Claros Mortgage Trust, Inc. — Q2 2023 Form 10-Q
Reporting period: Quarter ended June 30, 2023. Amounts are in U.S. dollars; financial statement amounts below are in millions unless otherwise stated.
Business context
Claros is an externally managed commercial real estate finance company and REIT focused primarily on loans secured by transitional commercial properties. At quarter-end, its 75-loan portfolio had $7.56 billion of unpaid principal, with a weighted-average interest rate of 8.87% and weighted-average yield to maturity of 9.2%. Multifamily accounted for 41% of portfolio carrying value, hospitality 20%, and office 15%. Management reported a 68.5% weighted-average loan-to-value or loan-to-cost ratio.
Financial and operating metrics
| Metric | Q2 / June 30, 2023 | Comparable period / prior year-end |
|---|---|---|
| Interest and related income | $180.7 | $99.0 in Q2 2022 |
| Interest and related expense | $119.7 | $46.9 in Q2 2022 |
| Net interest income | $61.1 | $52.1 in Q2 2022 |
| Total net revenue, including real estate owned | $80.9 | $69.2 in Q2 2022 |
| Net income attributable to common stock | $4.3; $0.02 per share | $63.2; $0.45 per share in Q2 2022 |
| Six-month net income attributable to common stock | $40.9; $0.28 per share | $92.6; $0.66 per share in first half 2022 |
| Cash and cash equivalents | $253.1 | $306.5 at Dec. 31, 2022 |
| Cash, cash equivalents and restricted cash | $285.1 | $348.2 at Dec. 31, 2022 |
| Total assets / total liabilities | $8,400.6 / $6,000.2 | $8,241.5 / $5,785.0 at Dec. 31, 2022 |
| Total equity / book value per share | $2,400.4 / $16.94 | $2,456.5 / $17.48 at Dec. 31, 2022 |
| Total borrowings outstanding | $5,896.5 | $5,688.4 at Dec. 31, 2022 |
| Net debt-to-equity / total leverage ratio | 2.3x / 2.7x | 2.2x / 2.6x at Dec. 31, 2022 |
| Dividend declared | $0.37 per share | $0.37 per share in Q2 2022 |
For the six months ended June 30, operating cash flow was $41.9 million, investing cash outflow was $204.1 million, and financing cash inflow was $99.1 million. Cash and restricted cash decreased by $63.1 million. Management reported total available liquidity sources of $406.6 million, including $253.1 million cash and $152.9 million of approved, undrawn credit capacity.
Material changes versus comparable periods
- Q2 net income fell to $4.3 million from $63.2 million a year earlier. The quarter included a $41.5 million CECL provision; Q2 2022 included a $30.1 million realized gain on loan sale, which did not recur.
- For the first half, net interest income increased by $16.0 million year over year, as higher interest income was partly offset by materially higher borrowing costs. Total net revenue rose $22.9 million, while total expenses increased $17.9 million.
- First-half interest and related expense increased to $225.7 million from $86.5 million in 2022, reflecting higher financing balances and benchmark rates. Interest and related income increased to $344.9 million from $189.7 million.
- Portfolio unpaid principal grew modestly to $7.56 billion from $7.54 billion at year-end, while loan commitments declined to $9.06 billion from $9.43 billion. Risk ratings were unchanged at a weighted average of 3.2; loans rated 4 or 5 represented 18% of carrying value, versus 17% at year-end.
- The CECL reserve totaled $117.7 million at June 30, including $38.0 million in specific reserves and $65.7 million in general reserves for funded loans, plus reserves for unfunded commitments. The six-month provision was $38.2 million, including a $44.6 million increase in specific reserves partly offset by general reserve reversals.
- Real estate owned increased to $522.4 million from $401.2 million, principally after the company took title to a New York mixed-use property through an assignment-in-lieu of foreclosure on June 30.
Outlook, risks and unusual items
- No quantified earnings or dividend guidance was provided. Management identifies dividends, distributable earnings, book value and leverage as key measures. Q2 distributable earnings before realized gains and principal charge-off were $0.35 per diluted share, compared with the $0.37 dividend; after a $66.9 million principal charge-off, distributable loss was $0.10 per share. These are non-GAAP measures and are not substitutes for GAAP earnings or cash flow.
- The mixed-use-property foreclosure resulted in a $66.9 million principal charge-off, following specific CECL provisions, and the property was recorded at an estimated fair value of approximately $144.0 million. Management reported no real estate asset impairments through June 30.
- Loans on non-accrual represented 5.8% of loan portfolio carrying value, up from 4.8% at year-end. Separately, three loans with $402.3 million aggregate carrying value were in maturity default but remained on accrual; another loan with $78.3 million carrying value was delinquent on interest but remained on accrual because interest was deemed collectible.
- Unfunded loan commitments were $1.5 billion, with $933.0 million allocated to less than one year in the contractual-obligations schedule. Management notes funding timing depends on borrower project progress and conditions precedent.
- All floating-rate loans and financing arrangements transitioned to SOFR effective July 1, 2023. At quarter-end, net floating-rate exposure was approximately $1.54 billion; management estimated a 100-basis-point SOFR move would change annual net interest income by approximately $13.6 million, or $0.10 per share, in the same direction.
- Key risks include borrower defaults and collateral-value declines, higher rates and financing costs, loan extensions or maturity defaults, repo margin calls, refinancing and counterparty risks, and market access. The company reported compliance with financing covenants and no repo margin calls through June 30. It also reported no material legal proceedings and no material changes to its previously disclosed principal risk factors.
- After quarter-end, on July 28, 2023, the JPMorgan repurchase facility was amended to extend initial and fully extended maturities to July 2026 and July 2028, respectively, and combine the Side Car financing with the main pool. The filing also reports the August 1, 2023 share count of 138,385,904.
Important facts for investors to verify
- Whether the specific CECL reserves and collateral valuations adequately reflect current property values, workout assumptions and borrower repayment prospects.
- The status and resolution plans for non-accrual loans, maturity defaults and the delinquent-interest loan, including actual recoveries and any further charge-offs.
- Liquidity available to meet $1.5 billion of unfunded commitments, near-term financing payments and dividends, and the terms and availability of undrawn facilities.
- Whether distributable earnings can support the $0.37 quarterly dividend, given Q2 distributable earnings before charge-off were below the dividend and GAAP net income was $0.02 per share.
- The effect of SOFR movements and refinancing conditions on net interest income, borrowing costs, collateral values and covenant headroom.
- Operating performance, lease collections and debt arrangements for the foreclosed mixed-use property and hotel portfolio.