Claros Mortgage Trust, Inc. — Q3 2022 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2022; unaudited. Claros is an externally managed commercial real estate finance REIT focused on transitional CRE loans. Unless otherwise noted, financial amounts below are in U.S. dollars.
Financial performance and position
| Metric | Q3 2022 / September 30, 2022 | Comparable period / prior year-end |
|---|---|---|
| Total revenue | $76.4 million | $67.0 million in Q3 2021; up 14% |
| Net interest income | $58.5 million | $58.4 million in Q3 2021 |
| Net income attributable to common stock | $42.1 million; $0.30 per share | $52.9 million; $0.40 per share in Q3 2021 |
| Distributable Earnings (non-GAAP) | $47.1 million; $0.33 per share | $0.37 per share dividend declared |
| Loans held for investment, net | $7.27 billion | $6.34 billion at December 31, 2021 |
| Total assets / stockholders’ equity | $8.06 billion / $2.54 billion | $7.46 billion / $2.60 billion at December 31, 2021 |
| Debt outstanding | $5.43 billion | $4.76 billion at December 31, 2021 |
| Cash and cash equivalents | $225.6 million; restricted cash was $37.1 million | $310.2 million cash at December 31, 2021 |
| Leverage (company-defined, non-GAAP) | Net debt-to-equity 2.0x; total leverage 2.4x | 1.7x and 2.1x, respectively, at December 31, 2021 |
For the first nine months of 2022, revenue was $203.6 million, net income was $134.8 million, and net income attributable to common stock was $134.7 million, or $0.95 per share. The comparable 2021 figures were $191.8 million, $153.4 million, and $153.5 million, or $1.15 per share. Net cash provided by operating activities was $91.0 million, investing cash flow was negative $650.9 million, and financing cash flow was positive $488.4 million. Cash, cash equivalents and restricted cash decreased $71.5 million to $262.7 million.
The loan portfolio comprised 77 loans with $7.38 billion unpaid principal and $9.15 billion in total commitments. Weighted-average loan yield to maturity was 7.7%, fully extended term was 3.5 years, and LTV was 67.8%. Approximately 97.8% of loan principal was floating rate; net floating-rate exposure was approximately $1.80 billion. Multifamily loans were 41% of portfolio carrying value, and hospitality loans were 21%.
Material changes and notable items
- Loan principal grew from $6.44 billion at year-end 2021 to $7.38 billion, reflecting new originations and advances, partially offset by repayments and a loan sale. The company originated or acquired $2.0 billion of loans and advanced $480.8 million on existing loans during the first nine months.
- Q3 interest and related income rose 22% year over year, but interest expense increased 50%; quarterly net interest income was nearly flat. For the nine-month comparison, net interest income declined 8%, mainly due to higher borrowing costs and borrowing levels.
- Net income attributable to common stock declined 33% year over year in Q3. Sequentially, it fell from $63.2 million in Q2 to $42.1 million in Q3, partly because Q2 included a $30.1 million realized gain on a loan sale. Q3 also included a $2.4 million CECL provision and $2.8 million unrealized gain on an interest-rate cap.
- The total CECL reserve was approximately $75.0 million, about 1.0% of unpaid loan principal. The filing reports two loans on non-accrual with $70.5 million unpaid principal; it separately identifies two additional loans with $136.8 million carrying value in maturity default. One loan incurred an $11.5 million principal charge-off in Q2.
- In August, Claros ceased consolidating CMTG/TT and began accounting for its 51% interest under the equity method; the reported investment was $40.7 million at quarter-end. A New York land loan was converted to a construction loan, with $75.0 million funded by quarter-end and further commitments outstanding.
- Book value per share was $17.96, down from $18.35 at year-end; adjusted book value per share was $18.58, versus $18.88. The company repurchased 1.09 million shares for $17.5 million through September 30 under its prior repurchase plan.
Liquidity, outlook, risks and contingencies
- Management reported $506.6 million in identified liquidity sources, including cash, loan principal payments held by servicers and approved undrawn credit capacity. It also reported $535 million of unencumbered loans, subject to lender approval as collateral. Aggregate unfunded loan commitments were approximately $1.77 billion; funding timing depends on borrower and project conditions.
- Financing covenants were reported in compliance, and the company had received no margin calls under repurchase facilities through September 30. Repurchase borrowings were partially recourse, with guarantees generally ranging from 25% to 50% of outstanding borrowings. The hotel-property mortgage was non-recourse to Claros.
- Management reported no material legal proceedings, no off-balance-sheet arrangements, and no material changes to previously disclosed principal risk factors. It provided no specific earnings or dividend guidance. The $0.37 quarterly dividend exceeded Q3 GAAP EPS of $0.30 and Distributable Earnings per share of $0.33; management cautions that Distributable Earnings is non-GAAP and is not cash flow or a measure of liquidity.
- Key risks include rising rates and borrower debt-service capacity, CRE collateral values and liquidity, loan defaults and maturity extensions, funding availability and repo margin requirements, and the LIBOR-to-SOFR transition. A company sensitivity estimate indicated a 100-basis-point increase in benchmarks would raise annual net interest income by approximately $20.3 million, while a 50-basis-point decrease would reduce it by approximately $9.1 million; actual outcomes may differ.
- After quarter-end, Claros originated two floating-rate loans with $246.5 million aggregate commitments, received repayments on two loans, and entered into a JPMorgan facility with a maximum size of $1.0 billion. At closing, $400 million was committed and approximately $255 million advanced. The facility is non-mark-to-market and has a company equity-obligations guaranty plus limited bad-act recourse. On November 8, the board authorized a new share repurchase program of up to $100 million.
Important facts for investors to verify
- Underlying borrower, collateral and recovery prospects for the non-accrual and maturity-default loans, including the basis for CECL estimates and charge-offs.
- Ability to fund the $1.77 billion of unfunded commitments while preserving liquidity and meeting financing covenants.
- Whether floating-rate income gains will offset higher financing costs and any stress on borrowers as rates rise; confirm benchmark-transition terms for LIBOR-linked assets and liabilities.
- Dividend sustainability against recurring earnings and cash needs, considering that Q3 dividends exceeded both GAAP EPS and Distributable Earnings per share.
- Terms, asset eligibility, guaranties and actual borrowing capacity of the post-quarter JPMorgan facility, and intended use of the new $100 million repurchase authorization.
- Hotel portfolio operating performance, debt maturity in February 2024, and the assumptions supporting reported real estate values.