Release Date: August 06, 2024
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
Positive Points
- Claros Mortgage Trust Inc (CMTG, Financial) reported distributable earnings of $0.20 per share, consistent with the previous quarter.
- The company saw a slight growth in its loan portfolio to $6.8 billion, indicating stability and potential for future growth.
- CMTG's multifamily portfolio remains strong, representing 40% of the total portfolio, benefiting from a supply-demand imbalance in the housing market.
- The company has made significant progress in improving the value of its REO assets, attributing success to its experienced management team.
- Claros Mortgage Trust Inc (CMTG) has received a total of $873 million in loan proceeds year-to-date, demonstrating effective loan resolution and repayment activities.
Negative Points
- Claros Mortgage Trust Inc (CMTG) reported a GAAP net loss of $0.09 per share for the second quarter of 2024.
- The company downgraded three loans to a four-risk rating, representing a total carrying value of $370 million, indicating increased risk in the portfolio.
- A New York land loan was placed on nonaccrual status, reflecting challenges in the borrower's progress and delinquency in paying interest.
- Total CECL reserves as a percentage of UPB increased to 3.1% from 2.6% in the prior quarter, indicating higher expected credit losses.
- The company adjusted its quarterly dividend to $0.10 per share, reflecting a cautious approach to capital allocation amidst market uncertainties.
Q & A Highlights
Highlights of Claros Mortgage Trust Inc (CMTG) Q2 2024 Earnings Call
Q: Can you discuss the strategy on REO and whether it is changing?
A: Richard Mack, CEO: We are being opportunistic around REO. Previously, we focused on creating liquidity, but now we see this as a good time to acquire assets at a discount. We aim to manage these assets better than the current sponsors and write up their value. Priyanka Garg, EVP, added that the focus has been on residential assets, which we believe have not seen a secular shift in value but rather a temporary one.
Q: Can you elaborate on the adjustments made to covenants with your lenders?
A: J. Michael Mcgillis, CFO: We have always had a constructive relationship with our repo counterparties. We proactively deleveraged our balance sheet and were transparent about our needs for covenant relief to execute our strategies. This included reducing minimum required interest coverage levels and tangible net worth covenant levels.
Q: What are your expectations for loan repayments for the rest of the year, and how will you allocate the proceeds?
A: J. Michael Mcgillis, CFO: We expect significant repayments through the rest of the year and into early 2025. The allocation of proceeds will depend on the situation at the time, including potential REO acquisitions, paying down high-cost debt, and stock buybacks. The dividend cut this quarter was also part of this strategy to retain capital for growth and value enhancement.
Q: Can you provide more details on the office loan repayment post-Q2?
A: Priyanka Garg, EVP: We traded out of a vacant office building in Brooklyn, reducing our New York City office exposure. We traded into a pari mortgage piece on a cash-flowing asset with improving performance in the retail sector, which is showing positive trends. This trade included additional credit support from other assets owned by the sponsor.
Q: What is the dollar amount of loans you expect to take into REO?
A: Priyanka Garg, EVP: It's hard to put a specific number on it as we are working with borrowers. However, the specific sponsor with significant credit migrations represents about 5% of our UPB, which is likely to become REO.
Q: Why do you have risk-rated four loans that you expect to take into REO? Shouldn't those be risk five?
A: J. Michael Mcgillis, CFO: The risk rating is a function of GAAP accounting requirements. Just because a loan is expected to go to REO doesn't mean a specific reserve is required. We feel comfortable with the long-term collateral value of these assets.
Q: Are there parts of your capital allocation strategy that can be executed sooner rather than later?
A: Richard Mack, CEO: Yes, we are set up and ready to execute rapidly on certain strategies. The pace of repayments has been accelerating, and we are prepared to pivot as needed. Everything is on the table, including new origination, paying off debt, and stock buybacks.
Q: How are you managing the term loan covenants?
A: J. Michael Mcgillis, CFO: We continue to comply with the interest coverage covenant on our term loan. We plan to have discussions about modifications, extensions, and potential paydowns before the maturity in August 2026.
Q: What are your expectations for the real estate market and how does it impact your strategy?
A: Richard Mack, CEO: We expect rate relief to re-energize the real estate capital markets, providing valuation tailwinds. We are optimistic about the Fed reducing rates and are reevaluating our capital deployment strategies to take advantage of potential asset value increases.
Q: How do you view the current market environment and its impact on your portfolio?
A: Richard Mack, CEO: We see green shoots in the commercial real estate market, suggesting a more positive trajectory. While it's too early to declare a sea change in investor sentiment, large transactions are getting done, and liquidity is gradually increasing. We remain constructive on the long-term outlook of the multifamily sector.
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
