(EDGAR Online via COMTEX) -- Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.
The following discussion should be read in conjunction with our unaudited consolidated financial statements and notes thereto appearing elsewhere in this quarterly report on Form 10-Q. References herein to "Claros Mortgage Trust," "Company", "we", "us" or "our" refer to Claros Mortgage Trust, Inc. and its subsidiaries unless the context specifically require otherwise.
We make forward-looking statements in this quarterly report that are subject to risks and uncertainties. These forward-looking statements include information about possible or assumed future results of our business, financial condition, liquidity, results of operations, plans and objectives. When we use the words "believe," "expect," "anticipate," "estimate," "plan," "continue," "intend," "should," "may" or similar expressions, we intend to identify forward-looking statements. Statements regarding the following subjects, among others, may be forward-looking:
our business and investment strategy;
our projected operating results;
the timing of cash flows, if any, from our investments;
the state of the U.S. and global economy generally or in specific geographic regions;
the duration and the severity of the COVID-19 pandemic, actions that may be taken by governmental authorities to contain the COVID-19 pandemic or to treat its impact and the adverse impacts that the COVID-19 pandemic has had, and will likely continue to have, on the global economy and on our business, financial condition, liquidity, results of operations and prospects and on our ability to service our debt and pay dividends to our stockholders, including as a result of the COVID-19 pandemic's adverse impact on the net worth, liquidity and other ability of borrowers or any guarantors to honor their obligations to us;
defaults by borrowers in paying debt service on outstanding loans;
governmental actions and initiatives and changes to government policies;
the amount of commercial mortgage loans requiring refinancing;
our ability to obtain financing arrangements on attractive terms, or at all;
current and prospective financing costs and advance rates for our target assets;
our expected leverage;
general volatility of the securities markets in which we may invest;
the impact of a protracted decline in the liquidity of credit markets on our business;
the uncertainty surrounding the strength of the global economy;
the return on or impact of current and future investments, including our loan portfolio and real estate owned investment;
allocation of investment opportunities to us by our Manager and our Sponsor;
changes in interest rates and the market value of our investments;
effects of hedging instruments on our target assets;
rates of default or decreased recovery rates on our target assets and related impairment charges, including as it relates to our real estate owned investment;
the degree to which our hedging strategies may or may not protect us from interest rate volatility;
changes in governmental regulations, tax law and rates, and similar matters (including interpretation thereof);
our ability to maintain our qualification as a REIT;
our ability to maintain our exclusion from registration under the 1940 Act;
availability and attractiveness of investment opportunities we are able to originate in our target assets;
the ability of our Manager to locate suitable investments for us, monitor, service and administer our investments and execute our investment strategy;
availability of qualified personnel from our Sponsor and its affiliates, including our Manager;
estimates relating to our ability to pay dividends to our stockholders in the future;
our understanding of our competition;
impact of increased competition on projected returns; and
market trends in our industry, interest rates, real estate values, the debt markets generally, the CRE debt market or the general economy.
The forward-looking statements are based on our beliefs, assumptions and expectations of our future performance, taking into account all information currently available to us. You should not place undue reliance on these forward-looking statements. These beliefs, assumptions and expectations can change as a result of many possible events or factors, not all of which are known to us. Factors that could cause or contribute to these differences include, but are not limited to, those identified below and those discussed in the section titled "Risk Factors" of this filing. If a change occurs, our business, financial condition, liquidity, results of operations and prospects may vary materially from those expressed in our forward-looking statements. Any forward-looking statement speaks only as of the date on which it is made. New risks and uncertainties arise over time, and it is not possible for us to predict those events or how they may affect us. Except as required by law, we are not obligated to, and do not intend to, update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.
We are a CRE finance company focused primarily on originating senior and subordinate loans on transitional CRE assets located 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.
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, Net Debt-to-Equity Ratio and Total Leverage Ratio. During the three months ended September 30, 2021, we had net income per share of $0.40, declared dividends of $0.37 per share, had Distributable Earnings per share of $0.34, and had Net Distributable Earnings of $0.34 per share. As of September 30, 2021, our book value per share was $18.78, our Net-Debt-to-Equity Ratio was 1.8x, 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): Three Months Ended September 30, 2021 June 30, 2021 Net income attributable to common stock $ 52,877 $ 42,021 Weighted average shares of common stock outstanding, basic and diluted(1) 133,433,487 133,433,487 Basic and diluted net income per share of common stock $ 0.40 $ 0.31 Dividends declared per share of common stock $ 0.37 $ 0.37
(1) Amounts for the three months ended September 30, 2021 and June 30, 2021 include 584,767 fully vested RSUs, which were delivered on April 4, 2021. Excludes 1,097,293 shares of common stock underlying unvested RSUs that vested in full in connection with the Company's initial public offering.
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. During the nine months ended September 30, 2021, we recorded a net reversal of $17.4 million in the CECL reserve, which has been excluded from Distributable Earnings and Net Distributable Earnings. During the nine months ended September 30, 2021, no loan losses were charged off and recognized through Distributable Earnings.
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):
Three Months Ended September 30, 2021 June 30, 2021 Net income attributable to common stock: $ 52,877 $ 42,021 Adjustments: Non-cash equity compensation expense (186 ) 1,452 Current expected credit loss reserve (9,306 ) (7,922 ) Income tax benefit - (1,881 ) Depreciation expense 1,940 1,940 Distributable Earnings $ 45,325 $ 35,610 Less: incentive fee adjustments $ - $ - Net Distributable Earnings $ 45,325 $ 35,610 Weighted average shares of common stock outstanding, basic and diluted(1) 133,433,487 133,433,487 Basic and diluted earnings per share $ 0.40 $ 0.31 Distributable Earnings per share, basic and diluted $ 0.34 $ 0.27 Net Distributable Earnings per share, basic and diluted $ 0.34 $ 0.27
(1) For the three months ended September 30, 2021 and June 30, 2021, includes 584,767 shares of our common stock underlying fully vested RSUs, which were settled on April 4, 2021. 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): September 30, 2021 December 31, 2020 Total Stockholders' Equity(1) $ 2,543,311 $ 2,622,386 Non-controlling interest (37,143 ) (35,286 ) Preferred Stock (125 ) (125 ) Stockholders' Equity, Net of Preferred Stock and Non-controlling interest $ 2,506,043 $ 2,586,975 Number of Shares Common Stock Outstanding at Period End(1)(2) 133,433,487 133,726,218 Book Value per share(2) $ 18.78 $ 19.35
(1) Includes 7,306,984 shares of our common stock outstanding as of September 30, 2021, 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 (x) December 31, 2020 includes 877,498 shares of common stock underlying RSUs that were vested in full but not yet settled and (y) September 30, 2021 includes 584,767 shares of our common stock underlying RSUs that were vested in full and settled, in each case as of period end. Excludes 1,097,293 shares of common stock underlying unvested RSUs that vested in full upon completion of our initial public offering in November 2021.
II. Our Portfolio
The below table summarizes our loan portfolio as of September 30, 2021 (dollars in thousands):
Weighted Average(3) Term to Number Unpaid Term to Fully Number of of Principal All-In Initial Extended Investments (1) Loans(1) Loan Commitment(2) Balance Yield(4) Maturity(5) Maturity(5) LTV(6) Senior loans(7) 52 89 $ 7,022,870 $ 6,010,976 6.0 % 1.4 2.9 66.3 % Subordinate loans 6 8 459,571 435,577 11.3 % 0.2 2.2 63.5 % Total / Weighted Average 58 97 $ 7,482,441 $ 6,446,553 6.4 % 1.3 2.9 66.1 %
(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 September 30, 2021.
(5) Term to initial and fully extended maturity are measured in years. Fully extended maturity assumes all extension options are exercised by the borrower upon satisfaction of the applicable conditions.
(6) 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.
(7) Includes contiguous subordinate loans (i.e., loans for which we also hold the mortgage loan) representing loan commitments of $855.1 million, and aggregate unpaid principal balance of $737.1 million as of September 30, 2021.
Portfolio Activity and Overview The following table summarizes changes in unpaid principal balance within our 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 Nine Months Ended September 30, 2021 September 30, 2021 Interests Interests Loans in Loans in Loans Receivable Receivable Total Loans Receivable Receivable Total Unpaid principal balance, beginning of period $ 5,719,392 $ 410,225 $ 6,129,617 $ 6,152,331 $ 338,957 $ 6,491,288 Initial funding of loans 745,034 - 745,034 842,154 - 842,154 Advances on loans 220,802 27,213 248,015 502,345 101,171 603,516 Loan repayments (675,463 ) (650 ) (676,113 ) (1,383,164 ) (3,340 ) (1,386,504 ) Transfer to real estate owned, net - - - (103,901 ) - (103,901 ) Total net fundings (repayments) $ 290,373 $ 26,563 $ 316,936 $ (142,566 ) $ 97,831 $ (44,735 ) Unpaid principal balance, end of period $ 6,009,765 $ 436,788 $ 6,446,553 $ 6,009,765 $ 436,788 $ 6,446,553
The following table details our loan investments individually based on unpaid principal balances as of September 30, 2021 (in thousands):
Weighted Average(3) Fully Principal Carrying Initial Extended Loan Number(1) Loan type Origination Date Loan Commitment(2) Outstanding Value Maturity Maturity(7) LTV Property Type Construction Location Risk Rating Stated Rate(4) All-in Yield 1 Senior 11/1/2019 390,000 390,000 388,196 11/1/2024 11/1/2026 74.3% Multifamily - NY 3 L + 2.75% 4.35% 2 Senior 10/18/2019 330,000 290,124 288,804 10/18/2022 10/18/2024 73.3% Condo Y CA 3 L + 4.95% 7.69% 3 Senior 7/12/2018 290,000 290,000 290,503 8/1/2022 8/1/2023 52.9% Hospitality - NY 4 L + 5.35% 7.57% 4 Senior 8/20/2018 370,228 286,365 284,883 8/20/2022 8/20/2024 64.2% Mixed-use Y VA 2 L + 4.80% 6.84% 5 Senior 6/29/2018 306,800 248,311 248,473 2/9/2022 8/9/2023 55.0% Mixed-use Y NY 2 L + 4.25% 5.64% 6(5) Subordinate 8/22/2019 245,000 237,866 238,479 11/9/2021 9/9/2024 68.0% Office - IL 2 L + 8.59% 11.09% 7 Senior 12/27/2018 210,000 207,548 207,325 2/1/2022 2/1/2025 75.0% Mixed-use - NY 4 L + 2.70% 3.02% 8 Senior 8/14/2019 193,129 193,129 193,291 8/15/2022 8/15/2022 67.8% Hospitality - NY 3 L + 3.95% 6.86% 9(5) Senior 7/26/2018 205,049 188,477 188,477 7/9/2021 7/9/2022 39.4% Mixed-use Y CA 2 L + 4.87% 5.46% 10 Senior 7/26/2021 225,000 188,457 186,330 7/26/2024 7/26/2026 59.1% Hospitality - GA 3 L + 4.80% 5.32% 11(9) Senior 3/9/2018 186,500 170,877 170,432 12/31/2022 12/31/2022 96.2% Condo Y NY 4 L + 7.91% 9.08% 12 Senior 9/30/2019 167,500 155,208 154,888 9/9/2022 9/9/2024 56.3% Office - NY 3 L + 3.48% 5.40% . . .
Dec 16, 2021
Is there a problem with this press release? Contact the source provider Comtex at firstname.lastname@example.org. You can also contact MarketWatch Customer Service via our Customer Center.
(c) 1995-2021 Cybernet Data Systems, Inc. All Rights Reserved