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March 16, 2022, 6:15 a.m. EDT

10-K: CLAROS MORTGAGE TRUST, INC.

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(EDGAR Online via COMTEX) -- Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.

The following discussion should be read in conjunction with our consolidated financial statements and notes thereto appearing elsewhere in this Annual Report on Form 10-K. In addition to historical data, this discussion contains forward-looking statements about our business, operations and financial performance based on current expectations that involve risks, uncertainties and assumptions. Our actual results may differ materially from those in this discussion as a result of various factors, including but not limited to those discussed in Part 1. Item 1A, "Risk Factors" in this Annual Report on Form 10-K.

Introduction

We are a CRE finance company focused primarily on originating senior and subordinate loans on transitional CRE assets located primarily in major U.S. markets, including mortgage loans secured by a first priority or subordinate mortgage on transitional CRE assets, and subordinate loans including mezzanine loans secured by a pledge of equity ownership interests in the direct or indirect property owner rather than directly in the underlying commercial properties. These loans are subordinate to a mortgage loan but senior to the property owner's equity ownership interests. Transitional CRE assets are properties that require repositioning, renovation, rehabilitation, leasing, development or redevelopment or other value-added elements in order to maximize value. We believe our Sponsor's real estate development, ownership and operations experience and infrastructure differentiates us in lending on these transitional CRE assets. Our objective is to be a premier provider of debt capital for transitional CRE assets and, in doing so, to generate attractive risk-adjusted returns for our stockholders over time, primarily through dividends. We strive to create a diversified investment portfolio of CRE loans that we generally intend to hold to maturity. We focus primarily on originating loans ranging from $50 million to $300 million on transitional CRE assets located in major U.S. markets with attractive fundamental characteristics supported by macroeconomic tailwinds.

We were organized as a Maryland corporation on April 29, 2015 and commenced operations on August 25, 2015, and are traded on the New York Stock Exchange, or NYSE, under the symbol "CMTG". We have elected and believe we have qualified to be taxed as a REIT for U.S. federal income tax purposes commencing with our taxable year ended December 31, 2015. We are externally managed and advised by our Manager, an investment adviser registered with the SEC pursuant to the Advisers Act. We operate our business in a manner that permits us to maintain our exclusion from registration under the 1940 Act.

Recent Market Conditions

Since the onset of COVID-19, the global impact of the outbreak has rapidly evolved, and more normalized activities have resumed. However, despite federal and state government intervention, including economic stimulus measures, and vaccine availability, the prolonged duration and the severity of the COVID-19 pandemic and its impact remain highly uncertain and could have a material adverse effect on our business. Such impacts include supply chain disruptions, labor shortages, return-to-work, inflation, and are highly uncertain and cannot be predicted at this time. For additional information on the factors that impacted us to date, and which may continue to, see Item 1A, "Risk Factors".

I. Key Financial Measures and Indicators

As a CRE finance company, we believe the key financial measures and indicators for our business are net income per share, dividends declared per share, Distributable Earnings per share, Net Distributable Earnings per share, book value per share, adjusted book value per share, Net Debt-to-Equity Ratio and Total Leverage Ratio. During the year ended December 31, 2021, we had net income per share of $1.27, declared dividends of $1.48 per share, had Distributable Earnings per share of $1.25, and had Net Distributable Earnings of $1.25 per share. As of December 31, 2021, our book value per share was $18.35, our adjusted book value per share was $18.88, our Net-Debt-to-Equity Ratio was 1.7x, and our Total Leverage Ratio was 2.1x. We use Net Debt-to-Equity Ratio and Total Leverage Ratio, financial measures which are not prepared in accordance with GAAP, to evaluate our financial leverage, which in the case of our Total Leverage Ratio, makes certain adjustments that we believe provide a more conservative measure of our financial condition.







        Net Income Per Share and Dividends Declared Per Share
        The following table sets forth the calculation of basic and diluted net income
        per share and dividends declared per share (in thousands, except share and per
        share data):
                                                                        Year Ended
                                                         December 31, 2021       December 31, 2020
        Net income attributable to common stock         $           170,537     $           202,378
        Weighted average shares of common stock
        outstanding, basic and diluted(1)                       134,539,645             132,980,316
        Basic and diluted net income per share of
        common stock                                    $              1.27     $              1.52
        Dividends declared per share of common stock    $              1.48     $              1.61
        


(1) Amounts for the year ended December 31, 2020 includes 877,498 fully vested RSUs, of which were 584,767 delivered on April 4, 2021 and excludes 1,097,293 shares of common stock underlying unvested RSUs that vested in full in connection with the Company's initial public offering in November 2021.

Distributable Earnings and Net Distributable Earnings

Distributable Earnings and Net Distributable Earnings are non-GAAP measures used to evaluate our performance excluding the effects of certain transactions, non-cash items and GAAP adjustments, as determined by our Manager, that we believe are not necessarily indicative of our current performance and operations. Distributable Earnings is a non-GAAP measure, which we define as net income as determined in accordance with GAAP, excluding (i) non-cash equity compensation expense (income), (ii) incentive fees, (iii) real estate depreciation and amortization, (iv) any unrealized gains or losses from mark-to-market valuation changes (other than permanent impairments) that are included in net income for the applicable period, (v) one-time events pursuant to changes in GAAP and (vi) certain non-cash items, which in the judgment of our Manager, should not be included in Distributable Earnings. Net Distributable Earnings is Distributable Earnings less incentive fees due to our Manager. Pursuant to the Management Agreement, we use Core Earnings, which is substantially the same as Distributable Earnings, to determine the incentive fees we pay our Manager. Distributable Earnings is substantially the same as Core Earnings, as defined in the Management Agreement, for the periods presented.

We believe that Distributable Earnings and Net Distributable Earnings provide meaningful information to consider in addition to our net income and cash flows from operating activities determined in accordance with GAAP. We believe the Distributable Earnings and Net Distributable Earnings measures help us to evaluate our performance excluding the effects of certain transactions, non-cash items and GAAP adjustments, as determined by our Manager, that we believe are not necessarily indicative of our current performance and operations. Distributable Earnings and Net Distributable Earnings do not represent net income or cash flows from operating activities and should not be considered as an alternative to GAAP net income, an indication of our cash flows from operating activities, a measure of our liquidity or an indication of funds available for our cash needs. In addition, our methodology for calculating Distributable Earnings and Net Distributable Earnings may differ from the methodologies employed by other companies to calculate the same or similar supplemental performance measures and, accordingly, our reported Distributable Earnings and Net Distributable Earnings may not be comparable to the Distributable Earnings and Net Distributable Earnings reported by other companies.

In order to maintain our status as a REIT, we are required to distribute at least 90% of our REIT taxable income, determined without regard to the deduction for dividends paid and excluding net capital gain, as dividends. Net Distributable Earnings, and other similar measures, have historically been a useful indicator of mortgage REITs' ability to cover their dividends, and to mortgage REITs themselves in determining the amount of any dividends. Net Distributable Earnings is a key factor, among others, considered by the board of directors in setting the dividend and as such we believe Net Distributable Earnings is useful to investors. Accordingly, we believe providing Net Distributable Earnings on a supplemental basis to our net income as determined in accordance with GAAP is helpful to our stockholders in assessing the overall performance of our business.

While Distributable Earnings and Net Distributable Earnings excludes the impact of our unrealized current provision for credit losses, loan losses are charged off and recognized through Distributable Earnings when deemed non-recoverable. Non-recoverability is determined (i) upon the resolution of a loan (i.e. when the loan is repaid, fully or partially, or in the case of foreclosure, when the underlying asset is sold), or (ii) with respect to any amount due under any loan, when such amount is determined to be non-collectible.

The following table provides a reconciliation of net income attributable to common stock to Distributable Earnings and Net Distributable Earnings (in thousands, except share and per share data):







                                                                    Year Ended
                                                    December 31, 2021        December 31, 2020
        Net income attributable to common stock:   $            170,537     $            202,378
        Adjustments:
        Incentive fees - affiliate                                    -                    7,766
        Incentive fees attributable to the JV                         -                      (68 )
        Non-cash equity compensation expense                      8,812                    5,670
        Gain on foreclosure of real estate owned                 (1,430 )                      -
        Other income                                             (5,855 )                      -
        Charge-offs of current expected credit
        loss reserve                                             (1,761 )                      -
        Provision for (reversal of) current
        expected credit loss(1)                                  (8,962 )                  6,000
        Income tax expense (benefit)                                  -                        -
        Depreciation expense                                      7,113                        -
        Distributable Earnings                     $            168,454     $            221,746
        Less: incentive fee adjustments            $                  -     $             (7,698 )
        Net Distributable Earnings                 $            168,454     $            214,048
        Weighted average shares of common stock
        outstanding, basic and diluted(2)                   134,539,645              132,980,316
        Basic and diluted earnings per share       $               1.27     $               1.52
        Distributable Earnings per share, basic
        and diluted                                $               1.25     $               1.67
        Net Distributable Earnings per share,
        basic and diluted                          $               1.25     $               1.61
        


(1) Prior to the adoption of ASU 2016-13 on January 1, 2021, this adjustment was reflected as provision for loan losses.

(2) Amounts for the year ended December 31, 2020 includes 877,498 fully vested RSUs, of which 584,767 were delivered on April 4, 2021 and excludes 1,097,293 shares of common stock underlying unvested RSUs that vested in full in connection with the Company's initial public offering.







        Book Value Per Share
        The following table sets forth the calculation of our book value per share (in
        thousands, except share and per share data):
                                                      December 31,            December 31,
                                                          2021                    2020
        Total Stockholders' Equity(1)              $         2,604,267     $         2,622,386
        Non-controlling interest                               (37,636 )               (35,286 )
        Preferred Stock                                              -                    (125 )
        Stockholders' Equity, Net of Preferred
        Stock and Non-
          controlling interest                     $         2,566,631     $         2,586,975
        Number of Shares of Common Stock
        Outstanding at
          Period End(1)                                    139,840,088             133,726,218
        Book Value per share(2)                    $             18.35     $             19.35
        


(1) Includes 7,306,984 shares of our common stock outstanding at December 31, 2020, that are classified as redeemable common stock on our balance sheet. The stockholder's contractual redemption right terminated upon completion of our initial public offering in November 2021, at which point the shares previously subject to that right were reclassified as common stock on our balance sheet.

(2) Calculated as (i) total stockholders' equity less non-controlling interest and preferred stock divided by (ii) number of shares of common stock outstanding at period end, which as of December 31, 2020 includes 877,498 shares of common stock underlying RSUs that were vested in full but not yet settled.

We believe that presenting book value per share adjusted for the general allowance for loan losses and accumulated depreciation is useful for investors as it enhances the comparability to prior years. Our lenders consider book value per share prior to the general allowance for loan losses and accumulated depreciation as an important metric related to our overall capitalization and we believe disclosing book value per share prior to the general allowance for loan losses and accumulated depreciation is important to investors such that they have the same visibility.

The following table sets forth the calculation of our adjusted book value per share (in thousands):







                                                                  December 31,
                                                                      2021
        Book Value per share                                      $       18.35
        Add back: accumulated depreciation on real estate owned            0.05
        Add back: general allowance for loan losses                        0.48
        Adjusted Book Value per share                             $       18.88
        


II. Our Portfolio

The below table summarizes our loan portfolio as of December 31, 2021 (dollars in thousands):







                                                                                                                          Weighted Average(3)
                                                                                                                                 Term to
                                                                                                Unpaid                            Fully
                                      Number of            Number              Loan            Principal        All-In          Extended
                                    Investments(1)       of Loans(1)       Commitment(2)        Balance        Yield(4)        Maturity(5)       LTV(7)
        Senior loans(6)                          55                93     $     7,426,332     $ 6,343,758             5.5 %             3.3          67.5 %
        Subordinate loans                         5                 6             263,006         259,046            10.4 %             2.7          68.2 %
        Total / Weighted Average                 60                99     $     7,689,338     $ 6,602,804             5.7 %             3.3          67.6 %
        


(1) Certain investments include multiple loans for which we made commitments to the same borrower or affiliated borrowers on the same date. The loan portfolio table excludes our one real estate owned investment.

(2) Loan commitment represents initial loan commitments, as adjusted by commitment reductions, less principal repayments and transfers which qualified for sale accounting under GAAP.

(3) Weighted averages are based on unpaid principal balance.

(4) All-in yield represents the weighted average annualized yield to initial maturity of each loan within our loan portfolio, inclusive of coupon, origination fees, exit fees, and extension fees received, based on the applicable floating benchmark rate (if applicable), including LIBOR floors (if applicable), as of December 31, 2021.

(5) Term to fully extended maturity is measured in years. Fully extended maturity assumes all extension options are exercised by the borrower upon satisfaction of the applicable conditions.

(6) Includes contiguous subordinate loans (i.e., loans for which we also hold the mortgage loan) representing loan commitments of $831.7 million, and aggregate unpaid principal balance of $723.6 million as of December 31, 2021.

(7) LTV represents "loan-to-value" or "loan-to-cost", which is calculated as our total loan commitment from time to time, as if fully funded, plus any financings that are pari passu with or senior to our loan, divided by our estimate of either (1) the value of the underlying real estate, determined in accordance with our underwriting process (typically consistent with, if not less than, the value set forth in a third-party appraisal) or (2) the borrower's projected, fully funded cost basis in the asset, in each case as we deem appropriate for the relevant loan and other loans with similar characteristics. Underwritten values and projected costs should not be assumed to reflect our judgment of current market values or project costs, which may have changed materially since the

date of origination including, without limitation, as a result of the COVID-19 pandemic. LTV is updated only in connection with a partial loan paydown and/or release of collateral, material changes to expected project costs, the receipt of a new appraisal (typically in connection with financing or refinancing activity) or a change in our loan commitment.







        Loan Portfolio Activity and Overview
        The following table summarizes changes in unpaid principal balance within our
        loan portfolio, for both our loans and for our interests in loans (i.e., loans
        in which we have acquired an interest in a loan for which the transferor did not
        account for the transaction as a sale under GAAP) (dollars in thousands):
                                                           Three Months Ended                                    Year Ended
                                                            December 31, 2021                                 December 31, 2021
                                                                Interests                                         Interests
                                                 Loans          in Loans                           Loans          in Loans
                                               Receivable      Receivable         Total          Receivable      Receivable         Total
        Unpaid principal balance, beginning
        of period                             $  6,009,765      $  436,788     $  6,446,553     $  6,152,331      $  338,957     $  6,491,288
        Initial funding of loans                 1,489,174               -        1,489,174        2,331,328               -        2,331,328
        Advances on loans                          190,144          19,329          209,473          692,489         120,500          812,989
        Loan repayments                         (1,197,505 )      (294,551 )     (1,492,056 )     (2,580,669 )      (297,891 )     (2,878,560 )
        Transfer to real estate owned, net               -               -                -         (103,901 )             -         (103,901 )
        Principal charge-offs                       (1,761 )             -           (1,761 )         (1,761 )             -           (1,761 )
        Sale of loans receivable                   (48,579 )             -          (48,579 )        (48,579 )             -          (48,579 )
        Total net fundings (repayments)            431,473        (275,222 )        156,251          288,907        (177,391 )        111,516
        Unpaid principal balance, end of
        period                                $  6,441,238      $  161,566     $  6,602,804     $  6,441,238      $  161,566     $  6,602,804
        


The following table details our loan investments individually based on unpaid principal balances as of December 31, 2021 (in thousands):







                                                                                                                              Fully
                                                                                     Principal                               Extended
        Loan Number(1)    Loan type    Origination Date    Loan Commitment(2)       Outstanding        Carrying Value      Maturity(6)     Property Type     Construction      Location   Risk Rating
              1            Senior         11/1/2019                    390,000            390,000              388,336        11/1/2026     Multifamily               -           NY           3
              2            Senior         12/16/2021                   405,000            359,066              355,655        6/16/2027     Multifamily               -           CA           3
              3            Senior         10/18/2019                   330,000            290,139              289,032       10/18/2024   For Sale Condo          Y               CA           3
              4            Senior         7/12/2018                    290,000            290,000              290,783         8/1/2023     Hospitality               -           NY           4
              5            Senior         12/30/2021                   257,963            257,963              256,516       12/30/2026     Multifamily               -           VA           2
              6            Senior         12/27/2018                   210,000            207,548              207,474         2/1/2025      Mixed-use                -           NY           4
              7            Senior         8/14/2019                    193,129            193,129              193,533        8/15/2022     Hospitality               -           NY           3
              8            Senior          9/7/2018                    192,600            192,600              192,066       10/18/2024        Land                   -           NY           3
              9            Senior         7/26/2021                    225,000            191,074              189,120        7/26/2026     Hospitality               -           GA           3
              10           Senior         12/30/2021                   184,500            184,500              183,465       12/30/2026     Multifamily               -           VA           2
              11           Senior         6/29/2018                    200,727            161,566              161,864         8/9/2023      Mixed-use            Y               NY           2
              12           Senior         9/30/2019                    167,500            155,208              154,958         9/9/2024       Office                  -           NY           3
              13           Senior         10/4/2019                    263,000            152,579              152,014        10/1/2025      Mixed-use            Y               DC           3
              14           Senior         2/28/2019                    150,000            150,000              150,000        2/28/2024       Office                  -           CT           3
              15           Senior          1/9/2018                    148,500            148,500              148,490         1/9/2024     Hospitality               -           VA           3
              16           Senior         12/30/2021                   147,500            147,500              146,930       12/30/2025     Multifamily               -           PA           3
              17           Senior         9/27/2019                    258,400            140,401              138,551        9/26/2026       Office                  -           GA           3
            18(8)          Senior          3/9/2018                    144,056            136,602              136,302       12/31/2022   For Sale Condo          Y               NY           4
              19           Senior          8/8/2019                    154,999            134,573              133,716         8/8/2026     Multifamily               -           CA           3
              20           Senior         9/20/2019                    225,000            131,957              130,061       12/31/2025   For Sale Condo          Y               FL           3
              21           Senior         12/10/2021                   130,000            130,000              128,910       12/10/2026     Multifamily               -           VA           3
              22           Senior         9/24/2021                    127,535            121,172              120,093        9/24/2027     Hospitality               -           TX           3
              23           Senior         4/29/2019                    120,000            119,377              119,269        4/29/2024      Mixed-use                -           NY           3
            24(7)          Senior         9/21/2018                    116,020            116,020              116,211        10/1/2021        Land                   -           NY           4
              25           Senior         7/20/2021                    113,500            113,500              112,860        7/20/2026     Multifamily               -           IL           3
              26           Senior         2/13/2020                    124,810            111,101              110,477        2/13/2025       Office                  -           CA           3
              27           Senior          9/2/2021                    166,812            106,857              104,484         9/2/2026        Other              Y               GA           3
            28(7)          Senior          6/8/2018                    104,250            104,250              105,343        1/15/2022        Land                   -           NY           4
              29           Senior         12/15/2021                   103,000            103,000              102,087       12/15/2026     Multifamily               -           TN           3
              30           Senior         10/11/2017                    97,500             97,500               97,393       10/31/2023     Hospitality               -           CA           3
              31           Senior          8/2/2021                    100,000             94,405               93,696         8/2/2026       Office                  -           CA           3
              32           Senior         12/30/2021                    92,537             92,537               92,018       12/30/2025   For Sale Condo              -           VA           3
              33           Senior         3/31/2020                     87,750             87,750               87,750         2/9/2025       Office                  -           TX           3
              34           Senior         7/10/2018                     81,380             81,380               77,530        7/10/2025     Hospitality               -           CA           4
        . . .
        


Mar 16, 2022

COMTEX_404219827/2041/2022-03-16T06:14:33

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