Q1 2021 Lument Finance Trust Inc Earnings Call
Good morning, and thank you for joining the Lumens Finance Trust first quarter, 2020 one of the earnings call.
Today's call is being recorded of will be made available via webcast on the company's website.
After today's presentation of it'll be an opportunity to ask questions.
So you asked the question you May Press Star then one on your Touchtone phone.
So would you all of your question. Please press Star then two.
I would now like to turn the call over to Charles thought of it wasn't investor relations.
With management. Please go ahead.
Thank you and good morning, everyone.
Thank you for joining our call to discuss looming finance Trust's first quarter 2021 for neutral results.
With me on the call today of James Flynn, CEO, Michael Larsen, President James Breen, CFO and for <unk> as head of real estate investment strategies.
On Monday, we filed our 10-Q with the SEC and issued a press release, which provide the details on our first quarter results.
Also provided the 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 and May constitute forward looking statements within the meaning of section 27, a in the Securities Act of 1933 and section 21 E of the Securities Exchange Act of 1934.
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 statement.
These risks and uncertainties are discussed in the Companys reports filed with the SEC, including its reports on form 8-K, 10-Q, and 10-K and in particular the risk factors section of our form 10-K.
Additionally, many of these risks and uncertainties are currently amplified by and we will continue to be amplified by or may in the future be amplified by the COVID-19 pandemic.
It is not possible possible to predict where identify all such risks listeners are cautioned not to place undue reliance on these forward looking statements, which speak only as of the date hereof the comes.
<unk> undertakes no obligation to update any of these forward looking statements.
Furthermore of certain non-GAAP financial measures will be discussed on this conference call.
The presentation of this information is not intended to be considered in isolation, nor as a substitute for the financial information presented in accordance with GAAP.
A reconciliation of these non-GAAP financial measures to the most comparable measures prepared in accordance with GAAP can be accessed through our filings with the SEC at SEC Gov.
I will now turn the call over to James Flynn. Please go ahead.
Yeah.
Thank you Charlie.
Good morning, everyone and welcome to the Lumen Finance Trust earnings call for the first quarter of 2021.
I appreciate you joining today.
So again I'd like to provide an update on the recent positive developments for the company.
As previously announced via press release I'm pleased to note that on May 5th.
We successfully closed an underwritten public offering of 2.4 million shares of.
Of seven and seven eight series, a cumulative redeemable preferred stock.
At the public offering price of $20 $25 per share.
Okay.
We received approximately $58 million of net proceeds from the offering after deducting the underwriting discounts, but before estimated offering expenses.
The series a preferred stock has been authorized for listing on the New York stock exchange under the symbol L. F. T. P. R E.
And trading of the series a preferred stock commence yesterday.
Hey, Ted.
Simultaneous with the preferred offering we amended our term loan which of them, which will provide an incremental seven 5 million. The we expect to be funded this quarter.
Together these transactions will produce $65 million of net capital that we will look to deploy over the coming months.
I believe this transaction was the great execution for all of T and it's consistent with our stated goal of growing our capital base to create additional scale.
We believe will benefit all shareholders.
The positive investor interest for a preferred offering reflect strongly upon what else. He has been able to accomplish during the challenging year the.
Operating provided us the opportunity to tell our story to a broad institutional audience exhibit the breadth and expertise of the entire lumen platform and highlight the credit quality and performance of L. P. As the investment portfolio.
In the coming months, we hope to continue discussions with investors and educate market participants about L. S T and the opportunity we believe the offer investors.
As we've mentioned on previous calls although L. P is a relative is relatively small on our space our manager and the larger lumen platform does not.
Our managers one of the nation's largest capital providers in the multifamily and seniors housing space with over 16 billion in total transaction volume during the calendar year of 2020.
Our manager services of $47 billion portfolio and has over 550 employees in 25 offices nationwide.
The scale of this platform benefits for the investors of L. S T.
The great support in the execution of our investment strategy.
Our strategy is to continue to invest primarily in floating rate bridge loans with the focus on middle market multifamily opportunities.
Although we have seen increased competition for these investments the strength of the Loopnet platform and our focus on multifamily in particular continues to provide us with compelling investment opportunities.
In fact, we have seen our investment pipeline increased dramatically over the last several months.
We intend to use the net proceeds of our recent preferred offering and increased term loans to make additional investments in these types of opportunities.
As we continue to grow we will also identify other investment opportunities in commercial real estate debt to invest a portion of our capital.
Such as preferred equity and mezzanine loans and other high yield theory of debt instruments.
Before turning over to turning the call over to Jim and Mike I would also like the briefly touch on our portfolio and our financing sources.
Our focus on multifamily bridge lending and the strength of our credit and asset management platform continues to prove itself and the performance of our portfolio as of March 31st our portfolio was 100% performing with no loan impairments no loan defaults and no loans subject to forbearance.
Furthermore, we have not needed to grant a single forbearance, nor have we expand experience of single loan default during the COVID-19 era.
I believe this is a testament to both of our rigorous credit standards as well as our proactive asset management efforts.
With regards to of financing sources, we do not currently utilize repurchase of warehouse facilities and therefore, we are not subject to margin calls on any of our assets from from repo or warehouse lenders.
Our primary source of financing are two matched term non mark to market theory, CLO as well as the corporate term loan.
I'd like to note that our utilization of non mark to market financing provided proved valuable during the last year's disruption.
And we continue to see this as an attractive way to finance our investment portfolio.
When this management team took over as manager of L. F. T in January of 2018.
We were clear on our goal of deploying our capital on to commercial real estate debt investments with a focus on multifamily in order to supervise stable book value and earnings.
The support of market returns for our shareholders. We also indicated our desire then to grow L. P. Two of larger scale, which we felt the peak valuable to our shareholders with these recent.
Preferred offering and term loan increase we're continuing to make progress progress toward that goal and I'm excited about our continued growth as we focus on executing our business plan.
Of that I'd like to turn the call over to Jim Briggs, who will provide details on our financial results Jim.
Thank you Jim and good morning, everyone.
On Monday evening, we filed our quarterly report on form 10-Q, I provided the supplemental investor presentation on our website, which we will be referencing during our remarks the.
Supplemental investor presentation has been uploaded to the webcast.
As well for your reference on pages five six and seven of the presentation, you will find key updates and an earnings summary for the quarter.
For the first quarter of 2021, we reported net income to common stockholders of two for an 8 million for 11 cents per share, which represents a slight increase relative to Q4 2000, Twenty's net income to common stockholders of $2 5 million for 10 cents per share.
The current quarter was not meaningfully impacted by any non distributable earnings adjustments as a result, our distributable earnings attributed to common stockholders for the quarter was $2 8 million or <unk> 11 per share. This represents a slight increase relative to Q4 2000, Twenty's distributable earnings of $2 6 million or 10 cents per share.
Okay.
Relative to the prior quarter. The first quarter of 2021 was positively impacted by higher realized exit fees.
For the tune of approximately two cents per share as a result of elevated level of loan payoffs during the quarter.
Such benefit partially offset the decline in earning assets during the quarter, which resulted from net payoffs that Mike will give some more color on shortly.
In his opening remarks, Jim mentioned the successful closing of a preferred equity offering on may 5th which resulted in approximately $58 million of net proceeds to the company for.
For a dividend rate of 770, it's.
In accordance with the offering documents for the preferred equity transaction, we anticipate making our first dividend for shareholders on July 15th in the amount of approximately 38 cents per share.
As we work to deploy the proceeds from this offering and the incremental term loan of $7 5 million. We expect from this quarter. We may see short term declines in our net income on distributable earnings to common shareholders over the coming months we.
We expect any such decline to be transitory in nature, and we do not anticipate any negative impact or a medium term of long term earnings outlook.
However, the risk does exist in the short term for some drag on net income to common stockholders during its initial capital deployment phase.
Our book value at March 31 was $114 $3 million of $4 58 per share.
Parents favorably to the book value per share of the book value of $113 7 million or $4 from 56 cents per share as of December 31st.
As I've discussed in prior quarters, I would like to remind everyone that as the smaller reporting company as defined by the SEC, we have not yet adopted ASC 2016 Dash 13, commonly referred to as she saw where current expected credit losses, which is the comprehensive GAAP amendment of how to recognize credit losses on finance.
For instruments.
As the smaller reporting company, we are scheduled to implement she's so on January one 2023 until then we can continue to prepare our financial statements on the.
The incurred loss model basis.
As of March 31st we do not consider to be in here for our loans to be impaired under the incurred loss model and we have not recorded any impairments or allowance for loan losses from the current quarter.
On the current performance of our bridge loan portfolio remains healthy uncertainty about the COVID-19 recovery exists, including its impact on our borrowers on the value of properties that collateral lives on commercial mortgage loan investments. We will continue to evaluate the loan portfolio of for credit losses, and will record any impairments or allowance as incurred.
As a quick note with respect for our common dividend in accordance with normal course timing and process. We have not yet made of dividend declaration for the second quarter of 2021 weeks.
We expect to make the determination on our dividend in June after discussing with our board in normal course.
Now turn the call over to Mike Larsen, who will provide details on our portfolio composition and the investment activity.
Thank you Jim morphine everyone.
Oh, the first touch briefly on our quarterly investment activity during the quarter, we acquired three new loans with total incremental fundings of approximately $35 million.
All of these fundings were on loans secured by multifamily assets.
Jim mentioned since January we haven't seen of significant significant increase in the investment pipeline activity.
Which has been driven by the surge in multifamily value add acquisitions newly constructed properties that are in lease up and request for bridges, the permanent agency and FHA financing.
In general market competence and the commencement of an economic recovery from the COVID-19 environment has positively impacted bar demand for bridge loans during this year.
With these improved market dynamics and the increase in our pipeline, we feel positive about our investment opportunities.
On the short term, we anticipate deploying the proceeds from our recent capital raise over the remainder of 2021 and are confident in our ability to keep our capital fully deployed on going.
We experienced 98 million of loan payoffs during the quarter and at quarter end, our total loan portfolio had an outstanding principal balance of $484 million.
The portfolio consists of consisted of 34 loans with an average loan size of $14 million, which provides for significant asset diversity.
The portfolio has the weighted average spread to LIBOR of 353 basis points.
All of the loans in our portfolio had a LIBOR floor above the current spot LIBOR with the weighted average floor of 154 basis points.
The overall loan portfolio of quarter end was 88% multifamily, which is pretty much in line with prior quarter.
Due to our managers can strong focus on multifamily we continue to anticipate the majority of all the loan activity will be related the multifamily assets.
Yeah.
At 331 of our loan portfolio continued to be financed with two series C. Low securitizations with an average cost of financing of LIBOR, plus 150 basis points.
As you mentioned for the reinvestment period of our first CLO ended in February of 2020, and our second CLO of the reinvestment period that runs through August of this year.
With regard specifically to our first CLO, we experienced approximately 64 million in loan payoffs during the quarter since the reinvestment period. The net securitization hasn't ended these payoffs of began sequentially paying down the CLO bonds.
However, even after the impact of that deleveraging of our leverage and cost of funds within the first CLO remain reasonably attractive at 79, 8% and LIBOR plus 157 basis points respectively.
As reported on prior calls in the filings we are actively pursuing a refinance of our CRE loan portfolio and subject to market conditions, we expect to refinance our existing senior loans with the new CRE CLO during 2021.
We are encouraged by positive developments from the series C O of market and across the commercial real estate capital markets. So far this year and we believe conditions are positive for the street.
With that I'll pass the call back to Jim for some closing remarks.
Okay.
Thank you Mike.
Mentioned, we feel very good about our business plan and we're excited about the future of L. F T.
We look forward to updating you all on our progress and appreciate your time and your interest.
And with that I'd like to open the call to questions.
Thank you for asking question you May Press Star then one of you touched on phone to withdraw. Your question. Please press Star then true we will now take our first question, which today comes from Steve Delaney of JMP Securities. Please go ahead.
Thanks, everyone for you you guys have been busy congrats the.
Like to start with the term loan increase on that was actually done in April I'm sure you were in discussions about the preferred but in fact, the preferred it not not quite close. So now that you have that are you know.
Additional 50 some million of capital is it reasonable to think that there is there's further upside.
Sad to the size of the term loan facility as we move forward over the next six to 12 months.
Yeah.
So the term loan facility.
As you know we have we're subject to two certain certain covenants in.
With respect of debt and normal course of corporate governance, there. So in our discussions with with the provider of who's been very supportive of of the business plan. They were supportive of our ability to go in and do a preferred offering.
But but also where it wasn't interested in increasing the size of.
Of of their capital.
S T a.
So that's the.
That started that conversation and they were done really connected to one another the the increase from the term loan and the preferred offering.
I think the answer to your I think the answer to your question as you know we we as we stated in the past R. R.
Our goal our long term goal is to continue to grow the overall capital base and in particular, the overall equity base and in the plus one we've done so here with the preferred offering.
And we've talked in the past about you know common stock and other types of offerings that debt.
We've looked at.
That you'll see us continue to focus on how do we grow the overall base, how do we grow our equity base.
At this point more more focus than you know continuing to look toward the.
On the debt market that doesn't mean, we wouldn't consider increases, but just from a leverage standpoint, I think we felt comfortable with where we are in and one of continued to grow.
And the bite new investors as you know for the preferred offering we had a very strong institutional book.
Interest in and we certainly hope to continue that going forward.
Okay. Thank you Jim.
And I guess for Jim Flynn, Jim you were pretty clear about you know, we we respected and appreciated the concentration of multifamily.
And when we talk about diversification.
At looming for net finance trust, it sounds like rather than property type.
You may consider different loans structures, you know to get you two of you know of different return profile and I'm just curious how with your multifamily expertise how the construction loans a product with how you see that possibly fitting into the the REIT.
Sure so.
As you pointed out where we're certainly of multifamily seniors housing focus.
The platform.
And that's not going to change now or in the in the future.
We will obviously diversify it hopefully a bit more in product type, but with the heavy heavy concentration in multifamily.
In terms of of construction. So we the manager of the non L. T. The manager we have.
Been doing construction loans on our books you know.
The potential for there being.
We've typically done kind of non recourse and multifamily construction loans that we know very well.
You know higher yielding higher yielding varieties, so could I see those being having potential for a small allocation at the REIT, yes, that's possible.
It's not something that we're saying.
We're doing it but that that would be an example of.
It's something that has you know if we use the of life CLO financing. It's it's fantastic financing of you know, it's Mark tomorrow, non mark to market in the termed out.
Some of these other products would have a structural leverage at the asset level as it goes to the corporate leverage which we think is attractive.
Right.
Thank you for the comments.
Thank you Steve.
And ladies and gentlemen, as a reminder to ask the question. Please press Star then one on.
The next question today comes from Jason Stewart of Jones trading. Please go ahead.
Hi, good morning. Thanks.
If we could talk for a minute about incremental loans sort of the economics, there where spreads are on where you're striking LIBOR floors on a new origination.
Sure first of all you want to you on a deal that one for Jason.
Sure.
The markets I would say that on in general we are able to garner of loans that there still are free.
We consider the.
Wed call it up to kind of city 50, all in on it.
Level.
On the market pretty dispersed in terms of spread on with respect to the type of multifamily for instance, the class a b type of assets are have to be bad for I'm, sorry, the top of that those are much tighter and spread.
And we have the middle of the fairway worked for middle market multifamily assets that have been the anchor of our portfolio and I'd say I've tried though given the strength of our infrastructure origination of infrastructure, we are still able to garner.
You know higher or.
More on some premium relative to the.
The Pfizer on lease up assets larger sites.
So and we've been able to do so.
On the year comment and expect to be able to contribute on more of that.
Consistent with our historic on strategy.
The next few months.
Okay. That's helpful. I guess, what I think people are trying to get to here is oh can you originate loans and lever them via the credit facility.
I'm at an accretive ROA of two to the REIT and all of them. So maybe if you could put that in terms of advanced rate at the facility.
And what that means to the bottom line for the REIT would be would really be helpful.
Okay I'll start.
The first question and then I'll switch over to Jim or Mike for the second part in terms of bottom line, but in terms of on the leverage obviously, what we have right now is the CLO right. We don't have the sympathies as Jim mentioned, so as the result of that on the leverage is what it is.
On the risk.
But as the publicly available on advance rates from our CLO, which right now we're about 80%.
The the extent and we refinance the.
That's the yellow and obviously the advance rates and the will Garner then which hopefully is.
Going to be the same or better and we'll continue to provide the returns based on the spreads we're seeing in today's market.
So the bottom line, Jim or Mike.
Because of that.
Yeah, Yeah I mean.
Good my credit card.
Okay.
The the simple answer is the yeah, absolutely, we do see opportunities and I've seen the significant interest in the pipeline as you mentioned of opportunities that are accretive.
<unk> T based on.
Based on our current financing with the CRE, CLO and where based on on the strength of the capital markets today.
We see the opportunity is for refinancing of the CLO, which is which as Sean mentioned, the 80% of the answer it or higher than the financing costs of <unk>.
On the women 50 basis points of the LIBOR.
Range of Hugo So.
So with that with the existing but the financing is in place and one of the capital markets other than the spreads we're seeing on new investment opportunities from D. A.
And we're seeing quite a quite a robust pipeline of accretive opportunities.
Okay.
So I guess, we can all appreciate the transitory nature of the putting this capital to work probably funding in the last economic levels and you would want to or certainly could in the CLO market longer term I think everybody's sort of appreciate the longer term financing aspect of it but when you pull all of that together I mean, I think you noted the transitory nature of the impact on net income.
Can you define sort of how long do you think that that takes to work through and what the impact on the dividend.
Could be or do you think that the conversation with the board as we understand this is short term and we're gonna look through that when we think about the dividend rate.
Yeah.
Yeah. So.
Congrats on good well.
I was going to say, Jason that debt you know one of the one of the benefits of.
The re being managed by a much larger you.
External organization is that you know.
We've continued to.
To make loans, we don't we don't we the manager continued to make loans, even when the REIT is you know fully deployed and that allows us to continue to build the pipeline and build a portfolio of loans.
That are either already closed or or about to close.
Whether the read is fully deployed or not and so you know when we the size of the steel when we talk to our bankers on the board. We did so with the consideration toward how quickly can we put this money to work.
What what assets do we have that we could.
Potentially target for the.
The deployment within the REIT.
And also.
As we've stated publicly in the past we are in the process of evaluating the refinancing of our existing CLO. So with with the combination of the all of those considerations. You know, we expect that we'll be able to.
The deploy the capital over the coming months and hopefully not.
Not no not too much drag, but we certainly considered the the the negative implications of of capital that's deployed when when we sized it.
<unk>.
Okay. Thanks for taking the questions and congrats on on that deal and look forward to the things to come thanks for taking them.
Thank you.
And the next question today comes from Christopher Nolan and Ladenburg Thalmann. Please go ahead.
Hi, just a follow up on Jason's question I'm looking at the Q on the.
The weighted average coupon for your investments is five 1%.
The coupon on the preferred is seven 875%. So that's sort of implies a negative carry am I looking at the wrong.
The.
Hello, I'm sorry for missing.
The missing piece there is the leverage so that that coupon on the investments as of the the.
Of the coupon, we do deploy the leverage through its the non mark to market share each year loads debt finance loan.
Our loan portfolio.
And which rich.
On the Levered basis produces the return well in excess of the net income.
On on the preferred.
What is the return on the leverage basis. Please.
Well our current our current cost of capital is.
About one LIBOR plus 145 Charley of him.
I'm looking at your.
And then the weight.
The weighted average of the Leverages about 80, it's come down because we've been amortized at just above 80%.
As you know.
The you can look at our weighted average spreads of loans.
And see the met.
Do the math from there, but it's.
You guys for sales mentioned earlier the CLO market in general is has been very healthy and.
Robust then book leverage and pricing has has kind of is currently.
You know fairly close to what it was when we did our original clo's.
Certainly spreads on loans spreads have come in a bit.
But it's still you know on attractive overall return profile on the non mark to market.
Termed out leverage basis.
Oh, okay.
Okay.
I guess I'll follow up offline okay. Thank you.
Ladies and gentlemen. This concludes the question and answer session I would like to turn the conference back the other day insulin for final remarks.
Yeah. Thank you. Thank you all for your interest. Thank you for those that supported our recent offering.
As we mentioned, we hope to be out you know and the market meeting with participants and investors are more regularly going forward.
Look forward to speaking to you again next quarter.
Thanks, everyone.
He served this concludes today's conference call. Thank you all for attending today's presentation. You may now disconnect your lines and have a wonderful day.