UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM
(Mark One)
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission File Number:
(Exact Name of Registrant as Specified in its Charter)
(State or other jurisdiction of incorporation or organization) |
(I.R.S. Employer |
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(Address of principal executive offices) |
(Zip Code) |
Registrant’s telephone number, including area code: (
Former name, former address and former fiscal year, if changed since last report: N/A
Securities registered pursuant to Section 12(b) of the Act:
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Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
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Accelerated filer |
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Non-accelerated filer |
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Smaller reporting company |
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Emerging growth company |
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If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No
As of August 2, 2024, the registrant had
Table of Contents
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PART I. |
3 |
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Item 1. |
3 |
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3 |
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4 |
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5 |
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6 |
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Item 2. |
Management’s Discussion and Analysis of Financial Condition and Results of Operations |
30 |
Item 3. |
52 |
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Item 4. |
55 |
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PART II. |
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Item 1. |
56 |
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Item 1A. |
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Item 2. |
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Item 3. |
56 |
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Item 4. |
56 |
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Item 5. |
56 |
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Item 6. |
57 |
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58 |
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2
PART I—FINANCIAL INFORMATION
Item 1. Financial Statements.
Claros Mortgage Trust, Inc.
Consolidated Balance Sheets
(unaudited, in thousands, except share data)
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June 30, 2024 |
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December 31, 2023 |
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Assets |
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Cash and cash equivalents |
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$ |
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$ |
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Restricted cash |
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Loan principal payments held by servicer |
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Loans receivable held-for-investment |
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Less: current expected credit loss reserve |
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Loans receivable held-for-investment, net |
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Loans receivable held-for-sale |
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Equity method investment |
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Real estate owned, net |
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Other assets |
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Total assets |
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$ |
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$ |
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Liabilities and Equity |
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Repurchase agreements |
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$ |
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$ |
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Term participation facility |
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Loan participations sold, net |
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Notes payable, net |
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Secured term loan, net |
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Debt related to real estate owned, net |
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Other liabilities |
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Dividends payable |
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Management fee payable - affiliate |
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Total liabilities |
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Equity |
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Common stock, $ |
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Additional paid-in capital |
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Accumulated deficit |
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Total equity |
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Total liabilities and equity |
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$ |
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$ |
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The accompanying notes are an integral part of these consolidated financial statements.
3
Claros Mortgage Trust, Inc.
Consolidated Statements of Operations
(unaudited, in thousands, except share and per share data)
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Three Months Ended |
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Six Months Ended |
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June 30, 2024 |
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June 30, 2023 |
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June 30, 2024 |
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June 30, 2023 |
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Revenue |
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Interest and related income |
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$ |
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$ |
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$ |
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$ |
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Less: interest and related expense |
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Net interest income |
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Revenue from real estate owned |
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Total net revenue |
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Expenses |
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Management fees - affiliate |
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Incentive fees - affiliate |
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- |
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- |
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- |
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General and administrative expenses |
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Stock-based compensation expense |
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Real estate owned: |
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Operating expenses |
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Interest expense |
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Depreciation and amortization |
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Total expenses |
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Proceeds from interest rate cap |
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Unrealized loss on interest rate cap |
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( |
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( |
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( |
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(Loss) income from equity method investment |
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( |
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( |
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( |
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(Loss) gain on extinguishment of debt |
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( |
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( |
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Provision for current expected credit loss reserve |
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( |
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( |
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( |
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Net (loss) income |
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( |
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Net (loss) income per share of common stock: |
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Basic and diluted |
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$ |
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$ |
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$ |
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$ |
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Weighted average shares of common stock |
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Basic and diluted |
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The accompanying notes are an integral part of these consolidated financial statements.
4
Claros Mortgage Trust, Inc.
Consolidated Statements of Changes in Equity
(unaudited, in thousands, except share data)
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Common Stock |
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Additional |
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Accumulated |
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Shares |
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Par Value |
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Capital |
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Deficit |
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Total Equity |
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Balance at December 31, 2023 |
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$ |
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$ |
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$ |
( |
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$ |
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Stock-based compensation expense |
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- |
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- |
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Dividends declared |
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- |
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- |
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- |
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( |
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( |
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Net loss |
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- |
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- |
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- |
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( |
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( |
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Balance at March 31, 2024 |
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$ |
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$ |
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$ |
( |
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$ |
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Stock-based compensation expense |
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- |
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Payments for withholding taxes upon delivery of |
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- |
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- |
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( |
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- |
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( |
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Dividends declared |
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- |
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- |
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- |
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( |
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( |
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Net loss |
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- |
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- |
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- |
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( |
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( |
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Balance at June 30, 2024 |
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$ |
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$ |
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$ |
( |
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$ |
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Common Stock |
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Additional |
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Accumulated |
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Shares |
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Par Value |
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Capital |
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Deficit |
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Total Equity |
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Balance at December 31, 2022 |
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$ |
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$ |
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$ |
( |
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$ |
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Stock-based compensation expense |
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- |
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- |
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- |
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Dividends declared |
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- |
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- |
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- |
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( |
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( |
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Net income |
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- |
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- |
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- |
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Balance at March 31, 2023 |
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$ |
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$ |
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$ |
( |
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$ |
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Stock-based compensation expense |
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- |
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- |
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Dividends declared |
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- |
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- |
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- |
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( |
) |
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( |
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Net income |
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- |
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- |
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- |
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Balance at June 30, 2023 |
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$ |
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$ |
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$ |
( |
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$ |
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The accompanying notes are an integral part of these consolidated financial statements.
5
Claros Mortgage Trust, Inc.
Consolidated Statements of Cash Flows
(unaudited, in thousands)
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Six Months Ended |
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June 30, 2024 |
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June 30, 2023 |
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Cash flows from operating activities |
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Net (loss) income |
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$ |
( |
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$ |
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Adjustments to reconcile net (loss) income to net cash provided by operating activities: |
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Accretion of fees on loans receivable |
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( |
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( |
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Amortization of deferred financing costs |
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Non-cash stock-based compensation expense |
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Depreciation and amortization on real estate owned and in-place lease values |
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Amortization of above and below market lease values, net |
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- |
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Unrealized loss on interest rate cap |
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Loss (income) from equity method investment |
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( |
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Loss (gain) on extinguishment of debt |
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( |
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Non-cash advances on loans receivable in lieu of interest |
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( |
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Non-cash advances on secured financings in lieu of interest |
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Repayment of non-cash advances on loans receivable in lieu of interest |
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Provision for current expected credit loss reserve |
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Changes in operating assets and liabilities: |
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Other assets |
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( |
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( |
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Other liabilities |
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( |
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Management fee payable - affiliate |
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( |
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( |
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Net cash provided by operating activities |
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Cash flows from investing activities |
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Loan originations, acquisitions and advances, net of fees |
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( |
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( |
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Advances on loans receivable held-for-sale |
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( |
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- |
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Repayments of loans receivable |
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Proceeds from sales of loans receivable |
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- |
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Extension and exit fees received from loans receivable |
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Cash and restricted cash acquired from assignment-in-lieu of foreclosure of real estate owned |
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- |
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Payment of transaction costs from assignment-in-lieu of foreclosure of real estate owned |
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- |
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( |
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Reserves and deposits held for loans receivable |
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( |
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Capital expenditures on real estate owned |
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( |
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( |
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Net cash provided by (used in) investing activities |
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( |
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The accompanying notes are an integral part of these consolidated financial statements.
6
Claros Mortgage Trust, Inc.
Consolidated Statements of Cash Flows
(unaudited, in thousands)
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Six Months Ended |
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June 30, 2024 |
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June 30, 2023 |
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Cash flows from financing activities |
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Payments for withholding taxes upon delivery of stock-based awards |
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( |
) |
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- |
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Dividends paid |
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( |
) |
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( |
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Proceeds from secured financings |
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Payment of deferred financing costs |
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( |
) |
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( |
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Purchase of interest rate cap |
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( |
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- |
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Repayments of secured financings |
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( |
) |
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( |
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Repayments of secured term loan |
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( |
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( |
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Repayments of debt related to real estate owned |
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( |
) |
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- |
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Net cash (used in) provided by financing activities |
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( |
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Net decrease in cash, cash equivalents and restricted cash |
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( |
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( |
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Cash, cash equivalents and restricted cash, beginning of period |
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Cash, cash equivalents and restricted cash, end of period |
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$ |
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$ |
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Cash and cash equivalents, end of period |
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$ |
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$ |
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Restricted cash, end of period |
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Cash, cash equivalents and restricted cash, end of period |
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$ |
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$ |
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Supplemental disclosure of cash flow information: |
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Cash paid for interest |
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$ |
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$ |
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Supplemental disclosure of non-cash investing and financing activities: |
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Dividends accrued |
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$ |
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$ |
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Loan principal payments held by servicer |
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$ |
- |
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$ |
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Accrued deferred financing costs |
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$ |
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$ |
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Real estate acquired in assignment-in-lieu of foreclosure |
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$ |
- |
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$ |
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Lease intangibles, net acquired in assignment-in-lieu of foreclosure |
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$ |
- |
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$ |
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Working capital acquired in assignment-in-lieu of foreclosure |
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$ |
- |
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$ |
( |
) |
Settlement of loans receivable in assignment-in-lieu of foreclosure |
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$ |
- |
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$ |
( |
) |
Accrued assignment-in-lieu of foreclosure transaction costs |
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$ |
- |
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$ |
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The accompanying notes are an integral part of these consolidated financial statements.
7
Claros Mortgage Trust, Inc.
Notes to Consolidated Financial Statements
(unaudited)
Note 1. Organization
Claros Mortgage Trust, Inc. (referred to throughout this report as the “Company,” “we,” “us” and “our”) is a Maryland Corporation formed on April 29, 2015 for the purpose of creating a diversified portfolio of income-producing loans collateralized by institutional quality commercial real estate. We commenced operations on August 25, 2015 (“Commencement of Operations”) and generally conduct our business through wholly-owned subsidiaries. Unless the context requires otherwise, any references to the Company refers to the Company and its consolidated subsidiaries. The Company is traded on the New York Stock Exchange, or NYSE, under the symbol “CMTG”.
We elected and intend to maintain our qualification to be taxed as a real estate investment trust (“REIT”) under the requirements of the Internal Revenue Code of 1986, as amended (the “Internal Revenue Code”), for U.S. federal income tax purposes. As such, we generally are not subject to U.S. federal income tax on that portion of our income that we distribute to stockholders. See Note 13 – Income Taxes for further detail.
We are externally managed by Claros REIT Management LP (the “Manager”), our affiliate, through a management agreement (the “Management Agreement”) pursuant to which our Manager provides a management team and other professionals who are responsible for implementing our business strategy, subject to the supervision of our board of directors (the “Board”). In exchange for its services, our Manager is entitled to management fees and, upon the achievement of required performance hurdles, incentive fees. See Note 11 – Related Party Transactions for further detail.
Note 2. Summary of Significant Accounting Policies
Basis of Presentation and Principles of Consolidation
The accompanying consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”).
These unaudited consolidated financial statements have been prepared in accordance with the instructions to Form 10-Q and should be read in conjunction with the consolidated financial statements and notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2023, as filed with the Securities and Exchange Commission. In the opinion of management, all adjustments (consisting only of normal recurring adjustments) necessary for a fair statement of our financial position, results of operations and cash flows have been included. Our results of operations for the three and six months ended June 30, 2024 are not necessarily indicative of the results to be expected for the full year or any other future period.
We consolidate all entities that are controlled either through majority ownership or voting rights. We also identify entities for which control is achieved through means other than through voting rights (a variable interest entity or “VIE”) using the analysis as set forth in Accounting Standards Codification (“ASC”) 810, Consolidation of Variable Interest Entities, and determine when and which variable interest holder, if any, should consolidate the VIE. We do not have any consolidated variable interest entities as of June 30, 2024 and December 31, 2023. All significant intercompany transactions and balances have been eliminated in consolidation.
Use of Estimates
The preparation of financial statements in conformity with GAAP requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the consolidated financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates. Estimates that are particularly susceptible to our judgment include, but are not limited to, the adequacy of our current expected credit loss reserve, the determination of the fair value of real estate assets acquired and liabilities assumed, and the impairment of certain assets.
Risks and Uncertainties
In the normal course of business, we primarily encounter two significant types of economic risk: credit and market. Credit risk is the risk of default on our loans receivable that results from a borrower’s or counterparty’s inability or unwillingness to make contractually required payments. Market risk reflects changes in the value of the loans receivable due to changes in interest rates, spreads or other market factors, including risks that impact the value of the collateral underlying our loans. We believe that the carrying values of our loans receivable are reasonable taking into consideration these risks.
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Current Expected Credit Losses
The current expected credit loss (“CECL”) reserve required under ASC 326, Financial Instruments – Credit Losses, reflects our current estimate of potential credit losses related to our loan portfolio. Changes to the CECL reserve are recognized through a provision for or reversal of current expected credit loss reserve on our consolidated statements of operations. ASC 326 specifies the reserve should be based on relevant information about past events, including historical loss experience, current loan portfolio, market conditions and reasonable and supportable macroeconomic forecasts for the duration of each loan.
General CECL Reserve
Our loans are typically collateralized by real estate, or in the case of mezzanine loans, by an equity interest in an entity that owns real estate. We consider key credit quality indicators in underwriting loans and estimating credit losses, including: the capitalization of borrowers and sponsors; the expertise of the borrowers and sponsors in a particular real estate sector and geographic market; collateral type; geographic region; use and occupancy of the property; property market value; loan-to-value (“LTV”) ratio; loan amount and lien position; our risk rating for the same and similar loans; and prior experience with the borrower/sponsor. This information is used to assess the financial and operating capability, experience and profitability of the borrower/sponsor. Ultimate repayment of our loans is sensitive to interest rate changes, general economic conditions, liquidity, LTV ratio, existence of a liquid investment sales market for commercial properties, and availability of replacement financing.
We regularly evaluate on a loan-by-loan basis, the extent and impact of any credit deterioration associated with the performance and/or value of the underlying collateral property, the financial and operating capability of the borrower/sponsor, the financial strength of loan guarantors, if any, and the overall economic environment, real estate sector, and geographic sub-market in which the borrower operates. Such analyses are completed and reviewed by asset management personnel and evaluated by senior management on at least a quarterly basis, utilizing various data sources, including, to the extent available, (i) periodic financial data such as property occupancy, tenant profile, rental rates, operating expenses, the borrower’s exit plan, and capitalization and discount rates, (ii) site inspections, (iii) sales and financing comparables, (iv) current credit spreads for refinancing and (v) other relevant market data.
We arrive at our general CECL reserve using the Weighted Average Remaining Maturity, or WARM method, which is considered an acceptable loss-rate method for estimating CECL reserves by the Financial Accounting Standards Board (“FASB”). The application of the WARM method to estimate a general CECL reserve requires judgment, including the appropriate historical loan loss reference data, the expected timing and amount of future loan fundings and repayments, the current credit quality of our portfolio, and our expectations of performance and market conditions over the relevant time period.
The WARM method requires us to reference historical loan loss data from a comparable data set and apply such loss rate to each of our loans over their expected remaining duration, taking into consideration expected economic conditions over the forecasted timeframe. Our general CECL reserve reflects our forecast of the current and future macroeconomic conditions that may impact the performance of the commercial real estate assets securing our loans and the borrower’s ultimate ability to repay. These estimates include unemployment rates, price indices for commercial properties, and market liquidity, all of which may influence the likelihood and magnitude of potential credit losses for our loans during their expected remaining duration. Additionally, further adjustments may be made based upon loan positions senior to ours, the risk rating of a loan, whether a loan is a construction loan, whether the loan’s initial maturity is near-term, or the economic conditions specific to the property type of a loan’s underlying collateral.
To estimate an annual historical loss rate, we obtained historical loss rate data for loans most comparable to our loan portfolio from a commercial mortgage-backed securities database licensed by a third party, Trepp, LLC, which contains historical loss data from January 1, 1999 through June 30, 2024. We believe this CMBS data is the most relevant, available, and comparable dataset to our portfolio.
When evaluating the current and future macroeconomic environment, we consider the aforementioned macroeconomic factors. Historical data for each metric is compared to historical commercial real estate credit losses in order to determine the relationship between the two variables. We use projections of each macroeconomic factor, obtained from a third party, to approximate the impact the macroeconomic outlook may have on our loss rate. Selections of these economic forecasts require judgment about future events that, while based on the information available to us as of the balance sheet date, are ultimately subjective and uncertain, and the actual economic conditions could vary significantly from the estimates we made. Following a reasonable and supportable forecast period, we use a straight-line method of reverting to the historical loss rate. Additionally, we assess the obligation to extend credit through our unfunded loan commitments through their expected remaining duration, adjusted for projected fundings from interest reserves, if applicable, which is considered in the estimate of the general CECL reserve. For both the funded and unfunded portions of our loans, we consider our internal risk rating of each loan as the primary credit quality indicator underlying our assessment.
We evaluate the credit quality of each of our loans receivable on an individual basis and assign a risk rating at least quarterly. We have developed a loan grading system for all of our outstanding loans receivable that are collateralized directly or indirectly by real estate. Grading criteria include, but are not limited to, as-is or as-stabilized debt yield, term of loan, property type, property or collateral location, loan type and other more subjective variables that include, but are not limited to, as-is or as-stabilized collateral value, market
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conditions, industry conditions and sponsor’s financial stability. While evaluating the credit quality of each loan within our portfolio, we assess these quantitative and qualitative factors as a whole and with no pre-prescribed weight on their impact to our determination of a loan’s risk rating. However, based upon the facts and circumstances for each loan and the overall market conditions, we may consider certain previously mentioned factors more or less relevant than others. We utilize the grading system to determine each loan’s risk of loss and to provide a determination as to whether an individual loan is impaired and whether a specific CECL reserve is necessary. Based on a 5-point scale, the loans are graded “1” through “5,” from less risk to greater risk, which gradings are defined as follows:
Specific CECL Reserve
In certain circumstances we may determine that a loan is no longer suited for the WARM method due to its unique risk characteristics or where we have deemed the borrower/sponsor to be experiencing financial difficulty and the repayment of the loan’s principal is collateral-dependent. We may instead elect to employ different methods to estimate credit losses that also conform to ASC 326 and related guidance. For such loans, we would separately measure the specific reserve for each loan by using the estimated fair value of the loan’s collateral. If the estimated fair value of the collateral is less than the carrying value of the loan, an asset-specific reserve is created as a component of our overall current expected credit loss reserve. Specific reserves are equal to the excess of a loan’s carrying value to the estimated fair value of the collateral, less estimated costs to sell, if recovery of our investment is expected from the sale of the collateral and such costs will reduce amounts recovered by us.
If we have determined that a loan or a portion of a loan is uncollectible, we will write off such portion of the loan through an adjustment to our current expected credit loss reserve. Significant judgment is required in determining impairment and in estimating the resulting credit loss reserve, and actual losses, if any, could materially differ from those estimates.
See Note 3 - “Loan Portfolio - Current Expected Credit Losses” for further detail.
Recent Accounting Guidance
The FASB issued ASU 2023-09, “Improvements to Income Tax Disclosures” (“ASU 2023-09”). The standard provides improvements to income tax disclosure requiring disaggregated information about a reporting entity’s effective tax rate reconciliation as well as information on income taxes paid. The standard is effective for annual periods beginning after December 15, 2024, with early adoption permitted. The adoption of ASU 2023-09 is not expected to have a material impact on our consolidated financial statements.
The FASB issued ASU 2023-07, “Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures” (“ASU 2023-07”). The standard provides improvements to reportable segment disclosure requirements for annual and interim reporting, primarily through enhanced disclosures about significant segment expenses. The standard is effective for annual periods beginning after December 15, 2023 and interim periods beginning after December 15, 2024, with early adoption permitted. The adoption of ASU 2023-07 is not expected to have a material impact on our consolidated financial statements.
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Note 3. Loan Portfolio
Loans Receivable
Our loan portfolio as of June 30, 2024 was comprised of the following loans ($ in thousands, except for number of loans):
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Number of |
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Loan Commitment(1) |
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Unpaid Principal Balance |
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Carrying |
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Weighted Average Spread(3) |
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Weighted Average Interest Rate(4) |
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Loans receivable held-for-investment: |
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Variable: |
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Senior loans(5) |
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$ |
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$ |
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$ |
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% |
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Subordinate loans |
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% |
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% |
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Fixed: |
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Senior loans(5) |
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$ |
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$ |
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$ |
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N/A |
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% |
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Subordinate loans |
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N/A |
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% |
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% |
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Total/Weighted Average |
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$ |
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$ |
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$ |
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N/A |
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% |
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General CECL reserve |
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( |
) |
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Loans receivable held-for-investment, net |
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$ |
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