in these impacts strength There's something go underlying to asset that think borrower, because just very deterioration, execution. sales, and really situational, ourselves, people the particular, speak wanted depends understand can our only and I can and was to what all loan expedient that's occurring think go after, it's I said.I like certain very foreclose. we jurisdiction given they're obviously

so both minimized wanted think in to And execution buyer off who could very related selected it's quickly, our risk.So a case, as Francisco we environment. the uncertain rate given market our ensure continued the And which really a that to environment we close situation. we I just got and in strong overall just quickly, dependent it it San and books

I there's So think in? want jump it's just to a a wholesale great question, not think but I do you response.Richard,

Francisco, We work crime, by with and the can governance, homelessness, increased go particular, home, San on taxes. you jump a me just to Francisco San Francisco impacted from at use, Let When at regulation. for stagnate as of continues a occurred storm. regulated in San of bit. continues in we to sale, and multi-housing on little look and us, be drug has California the perfect high what in kind looked and -- prospect

it I think asset. relates as on we that and to go can the with on issues

go And all level to very move losses sales. to this that a could terms few they market, to and so very, very about in been there that significant just and office of are would take like we have going-forward a relates unusual a it at decided is everything transact not I other situation want for and, classes asset like they in weak markets we that where on. given wrong many of hope, going vastly loss.As unless to opportunity imagine this feel on one-off very people a and in very was wanting of move the the that that type certainty wrong, wanting that in diminished.So asset uncertainty,

don't So going those loans we're multiple I to significant think selling are here. of there continue factors of to people outside at office see that But type discounts.

Great.

cap XX-Q some rates follow-up commentary As and question, terminal my around rates. discount the provides

what multifamily? So generally you think stabilized cap office be should rates speaking, and do on

very a Go tough question. ahead, Priyanka. That's

if specific. I talking same say quality about specific, it's lease thing, was terms. leased-up exact mean, on asset, the market roll, I I depends just the you're asset going of a to actually. it so the rent think Again, weighted-average

So all in going there made are related take and lease-up our are portfolio think stabilization the transitional to go the which what's assets into time, things that.I to in asset transitional XX-Q, in is reference is, many you are so that by that definition, these that arena. to the

we normalized transaction a is capital-constrained have environment. used that indicative And obviously more environment, today, than rates are cap which a cap rates rather so of very

Thank you.

no have now closing any I'll to We further back questions. hand for comments. Richard

you thank us. all for joining Well,

Thank be market next thank up us, joining for again our very by and the these going we you road set I difficult. other think you forward is every you all for environment it's we're capital ready to a for we difficult. turnaround to side. and well day, be XXXX.So continue look not We be next that to at and this may for fun very work year, problems environment this It through for And handle going and we to to speaking are ready to it. It's but to much. least. But think problems call. be are up to so think, an get at we a like set hopefully the bumpy earnings

now joining. Thank all Thank you. you This concludes today's for call.

your lines. disconnect now may You