Q3 2020 Hunt Companies Finance Trust Inc Earnings Call
[music] good morning, and thank you for joining the Hunk companies Finance Trust third quarter 2020 earnings call.
Today's call is being recorded and will be made available via webcast on the company's website at.
I would now like to turn the call over to Charles study with Investor Relations at Ari The investment management. Please go ahead.
Thank you and good morning, everyone.
Thank you for joining our call to discuss home properties financed trust third quarter 2020 financial results.
With me on the call today are James Glenn CEO, Michael Larsen, President James Riggs, CFO and facilitate more as head of real estate investment strategies.
On Friday, we filed our 10-Q with the FCC and issued a press release, which provided details on our third quarter results.
We also provided a supplemental earnings presentation, which 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 are not based on historical information that may constitute forward looking statements within the meaning of section 27, a of the securities that Nike 33, and section 21 E of the Securities Act of 934.
When used in this conference words, such as outlook evaluate indicate believes will anticipates expects intends and other similar expressions are intended to identify forward looking statements.
Such forward looking statements are subject to various risks and uncertainties that could cause actual results to differ materially from those contained in the forward looking statements. These risks and uncertainties are discussed in 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 factors section of our form.
Okay.
Additionally, many of these risks and uncertainties are currently amplified by and we'll continue to be amplified by or in the future may be amplified by the COVID-19 pandemic.
It is not possible to predict or identify all such risks listeners are cautioned not to place undue reliance on these forward looking statements speak only as of the date hero. The company undertakes no obligation to update any of these forward looking statements.
Furthermore, certain non-GAAP financial measures will be discussed on this conference call and presentation of this information is not intended to be considered in isolation, nor as a substitute the financial information presented in accordance with GAAP.
Reconciliations of these non-GAAP financial measures to the most comparable measures prepared in accordance with GAAP can be accessed through our filings with the FCC at Www Dot FCC daqo.
I will now turn the call over to James Flynn. Please go ahead.
[noise]. Thank you Charlie.
Good morning, everyone.
Welcome to the Hunt companies Finance Trust's earnings call for the third quarter of 2020. Thank.
Thank you for joining us today on those are under what continues to be challenging circumstances.
For many of us given what's going on.
In the country today.
Despite all that I will say that we are very pleased with the financial results and stability for her companies financed trust.
And look forward to tell you more about it here today.
With regards to the COVID-19 pandemic.
First let me Express my hope that you and your families are continuing to stay safe and healthy.
As Weve all experienced the COVID-19 pandemic continues to have a significant impact on our economy, our industry or political environment and how we all live and work.
We continue to take measures to protect our employees, while ensuring continued business operations with as little disruption as possible.
Our employees have been working remotely since mid March.
And they will continue to do so.
However, we've been able to execute on all investment management asset management servicing portfolio monitoring and related functions on a daily basis.
Leadership across all segments of the Orix organization or parent is actively monitoring the situation as it continues to progress.
Clearly in the current environment.
[noise] clear that the current environment is unprecedented and we are closely monitoring the impact.
On on of the pandemic on our assets as well as its impact on the broader economy and financial markets.
The economic concerns associated with over 19 have continued to impact the breadth of the bridge lending market transparency around the reset levels of asset values as well as the general availability of financing.
Notably real estate acquisition volume driving the bridge lending market has picked up.
[noise], but does not return to robust coven levels.
We are actively screening and underwriting new transactions, but continue to be mindful of local ordinance constraints on lender protection and the impact of eviction moratoriums as well as the potential for some cash flow disruption for the rental market and with the economic realities.
[noise] of today's covert environment, including increased concessions and potential delinquencies.
Tennants delinquencies.
As a result, our originations of late have had a heightened focus on sponsor qualification and markets with more resilient demand drivers.
We will continue to be thoughtful patient and opportunistic in our valuation of series debt investment opportunities for GFT.
Given this backdrop I would like to provide a brief update on our portfolio our financing sources, our liquidity position.
And our dividends.
With regard to our portfolio over 99% of our investments consist of senior mortgage loans the participations.
We currently do not own any medical loans construction loans mortgage backed securities or loans backed by help hotels.
Furthermore, multifamily assets make up the vast majority of our collateral we have limited exposure to retail and office properties.
We do not currently have any exposure to seniors housing health care or skilled nursing facilities.
Additionally, I'd like to highlight that as of September 32000, 2100% of the loans in our theory investment portfolio.
Recurrent.
Furthermore, a 100% of those loans in our portfolio made their October payments.
We have not executed any forbearances, nor have we experienced any loan defaults or write downs during the covert era.
Overall, we believe that our portfolio is well positioned and we continue to focus on proactive asset management of all assets potentially impacted by the broader economic uncertainties.
With regard to our financing sources we.
We do not currently utilized to repurchase or warehouse facility financings at each CFP.
And therefore, we are not subject of margin calls on any of our assets from repo or warehouse lenders.
Our primary sources of financing or to match term non mark to market theories filos as well as a corporate term loan.
From a liquidity standpoint.
We have not experienced any material adverse liquidity events today due to covert 90.
While we acknowledge the continued significant economic uncertainty, we believe that our liquidity position is sufficient based on work, where we stand today and what we know today.
But that being said significant uncertainty exists and the depth and length of the economic recession.
Potential recession.
And so the state the obvious the except we experienced delinquencies Andorra defaults in the portfolio our liquidity maybe impacted.
With that in mind, we remain focused on liquidity management, and we'll continue to do so over the coming months and quarters.
With respect to our dividend on September 17th.
We announced the 13% increase in our quarterly dividend from seven and a half centsper share the eight and a half cents per share.
I'm pleased to announce that for the third quarter, we comfortably covered the dividend with the GAAP EPS dividend ratio coverage ratio of 118% in the core EPS dividend coverage ratio of 129%.
In accordance with the normal course timing a process you have not yet made the Q4 2020 dividends declared declaration [noise].
We expect to make that determination on our dividend in early December after discussing with our board in the normal course.
We do expect to distribute 100% of our taxable income and made declare a special dividend in Q4 if necessary.
With that I'd like to turn the call over to James parents, who will provide details on our financial results Jim.
Thank you Jim and good morning, everyone.
On Friday evening, we filed our quarterly report on form 10-Q, and provided a supplemental investor presentation on our website, which we will be referencing during our remarks. This.
A supplemental investor presentation, that's been uploaded to the webcast as well for your reference.
On pages four five and six of the presentation, you will find key updates and earning summary for the quarter.
For the third quarter of 2020, we reported net income to common stockholders of 2.5 million or 10 cents per share. This.
This compares to net income to common stockholders of 1.9 million or eight cents per share for the prior quarter and net income to common stockholders of 2.2 million or nine cents per share for the third quarter of 2019.
Relative to the prior quarter the positive variance in earnings was driven primarily by lower expenses, which declined from 2.8 million in Q2 to 2.3 million. In Q3. This improvement was primarily the result of the company incurring approximately 600000 of nonrecurring expenses in prior quarter related.
We will post currency although issuance.
We'd also like to highlight that in both the current and prior quarter, we experienced a meaningful benefit to interest income from the LIBOR floors that exist on 100% of the loans in our portfolio.
The current quarter was impacted by two non core items.
The first have to use was a 350000 dollar decline in the fair value of our legacy mortgage servicing rights portfolio as.
As we continue to experience elevated prepayments speeds associated with lower interest rates.
As of 930, the carrying value of this asset was 1.1 million.
Due to the limited size of the remaining asset we would generally expect the magnitude of any future quarterly reductions in fair value to be less meaningful to the bottom line.
The other non core item experienced this quarter was a gap income tax benefit of 143000 pertaining to activity or a taxable REIT subsidiary.
After adjusting for these two items our core earnings attributed to common stockholders for the quarter was 2.8 million or 11 cents per share.
We are pleased with the court U.P.S. yield generated by the company this quarter, which was 9.6% of book equity value on an annualized basis.
Our book value at September Thirtyth was 114.5 million or $4.59 per share. This.
This represents a two cents increase from our Q2 2020 and book value per share or $4.57.
We'd like to highlight that our book value per share has been extremely stable over the last four quarters. As we began the year a $4.59 per share which is in line with where we stand today.
One additional item, which we discussed last quarter, but I would like to remind everyone of is that as a smaller reporting company as defined by the FCC, we have not yet adopted a S. C 2016 dash 13, commonly referred to as diesel or current expected credit losses, which is a comprehensive.
GAAP amendment up how to recognize credit losses on financial instruments.
As a smaller reporting company, we would implement Cecil on January one 2023 until then we can continue to prepare financial statements on the incurred loss model as of September Thirtyth, we do not consider any of our loans to be when paired under the incurred loss model and have not recorded any impairments or allowance for loan loss.
It was in the current quarter.
While the current performance of our bridge loan portfolio remains healthy.
Uncertainty about the severity and duration of the economic impact of the COVID-19 pandemic continues to exist.
Cleaning its impact on our borrowers and on the value of the properties to collateralize, our commercial mortgage loan investments.
We will continue to evaluate the loan portfolio for credit losses, and will record any impairments or allowance as incurred.
Well now turn the call over to Mike Larson, who will provide details on our portfolio composition and investment activity.
Thank you Jim.
As Jim Flynn Glen discussed earlier on the call. We continue to take a measured approach to new originations during the quarter, we acquired one new loan and they get future funding advances on six loans, the total incremental fundings of 10.6 million.
All of these fundings on loans secured by multifamily assets.
Experienced 21.5 million of loan payoffs during the corner quarter and on a net basis, our loan portfolio decreased by $10.9 million were 1.8% of total you can be.
While we continue to be thoughtful and patient evaluation of new investments, we are seeing compelling investment opportunities in the current market.
We continue to anticipate that the majority of our loan activity will be related to multifamily assets or overall loan portfolio at quarter end was over 90% multifamily in line with prior quarter.
We believe this is relevant to note in the current environment multifamily assets at historically reflected the greatest resiliency amongst the different property types during a downturn and we anticipate the same being true during this period.
Our total portfolio of floating rate loans had an outstanding principal balance of 599 million at quarter end.
The portfolio consisted of 44 loans with an average loan size of $13.6 million, which provides for significant passive diversity.
Our full portfolio has a weighted average spread to LIBOR, a 354 basis points and as Jim noted, we have LIBOR floors on 100% of the loans in our portfolio with a weighted average of 161 basis points.
Good current LIBOR rates persist and we are able to maintain LIBOR floors above the sea levels, we anticipate that our LIBOR floors. There to continue to have meaningful positive impact on our earnings.
Final note on our financing as of 930, our loan portfolio was financed with two series Siloed Securitizations with an average cost of financing of LIBOR, LIBOR, plus 143 basis points.
With the continued market uncertainty the non mark to market match term financing that these fuel loads provide give us additional protection.
The reinvestment period in our first yellow ended in February of 2020, and our second tier low hazard reinvestment period that runs through August of 2021.
With regards to our first yellow specifically, we experienced $28 million of loan payoffs during Q2, and an additional 9 million of loan payoffs during Q3.
Since the reinvestment period on the securitization has ended these payoffs have you done sequentially came down this euro bonds.
Now I'd like to highlight that even after the impact of these bonds pay downs.
Which is a 9 million occurred after quarter end, our leverage and cost of funds within the first COO remain attractive at 81% in LIBOR, plus 143 basis points respectively.
We continue to actively monitor conditions in the series yellow space and evaluate our options for refinancing that condition develops we.
We are encouraged by the positive signs across commercial real estate capital markets, including the recent issuance of the first managed series Siloed during the quarter there.
Furthermore, several new series, Zillow issuances or expect to come to market over the coming quarter and we have seen liquidity returned to the secondary market for ceilings yellow bonds. These.
These developments provide a positive backdrop to our evaluation of refinance alternatives.
In terms of warehouse and repo facilities warehouse line providers are reviewing more financing requests from lenders, while certain warehouse lenders are you to put capital out others remain on the sidelines.
Due to the continued economic uncertainty.
We are seeing some improvement in the terms offered as well, albeit they have not returned to pre cobot levels.
With that I'll pass the call back to Jim for some closing remarks.
Thank you Mike.
[music].
In summary, we are excited about the quarter and the progress that we continue to make we remain positive about the company's outlook and EPS growth prospects.
We look forward to updating you on our progress and we appreciate your interest in our firm.
Well, we take to an AD like to reiterate my hope to you and your families remain healthy and safe and hopefully continued good news with respect to.
Vaccines and [noise] treatments I know Pfizer had a big announcement today, so hopefully that will bode well for the future.
With that I will ask the operator to open the call for questions.
Thank you we will now begin the question and answer session to ask a question you May Press Star then one on a touchtone phone.
You are using a speakerphone please pick up your handset before pressing the key.
So let's try a question. Please press star then she.
The first question today comes from Christopher Nolan of Ladenburg Thalmann. Please go ahead.
Hey, guys, Mike on your comments on the Cibolo refinancing any idea of possible timing.
Could this be a first.
For 2021 type of event.
It was a lot of factors that go into that in and we have throughout the year I'm continually evaluated the market and looking at the.
The timing to do that and things definitely have improve which would put us in a position to revisit that on in the coming months and into next year, but as we all know the market can continue to change.
What I, what I will say is that we have no obligation to refinance a the for the foreseeable or that we have and.
As I mentioned, the terms remain a very attractive consistency compared to.
It's a tough market. So we'll continue to evaluate that but it's going to depend on on how the market develops.
Great and I guess for James Flynn for your.
Portfolio companies or your investments.
What is the average interest rate coverage.
Of your debt by the borrowers.
Over death by the bars.
It's it's it's a tricky it's a tricky question because because some of the borrowers are these are you know the bridge loans.
You know so they're going in and doing work. So in some cases, the coverages is quite low while they're well they're doing work.
I can tell you that we underwrite stabilized coverage typically to a minimum of 125.
So I don't know if you want to add more to that to that.
Sharpish or more specific but yes, Laurie as of the end of the corrugate. This 1.069, but keep in mind, we have parity heights, Lori I'm going to affect number Miscalculate then.
Okay. So 1.06 was the most recent but normally it's little bit higher than that.
Yes, Floris are there what I'm, suggesting it's not the floors.
Of our loans are hi, I'm, sorry, south of that if you were to normalize.
Normalized EPS for where where library, it's the day it would be higher.
Actually my question really is about the economics of the underlying properties.
And whether or not there you know how much their.
Pre interest rate earnings cover your debt carried interest.
Well so the blended rate is is a one of those six but because there is a wide range there because of because of.
What I described as well as those that are continuing to do.
Work on units, whether it's multifamily or or or the retail or other assets, where whereas they are not receiving rent.
Versus those that are better.
Majority occupied and are receiving rent so I think you.
You know on anything over one we think is is as good as a blended portfolio because because of the expectation that a.
Certain assets or are going to be at or below one during a period of.
[noise] of rehabilitation of the of the asset.
Okay, and then I guess what percentage of your loans if any are at their floors.
They all I think I would suggest they all are yeah, they're all at the Florida Okay.
But just to just add to that to the average of the weighted average our floors in our loans have a weighted average 161 basis points. So if you look at the library today, it's well below that.
So all of our loans or how the LIBOR floor above current levels.
Okay, great that's.
That's it for me Thank you guys.
[noise]. Thank you.
As a reminder, if you have a question. Please press Star then one.
Your next question comes from Steve Delaney of JMP Securities. Please go ahead.
Good morning, everyone, congratulations on the quarter and the credit performance of the portfolio.
I note that the average remaining term of the portfolio is fairly short 14 months. So given that can you comment on your outlook for repayments over the next two to three quarters and.
Do you expect to have access to additional slightly seasoned loans with floors overcurrent LIBOR as you did in the third quarter. Thanks.
[noise] [noise] I, let personal to go through the <unk> provide a little more detail but in general.
Most of our loans.
I have a have you know extension options at the borrowers with with some.
Some requirements on on extension, but most of them arguable or will be met so.
Got it so first I would say that is that the.
That it's possible that those terms are extended.
Under the current under the current low in terms of and then the the more important second part of your question I think the short answer is yes, we would expect to have access to some seasoned loans that that the manager and our parents have on our balance sheet or will have.
On our balance sheet that we can.
Place into a HFT as as liquidity.
As liquidity elevates.
So from that same and and as we stated earlier you know since labor day the portfolio I mean, the the activity has picked up we've seen.
Some some some good transaction flow come through.
Really a lot over the last month or so that we think is high quality and.
We feel pretty good about.
Having tea or hopefully being able to win a fair amount of that business and then in terms of the floors. We we will continue to put took what floors and in our loans. The levels will be dictated by you know where LIBOR is saying buy or what the what the market is [noise].
It's tolerable of but we we've always used floors and we'll continue to do so.
So I don't know if a if you want to add anything on the card portfolio and duration.
Sure No Steve that's right I'm missing something here about 14, I'm, sorry, they're mean terms about 14 months, but I will say.
That we have seen also as Jim mentioned and acceleration volume in terms of on screening given that and acquisition activity in the markets that has stop post labor day, we expect especially to the positive news today that that will only accelerate.
I saw you know both to resell payments that come true.
That's helpful from both of you. Thanks, and one final thing Jim you nailed it nailed. It works is the manager I'm curious if there are any plans to rebrand the company and down the road you know could you add other loan products or business lines to the H C. F T platform. Thanks.
Sure so.
We have had a preliminary discussions around branding and the long term.
You know positioning of a the reed with with our board and with their manager so well continue to have those discussions and.
And come back to the Investor community with with the conclusions on those.
In terms of of your second question I, I mean, again, I say sticking with short answers. The answer is yes. There is there is that potential we in fact have been.
Evaluating using.
Some of the limited liquidity that we do have and Ed any future potential liquidity that that that the.
Re is able to generally or ways that we would.
You some of that to think about diversifying away from.
Just the bridge loan category, but put related or the types of assets and investments that we.
Typically already see whether it be mezz financing or some other structured finance.
So to answer around the same asset classes and things of that nature. So.
I do see there being potential for that to happen down the road of course.
All those things are subject to where we see opportunities in the market both available and for us.
You know that are available and you know the credit profile that we find attractive I think there are some so it's it's it's fair to say, we would consider that down the road.
I appreciate the comments and everyone stay safe have a good close to 2020 I think we'll all be glad when it's over.
Yes, Sir thank Steve.
Yeah.
Again, it is star one to ask a question.
Showing no further questions. This concludes our question and answer session I would like to turn the conference back over to James Flynn for any closing remarks.
[noise] Oh, Thank you I just want to say, thank you to a to the group. Thank you for joining again today and we look forward to speaking to everyone again soon.
[music].
Stay well be healthy and hopefully will continue yes, and some good news here and then the fourth quarter Oh speaking again soon thank you.
The conference is now concluded. Thank you for attending today's presentation you may now disconnect.
[noise].