Claros Mortgage Trust, Inc. annual report, FY2021

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Claros Mortgage Trust, Inc. — FY 2021 Form 10-K

Reporting period: Year ended December 31, 2021. This summary reflects full-year results, not standalone fourth-quarter results. Claros Mortgage Trust (NYSE: CMTG) is an externally managed commercial real estate finance REIT focused on senior and subordinate loans for transitional properties, primarily in major U.S. markets. Its shares began trading on the NYSE on November 3, 2021.

Financial and operating highlights

  • Revenue and earnings: Total revenue was $247.0 million, down 9.8% from $273.7 million in 2020. Net interest income fell 20.0% to $219.0 million; net income was $170.4 million, down 17.2%, and net income attributable to common stock was $170.5 million. Diluted EPS was $1.27 versus $1.52.
  • Distributable earnings and dividends: Distributable Earnings and Net Distributable Earnings were each $168.5 million, or $1.25 per share, versus $221.7 million ($1.67 per share) and $214.0 million ($1.61 per share), respectively, in 2020. Dividends declared were $1.48 per share, down from $1.61; thus, declared dividends exceeded both reported EPS and the company’s non-GAAP Net Distributable Earnings per share. The filing cautions that these non-GAAP measures are not cash flow or a measure of funds available for distributions.
  • Cash flow: Operating activities provided $213.6 million, compared with $140.5 million in 2020. Investing activities used $373.2 million and financing activities provided $62.8 million. Cash, cash equivalents and restricted cash decreased $96.8 million to $334.1 million; year-end cash and cash equivalents alone were $310.2 million.
  • Portfolio: At year-end, the loan portfolio comprised 99 loans across 60 investments, with $6.60 billion unpaid principal balance and $7.69 billion in commitments. Weighted-average all-in yield was 5.7%, fully extended term 3.3 years, and LTV 67.6%. The loan portfolio excludes the hotel real estate owned investment.
  • Credit quality and allowance: Six investments totaling $366.5 million, or 5.6% of the loan portfolio, were on non-accrual status; four, totaling $273.6 million, were at least 90 days past due on interest. The year-end allowance for loan losses was $73.5 million, including reserves for unfunded commitments and accrued interest; the balance sheet showed a $67.0 million allowance against loans receivable. Claros adopted CECL in 2021 and recorded a $78.3 million cumulative-effect adjustment to retained earnings. It recorded a net $9.0 million reversal of credit-loss reserves during 2021.
  • Debt and leverage: Consolidated borrowings were approximately $4.76 billion, against total stockholders’ equity of $2.60 billion. Net debt-to-equity was 1.7x, versus 1.5x in 2020; Total Leverage Ratio was 2.1x in both years and includes certain non-consolidated senior interests. Management said it expects Total Leverage Ratio to range from 2.0x to 3.0x. Repurchase facilities had $4.34 billion capacity and $3.49 billion outstanding; $762.7 million was outstanding under the secured term loan, and $290.0 million under debt related to real estate owned.
  • Liquidity and commitments: Reported liquidity sources totaled $961.6 million: $310.2 million cash, $584.3 million available under secured financing arrangements, and $67.1 million in loan principal payments held by servicers. Unfunded loan commitments were $1.09 billion, with $584.3 million of committed or identified financing capacity for those commitments. The company reported compliance with financing covenants at year-end.
  • Book value: Book value per share was $18.35, down from $19.35 at year-end 2020. Adjusted book value per share, which adds back accumulated real estate depreciation and the general loan-loss allowance, was $18.88.

Material changes versus 2020

  • Interest and related income declined 6.9% to $415.3 million, while interest expense increased 13.9% to $196.2 million. The company attributed lower net interest income to repayments of $2.9 billion of loans, non-accrual loans and higher 2020 prepayment fees, as well as increased financing expense; new loan originations partly offset the decline.
  • Clar os originated $2.33 billion of new loans and recorded $2.88 billion in loan repayments during 2021. Year-end loan unpaid principal balance was $6.60 billion, compared with $6.49 billion a year earlier.
  • In February 2021, Claros foreclosed on seven New York City limited-service hotels after the related $103.9 million mezzanine loan defaulted. It recognized the hotels at an appraised fair value of $414.0 million and assumed a $300.0 million senior mortgage, later repaying $10.0 million and extending the mortgage maturity to February 2024. Year-end real estate owned, net, was $406.9 million, with $290.0 million of associated debt. Hotel operations generated $28.0 million revenue and a $4.2 million net operating loss, including depreciation, from acquisition through year-end.
  • The company completed its IPO in November 2021, issued 5.52 million shares at $18.65 per share, and raised $103.0 million from common stock issuance during the year. It also repurchased 215,626 shares at an average $16.71 under a $25.0 million purchase plan.
  • General and administrative expense increased, partly due to public-company costs and financing modifications. Equity compensation expense also rose, while no incentive fee was incurred in 2021, compared with $7.8 million in 2020.

Outlook, risks and unusual items

  • Management provided no earnings or dividend guidance. The company intends to pay regular quarterly dividends, but the board retains discretion and the filing establishes no minimum dividend.
  • Management described continued uncertainty from COVID-19, including effects on borrower cash flows, hospitality and other collateral, construction schedules, supply chains, labor availability, inflation and financing markets. Loan modifications may involve extensions, interest deferrals, reserve repurposing or additional borrower equity.
  • Interest-rate exposure remains important. At year-end, 96.6% of loans were floating rate, primarily indexed to one-month LIBOR; net floating-rate exposure was approximately $1.64 billion. Under the company’s stated static sensitivity assumptions, a 100-basis-point increase in the benchmark rate was estimated to reduce 12-month net interest income by $11.8 million, or $0.08 per share. The filing also warns that the LIBOR-to-SOFR transition could affect income and borrowing costs.
  • Portfolio concentrations include 38% of loans in the New York metropolitan area, 30% in multifamily, 18% in hospitality and 17% in office; the 15 largest loans represented 50% of the portfolio. The company cautions that reported LTVs use underwriting values that may not reflect current property values.
  • Other key risks include leverage and refinancing needs, potential margin calls, illiquid collateral, construction and borrower execution risk, non-accruals and loan losses, competition, reliance on the external manager and its affiliates, conflicts of interest, and maintaining REIT qualification and the company’s exclusion from registration under the Investment Company Act. The planned LIBOR cessation and the concentration of hotel ownership in New York are also relevant exposures.
  • The filing reports no material legal proceedings and no off-balance-sheet arrangements. Management concluded disclosure controls were effective at the reasonable-assurance level; the 10-K did not include management’s internal-control assessment or auditor attestation because of the transition period for newly public companies. The auditor issued an unqualified opinion on the financial statements and noted the 2021 change in credit-loss accounting.

Important facts for investors to verify

  • Whether cash earnings and future taxable income support the $1.48 per-share dividend, given 2021 Net Distributable Earnings of $1.25 per share and the filing’s warning that this measure is not cash available for distributions.
  • The status, collateral valuations, expected recoveries and potential further losses for the six non-accrual investments, particularly loans already 90 days past due.
  • The hotel portfolio’s operating performance, valuation assumptions, refinancing or sale prospects, and ability to service its $290.0 million senior mortgage.
  • Availability and terms of financing for $1.09 billion of unfunded commitments, and the maturity, covenant, refinancing and margin-call profile of approximately $4.76 billion of consolidated borrowings.
  • How New York-area and property-type concentrations, current collateral values and borrower business-plan execution compare with the company’s underwriting assumptions.
  • The effect of rising rates and LIBOR transition on asset yields, financing costs and spreads, including whether the disclosed sensitivity remains representative under changing balances and benchmark rates.