Q2 2021 Lument Finance Trust Inc Earnings Call
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Good morning, and thank you for joining the alumina finance Trust's second quarter 2000 of 'twenty..1 earnings call. Today's call is being recorded and will be made available via webcast on the company's website.
I would like to turn the call over to Charles study with Investor Relations at Luna Investment management. Please go ahead Sir.
Thank you and good morning, everyone and thank you for joining our call to discuss moving finance Trust's second quarter of 2021 financial results with me on the call today of James Flynn CEO, Michael Larsen, President James Briggs, CFO and for solo Torres head of real estate investment strategies.
On Monday, we filed our 10-Q with the SEC and issued a press release, which provided details on our second quarter results.
So 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 and May constitute forward looking statements within the meaning of section 27, a of the Securities Act of 1933 and section 21 E of the Securities Exchange Act with 1930 for when.
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 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 will continue to 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, which speak only to the date hereof.
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. A 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.
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 SEC.
The SEC dot Gov.
I'll now turn the call over to James Flynn. Please go ahead.
Yeah.
Thank you Charlie Good morning, everyone welcome to the Lumen Finance Trust earnings call for the second quarter of 2021, and thank you all for joining.
This quarter was the busy important and successful quarter for aluminum finance trust growth and growth strategy.
During the quarter, we executed several significant capital transactions that allowed us to grow of capital and institutional Investor base at the same time, we made significant incremental investments observed continued strong performance in our portfolio and maintain distributable distributable earnings consistent with our prior quarters.
This all accomplished in an environment marked with uncertain economic that are interest rates unemployment asset values.
Well, it's helped out of it with respect of COVID-19, and the variance specifically the delta there now appearing throughout the country in the world.
The first of our major transactions was the issuance of the perpetual preferred equity that we discussed during our prior call raising $58 million of net proceeds.
Secondly, and as previously announced on June 14th we successfully closed a $1 billion CRE CLO.
In conjunction with this transaction, we redeemed our 2 prior seal of.
This new CLO provided us with an attractive leverage.
And pricing on the nonrecourse non mark to market match term basis.
Our utilization of the CLO market proved valuable during last year's disruption and we continue to see this as an attractive way to finance our investment portfolio.
The closing of this our largest CRE CLO represents another significant positive milestone in the progression of our growth plans.
Importantly, this transaction allowed us to quickly deploy the portion of the proceeds from our preferred equity offering well well, while still providing favorable economic and structural features to allow for continued growth.
The CLO allowed us to increase the L. P. As total assets on balance sheet by 80 feet, 85% from 567 million as of 331 to 1 point O 4 billion as of June 30.
In addition, combining our 2 priority of Lowe's into a larger single transaction allowed for increased economies of scale and for.
The Philippines greater investment diversification.
Okay.
We believe the strong execution for the CLO, along with our successful preferred equity offering and the increase in our term loan reflect noteworthy market and investor interest in our company and in our future.
In the coming months, we hope to continue discussions with investors and educate market. The dish participants about the L. F T and the opportunity we provide for investors.
Although L. F. T is relatively small in the commercial mortgage REIT space.
Our manager and the larger lumen platform or not.
Our manager has 1 of the nation's largest capital providers in the multifamily and seniors housing space executing over 16 billion in total transaction volume in 2020.
Servicing of $47 billion.
Loan portfolio and employing nearly 600 employees in over 25 offices nationwide.
The scale of this platform benefits the investors of LT and provides great support in the execution of our investment strategy.
As we have continued to show over the last 3 years, you're utilizing the strengths of our managers to focus our investments in middle market multifamily floating rate bridge loans that have continued to perform extremely well even in the very challenging economic environment last year.
Although there has been increased competition for these investments with numerous new debt funds entering the space the <unk>.
Breath of women's platform and the strength in multifamily in particular continue to continues to provide us with compelling investment opportunities.
During the last 3 months since our preferred offering you have.
Vested in the vested over 530 million of new floating rate bridge loans, showing our ability to quickly to book.
<unk> substantial amounts of newly raised capital.
The strong deal flow is driven by the expansive origination capabilities of our manager.
In addition, we have seen tremendous transaction activity in the first half of the year as the market response to the Covid recovery, albeit tempered by the recent increases seen in cases around the country.
As we continue to grow we will also identify other investment opportunities in commercial real estate debt.
To diversify and invest a portion of our of our capital into asset classes, such as preferred equity mezz loans and other high yield debt securities.
While we are proud of the capital raising and deployment of achievements. This quarter. It is important to acknowledge that our focus in multifamily bridge lending and the strength of our credit and asset management platform.
Allowed us in our portfolio to continue to perform admirably admirably.
As of June 30th our loan portfolio was 100 per cent performing with no loan impairments no loan defaults and no loan subject to the forbearance for the.
The more we have.
Granted the single forbearance, nor have we experienced the single loan default during the Covid era.
I believe this is a testament to both the rigorous credit standards as well as our proactive asset management efforts.
Okay.
And perhaps most importantly, our ability to continue to execute our business plan is reflected in our results.
Our distributable earnings for the quarter.
It was <unk> 11 per share consistent with last quarter inclusive of this quarter. We have produced 43 cents per share of distributable earnings over the prior 4 quarters, representing consistent earnings that provides strong support for our dividend.
When this management team took over as manager of Lumen Finance Trust in January of 2018, we were clear on our goal of deploying our capital into commercial real estate debt investments for the focus in multifamily in order to provide stable earnings that support of market returns for shareholders.
We also indicated our desire to grow of tea to a larger scale, which we felt would provide value to our shareholders with the recent CLO refinance the preferred offering we're continuing to make progress towards these goals and I am excited about our continued.
Growth as we focus on executing the business plan.
With that I'd like to turn the call over to Jim Briggs, who will provide details on our financial results.
Thank you Jim and good morning, everyone.
The Monday 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 the <unk>.
Couple of mental Investor presentation has been uploaded to the webcast as well for your reference.
On pages 5.6 and 7 of the presentation, you will find key updates and an earnings summary for the quarter.
For the second quarter of 2021, we reported net income to common stockholders of approximately 955000 or 4 cents per share, which represents the decline relative to Q1 of 2021 net income to common stockholders of $2.8 million for <unk> 11 per share.
However, the current quarter was meaningfully impacted by certain non distributable earnings adjustments.
After adjusting for these non distributable items Osp's distributable earnings per share of common stock was <unk> 11 per share, which as Jim mentioned is in line with the prior quarter.
The first the abuse of adjustments was $1.7 million or 7 cents per common share loss on extinguishment of debt.
This loss on extinguishment of debt was caused by the unwind of Hunt CRE 2018 F L 2 which for us refinance during the quarter.
The $1.7 million loss represents an acceleration of deferred financing costs incurred at the closing of the parents CRE.
2019 of F. L, 2 which were not yet amortized to interest expense at the time of the refinance.
As of June 30th and as of today. The company does not expect any additional losses or expenses associated with either of Alex Pease to previous CRE CLO.
The 2 other non distributable items experienced during Q2 the for.
First of all of US was $220000 of unrealized loss on mortgage servicing rights, which was driven by higher realized prepayment speeds in our legacy residential MSR portfolio.
I'd like to note that as of June 30th the carrying value of our legacy MSR asset was less of $700000 and therefore, we do not believe that any future for changes in the value of this asset should be a meaningful driver of earnings.
The final non distributable items incurred during Q2 was the $54000 income tax benefit associated with the activity at our taxable REIT subsidiary.
In his opening remarks, Jim mentioned the successful closing of the preferred equity offering on May theft, and the successful closing of our CLO refinance on June 14th.
As we work to deploy the proceeds from these transactions we may see short term declines in our net income of distributable earnings to common shareholders over the current months coming months.
We expect for any such the clients to be transitory in nature, we do not anticipate any negative impact or medium term for long term earnings outlook. However, this risk does exist in the short term for some drag on net income to common stockholders for during this capital deployment phase.
Our total stockholder holders equity at June 30 was 170 <unk>.
The 1 million, which represents a $56 million increase relative to the prior quarters total stockholders' equity of $114.2 million.
This increase was driven by the successful execution of our preferred equity offering during the quarter as previously discussed on the call.
The common book value per share was $4.41 as of June 30th.
This represents a 17 cents per share or 3.7% decline relative to the March 31st common book value per share of $4 from 58 cents.
With regards to this decline I would like to note that the.
The book value per share of common stock is net of $2.7 million for 11 per share of preferred stock offering costs incurred during the quarter.
Book value per share of common stock was also negatively impacted by the $1.7 million loss on extinguishment of debt that I previously referenced.
Excluding the impact of these nonrecurring items L. F teams book value per share of common stock would have increased by 1.7 per share of quarter over quarter.
As discussed in prior quarters, I would like to remind everyone that of a smaller reporting company as defined by the SEC.
We have not yet adopted ASU 2016, cash 13, commonly referred to as she saw where current expected credit losses, which was comprehensive GAAP amendment of how they recognize credit losses on financial instruments.
The smaller reporting company, we are scheduled to implement Cecil on January 1.2023 until then we continue to prepare our financial statements on an incurred loss model basis.
As of June 30th we do not consider any of our loans to be impaired under the incurred loss model and we have not recorded any impairments or allowance for loan losses in the current quarter.
For the current performance of our bridge loan portfolio remains healthy uncertainty about COVID-19 recovery of exists, including its impact on our borrowers and on the value of the properties the collateralized our commercial mortgage loan investments we.
We will continue to evaluate the loan portfolio for credit losses, and will record any impairments or allowance that was incurred.
A quick note with respect for our common dividend in accordance with normal course timing and process. We have not yet made the dividend declaration for the third quarter of 2021, we expect to make the determination of our dividend in September after discussing with our board of normal course.
I'll now turn the call over to Mike Larsen, who will provide details on our portfolio composition and investment activity.
Thank you Jim and good morning, everyone.
As Jim mentioned the last several months have been very active from an investment standpoint. During Q2, we acquired 41 investments from an affiliate of of our manager with a total U P D of $303 million.
These acquisitions consisted of 23 loans with an aggregate <unk> of $289 million and 18 participation related the loans already owned by all of tea with the total combined U P b of $14.5 million.
82% of these acquisitions during the quarter were secured by multi for multifamily assets, 17% were secured by self storage assets and 1% was secured by office.
The Q2 acquisitions had a weighted average spread of LIBOR of 379 basis points of weighted average LIBOR floor of 113 basis points and a weighted average LTV at origination of 67, 2%.
We experienced the $175.8 million of loan payoffs during the quarter end of quarter end, our total loan portfolio outstanding had outstanding principal per ounce, the $611.5 million.
The portfolio consists of 44 loans with an average loan size of $14 million, which provide for significant asset diversity.
Our portfolio has the weighted average spread of LIBOR of 366 basis points.
98 per cent of the loans in our portfolio of of a LIBOR floor above the current spotlight LIBOR rate with the weighted average floor of 132 basis points.
Our overall loan portfolio at quarter end was <unk> 85 per cent multifamily down slightly from prior quarters due primarily to our investment this quarter in self storage.
Self storage represents 9% of our portfolio at quarter end compared to 1% in Q1.
More of a retail exposure decreased from 7% to 4 per cent of the portfolio.
We believe that generally self storage and industrial property types of provide the least volatility in performance outside of multifamily.
Typically our self storage debt debt investments are related the top national operators.
Or in markets with per capita of existing supply below the historical national average of 7 screen square feet per capita.
Furthermore, we focus on moderately leveraged assets as reflected by the weighted average LTV of 61% on our self storage portfolio.
Despite this increase in self storage investments due to our managers strong focus of multifamily. We continue to anticipate for the majority of our loan activity will be related to multifamily assets.
However, we will look to supplement our multifamily portfolio with quality investments in other asset types that can offer of strong return profile relative to multifamily.
Turning to the recent CLO issuance in aggregate of approximately 834 million of investment grade related notes were issued and sold the institutional investors.
Well the <unk> retained subordinated interest in the CLO of approximately $166 million.
This represents an extremely attractive advance rate of 83 for 375 per cent, which compares favorably to an average advance rate of 78, 3% on Lst's price yellows as of March 31st.
The offered notes at an initial weighted average spread of 143 basis points of of 1 month LIBOR, excluding fees and transaction costs, which is very consistent with the cost of our price yellows.
When you see a lots of 30 month reinvestment period running through December of 2023 of that allows the principal proceeds from repayments of <unk>.
Assets to be reinvested. In addition, the initial collateral for the CLO includes approximately $314 million of ramp which will be used to acquire additional loans or participations over the first 180 days.
Just as a reminder, we are not currently utilized repo or warehouse facility financing of LST and therefore, we are not subject to margin calls on any of our assets from repo or warehouse lenders.
Subsequent to quarter end on July 29, the company acquired an additional $250 million of multifamily loans from an affiliate of the manager at a weighted average interest rate of LIBOR, plus 337 basis points and a weighted average LIBOR floor of 17 basis points.
These incremental acquisitions have allowed us to the play a significant portion of the capital we raised during the quarter through a preferred offering in the CLO.
In general market confidence in an economic recovery from the Covid environment has positively impacted bar of demand for bridge loans during the year.
With these improved market dynamics and the increase in our pipeline, we feel positive about our investment opportunities in the short term, we anticipate the anticipate deploying the proceeds from our recent capital raises over the remainder of the remainder of 2021 and are confident in our ability to keep our capital fully deployed ongoing.
With that I'll pass the call back to Jim.
Thank you Mike.
As I mentioned earlier, we feel we're making great progress in our business plan and our growth index and.
And are excited about the future of LT.
We look forward to updating you all on our progress and appreciate your time and interest today.
I'll 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 1 on your Touchtone phone.
Youre using a speakerphone please pick up your handset before pressing the keys.
Withdraw your question. Please press Star then 2 and at this time, we will pause momentarily to assemble our roster.
And the first question will come from Christopher Nolan with Ladenburg Thalmann. Please go ahead.
Hi, Thanks for taking my call.
Jim Briggs the comments that you had on the decline in the near term earnings.
Given the rollout of assets in the third quarter to date, what would be the catalysts for the decline.
Yes.
So is the does the.
The decline in the second quarter earnings I'm, sorry, Chris just to be clear on that.
Yeah, No I thought he was commenting debt in the near term coming quarters, we could see a decline in earnings so it'd be tough, yes, sorry, I was on I was on the agenda.
In my comments I, just mentioned that there.
There is stop store capital to be deployed.
And as a result of that we could we could see a.
A drag.
Okay.
And then I guess.
2 follow up questions..1 is on the addition of self storage.
Do you guys anticipate this becoming a significant.
Part of your strategy above where it's currently at or.
Just sort of ex stay at current levels.
No. So I wouldn't I wouldn't describe it as a significant component.
What I would say is as you know our floating rate bridge flow program since the since you know this management team has been executing.
That platform, which which predates the taking over the management of.
Of L. F. T. We've always had a multifamily in housing focus so 80.90 per cent, maybe maybe a touch under 80 in certain periods.
And that's generally been.
The way that we viewed the business going forward of L. T.
And instead of self storage is not something that.
It's something we've continued to put on our own balance sheet as well.
You know just just for yields and attract the product that we feel like we know well the size of L. F T over the past.
Or just in general, but certainly since we've taken a of the management has limited our ability to T generally diversify.
But I think as we stated multifamily and housing in general is our bread and butter and I would expect it to continue to.
The maintained at or about the current levels or more.
This this uptick is largely related to you know doing the equity offering having a large portfolio of assets that we were able to you know.
Immediately deploy capital.
That was raised by moving assets from the.
From the managers balance sheet into the REIT or at 1 time.
So I think it's I think that perhaps looks a bit overstated because of that but in general I would expect it to 2.
Stay at or below the levels, meaning the self storage and in non <unk>.
Non multi asset classes too.
Stay at that somewhere somewhere south of 2030 per cent or at the most.
The final question final question and then all of penetration. Please go ahead.
So I was just kind of add to that.
I mentioned that we did.
Subs in the quarter and acquired $250 million of additional multifamily assets in July and just to add the what Jim said if you. If you include those acquisitions as of the end of July the the portion of the portfolio of best in the self storage is now at 7% or was at the end of July at 7% of multifamily at 80.
9%, so so that was.
The consistent with what Jim said, well, we'll supplement multifamily investments but.
Don't expect it to be.
We have significantly more than more than what you see.
Great and final question leverage ratio, what's the target leverage ratio going forward and does that include the preferred stock and the equity part.
Yeah. So the the I mean, depending on what you want to look at it for total leverage for the put.
We would look at both total equity and common.
We continue to believe that were you know.
For our size of our leverage as we feel appropriate because of the type of leverage the that we that we utilize.
The non recourse turned out financing of the <unk>.
The the.
Favorable and standard of term loan and even a preferred equity being perpetual with.
With no put rates.
In General we think were.
Overall, our our leverage ratios or are on the high side of of market as we grow and continue and we do expect to grow and continue to look and seek to raise new capital of the general expectation would be to look to to raise capital that would.
You know help help reduce debt.
Debt leverage ratio to more of an inline in the in the middle of the market.
Great. That's it for me thank you.
The next question will come from Chris Mueller with JMP Securities. Please go ahead.
Hi, Thanks for taking the question and congrats on the 2 transactions this quarter. So I guess following up on that a little bit can you guys talk about maybe what kind of loan capacity size. You have following those 2 transactions are sort of different way what is the fully deployed portfolio size.
Yeah.
Well the fully deployed portfolio size of of loans would be the the $1 billion just just north of.
Yeah. So.
Okay.
From a from the standpoint of the the only thing not the only thing, but the 1 of the.
Benefits of the larger transaction allows us to execute larger deals and that's that's largely due.
Due to just general diversification number of loans.
Is geographic concentration et cetera. So we we can deploy the capital in a wider range of assets.
But in debt, but its roughly a $1 billion.
Alright, and then with 3 payments they looked a little high this quarter or was there anything behind that and then do you have any thoughts of repayments of look like for the rest of the year. Thank you.
And then for Silicon off for a few of I don't think there was I don't think there's any magic to a to what happened. The other then.
You know you had.
Notwithstanding the the Delta Varian and some of the concerns around around Covid that are kind of elevated again.
Thank you you probably had.
Some of our of managers holding off a bit because of uncertainty and not wanting to.
You know to.
Go into a permanent financing until they had more clarity on.
The performance and overall economic health of that might've.
Facilitated some guys, perhaps waiting a bit longer but in general I don't think of.
For so you can offer your thoughts on this but I don't I don't think there was any particular catalyst per se.
Hey, we need to.
[noise] prepay and get this refinanced you know people are concerned about rates, but we could probably go back and listen to these calls.
For the last couple of years in end of <unk>.
Generally said.
People are concerned about rising rates many of those quarters, So I'm not sure that the.
That's it that's the real true narrative, but the Brazil, if you have other thoughts there.
Sure the Mi.
I would say the free.
The Jim's.
It's fairly consistent I will note that perhaps 1.
Chocolate the concept there is there was a bit of the obviously last year with Covid there wasn't much activity in either of the acquisition of our financing side and so there might have been a little bit of a delay if you will repayment.
Level from the perspective of there were prepayments of probably shouldn't have happened last year, but were pushed off of that little bits of there was a bit of that but I would not the same number of Mt.
Alright, thanks for taking the questions.
But again if you have a question. Please press Star then 1.
This will conclude our question and answer session I would like to turn the conference back over to James Flynn for any closing remarks. Please go ahead Sir.
Thank you I just wanted to thank everyone for your continued interest in L. F. T. I look forward to speaking again next quarter and.
Please reach out if you have any other questions and we'll talk to you soon thanks al.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.
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