Claros Mortgage Trust Inc (CMTG) 2022 Q1 法說會逐字稿

Welcome to Claros Mortgage Trust First Quarter 2020 (sic) [2022] Earnings Conference Call. My name is Jordan, and I'll be your conference facilitator today. (Operator Instructions)

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

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, CMT Chief Financial Officer. We also have Kevin Cullinan, Executive Vice President, who leads MRECS Originations; 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 call may include forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Actual results may differ materially from those indicated by these forward-looking statements as a result of various important factors, including those discussed in our other filings with the SEC. Any forward-looking statements made on this call represent our views only as of today, and we undertake no obligation to update them. We will also be referring to certain non-GAAP financial measures on today's call, such as 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.

Good morning, everyone. Thank you for joining us today for CMTG's first quarter earnings call. I'm 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 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 a intersection of events that individually and collectively have created significant financial uncertainty and volatility across the equity and credit markets, or inflation, rising interest rates, a backup 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. And while this usually creates real estate value reduction, 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 the first and second quarters. We've been focused on markets that continue to demonstrate strong growth, such as Dallas, Miami, Phoenix, Seattle and Nashville, and has 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 first quarter originations. Both supply-demand dynamic 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 re-price rent on a yearly basis and make strong demand and an inflationary backdrop to keep these asset values stable with potential upside.

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 there shut off are the same reasons why we like high-growth cities that offer high quality of life. Work is no longer a play. 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. And besides hotels reliant 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, 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 and 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. The second quarter 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 the second quarter in resolving our nonaccrual loans.

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 the second quarter while reducing our nonaccrual percentage to approximately 2%.

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

Thank you, Richard, and 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's UPB 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 that yields wide of what they would have been priced at in a more normal securitization market.

Construction loans represented roughly 1/3 of our first quarter multifamily originations. In addition, 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 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. The first quarter 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. As an example, during the quarter, we originated a $130 million loan for Life Sciences development in the University City submarket 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 and the sector with strong demand and rent growth.

Before turning the call over to Jai, I would like to highlight that we have significant available investment capacity in the form of cash on balance sheet, underleveraged 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.

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

Thank you, Mike and Richard, and good morning, everyone. For the first quarter, we reported GAAP net income of $29.4 million or $0.21 per share and distributable earnings of $33.5 million or $0.24 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 landlord in New York City that was delinquent since the first quarter of 2020. 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 second quarter numbers as a gain on sale. The resolution significantly reduces nonaccrual loss 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 route as an owner, operator and developer provides us a competitive advantage in the underwriting and managing transitional loans.

Moving back to first quarter numbers. During the first quarter, our loan portfolio increased by $631 million to $7.2 billion, driven by initial funding on new loans of $685 million in originations and loan funding outpaced repayments. We had liquidity of over $450 million at quarter end and unencumbered assets of $650 million. We upsized warehouse facilities with 2 banks by $700 million, bringing a total capacity of $5 billion with availability of approximately $1 billion. Our leverage ratio was low at 1.9x at quarter end. And as we deploy additional capital, this ratio is expected to increase to the 2.5x to 3x range over time and will be more in line with the industry.

In terms of interest rates, our earnings profile has benefited on loans with in-place floors. Today, we continue to benefit from outside 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, 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. 2, we dissolved the nonaccrual assets I just referenced. 3, potential ramp-up in performance of our REO assets; and 4, potential evolution of our 2 remaining nonaccrual assets.

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

Our first question comes from Rick Shane of JPMorgan.

Really, 2 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 the second quarter, you start to revert to asset sensitivity. Is that the time frame? 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?

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

Rick, just to answer the second question. I think it just depends on what the market gives us from an opportunity perspective. And we have stepped in with the backup 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 in trying to create equivalent returns as we scale. However, it is likely that we are going -- 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, 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 these types of assets and loans about where we invest. And clearly, if we do heavier transitional loans, we will more slowly increase leverage on the balance sheet as we scale.

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

Our next question comes from Steve Delaney of JMP Securities.

So the first question I have is the sequential decline in net interest income from about $56 million and $40 million to $51 million. So just curious if you could comment on what drove that. My suspicion is that maybe you just had heavier repayment related income in the 4Q, but I'd love to hear your comments on that first quarter NII.

So yes, I'll start, and Mike, if you want to add. Steve, that's exactly right. It is we had loans paying off in the first quarter -- excuse me, in the fourth quarter. Some of those were subordinated loans, somewhere high -- somewhat loans with high LIBOR [source] and high coupons whereas those loans paid off in Q4. That was the biggest corporate 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. And credit seems to be healing. So I just want to make sure that it wasn't some impact of -- you didn't have any new nonaccruals or reversals of previously accrued interest or something like that.

That's exactly right. We are -- our nonaccruals actually decreased after the large, planned loan resolution that were known in the articles.

Okay. Great. And my follow-up would be just a bigger picture question. Strong net loan growth, it sounds like opportunities you're seeing, especially now in multifamily with CLO market kind of shutting down that 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 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 the -- what type of notes payable are they.

Jai, you want me to cover this one?

Mike, you should, yes.

Sure. Thanks, Steve. Nice to hear your voice again. I'll take a few things. I'll address the notes payable item first. So typically, the notes payable -- those are asset-specific financings on certain of our heavier transitional loans. So we tend not to finance those on repo lines. So to the extent we started shifting to more heavier transitional assets, we may see more of that activity, although we are working with a bad 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 obviously, we have a significant amount of capacity on our repo lines. And we have seen some of the counterparties start to pull back. But as Jai highlighted, we've been able to increase our capacity on those 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. I think we are -- we have assembled well, a collateral pool that I think would work effectively in a CRE CLO financing structure to the extent the market comes back there. So those are 3 engines right there.

The other thing that we continue to keep an eye on the corporate bond market and the TLB market. Obviously, we're on a great right now but we continue to monitor opportunities there 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. But I think there are other sources cost financing that we can certainly tap as the portfolio evolves and grows.

Steve, I would also add, we also have significant amount of cash on the balance sheet. And we don't have any near-term maturities coming up. So we're not desperate to raise cash.

Yes. Well, it sounds like you can self-fund what you're going to see in portfolio growth for the next couple of quarters anyway. Thank you both for your comments. I appreciate it.

Steve, 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.

Our next question comes from Jade Rahmani of Keefe, Bruyette & Woods.

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, which 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?

Yes. So this is fairly complicated, and any answer would be nuanced and long. So 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. So if you were to take multifamily in a lower growth market right now multifamily, just that every place is seeing a 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 are expanding values are coming down a bit, especially in markets where rent growth is less expensive. And so this is really location by location, asset by asset. But I think if you want to 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, but I think people's assumptions of value probably has 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, is that going to impact how you think about cap rates and where you see rent growth in supply and demand in each submarket and category of asset. So I hope that's a helpful answer. It's very, very hard to broad brush the market.

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, let's say, it's between 5% and 15% on those type of assets. To me, I think it's very hard to be an equity investor today given all these dynamics. But 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 investments in broad brush, very, very hard because of these dynamics. But with the equity subordination that we have, I think the risk-adjusted returns and 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.

I know you bring a fresh perspective to the mortgage REIT space, commercial mortgage REITs, in particular. And I think as Barry certainly often says, 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, non-repurchase focus? And where do A note sales stack in that catalyst?

Jade, I want to hand part of this off to Mike, but let me say that when we started the business, what we -- where we thought we were going to be was 25% warehouse and 75% [ANMs]. But the warehouse lines today are generally much more favorable than they have been in the past. And number 2, the cost of A notes for anything other than super heavy transitional, has just not made a lot of economic sense. And I think that that's because the banks have regulatory incentives to push to warehouse lines as opposed to ANMs.

And so 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. So we're -- it's a careful balance, but 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, and 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. 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, 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 and Mike lived through this.

So Mike, can I turn it over to you?

Sure. Thanks, Richard and Jade, nice to hear from you. 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, 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 have -- we still can effectively sort of service that senior financing.

So it's very deal-by-deal specific. If we do lighter, 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 will be trying to achieve the same power OEs on those loans or slightly higher ROEs.

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

Our next question comes from Brock Vandervliet of UBS.

Jai, if you could just talk about kind of the cadence between the fundings and the commitments. Fundings are 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?

That's kind of a hard question to answer just because we don't buy things off a Bloomberg screen, our loan take somewhere between 60 to 90 days to close. So we had a very strong fourth quarter and a reasonably strong first quarter of this year and the second quarter is turning out to be fairly strong thus far. So as a cadence, you can think about for a full year, which has deployed somewhere between $4 billion to $5 billion. It's hard to break it down in quarterly buy sizes just because of the amount of time it takes to close something and we can't predict or control the timing of living. But for a full year, you should think of us as $4 billion to $5 billion run rate. I don't know if that helps from a modeling perspective.

Sure. And going back to one of the other questions on NII, just to take another crack at it. We kind of backing into your loan yield and such. Was there -- what's driving what appears to be the lower loan yield? Is that just payoffs of higher-yielding paper or an asset mix shift? What's driving that?

Yes, sure. So 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. So as we reported in our supplement, 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. So those don't have the high LIBOR floors that are 2020, 2019 vintage loans pack. So those loans will catch up as the forward curve as the forward curve seats actually goes through and the yield should naturally increase. And the first part is also right that the loans that paid off in the fourth quarter had higher yields. So this is a transitional period, if you will.

And Jai, let me -- I'll just provide a little bit of additional color here. So Brock, if we look at our originations in Q4 in Q1, that was heavily weighted towards lighter transitional multifamily loans. So obviously, those are lower yielding, but much lower risk financings, and 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 the fourth quarter.

So as Jai highlighted, it is a function of the repayments we received during the end. At the end of the fourth quarter, combined with the portfolio shift, the heavier component of lighter transitional multifamily deals that occurred over the fourth quarter and through the first quarter of 2022.

I believe we have a follow-up question from Jade Rahmani of Keefe, Bruyette, & Woods.

The single-family rental space is very interesting, something I followed for quite a while and built-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 lighting to in the build-to-rent space?

Kevin, do you want to take the part of that one and maybe Kevin can do that the second. So Jade, most of what we are lending on could be considered horizontal multifamily. We're not lending on disparate homes. They're kind of purpose rental housing on a horizontal basis. And we're building 2 of those projects ourselves on the equity side in Phoenix right now. Actually, one we're building and one is billing entitlement. So 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 want to take the second, talk a little bit about why I'm not sure what we're allowed to say about our sponsors. But maybe just talk a little bit about that.

Jade, 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 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 meaningful infrastructure in the markets that they're developing these assets and meaningful portfolios.

But both the 2 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 mark-to-market risk. It's really a group that didn't -- they've amassed and put together some pretty significant capital formation for this space. They don't want the development risk. So they've agreed to forward takeout of the portfolio.

And the other is a long-term holder that is really, I would say, at the beginning or middle stages of trying to scale up a significant exposure to this asset class. So we think we've aligned ourselves with a really strong combination of local on the boots development expertise as well as very deep-pocketed private equity backers.

And do you believe that the CLO market wider pricing creates an opportunity to lend in the SFR space?

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 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. But 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 tidies up or closing that 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 it's fairly nascent relative to multifamily and a difficult thing to scale. We are able to size these positions to -- without underwriting any future rent growth. So if we're looking at untrended yields to our position 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's of concern to us as well. So said differently, sponsors can absorb fairly meaningful cost inflation, needed rent growth and still be at a very comfortable position in the capital stack.

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.

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 nonaccrual 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 and everyone being here. And I just wanted to compliment the team for continuing to do a great job every day and very, very proud 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.