{"id":61123,"date":"2023-09-14T21:59:47","date_gmt":"2023-09-15T01:59:47","guid":{"rendered":"https:\/\/ifintechworld.com\/news\/claros-mortgage-trust-stock-price-rise-possible-but-its-risky-nysecmtg\/"},"modified":"2023-09-14T21:59:54","modified_gmt":"2023-09-15T01:59:54","slug":"claros-mortgage-trust-stock-price-rise-possible-but-its-risky-nysecmtg","status":"publish","type":"post","link":"https:\/\/ifintechworld.com\/?p=61123","title":{"rendered":"Claros Mortgage Trust Stock: Price Rise Possible, But It\u2019s Risky (NYSE:CMTG)"},"content":{"rendered":"
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Since going public in 2021, the mortgage real estate investment trust [REIT] Claros Mortgage Trust (NYSE:CMTG<\/span>) has done quite poorly in the stock markets with its price down by 34% from its opening price on listing.<\/p>\n

With a slew of banks <\/span>slashing their rating on the trust, investor confidence in it is at a low. Yet, there\u2019s something to be said for its forward dividend yield, which is at a huge 13.2%. Its past yield hasn\u2019t been enough to make it a worthwhile investment, though, as total returns have declined by 20.7% since listing. But it has significantly softened the blow (see chart below).<\/span><\/p>\n

Here, the goal is then to figure out whether there\u2019s any likelihood of the CMTG\u2019s returns becoming positive due to price, dividends or both.<\/p>\n

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\"Total<\/span>
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Source: Seeking Alpha<\/span><\/p>\n<\/figcaption><\/figure>\n<\/p>\n

The company<\/h2>\n

First, a quick look at the company. CMTG provides loans for commercial real estate across the US, with New York and California as its biggest markets (see chart below). Its biggest customers are multi-family, followed by hospitality and offices.<\/span><\/p>\n

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\"Markets\"<\/span>
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Source: CMTG<\/span><\/p>\n<\/figcaption><\/figure>\n<\/p>\n

On its own, the company isn\u2019t small, with a market capitalisation of USD 1.55 billion. But, it is tiny as far as the world of REITs goes. The biggest REIT, Prologis (PLD) has a market capitalisation [Mcap] of USD 113.8 billion is over 73x that for CMTG. Even the tenth biggest, AvalonBay Communities (AVB) is way bigger, with an MCap of USD 25.5 billion.<\/p>\n

While different REITs can vary in terms of focus segments, it does reflect both the market potential for the company as well as what it’s up against. The picture gets clearer when we consider the revenues. Prologis had a revenue of USD 6.3 billion in 2022 and AvalonBay Communities was at USD 2.61 billion. By comparison, CMTG\u2019s revenues were USD 287.2 million during the year.<\/p>\n

The state of commercial real estate<\/h2>\n

The potential is further confirmed by the size of the US commercial property market at USD 1 trillion. The market is also expected to see a compounded annual growth rate [CAGR] of over 3.5% between 2023 and 2028.<\/p>\n

Rising interest rates<\/strong><\/p>\n

However, it\u2019s not without its challenges. The macroeconomic scenario, in particular, is bringing up issues that can affect REITS like CMTG. High interest rates are one of them, which can lower borrowing levels as well as increase the levels of delinquencies.<\/p>\n

While higher interest rates can be good for a lender\u2019s net interest income [NII], stabilising the possible loss of revenues from lower borrowings, this isn’t always the case. This is evident from CMTG\u2019s full-year 2022 figures, when its interest expenses\u2019 increase exceeded that for interest income, resulting in a decline in net interest income by USD 10.9 million (see table below). The situation has since reversed, which I will talk about in greater detail in the next section.<\/p>\n

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\"Income<\/span>
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Income Statement, figures in ‘000s except per share data (Source: CMTG)<\/span><\/p>\n<\/figcaption><\/figure>\n<\/p>\n

Structural changes<\/strong><\/p>\n

Further, a recent Goldman Sachs study points out that the office sector in particular faces headwinds. It’s the third biggest exposure for CMTG, with a 15% share in its portfolio. Besides the current macroeconomic scenario, the trend and preference for working from home is causing structural shifts in the sector that are still playing out, and not to its advantage.<\/p>\n

It needs to be noted, that in general, occupancy rates have been declining across most real estate categories but most sharply for offices (see chart below). That\u2019s something to watch out for going forward.<\/p>\n

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\"Occupancy<\/span>
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Source: Goldman Sachs<\/span><\/p>\n<\/figcaption><\/figure>\n<\/p>\n

The financials<\/h2>\n

The company\u2019s financials for the first half of 2023 (H1 2023) are a mixed bag. Based on the discussion above, here I focus on two aspects: (i) its NII and (ii) the impact of riskier lending conditions.<\/p>\n

Net Interest Income<\/strong><\/p>\n

Reversing the trend from 2022, in H1 2023, the company\u2019s NII increased by 15.5% year-on-year (YoY). Interest income grew by a huge 81.8%, which more than made up for an even bigger 161% rise in interest expense. The rise in NII supported total net revenue growth, which came in even higher at 18% on account of a 28.8% rise in revenues from owned real estate.<\/p>\n

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\"Income<\/span>
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Source: CMTG<\/span><\/p>\n<\/figcaption><\/figure>\n<\/p>\n

Provisions and charge offs<\/strong><\/p>\n

However, its net income still declined by 55.8% during this time, which looks glaring. But the situation isn\u2019t as bad as it seems. Last year, the number was bumped up by gains on the sale of a loan. However, there are two points to be noted here:<\/p>\n