Q1 2020 Earnings Call
We will be made available via webcast on the company's website I.
I would now like turn the call over to Brendan Gober with Investor Relations that Oreck investment management. Please go ahead.
Thank you good morning, everyone. Thank you for joining our call to discuss how companies Finance Trust first quarter 20 joint financial results with me on the call today or Jim blend CEO, Mike Larson, President, Jim, Greg CFO, and facilitate whereas head of real estate that strategies.
On Monday, we filed our Sanjay with the FCC and issued a press release, which provided details our first quarter results. We also provided us up unless earnings presentation that can be found on our website before handing the call over to Jim I would like to remind everyone that certain statements made during the course of this call or not based on historical information may constitute forward looking statements within the meaning of section 20. So.
M&A or the Securities Exchange Act 1933, and section 21. He of the Securities Exchange Act as mentioned 34 when used in this conference where it just as outlook evaluate indicate.
[noise] believes will anticipates expects intends and other similar expressions are intended to identify forward looking statement.
Such forward looking statements are subject to various risks uncertainties that could cause actual results to differ materially from those contained in the forward looking statements.
These risks uncertainties are discussing the company's reports filed with the FCC, including its report on form 8-K, 10-Q, and 10-K and in particular the risk factor section of our form 10-K. Additionally, many of these risks and uncertainties are currently amplified and we'll continue to be amplified or in the future may be amplified by the cobot 19 outbreak is not possible to predict or identify.
All such risks.
Listeners are cautioned not to place undue reliance on these forward looking statements, which speak only as of today here UBS.
Company undertakes no obligation to update any of these forward looking statements. Furthermore, certain non-GAAP financial measure will be discussing this conference call.
Presentation of this information is not intended to be considered in isolation or as a substitute to the financial information presented in accordance with gap.
Reconciliations of these non-GAAP financial measures to the most comparable measure pair in accordance with gap can be accessed through our filings with the FCC I'll now turn the call over to Jim what the please go ahead.
Thank you Brendan.
Good morning, everyone welcome to the Hunt the company's Finance Trust earnings call for the first quarter of 2020.
We appreciate you all joining us today under what are very challenging circumstances for us all.
First and foremost with regards to covert 19.
I'd like to express my hope that you and all of your families are staying safe and healthy.
As we've all seen Nicole the 19 pandemic is having a significant impact on the overall economy, our industry and how we all live and work.
We continue to take measures to protect our employees, while ensuring continued business operations, but there is little disruption as possible.
Our employees have been working remotely since mid March.
We've been able and we'll continue to execute on all investment management asset management servicing portfolio monitoring and related functions on daily basis.
[noise] leadership across all segments of the work or order to organization are actively monitoring the situation as it continues to unfold.
Clearly the current environment is unprecedented who we are close and we are closely monitoring the impacted the payback is having on our assets as well as its impact on the broader economy in financial markets.
The extreme volatility and economic concerns associated with Cobot 19 has impacted the bridge lending market created uncertainties around credit in asset values loan pricing and the availability of foster the financing.
Thus, reducing overall lending activity.
In addition stay at home orders and other travel restrictions have in some cases limited the ability of lenders to obtain appraisals and other third party reports.
With that in mind, we have significantly curtailed new loan origination at HCP as managers since mid March and we will continue to be thoughtful patient and opportunistic in our valuation theory that investment opportunities for each 50.
In light of the current environment.
To briefly address our portfolio financing sources [noise].
And our liquidity position and our dividend.
With regard to our portfolio over 99% of our investments consist of senior mortgage loans and participation.
We currently do not own any mezzanine loans construction loans mortgage backed securities.
Or any loans backed by hotels.
Furthermore, multifamily assets make up the vast majority of our collateral and we have limited exposure to retail properties.
We do not currently have any exposure to seniors housing health care skilled nursing properties.
I'd like to highlight that as of March 31st 20, 2100% of the loans that are theory investment portfolio worker.
Furthermore, 100% of loved in this area investment portfolio made their April payment.
With regards to may payment activity as it may 11th we have received payments a 95% of the portfolio for 49 out of 51 loans.
Borrowers on the remaining two loans, which we have not yet received payment were granted a seven day Grace period to May 13th 2020, we currently expect to receive payment from these borrowers on May 13.
We have not executed any forbearances today.
We believe that our portfolio is well positioned well continue to focus on proactive asset management, all assets potentially impacted by Copel get 19.
With respect to our financing sources, we do not currently utilized repurchase or warehouse facility financing HCFC.
And therefore, we are not subject to margin calls on any of our assets from repo warehouse lenders.
Our primary sources of financing or to match term non mark to market series to feel those as well as a corporate terminal.
From a liquidity perspective, we've now experience any material adverse liquidity events to date Ttcogen 19.
We ended the quarter was 11.3 million of unrestricted cash and have 9 million unrestricted cash on hand today.
Historically, we have operated with between seven and 13 million of unrestricted cash on the databases and therefore, we continue to operate within this range.
Well, we acknowledge the significant significant economic uncertainty over the coming months, we believe that our liquidity position is sufficient based on where we stand today.
Significant answers it certainly does exist today around the depth and length of the economic recession is the state the obvious.
To the extent, we experienced delinquencies are defaults in the portfolio, our liquidity could be impacted in the future.
With that and <unk> would that have mine, we are focused on liquidity management over the coming months.
With respect to our dividend we paid the Q1 2020 dividend of seven and a half centsper share on April 15th.
Accordance with normal course timing and process, we have not yet many to Q2 2020 dividend declaration, we expect to make a determination on the dividend in June after discussing with our board in normal course.
Now I'll touch briefly on our first quarter results.
Net income for the first quarter was 1.5 million or six cents per share in core organic core earnings for the first quarter was 2.2 million overnight that's for sure.
To embrace will discuss our financial results in more detail shortly.
During the quarter, we acquired and funded 38.6 million of floating rate theory loans at a weighted average spread of 305 basis points over LIBOR.
As announced in March we successfully invested the substantial majority of each if these undeployed.
Restricted cash due for 2019, we remain substantially fully deployed as of today.
That at the turn the call over to Jim Briggs, who provide further detail in the financial results Jeff.
Thank you Jim and good morning, everyone. A Monday evening, we filed our quarterly report on form 10-Q, providing the supplemental investor presentation on our website, which we will be referencing during our remarks.
Supplemental investor presentation has been lot pointed to the webcast as well for your reference.
On page five and six of the presentation, you will find key updates and an earnings summary for the first quarter.
For the first quarter of 2020 reported net income to common stockholders of 1.5 million or six cents per share. This compares to net income to common stockholders of 1.2 million or five cents per share for the prior quarter [noise].
And a net loss of 2.1 million were negative nine cents per share for the first quarter of 2019.
The current quarter was impacted by two noncore items.
The first abuse was an 878000 decline at fair value [noise].
Of our legacy.
Excuse me.
Of our legacy mortgage servicing rights portfolio, which was driven primarily primarily by declining interest rates and a corresponding increase unexpected prepayment rates.
As of March 30, Onest 2020, the MSR was valued at 1.8 million.
Our 2.2 times multiple of servicing fees compared to 2.7 million or 3.2 times multiple of servicing fees as at December 31st 2019.
While the value of our MSR, while continuing to Amherst amortized as loans payoff, we do not anticipate that the significant decline in valuation experienced this quarter will be recurring item.
The other noncore item experienced this quarter was a $227000 income tax benefit related to activity at our taxable REIT subsidiary.
Where our MSR MSR asset is help.
After adjusting for these two items our core earnings attributed to common stockholders for the quarter was 2.2 million or nine cents per share. This compares to core earnings of 1.3 million or six cents per share for the prior quarter and 1.7 million or seven cents per share for the first quarter of 2019.
The main driver on the quarter over quarter improvement in our core earnings was an increase in net interest income from 3.4 million in Q4 2019 to 4.2 million in Q1 of 2020.
This increase can be primarily attributed to our improved capital deployment throughout the quarter the benefit of our LIBOR floors and to a lesser extent an increase in exit fees earned during Q1.
Our book value at March 31st was 114.1 million, an increase of 5.4 million.
From year end and reflects the January investment a 5.7 million by an affiliate of our manager at $4 at 61 cents a share.
Our Q1 2020 book value per share was $4.57 compared to Q4 2019 book value per share $4.59.
I'd like to know that excluding the impact of the nonrecurring noncore items previously discussed our book value per share would have increased quarter over quarter to $4.60.
An additional item I would like to note is that a small reporting company is defined by the FCC, we have not yet adopted a C. 2016 dash 13, commonly referred to as Cecil or current expected credit losses, which is a comprehensive GAAP amendment of how to recognize credit losses on financial instruments as well.
Smaller reporting company, we would implement c. So on January Onest of 2023.
Until then we continue to prepare a financial statements on an incurred loss model.
As of March 31st we do not consider any of our loans to be impaired under the incurred loss model and if not recorded any impairments or allowance for loan losses in the current quarter.
While the current performance of our commercial loan portfolio remains healthy uncertainty about the severity integration of the economic impact of Cobot 19 pounds at pandemic exists, including its impact on our borrowers and on the value of the properties to collateralize, the commercial mortgage loan investments.
We will continue to evaluate the loan portfolio for credit losses, and we'll record any impairments or allowance as incurred.
I'll now turn the call over to Michael Larsen, who will provide details on our portfolio composition and investment activity.
Thank you Jim good morning, everyone.
Just expanding on the earlier comments, while we had significantly curtailed new loan originations at H. Fiftys managers since mid March the first quarter of 2020 was primarily a pre closing quarter.
During the quarter, we did acquired two loans it future funding advances on 19 loans, we total incremental fundings of 38.6 million.
We experienced 34.5 million of loan payoffs during the quarter quarter and on a net basis, our loan portfolio increased by 4.1 million and we continue to be fully deployed.
New loans for the quarter had a weighted average initial LTV of 79% and a weighted average spread over LIBOR of 305 basis points.
99% of these new new loan investments were in multifamily we continue to anticipate that a majority of our loan activity will be related to multifamily assets.
Overall portfolio at quarter end was over 90% multifamily, which is in line with year end.
We believe this is particularly relevant to note in the current environment multifamily assets have historically reflected the greatest resiliency among the different property types during a downturn and despite the worrisome employment trends, we're seeing we anticipate the same being treated and.
I would also like to note that due to the heavy middle market emphasis of the loans in our portfolio. We have limited exposure to certain central business district, such as New York City, which have been significantly impacted by cobot 19.
Our total portfolio folio floating rate loans had an outstanding principal balance of 639 million at quarter end. The portfolio consisted of 51 loans with an average loan size of 12.8 million.
The significant asset diversity.
Portfolio had a weighted average at July 355 basis points and as we've noted in prior calls we have LIBOR floors on 100% of the loans in the portfolio with a weighted average four of 160 basis points.
Due to the recent decline in LIBOR on every cent of our portfolio currently has a LIBOR floor above current LIBOR rate.
Good current LIBOR rates persist and we are able to maintain LIBOR floors. We anticipate that these four is another positive impact on our 2020 earnings.
Final note on our financing.
As was mentioned our loan portfolio stands for two series Siloed Securitizations with an average cost of financing of LIBOR, plus 141 basis points.
With the current market uncertainty the non mark to market match term financing that these HEALOS provide.
Give us additional production instability.
The reinvestment period on a first yellow ended in February of 2020, and our second has it reinvestment period that runs through August 2021.
We had been exploring a refinance of the first see a low however, theres no requirement for us to refinance the CLL and with the current market volatility the timing and restructure of the refinancing is uncertain.
We will continue to evaluate our options for refinancing as the status of the capital markets develops.
With that ill pass the call back to Jim.
Thank you Mike.
In summary, despite the current economic environment, we do continue to feel optimistic about the future of the company in remain positive on its outlook in growth prospects long term.
We look forward to updating you on our progress and we appreciate your time and interest.
Finally, I'd like to reiterate my sincere hope that you and your families are all well and we may take unhealthy during the remainder of this crisis with that I'll ask the operator open the call for any questions.
We will now begin question and answer your question to ask a question you May Press Star then one on your Touchtone phone.
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Hi, guys like ask a question.
The press Star one now.
Our first question will come from Christopher Nolan Ladenburg Thalmann.
Hi, guys hope everyone as well.
Thanks, Chris are you.
Jim break so when do you anticipate Cecil implementation.
We would be implementing I was a smaller reporting company January one of 2023.
Okay got it and then I guess in terms of.
You know I think those are good quarter, all around the surprisingly good and but it looks like you know asset quality is the big topic going forward.
And.
Can you give us any sort of granular Larry.
Insight in terms of.
How your borrowers are being impacted by everything that's going on with Covance and so forth.
And what you're doing to try to work with them.
Sure I'll a this is Jim I'll.
I'll start and I'm a facility can can offer some other thoughts as well but in general.
You know as you know the manager you know has a has a much larger footprint than just each year key with over 40 billion in or in our servicing portfolio.
Across across different products outside of HFT, I would say that that within.
Within the re we've seen.
We've seen that that the multifamily concentration is obviously helped.
All asset classes are obviously experiencing some distress.
Frankly, the the the multifamily market has actually performed I think better than that even I expected and that's including in the Fannie Freddie Epic Jay space.
You know, there's certainly concerned from.
Long term standpoint, obviously, we've seen the country's start to reopen over the over the past.
Ladies and week, or so and more to come going forward, including here in New York.
And that's obviously the the big question.
Most borrowers that that we've had to have all been you know very proactive with us and with their tenants.
Yeah, and vice versa right. So so many hugs EDA software to quit discounts another specials to try to try to get people to pay that rent early.
And just pay they've come to us we haven't had any forbearance agreement, but we have been in active dialogue with with a handful of our borrowers about the challenges that they're facing.
But but they continue to be long term good actors I think that as you point out the quality of of our assets they're significant equity.
But behind behind our offsets I think that's an important.
You know an important key for maintaining stability or maintaining.
Owner.
To make sure that properties remaining in good standing people from the tenants all the way through borrowers I think I think there's a strong sense of.
You know.
Reputation reputationally doing the right thing Oh.
Almost.
You know anecdotally I would say the it seem it does seem a little different then that adorable.
Cannot make downturn so.
I think we have a we have a high quality portfolio. We do have you know some some assets that are that are more challenge than others, but we continue to work with those borrowers and we expect to.
Be able to Ti work through the issues with them.
As they come up personal Torres, who is the P.M. here do you want to add any color there.
Sure so and the only other thing that's pretty critical it's that.
This substantial majority of our assets have heard it has historically been acquisition assets. So as a matter of course, a majority of our borrowers have significant cash equity invested in their transactions tend to think to probability or high probability.
Report of the assets through this difficult.
Challenging buried wrong about that would be a theme that behavior.
Any sense that in our collections today.
Alright, Thank you very homes it sounds like on the asset quality at least for now seems to be fairly steady I mean.
And then also given that you have asset sensitive excuse me your interest rate sensitivity seems to be benefiting from the changes in interest rates I mean.
Overall, it sounds like you know the earnings momentum seems to be relatively steady and.
So with the dividend is that fair characterization.
Yeah look I think I think on a on a.
Current basis at a relatively short term basis.
So we're pretty well position with interest rates are primarily due to the the floors that we have in our loan documents.
You know, but but just.
In the industry in the abundance of cost region thinking about management that may be true, but you know we're also keeping a very keen eye on liquidity you know because if if.
I think we're all we're also pleased to see that things are getting.
Seem to be getting better, but they're still you know a lot of people that are dying and there's a lot of lot of questions that remain with with this.
And this pandemic that they're going to less or could last for a very long time, but certainly for quite some time and you know where where we're definitely going to be a prudent with our liquidity and how we manage the portfolio, but but certainly in the short term you know we feel.
You know that whereas well positioned as as there's any of the other firms out there in terms of our asset quality and the structure of our loads.
Sure I'll get back into queue. Thank you for taking my questions.
Our next question kind of suddenly bulk with other cap.
Good morning, Thank you everyone and a quick question are there any LIBOR floors on the C.L. lows.
There are not on the on the notes on the on the liability.
Okay.
No. Okay. Thank you in just one other one Ah.
Excluding events caused by Kobin 19, looking ahead, what do you see as the biggest competitive challenges for your business model.
For us I think as Weve, certainly were where a different environment challenging environment now.
Overall, you know our desire is to grow in size right and.
And you know our scale definitely as they limiting the limiting factor or with our competition in terms of efficiencies and spreading of cost. So that's that's a big challenge, but the underlying challenge of growth.
Independent from you know just normal market conditions and what needs to be.
You know available to continue to to raise capital.
The there was a very significant amount of pressure put on the market by by competition by a lot of new funds a lot of new money that it entered the space.
Over the last several years there was a very concentrated.
View on investment it towards the short end of the curve, which led to a lot of that money coming in.
We've certainly seen.
Certainly seen a lot of [noise].
Maybe most of that money stop being in the market currently.
Whether that will continue or not is certainly.
Relevant to [noise] to the challenges for us.
We think that that you know, while well, we're well positioned today I think we'd like the little more diversity.
In in our assets in the in the theory that space not not beyond that but just you know broadening the the pool a bit.
So you know the biggest challenges is frankly.
No competition and whether you know people are.
In firms are getting paid for the risk you know my personal opinion is that.
As an industry in the commercial worried greets that that we probably haven't been being paid for the risk over the past.
18 months or so in general.
Overall, but but [noise].
That frankly is there's really been a function of competition.
Great. Thank you very much.
There are any further questions. Please tell you can't by pressing star one at this time.
Thanks for the question I'd like to hand, the call back over to Jones Lang for any closing remark.
I I just like to thank everyone for joining us today are we look forward to you a speed into next quarter.
Optimistically, hopefully will or will be in a better environment or prefer the hope for the whole country.
I wish everyone.
Good health.
And safety during the coming months and look forward to speed Houston. Thank you.
The conference has now concluded. Thank you for attending todays presentation you may now disconnect.