Q3 2020 Tremont Mortgage Trust Earnings Call
Good morning, welcome to <unk> third quarter, 2020, <unk> financial results Conference call.
All participants will be in listen only mode should you need assistance. Please signal a conference specialist by pressing the star key followed by zero.
Today's presentation will be opportunity to ask questions. Please note that the event is being recorded.
To turn the conference over to Mr., Kevin Berry manager Investor Relations. Please go ahead.
Thank you and good morning, everyone. Thanks for joining us today with.
With me on the call are Fred <unk>, Chief Executive Officer, David Blackman, Chief Financial Officer, and Treasurer, Doug <unk>, managing director of capital markets, Tom Wendy just a moment they will provide details about our business and our performance for the third quarter of 2020.
We will then open the call to a question and answer session with sell side analysts.
First I would like to note that the recording and retransmission of today's conference call is strictly prohibited without the prior written consent of the company.
Also note that today's conference call contains forward looking statements within the meaning of the private Securities Litigation Reform Act of 1995 and other securities laws.
These forward looking statements are based on <unk> beliefs and expectations as of today Tuesday November 3rd 2020, and actual results may differ materially from those that we project. The company undertakes no obligation to revise or publicly released the results of any revision to the forward looking statements made in today's conference call.
Additional information concerning factors that could cause those differences is contained in our filings with the securities and exchange Commission or FCC, which can be accessed from our website T. R. M. T <unk> dot com, where the U.S. infused website investors are cautioned not to place undue reliance upon any forward looking statements. In addition.
We will be discussing non-GAAP numbers during this call, including core earnings for a reconciliation of net income determined in accordance with GAAP to core earnings. Please see this morning's quarterly earnings release, which is available on our website.
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I will now turn the call over to David David.
Thank you Kevin and good morning.
Welcome to <unk> third quarter earnings call for Tri motto mortgage Trust.
During the quarter, our attention focused on asset managing our loan portfolio and actively engaging with our own sponsors well. Many borrowers are under pressure in this economic environment I'm pleased to report that all of our loans are current debt service.
As we have discussed on prior earnings calls three months capital remains fully committed which eliminated our ability to originate new loans during the quarter.
Our portfolio consists of 14 whole loans with approximately $294 million in aggregate loan commitments with a weighted average maturity of 2.9 years, when including extension options.
As of September Thirtyth, the portfolio had a weighted average coupon of 5.7% and an all in yield of 6.4%.
Since the end of the quarter the sponsor of our financing secured by retail center in Paradise Valley, Arizona exercises extension right. It has met all the conditions.
For one year, along an extension to be effective later this month.
Our financing secured by multifamily community in Houston also matures in November.
We are negotiating definitive documentation with the sponsor for a one year extension that includes an increase in the loans interest reserve.
At the current cash flow run rate the interest reserve should be more than adequate to help maintain debt service current for the next 12 months, while the sponsors stabilizes occupancy and markets the property for sale.
We expect documentation to be finalized an extension become effective later this month.
As I mentioned earlier some of our borrowers our experience in various levels of distress from tenants that are not able to operate and required right away.
For the trailing three months ended September thirtyth.
We had five loans, where the pandemic negatively impacted the cash flow from our collateral properties such that the income generated from the tenants was not sufficient to fully pay debt service.
None of these long term required forbearance and all remain current on debt service.
As a reminder, all of our loans are structured with risk mitigation mechanisms such as cash flow sweeps or interest reserves to help protect us against investment losses.
The relationship with our repurchase facility lender remain strong and we have maintained consistent dialogue regarding our liquidity and the status of our ones.
During the quarter city advance money in normal course to fund our loan commitments to borrowers.
In October we extended this facility by one year until November 2022.
We believe this reflects confidence in both the health and quality of our loan portfolio as well as our ability to originate high quality loans and to effectively asset manage.
In October we declared a one cents per share distribution. This is consistent with the distribution declared during the previous two quarters and reflects the decision announced earlier this year to reduce the dividend in light of the economic uncertainty and disruption to the U.S. capital markets brought on by the code 19 health crisis.
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Our business has continued to perform well and the proactive measures we have taken to preserve capital have led to improved liquidity.
As we look towards year end, we need to declare a one time distribution to shareholders in December in order to pay out at least 90% of trade bonds 2020 taxable income to maintain our route tax guidance.
We expect to pay this distribution in cash and our board will determine the amount based upon train miles for your financial performance after considering our tax loss carry forwards and distributions paid during the year.
As a reminder, our manager has extended its management fee waiver through the end of 2020, which we believe highlights our managers in building managers alignment with shareholders. During this challenging time.
And finally, a few weeks ago, we announced upcoming management changes and train them on our.
I will be retiring in June 2021, and we'll be resigning from my executive position with <unk> at the end of 2012.
It's my pleasure to introduce Tom Morton's anything that's been appointed President of trademark effective January one 2021.
Thomas currently a managing director of capital markets for our manager.
As a family member trade month predecessor business. It has more than 25 years of experience in the commercial real estate finance industry.
We are thrilled to have an executive with such a strong background to lead the team forward and navigate our high performing loan portfolio to achieve greater scale in the future.
Ill now turn the call over to Tom for an update on market dynamics in the current environment.
Huh.
Thank you David and good morning, everyone.
Before I get started on behalf of all of US at per month, I would like to take this opportunity to thank you David fear leadership and dedication.
It has been your steady hand that adult to lay the foundation for termite and our bright future.
We have a great opportunity in front of us to build upon the strength of our loan portfolio and I look forward to leading the team and helping to guide our course.
I would like to take a minute to update you on our view of the commercial real estate debt markets as they continue to evolve amid the ongoing pandemic.
Prior to COVID-19 commercial real estate transaction volumes were increasing driving demand for Seo reloads.
Alternative lenders like termite had gained market share and loan pricing has begun to stabilize.
The outbreak of the pandemic in the first quarter of 2020 led to an unprecedented decline in economic activity over the first half of the year.
Uncertainty surrounding the depth and duration of the economic downturn resulted in a severe decline in overall to see every transaction volume during that period.
In our view the CRB debt markets began to rebound in the latter half of the third quarter in June 2020.
The CMBS loan delinquency rate was near the highs experienced a 20 time, but has since steadily decline as the bulk of been cured either by borrowers investing additional capital to support their loans or in the form of a loan for parents.
With interest rates hovering around zero percent across the globe.
Investors' appetite for higher returns as a result in a rebound for the CMBS market.
Although credit spreads offered the borrower by alternative lenders have increased from those offered prior to the pandemic.
The lack of property sale transaction activity has resulted in fewer transactions to be financed and greater competition amongst lenders seeking to fund new loans.
We believe that this increased competition amongst lenders one with significant declines in LIBOR and the U.S. Treasury index rates has benefited borrowers seeking to refinancing high quality properties, particularly multifamily industrial.
Life Science, R&D lab properties that are either stabilized or near stabilization.
Well the longer term impact of Goldman 19, pandemic is still uncertain. We feel there will be modest increase in theory sales transaction volume in the fourth quarter as institutions and investors seek to invest dry powder into opportunistic situations.
Furthermore, we believe that as the us economy improves and returns to a more stable state there will be significant opportunities for dramatic to provide creative flexible debt capital for well capitalized sponsors.
In the meantime, despite not having available capacity to originate new loans in the near term we remain active in the market and focused on building awareness of Kamaz platform across the CRB industry.
And with that I'll turn it over to Doug to review our financial results.
Doug.
Thank you Tom and good morning, everyone.
I'll begin with a brief review of the statement of operations.
Our third quarter core earnings was $2.7 million or 33 cents per weighted average diluted share compared with 30 cents per share last quarter.
This increase was primarily driven by our income from investments net which benefited from the continued reduction of LIBOR inch.
Interest income from investments for the quarter was $44.6 million compared to $4.5 million in the prior quarter.
Interest and related expenses incurred from borrowings on our master repurchase facility.
Was approximately $1.2 million compared to $1.4 million in the second quarter of 2020.
Income from investments net increased to $3.4 million for the quarter.
From $3.1 million in the prior quarter.
As presented in our supplemental financial package or weighted average all in yield on our investments as of September 30 was LIBOR, plus 428 basis points and our weighted average LIBOR floor was 210 basis points.
Let me give you a bit more color on our exposure to interest rate fluctuations.
The interest income under loans held for investment and the interest expense on our borrowings float with LIBOR.
As LIBOR has decreased over the past three quarters, our income from investments net of interest expense has increased.
We have into.
Interest rate floor provisions in our loan agreements with borrowers that establish a minimum LIBOR rate for each loan currently ranging between 152.
The 250 basis points, however, borrowings under our master repurchase agreement do not have a minimum LIBOR floor provision.
As a result as LIBOR decreased below the force established were investments our income from investments remained constant while our borrowing costs decreased.
If LIBOR increases in the future, but remains below our floors, our interest income or will remain stable in interest expense on our repurchase facility will rise.
Resulting in decreased income from investments Matt.
Back to our review of the statement of operations.
<unk> expenses in the third quarter totaled approximately $765000 and include gene expenses.
$576000 of which $76000 was noncash stock compensation expense right.
Reimbursed shared services expenses amounted to $189000 in the third quarter.
Now turning to our balance sheet at the end of the third quarter, we had $11 million in cash our loans held for investment net at quarter end was $280.2 million, an increase of $2 million from last quarter a.
At quarter end, we had total loan commitments of $294 million.
Of which $14 million was unfunded.
During the quarter, we borrowed $1.3 million on her master repurchase facility to fund the advances made to borrowers.
As we discussed on our call last quarter in July, we repaid or facility $1.4 million using proceeds from the partial repayment. We received from the borrower under our loan related to a retail property in Coppell, Texas.
As a result, the outstanding principal balance of our facility was $201.1 million at the end of the quarter.
Unchanged from the prior quarter.
As of September Thirtyth, we had $213.5 million of total capacity on our master repurchase facility of which $12.4 million is undrawn, including $8.3 million that is below the maximum leverage from our existing pledged loans.
Operator. This concludes our prepared remarks, we will now take questions from sell side research analysts.
Well now begin the question answer session to ask a question Press Star then one on your Touchtone phone.
Using a speakerphone please pick up your handset before pressing the keys.
Draw. Your question. Please press Star then too.
This time, we'll pause momentarily to assemble a roster.
First question comes from Steve Delaney of the J.M.P. Securities. Please go ahead.
Hi, Good morning, everyone. I'm just curious if you anticipate any near term repo loan repayments over the next one to two quarters.
That's a good question, Steve you know we have six loans to have final maturity dates in 2021.
And so we're likely probably beginning in 2001 going to have some loans repay but.
But I don't anticipate that we have anything thats going to repay during the fourth quarter.
Okay and should we assume the plan is going to be that your situation.
Situation with city is that it will be your desire to reinvest those funds a new loans or would you I guess short term you'd you'd pay city down, but you would you intend to stay fully invested is what I'm, what I'm, saying rather than just pay down city.
Yeah, Steve I think our desire would be to stay fully invested.
Maybe around the margin, we my choose not to lever our loans quite as highway.
But I think staying invested would be good for our shareholders as it relates to our ability to pay dividends.
Okay. Thanks, and you mentioned all your loans are current I'm, just curious of the 14 loans.
Have any been modified and has any interest actually been deferred so in other words you could be current but you may have chosen to work with the borrower and defer some part of their their interest payments.
Yes, Steve we have not deferred.
Interest payments with any of our borrowers.
The only one loan I think we modified was to simply moves.
Money that we had swept some cash and we had swept to an interest reserve. So that we could use it to help keep debt service correct, but but no. We have not had to defer any interest payments on our lines right.
Well. Thank you for the comments in David We wish you a very happy retirement bank.
Thank you Steve.
The other question. Please press Star then one.
The next question comes from Brock Vandervliet, Yes. Please go ahead.
Oh, Thank you good morning.
You mentioned.
[noise] five loans that didn't have enough to fully pay debt service. So that's.
I guess, you're utilizing cashless sweep for interest reserves too.
Okay.
Can you talk about.
As loans.
So basically how tenuous that situation is your confidence with the cash flow sweeps and an interest reserves just trying to appear in the future a little bit on credit quality.
Sure Good question Brock.
For those five one arms have interest reserves.
And their reserves.
We believe are adequate to continue to support the ones as they continue to recover.
One of the loans actually our hotel loan in Atlanta does not have an interest reserve.
But we have a sponsor with incredibly high a character who has made additional equity investments into the property to keep debt service current.
So you know, we're very pleased or for them to continue to do that.
One of the one of the five loans has a early 21.
A final maturity date, and we expect that if we do extend the maturity of that loan you wouldn't likely be subject to a refreshing the interest reserve.
Got it okay.
And I think it's more of a bigger picture strategic question.
Yes, so far you seem to be navigating this pretty incredible dislocation very well.
What's that.
What's the longer term.
Plan.
On closing.
The book value.
Count here and there.
Company be amenable to other sources of capital.
Exploring any any new avenues of funding or capital.
Rob that's a good.
Excellent question, I would say first and foremost.
We need to reinstate the a more normalized distribution and you know because most of the companies in this sector tend to trade based upon a dividend yield and the fact, they were only paying a penny a quarter or four cents a year.
Really is inadequate to help close that gap, but yeah.
Yeah. We think we are starting to turn the corner of with the risk in our portfolio and.
Hope to go to a more normalized distribution sometime in 2021, which we think Oh.
We will go a long way to help close that gap I think the other question that you asked was whether we would be open to exploring additional capital I think the answer is yes.
Obviously, it's got to make sense for shareholders, we've got to be accretive.
And you know that it can't be capital, but necessarily you know.
Put the puts a gun to our head or or anything like that but yes. We would we would probably be open minded to consider in something like that.
Okay, great. Thanks.
But.
Thank you next question comes from Jason Stewart of Jones trading. Please go ahead.
Hi, Thanks, Good morning, I follow up on on Jim's question about use of proceeds in the event you do get an uptick in a investment selectivity or repayments would you consider as you pay down city also repurchasing stock.
Yeah, Jason that's a good question.
We always have to consider whether that's a good use of our capital.
But you know we're reasonably this.
This business it use a fair amount of leverage.
And we.
We have a relatively small equity base and so.
I think it will be challenging for us to seriously consider.
Repurchasing shares versus trying to make investments.
To stay fully invested.
Understood Yeah, it's it's clearly a it's a balancing act that you're trying to maintain and I wouldn't think about that and you go back to you know it sounds like a 2021 normalized dividend distribution.
Well, what what is keeping you from raising it right now is it the repayment activity that's expected in 2021.
Well you know as as I said in my prepared remarks, we are making a one time distribution organization going to declare one time distribution in December or with the expectation to phase in January.
And I think that will be meaningful and Dan I think you know depending upon how our loans continue to perform and our view on our ability to reinvest I would expect that you know we will return to a more normalized distribution in 2020.
One.
Okay. Thanks for taking the questions appreciate it.
Thank you we have a follow up question from Brock Vandervliet of U.S. Please go ahead.
Thanks.
I was.
I've mentioned this but.
As part of the extension of that city funding line, where there is there any.
Covenant much.
Or is it just a straight extension.
Hey, Brock its Doug, Illinois, Thanks, Oh, no no no covenant mods or.
At all in that extension just a straight extension of the of the term.
Okay, and then lastly.
Slide 11, where you show the original maturity and the the revised.
Maturity dates.
Yep.
Among the number of loans, they're simply a nature of.
These loans are structurally for repositioning that property and that's that's taking you know more extended period of time, a mid cove it.
There is.
Is that a sign of a no brainer.
Stressed that we should be aware.
Yeah.
Yes, Brock I don't consider a greater stress you know.
We make loans based upon a business plan to reposition an asset.
And ultimately we expect to be repaid either through an asset sale.
Or refinance.
We generally will have at least one extension options built into our structures.
For the scenario, where it may take a business plan, a little bit longer to execute and I think you know as a result of cove, it and the property market substantially shutting down for Ray for a portion of the year.
Business plans are expected to take a little bit longer to execute I don't view that as distressed I view it more as just simple timing.
Got it okay, great. Thanks for the color guys.
Sure. Thank you for the questions.
This concludes our question answer session not unlike determine conference back over to Mr., David Blackman, President and CFO for closing remarks. Please go ahead.
Thank you operator, and thank you all for joining us on todays call that concludes the call.
Yeah.
The conference is now concluded. Thank you for attending today's presentation you may now disconnect.