Welcome to today’s Claros Mortgage for our Second Quarter 2022 Earnings Conference Call. My name is Candice and I will be your operator for today’s conference. [Operator Instructions] I would now like to hand the call over to Anh Huynh, Vice President of Investor Relations for the Claros Mortgage Trust. Please proceed.

Thank you. I'm joined this morning by Richard Mack, Chief Executive Officer and Chairman of Claros Mortgage Trust; Mike McGillis, President and Director of Claros Mortgage Trust; and Jai Agarwal, CMTG's Chief Financial Officer. We also have Kevin Cullinan, Executive Vice President, who leads MRx Originations; and Priyanka Garg, Executive Vice President, who reads MRx Portfolio and Asset Management. Prior to this call, we distributed CMTG's earnings supplement. We encourage you to reference these documents in conjunction with the information presented on today's call. If you have any questions following today's call, please contact me. I'd like to remind everyone that today's call may include forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Actual results may differ materially from those indicated by these forward-looking statements as a result of various important factors, including those discussed in our other filings with the SEC. Any forward-looking statements made on this call represent our views only as of today and we undertake no obligation to update them. We will also be referring to certain non-GAAP financial measures on today's call, such as distributable earnings which we believe may be important to investors to assess our operating performance. For non-GAAP reconciliation, please refer to the earnings supplement. I would now like to turn the call over to Richard.

Good morning and thank you, everyone, for joining us for CMTG's second quarter earnings call. CMTG delivered another strong quarter as we continue to gain momentum across our strategic priorities in originations, asset management and capital markets activity. During the second quarter, we originated approximately $1 billion of new loans, reflecting our continued focus on the residential sector and high-growth markets such as Dallas and Atlanta. Our asset management team also made significant progress during the quarter. As noted on our last call, we successfully resolved our largest nonaccrual loan, driving a positive outcome for our stockholders and significantly reducing nonaccrual loans to approximately 2% of the portfolio and we continue to make progress towards future resolution of these remaining nonaccruals. I'm also happy to report that despite the choppiness in the capital markets, we further enhanced our financing capabilities by securing an additional $150 million bridge acquisition facility. As I look to the broader markets, heightened market uncertainty has become the prevailing theme challenging investors across asset classes. Record inflation levels disrupted supply chains, tightening monetary policy and geopolitical challenges had until recently dominated headlines but now mixed economic data is part of the analysis. Considerations include sectors of slowing economic growth, areas of rapid inflation, areas of minor inflation, higher borrowing costs, weakening corporate margins, a strengthening dollar, declining of volatile commodity prices and inconsistent corporate commentary. These are conflicting signals and they cloud the economic picture and further complicate the narrative for potential economic outcomes. And so it's no surprise that there's still much debate about whether the Fed can engineer a soft landing. Here at CMTG, we think a modest recession is the likely outcome but it's far from a certain one. What is certain is that the discussion continues to evolve and broaden in scope…

Thank you, Richard. We have been migrating our portfolio to asset classes that we view as defensive in nature and the sectors exhibiting strong underlying supply-demand fundamentals to support continued revenue growth at the asset level. In addition, we continue to deploy capital to select high-growth markets, demonstrating favorable demographic trends and job and wage growth. Our second quarter originations activity reflects our continued focus on these high conviction themes. During the second quarter, we originated approximately $1 billion in total loan commitments across eight investments, bringing year-to-date 2022 originations to $2.2 billion. Approximately half of our second quarter originations were in the multifamily sector which resulted in a 9% increase quarter-over-quarter in our multifamily exposure. In addition, we continue to add build to rent and industrial investments to the portfolio while capitalizing on attractive opportunities that we sourced in the hospitality and mixed-use sectors. Multifamily continues to represent our largest property type, comprising 41% of the portfolio's UPB at June 30 and we expect multifamily to continue to be an overweight allocation for us. For example, we originated $152 million floating rate loan collateralized by a portfolio of multifamily assets in Dallas, Texas. The borrower here is well known for its extensive value-add experience and significant presence in this market. The business plan is responsive to the demand for renovated multifamily product in a desirable submarket of Dallas that has demonstrated strong double-digit rent growth and low vacancy rates. Our portfolio UPB has remained relatively unchanged quarter-over-quarter at $7.1 billion. Initial and follow-on fundings offset the elevated volume of repayment activity we experienced during the quarter. Of the $782 million in repayments, including the loan sale proceeds from the nonaccrual loan Richard mentioned, $562 million were collateralized by assets located in New York which contributed to the 8% quarter-over-quarter…

Thank you, Mike and Richard and good morning, everyone. For the second quarter, we reported distributable earnings, excluding realized losses of $71.5 million or $0.51 per share. This compares to the prior quarter of $33.5 million or $0.24 per share. GAAP net income was $63.2 million or $0.45 per share. The quarter-over-quarter increase in distributable earnings was primarily due to, one, $0.21 per share gain resulting from the resolution of the nonaccrual land loan; and two, improved operating performance of our New York City REL hotel portfolio that contributed $0.03 per share to distributable earnings compared to a loss of $0.03 per share last quarter. So a swing of $0.06 per share. We also recorded a charge of $11.5 million or $0.08 per share against a $15 million loan that is on nonaccrual status. This loan is secured against the estate of a former borrower and previously had a $6 million fiscal reserve against the loan. This quarter, based on a proposed settlement offer, we recorded an additional 5.5 million CECL reserve and charged a total $11.5 million reserve and a realized loss from a GAAP standpoint. We now expect to collect $3.5 million against this loan. Our general CECL reserves stand at $73 million or 1% of our outstanding principal balance. This is an increase of $3 million over last quarter, primarily due to portfolio growth and macroeconomic assumptions. Turning to liquidity; we ended the quarter with over $460 million in cash and $735 million in unencumbered loan assets. We entered into a $150 million bridge acquisition facility that enables us to close loans unlevered, giving us up to six months to seek optimal financing. We continue to carry excess liquidity for both offense and defaults. With respect to interest rates, after the recent increases in interest rates, we are now asset sensitive as we passed across our point where our portfolio earnings are positively called with increases in benchmark rates. We estimate that a 100 basis point increase in rates over spot rates at June 30, would result in an annual increase in net interest income from our existing portfolio by $0.12 per share. Rates have already increased and continued to rise since June 30. At quarter end, our leverage remained at 1.9x which is one of the lowest in the industry. We expect this to increase as we deploy additional capital and still maintain a target leverage level of 2.5 to 3x. Lastly, the CMTG stock was added to the Russell family of indices during the quarter as we continue to see an increase in daily trading volumes in our stock. I would now like to open the call for questions. Operator, please go ahead.

[Operator Instructions] So our first question comes from the line of Rick Shane of JPMorgan.

Everybody. Can you hear me?

Yes.

Excellent. Richard, so I think I was hearing in some ways, two things from you and I'd love to sort of reconcile them. In one way, I think you're saying, hey, the markets are dislocated. It's a good -- when investors are scared, it's a good time to be putting capital to work and you positioned yourself well to do that. And I realize that sometimes it can be a little bit unnerving but I think it makes sense. At the same time, when we look and think back about what we’ve heard in earnings calls this quarter, the sort of consensus trade continues to be multifamily Sunbelt. How do you reconcile the idea of being contrarian with also how crowded potentially that particular niche could be?

Well, thanks for the question, Rick. And I don't think there's actually a reconciliation needed. We are perhaps not being as opportunistic as we could be because what we're able to do is invest in a consensus that as a lender but make returns in cash flowing assets that we might have previously had to make a construction loan to achieve a similar return. So we are basically, because of the backup in the market, taking a pretty conservative approach as to what we're lending on and the LTV, LTC that we're lending. And because of the backup in the market are able to achieve returns that are very similar for less risk than we were doing before. So maybe that we're not being as opportunistic as we can be at all times. We're going to be selective about construction and alpha-generating trades but we feel pretty good that we can move down in risk and make similar to better returns. So that's kind of the way we've been playing the market here. And I think we will continue to kind of barbell this with more conservative cash flowing Sunbelt multi where we see the demographic demand as being very strong and we think as close to recession proof as we see and also with short-term leases that can take advantage of the inflating market and protect you against interest rate moves. And so we'll continue to do that where there's a capital shortage and be opportunistic when we really think we're getting paid to take more risk. Hopefully, that was responsive.

The next question comes from the line of Don Fandetti of Wells Fargo.

Yes. Can you talk a little bit about your expectations for net portfolio growth over the next few quarters? It looks like Q3, the portfolio may have declined a bit and kind of how this all ties into your ability to cover the dividend with core earnings.

Jai or Kevin?

Yes, it's a function of repayments, Don. The more repayments we get, the more we can grow the portfolio. But in terms of your second question about covering the dividend, we feel good about covering the dividend, especially where if you look at the forward curve and so far and if you look at Page 16 of our deck, we are now asset sensitive and any increases in interest rates go straight to the bottom line. So based on a combination of -- or in spite of slower deployment base and slower repayment base. We expect to cover the dividend for the full year.

But in terms of net portfolio growth, you shrunk a little bit this quarter. And it looks like based on what we've seen for Q3, it declined a little bit more. Do you expect that to continue to moderate. And then can you just talk a little bit about deal flow on the ground? Is there enough activity to kind of replace the repayments?

Yes, I’ll start. We are sitting on $460 million of cash – so we are being very selective in where we are deploying. There are lots of opportunities that we are seeing and David can add more color on market but if repayments also will drag on, meaning outstanding loans on the ground will – if they do not pay, those loans might extend and that will help us generate further earnings.

Sure. And it's Kevin Cullinan here. I'll chime in on sort of the opportunity set at hand. It continues to remain very robust in our perspective. And there are a lot of opportunities that we're constantly and regularly evaluating to redeploy capital as we are receiving repayments. And I would go so far as to say and this kind of mirrors or echoes what Richard had said earlier, that we feel like we can do that at an accretive level in this spread and interest rate environment to some of the repayments that we are receiving at this point in time. So we remain bullish on being able to recycle capital into an accretive and perhaps even less execution risk assets.

And definitely, look, it’s great to see the repayments, particularly given the New York exposure in the history. So I was just trying to get a sense if you think you can get back to a growth mode. So thanks.

Our next question comes from the line of Jade Rahmani of KBW.

Away from multifamily and the Sunbelt which you characterized as defensive, where are you seeing the best opportunities? Can you give any color on the types of situations?

Kevin?

I can take that, Jade. So away from the multifamily trade which we've obviously been very active in, we have closed on and are working on a few what we would refer to as higher-end leisure-driven hospitality assets where we think there's still really good relative value. That's notwithstanding the structural protections and the underwriting that we're implementing to reflect what could be some meaningful economic uncertainty over the term of the loans that we're working on right now. But that is a spot in the market that the assets are performing well. They're recovering very well coming out of the pandemic. We see fairly consistent ADR RevPAR occupancy growth throughout 2022 and forward bookings importantly and it's a little bit of a less crowded space in terms of our competition. So we do expect to continue to look at those and evaluate those but be very selective, not only on the assets but also at the levels that we're willing to invest in, in those particular capital stacks. And then another one which we feel like we have a little bit of an edge on is certainly the industrial sector. We did close an asset in the second quarter in the industrial space that heavily structured and credit enhanced by not only the borrower but a partner that has a forward takeout of that asset down the road. So we're very happy with the risk-adjusted nature of that and working on some similar type investments where we're generating some alpha, meaningful credit enhancement by virtue of deposits on hand, cash on hand as well as forward take outs of some of those assets. So I would say, away from multifamily, where we see some very attractive relative value, if you can sort of cut through some of the noise, is lease-driven hospitality and new build industrial.

On the multifamily side, with respect to defensiveness, historically, rents have not declined – gotten negative during periods of economic softness. However, we’ve been in a period of extremely robust inflation and rent growth as well as the multifamily sector being, I would say, the darling asset class over the last 10-plus years. So as your underwriting deals, how do you account for a correction in multifamily values that I believe is underway and also moderating rent growth outlook in your underwriting?

Great question, Jai and happy to take that as well. I'd say it's twofold. We're fully expecting rent growth to, at a minimum, decelerate in many of the markets that we're working on and that we're looking at. And we're underwriting those assets accordingly. I'd say more importantly, at the levels that we are lending at and investing at, we are going in at debt yields or cap rates to our position that we feel are protected day one and not relying on future rent growth. So the rent growth is obviously upside and important to the equities business plan. But when we’re going in at mid-single-digit debt yields, perhaps there is a little bit of upside to our rent roll. Perhaps there is some future rent growth in the market. We’re trying to size our positions where we’re not relying on that whatsoever and that we’re at a debt yield that is supported by forward-looking cap rates with some assumptions on interest rate movements over time and where we expect the 10-year to be when we’re looking at whether it’s initial maturity or beyond that. So we’re eyes wide open to it and we feel like we’re picking our spots appropriately and not relying on that type of future growth as everyone can come to the conclusion that it’s difficult to sustain in the long term.

[Operator Instructions] Our next question comes from the line of Steve Delaney of JMP Securities.

We’re starting to hear some signs because of repricing of credit in the marketplace for comparable assets, say, today versus six months ago. Can you comment on that and that your spreads over LIBOR that you’re achieving on comparable loans? Where would you say that has moved, say, in the last 6 to 12 months?

Thanks, Steve. I can take that again. I would say I'll focus on the last six months because in this market and in this environment, 12 months feels like a pretty distant memory at this point. Apples-to-apples risk on apples-to-apples asset classes and business plans, I would say, over the last six months or perhaps since the end of the year, we could say spreads are probably out a minimum of 100 basis points. But unfortunately and we should say this, some of that is being driven by the bank financing market or the lack of securitizations that have become a little bit available in the market. So that's not all ROE but certainly, we're seeing ROE growth or net interest income on those underlying assets that is accretive to our position and accretive to the portfolio in the long term but we're definitely having to work harder on the liability side of the balance sheet to make sure that we're putting together the optimal capital stack.

Got it. Got it. So obviously, you had $1 billion come in and then 600, 700 or so go out in new loans. So I assume the way you’re describing that, Kevin, is pretty much the newer loans going out have the stronger spreads versus what paid up. So on the left-hand side of the balance sheet anyway, your returns are improving.

The whole yield are definitely going out in new investments at higher levels than repayments generally speaking. And we're very focused on making sure that we're optimizing the capital stack.

The repricing that you’re having to negotiate on your financing, would you describe that as broad? I mean, is this sort of a market-driven thing? Or is it a particular bank who is reducing, trying to tighten up their credit box? Or is it just all the banks or kind of in lock step on that, on the financing.

I can take that, Steve. Just to be clear, it's repricing of credit on new financings, not existing financings. It's a function of -- it varies bank by bank. So there's one or two banks who are just not doing any new business. But for the most part, banks are quoting loans, just at wider spreads than they were previously. And we’ve been in a good position to obtain financing, both from our warehouse counterparties but also from note and note format. So we are in a good position. There are – banks have become more selective in terms of who they will lend to. And I think banks are concentrating their lending platform to larger players like ourselves.

Thank you. As there are no more questions registered at this time. I would now like to turn the conference over to Richard Mack for closing remarks.

Thank you and I just want to thank everyone for joining. In response to some of the questions, I would finish off by saying we have capital to deploy. And with repayments, we'll have more. It's a really good time to be a lender, It's, I think, in many ways, a tough time to be a borrower. And I think we are in an environment where we can be in growth mode and also reducing our risk in terms of the amount of cash flow assets that we're lending to and diversifying our portfolio, particularly by lending to multifamily in high-growth markets at cap rates where we don't need much rent growth at all and these are assets that follow our mantra. They're assets that we want to own in markets where we have a lot of experience and expertise at a basis we find compelling which is kind of the way we look at the world and we're getting spreads that previously have been associated with heavy transitional for light transitional. We really like that trade. As Kevin mentioned, we also have an ability to get industrial exposure in a way that we haven't in the past. And we are going to continue to pepper our portfolio with alpha generation in terms of continuing to exploit our capabilities around development and making some construction loans, particularly in the industrial sector and also making loans in the hospitality sector to create alpha where we really see mispriced opportunities. And so I think it's quite an exciting time to be a lender, despite concerns around asset valuation given the amount of subordination of capital that we are able to get because of the backup in the capital markets. So, I want to thank you all for listening and just to give you a sense of how bullish we are right now about the environment. And we look forward to talking to everyone again on the next quarterly call.

Ladies and gentlemen, that concludes today's conference call.