Q4 2021 Lument Finance Trust Inc Earnings Call
Yeah.
Good morning, and thank you for joining the lunar Finance Trust fourth quarter 2021 earnings call.
Today's call is being recorded and will be made available via webcast on the company's website.
I'd now like to turn the call over to Charles <unk> with Investor Relations at Loopnet investment management. Please go ahead.
Yeah.
Thank you and good morning, everyone.
Thank you for joining our call to discuss lumen finance Trust's fourth quarter and full year 2021 financial results.
With me on the call today are James Flynn, CEO , Michael Larsen, President, James Greg's, CFO and peso Torres.
Real estate investment strategies.
On Tuesday, we filed our 10-K with the SEC and issued a press release, which provided details on our fourth quarter and full year 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 and May constitute forward looking statements within the meaning of section 27, a of the Securities Act of $90 33, 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 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 we will continue to be amplified by more than a teacher may be amplified by the COVID-19 pandemic. It is not possible to predict when identify all such risks listeners are cautioned not to place undue reliance on these forward looking statements, which speak only as of.
As 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 call the.
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 Rec.
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 at Www SEC Gov.
I will now turn the call over to James Flynn. Please go ahead.
Right.
Thank you Charlie good morning, everyone.
Welcome to the Lumen Finance Trust earnings call for the fourth quarter of 2021.
You all for joining.
2021 was a busy and important year for lumen finance cross selling.
During the year and over the FERC few months of 2022, we've executed several significant capital transactions.
<unk> us to meaningfully grow our equity capital and institutional Investor base.
At the same time, we made significant incremental investment.
And observed continued strong performance at our loan portfolio.
Those were all accomplished accomplished in an environment marked with uncertain economic considerations.
Around interest rates unemployment asset values.
All exacerbated by the <unk>.
Impact of variables such as Covid.
The tragic events going on in Ukraine.
Europe .
I'd like to begin by discussing our recent transferable rights offering which was announced on January seven 2022 and closed on February 22022 2022.
This transaction, which entitle shareholders to purchase newly issued common stock an LLC at a discount to the market price resulted in the company raising approximately $83 5 million of gross common equity proceeds.
We believe this is a transformative transaction that provides us with the growth capital.
They are necessary to further our objectives of achieving appropriate operating scale, expanding our capacity to make investments in target assets.
We intentionally structured the equity raises the rights offering to allow stockholders to participate in the companys growth by purchasing shares at a discount to the market price and avoiding ownership pollution.
We believe this raised enables the company to improve operating expense efficiencies and we anticipate that G&A expenses as a percentage of stockholders equity will decrease as a result of this offering.
We also expect that the offering will increase liquidity and trading volume of our common stock.
Finally, I would note that the transaction demonstrates the strong alignment of interest between LLC and its.
Its external manager limit.
An affiliate of the manager exercised oversubscription privilege. It made a total investment of $40 million in the transaction.
As we looked at the coming quarters, we intend to deploy this capital into the portfolio of multifamily centric assets.
System with the existing strategy and expertise.
Similarly levered basis.
We have.
Horribly utilized theory, you feel those to finance our investments and continue to believe that the CRE CLO.
Market provides attractive financing source due to favorable economic times as well as nonrecourse non mark to market features.
I will note that we have seen in the broader markets weaken over the last few weeks because of the risks and uncertainties around the Russian invasion of Ukraine and inflation.
New issue of Triple a theory, you feel those spreads have widened by as much as 30 to 40 basis points since the beginning of the year and we will remain cognizant of these levels as we look to deploy our capital on a levered basis.
With regards to our dividend, we declared quarterly common dividend of six cents per share for the first quarter of 2022.
This dividend reflects a resetting of our dividend taking into account our recent capital raise which meaningfully increase their share count during the quarter and resulted in a reduction in book value from 437% to 365.
In addition, this dividend reflects the anticipated drag on net income in Chicago shareholders as we deploy the newly raised capital over the coming months.
Overall, however, I would like to emphasize that once our capital is fully deployed we expect to be able to support a greater quarterly dividend six cents per share.
Pivoting to the company's 2021 result, Llc's fourth quarter capped off a banner year for our portfolio of perspective with record volume and portfolio growth. During Q4, we invested over $300 million in new floating rate bridge loans fully deploying the capital from 2021 successful.
$1 billion, CLO issuance and a $60 million preferred equity raise.
As of year end 2021, our total loan portfolio outstanding principal balance exceeded $1 billion.
This represents an 83% increase in portfolio size year over year.
It is also.
Also important to acknowledge that our focus in multifamily bridge lending and the strength of our credit and asset management platform.
Continue to allow the.
The portfolio to perform well.
As of December 31, our loan portfolio was 100% performing with no loan impairments no loan defaults and no loans subject to forbearance.
As stated in prior calls we still have not granted a single forbearance nor have we experienced any monetary default during the Covid era.
And I believe this is a testament to both our rigorous credit standards as well as our proactive asset management effort.
Perhaps most importantly, our ability to continue to execute on the business plan is reflected in our results for.
For the full year of 2021, our total distributable earnings was 39 cents per share, which represents a 108% dividend coverage ratio for the full year.
We continue to maintain a simple and straightforward strategy of deploying our capital into commercial real estate debt investments.
Focus in multifamily in order to provide stable earnings that support market returned to our shareholders.
We also feel it is important to grow up to a larger scale REIT.
Which we feel will provide long term value to our shareholders. We are continuing to make progress towards these goals and I'm excited about the continued growth as we focus on executing the business plan.
And they are coming up in the coming months, we hope to continue discussions with current and new investors educate market participants about LLC and the long term opportunity. We believe we offer investors our managers one of the nation's largest capital providers in the multifamily and seniors housing space executing over 17 billion in total transaction volume in 2020.
One.
Servicing are greater than a $50 billion loan portfolio and employing over 600 people in more than 30 offices nationwide.
The scale of risk platform benefits investors' ability and provides great support in the execution of our long term investment strategy.
As we've continued to show over the last three years, we're utilizing the strength of our manager to focus our investments in middle market multifamily floating rate bridge loans and they've continued to perform extremely well.
With that I'd like to turn the call over to Jim Briggs, who will provide details on our financial results.
Yeah.
Thank you Jim and good morning, everyone.
On Tuesday evening, we filed our annual report on Form 10-K , and provided a supplemental investor presentation on our website, which we'll be referencing during our remarks.
The supplemental investor presentation has been uploaded to the webcast as well for your reference pages four through eight of the presentation you will find key updates and an earnings summary for the quarter and the full year.
For the fourth quarter 'twenty, one we reported net income to common stockholders of approximately $2 5 million or 10 per share.
This result compares favorably to the prior quarter in which we reported net income to common stockholders of $1 2 million or five cents per share.
For the full year 2021 reported net income to common stockholders of approximately $7 4 million or <unk> 30 per share. This compares to $8 4 million or <unk> 34 per share for the full year of 2020.
With regards to the year over year comparison, I would like to note that our Q2 'twenty one results.
<unk>, a $1 7 million or <unk> <unk> per share loss on extinguishment of debt pertaining to the refinance of our prior CRE CLO.
Excluding the impact of this nonrecurring expense our full year net income to common stockholders would have been 36 per share representing an approximate 5% increase year over year.
For the fourth quarter of 'twenty, one we reported distributable earnings of $2 6 million or <unk> 11 per share and for the full year, we reported distributable earnings of $9 7 million or <unk> 39 per share.
Q4, Q4's, distributable EPS represents an increase relative to the prior quarter's distributable EPS at $1 4 million or <unk> <unk> per share.
This increase was driven in part by our ability to fully deploy our CLO and preferred equity capital during the quarter, which Jim noted and which we have to leave it to you on prior calls.
I'd also like to touch on the exit fees, which we have highlighted on prior calls as well.
These loans are typically structured with exit fees, which are recognized as interest income when a loan pays off in the fees collected in cash.
Therefore, the timing of loan payoffs and an associated exit fee income can cause some variability in <unk> earnings from quarter to quarter.
S. T may also be entitled to yield maintenance penalties and extension fees on loans from time to time.
In Q4 O S. T earned $1 5 million on fees and loan payoffs of $137 million in prior quarter <unk> year end exit fees of approximately 800000 on loan payoffs of approximately $118 million.
Our total stockholders equity at December 31 was approximately $169 million are.
Common book value per share was $4.38 as of December 31st.
As Jim noted in his opening remarks subsequent to yearend, we closed on the previously announced transferable rights offering.
Result of this transaction the company's total shares issued and outstanding increased on February 22nd to 52 2 million shares.
As a result of the transaction and on a pro forma basis. The Companys total book book equity increased to approximately $250 million.
Total common book value increased to approximately $190 million and book value per share of common stock declined to approximately $3 six and track sets.
As Jim previously mentioned.
We do anticipate a drag.
Drag on EPS as we deploy the proceeds of this rights offering.
Over the coming months and quarter quarters.
As discussed in prior quarters, I would like to remind everyone that as a smaller reporting company. That's defined by the SEC, we have not yet adopted ASC 2016, cash 13, commonly referred to as seasonal.
Our current expected credit losses, which is a comprehensive GAAP amendment I've had to recognize credit losses on financial instruments.
Smaller reporting company, we are scheduled to implement so on January one 2023 until then we continue to prepare our financial statements on an incurred loss model basis.
As of December 31, we do not consider any of our loans to be impaired under the incurred loss model, we have not recorded any impairments or allowance for loan losses in the current quarter.
While the current performance of our bridge loan portfolio remains healthy uncertainty.
The COVID-19 recovery continues to existing including its impact on our borrowers and on the values 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.
I will now turn the call over to Michael Larsen, who will provide details on our portfolio composition and investment activity.
Thank you Jim and good morning, everyone.
As Jim and Jim noted our strong fourth quarter results were driven in part by the full deployment of the capital that we raised last year.
This was accomplished due to continued strong investment activity over the last three months of the year.
During Q4, we acquired 23, new investments from an affiliate of our manager with total outstanding principal balance of $336 million.
All of these acquisitions were secured by multifamily assets.
The fourth quarter acquisitions had a weighted average spread to LIBOR of 321 basis points and the weighted average LIBOR floor of 12 basis points.
With a weighted average loan to value at origination of 70%.
For the full year 2021.
<unk> acquired and funded $984 million of new loans that that represents a significant increase.
Fair to just $58 billion of new loan acquisitions during the fourth prior year of 2020.
We continue to maintain a very strong pipeline of new multifamily bridge lending opportunities and we see no indications of a slowdown.
Our activity as we move into 2022.
During the quarter, we experienced a $137 million in loan payoffs, which is in line with our recent prior quarters.
And at quarter end, our total loan portfolio and an outstanding balance exceeding 1 billion. This is really a milestone for us. It's first time that we've exceeded $1 billion.
In loan balances.
The portfolio consisted of 66 loans with an average loan size of $15 million. Our overall loan portfolio at year end was 92% multifamily at a slight increase from 90% multifamily as of year end 2020.
Our second highest asset type concentration is self storage, which represents 5% of our portfolio.
And we continue to believe that generally self storage and industrial property provide beliefs volatility in performance outside of multifamily.
This diverse portfolio reflects our focus in the middle market multifamily space, we've touched on that it's very important we continue to believe that middle market workforce housing asset class. It's the best real estate asset class for investment today market dynamics of demographics continue to support multifamily and we believe this creates an attractive.
<unk> investment opportunity.
For our shareholders.
With respect to pricing our portfolio has a weighted average spread to LIBOR of 346 basis points and a weighted average LIBOR floor of 46 basis points.
As we've discussed in prior quarters due to the number of non bank bridge lenders in the market and the market's priority for multifamily debt assets comma.
Competition in the bridge space continues to be very strong.
Despite this competition we've seen some stabilization.
A slight increase in spreads over the last few weeks and months.
The competition does remain strong.
You'll note our exposure to retail and office property types continue to remain very low at just 3% of our total balance on a combined basis as of year end and represents a decline relative to 12 30 120 level of 9%.
Behind basis.
We continue to anticipate the majority of our loan activity will be related to multifamily assets, but we will look to supplement our multifamily investments with strong quality investments in other asset types.
So we feel can offer strong return profile relative to multifamily.
Yeah.
At year end, our loan portfolio was financed with one CRE CLO securitization and has a weighted average spread of 143 basis points over one month LIBOR and advanced rate just over 83% this year.
Hello has a reinvestment period running through December 2023 allows principal proceeds from repayments to be reinvested.
Subject to various conditions.
We do not currently utilize repo or warehouse facility financing.
And therefore, not subject to margin calls at any of our assets from a repo or warehouse lenders.
Overall, we continued to.
Silver over over the last three years and over the last year were utilizing the strength of our manager to focus on investments in middle market multifamily floating rate bridge loans.
Which has continued to perform extremely well and we.
We continue to see very strong pipeline of these multifamily lending opportunities.
Which we expect will continue.
With that I'll pass the call back to Jim.
Thank you Mike.
As I mentioned earlier, we feel that we are making great progress in the execution of our business plan to grow our capital base.
[noise] and deploy our capital prudently and continue to be excited about the long term future for <unk>.
We look forward to updating you on our continued progress and appreciate your time and interest.
That I'd like to turn the call over to questions.
Peter.
We will now begin the question and answer session to ask a question you May Press Star then one on your telephone keypad excuse me a speakerphone. Please pick up your handset before pressing the keys.
To withdraw your question. Please press Star then two.
At this time, we will pause momentarily to assemble roster.
Our first question comes from Crispin Love with Piper Sandler.
Now go ahead.
Thanks. Good morning. Thank you for taking my questions. So first on the on the dividend reduction for the first quarter can you just speak to some of the aspects that you and the board are seeing that warrants the three.
Recent reduction then and then just also what that means for the core earnings power for a moment over the next several quarters I.
I understand that the near term drag here from the offering that can kind of be the key of the operating wise to grow the portfolio and earnings over time. So I'm just kind of curious thoughts over the next couple of quarters and how long it should take to deploy that capital.
Sure.
So.
To reiterate we don't believe that that.
Fully deployed that's that's the right dividend and we do believe.
We can support something something higher.
Effectively we went through the rights offering we raised almost $84 million.
We obviously executed that that offering.
When you look at the timing of Av.
Hitting the market there was not ideal with the inflationary pressure really having an impact on.
The markets in the early part of 2022.
And then book ended with.
The beginnings of what is now a crisis in eastern Europe that has caused further market disruption.
And so those obviously that has played into.
The timing of of all of our investment decisions. So we feel will be fully deployed.
And the next couple of quarters.
And be able to move forward, but we've considered.
What that drag has what impact that drag has.
Earnings per share.
What impact the increased number of shares that were a result of the rights offering.
Issued at a discount as we've discussed.
And also the current market conditions, given where they are.
Volatility and lack of stability.
All of those things we expect to.
Our reason at least the latter part of the market the market components were reasonably optimistic that those things will.
Dissipate over time.
Sat with our board looked at the earnings not wanting to create.
Create any.
Incremental <unk>.
Dilution in.
Of our.
Of our book share price.
We looked at those and decided that we think the prudent decision.
It would be to make this reduction reduction to success.
Knowing and looking at our earnings power and looking at what we've been able to do over the last couple of years few years.
And feeling very confident that.
That is.
Generally temporary.
And that our business plan and what we've been able to do we will continue to be executed by the people that we have here. So it was it was really looking at all of the factors and wanting to ensure that we have.
We've continued to.
Stay to all of you how important it is for us.
Create stable earnings into U.
I'm sure that we cover our dividend.
Didn't want to.
Put ourselves in a position of.
Potentially not being able to do so.
But we also feel that.
We've taken a.
Relatively prudent view and I think as you look at the earnings on a go forward basis investors and shareholders will see that.
And over the long term basis, we're very comfortable and confident.
Great. Thank you.
Appreciate the comments there and then.
Would you say, it's fair to say that you're right now on hold.
Putting that $80 million of equity capital work before you can lever it up and do a crease. The CLO transaction, then kind of part of that right. Now is just the markets are limiting that just as spreads have widened.
Yes, I mean look the reality is we'll put it to work on a certainly on an unlevered basis.
Relatively.
In short order.
The timing of executing any securitization.
It would take would take time and a couple of couple of months anyway.
Regardless of the market conditions, just to get all of the go through the rating agency process and working with the banks and meet with investors in structuring the deal. So so we are in the midst of doing that but we're also looking and evaluating all of our potential options for.
Leverage you're financing the asset again, there's still high demand for.
In the CLO market for for that type of paper.
There's been a couple of deals that I think the characteristics of those transactions are different than ours that provide for.
I think I think some rationale for the wider spreads.
I don't expect that we're all hopeful for some resolution to.
Start resolution to things that are that are going on in Europe , and hopefully the impact that that will have on you.
Supply chain issues in.
Material costs in all of the things that flow through on the economic side of this crisis.
To get us to a more stable environment, we could execute a deal now.
Those levels would be.
Not the same as we've done in the past, but theres still.
They are not unattractive, but.
From a timing standpoint, we actually think.
We've we've got a little time under a normal operating environment before we would even estimate that decision.
Okay, great. Thank you I appreciate you taking my questions.
Our next question comes from Stephen Laws with Raymond James You May now go ahead.
Hi, good morning.
To follow up.
Follow up kind of on the previous.
Questions.
Think about.
Fully deployed how much.
And considering other types of financing will you use some warehouse financing to ramp ahead of a potential future.
Cielo and if so kind of how do we think about how much leverage you'd be willing to put on there.
Okay.
So historically as you know Stephen we haven't used that because we haven't had to we've been able to effectively warehouse.
Loans on the manager's balance sheet.
And.
<unk>.
In the.
Given the current market conditions, it's something we're going to look at.
And decide whether we want to go ahead and go through the process of putting a warehouse in place eventually we would need to have some warehouse capacity would want some.
So so it is we are talking with.
Our banking partners.
To explore potentially putting something in place I don't think that we would.
We wouldnt utilize the warehouse.
At a max leverage kind of.
The one point that you see in a CLO, where you have the.
Madam Chairman.
Non mark to Mark basis, but.
We could we could see we're looking at that that'll take a little bit of time to put in place.
What kind of going through this.
The pluses and minuses of.
The cost and time to do so and comparing that to.
The options that exist.
Continued down the path.
Putting a CLO in the market as soon as possible.
Again I think.
Okay.
We are we are in the midst of.
Significant turmoil in the market.
Broader markets I don't mean, just just.
CLO or real estate market in fact fundamentals are.
Still pretty good despite inflation and other matters, but the geopolitical risks.
That's overshadowing everything.
It's hard to.
Put a pin in it.
And say okay.
Things are going to be different so we should take this path.
As I just said I think we have.
We want to deploy the capital as quickly as possible.
We still have some.
There's work to be done whether it's on the warehouse or securitization financing under any market conditions. So we have.
The benefit if you will if you want to call it a benefit.
I'm having to undertake those.
Those actions.
Hey.
But I think if we sit here and say look if there's.
If there is some reasonable.
Outcome in Europe .
The fighting and stops.
People dying and put some stability in the market, it's hard to imagine that that.
Doesn't trickle through into.
Into a more stable environment in the capital markets overall very quickly.
But that could be.
A month it could be a few months it could be could.
Could be a week.
Talks change.
But again I think we are.
We're still well positioned our portfolio is doing great our pipeline is.
More than sufficient to utilize the capital.
And we just want to ensure that we have.
Put in place, especially if we're putting in place long term.
Financing of any sort that we do so.
In the most efficient manner.
Great I appreciate those comments are definitely a lot going on out there impacting the markets.
Michael maybe this is for you, but can you talk about competition certainly multifamily.
A lot of.
Interest in lending a lot of competition out there can you talk about what youre seeing.
Lot of repeat business or kind of how.
Sure.
Petition among pipeline look.
Sure I'll touch on that and then we're still and always feel free to jump in.
There is a lot of competition in market supported these floating rate bridge loan investments and particularly for multifamily. It is kind of the favorite asset class today.
I think the big picture, what we continue to see a very strong pipeline.
Very attractive opportunities and Thats driven by the district that our manager has in that space.
We are really putting.
And the leader in the multifamily housing and seniors housing space.
With the.
Well <unk>.
Sales platforms spread across 30 plus offices.
The market executing transactions in the multifamily space every day.
The manager Thats across product types.
So that drives investment opportunity and pipeline there.
That.
It creates opportunities for <unk>.
That's through quite a few repeat borrowers borrowers that is larger platform vendors.
A long term relationship with.
And being able to offer.
A wide set of products brings.
Loyalty and.
Two.
From our clients and allows us to.
To drive pipeline.
Where where I think we see the competition.
<unk>.
Reflecting most of us on the pricing side and continued.
Tighter pricing, although as I said I think we've seen it somewhat stabilize.
But in terms of building pipeline and opportunity.
Opportunities that has not been an issue and it was just managing.
With the pricing.
But for so.
Do you have anything that is too.
No I agree with that.
Probably in the fourth quarter of last year, there were some widening of spreads.
We expect that it will dissipate at the beginning of this year, but to Mike's point, what do we have seen actually is that spreads have Howard.
If anything over the past few weeks I'd say this thing from slight widening akshay because like the volatility.
Very importantly, excuse me what Mike.
You mentioned a experienced with everything because the pipeline is extremely strong and that the theme of Minto market workforce housing continues to be.
The anchor of that pipeline.
Great. Thanks for the comments this morning.
Our next question comes from Steve Delaney with JMP Securities You May now go ahead, hey, good.
Morning, everyone and congratulations on your successful rights offering.
Wondering just how much cash is currently available NFL one.
And where I'm really going with that is to see.
Where do you see the maximum portfolio size capping out of that with today's capitalization and financing sources. Thank you.
So within the current CLO.
Yes.
It's fully deployed plus or minus.
And.
There are anticipated payoffs, but that will be fully deployed.
From.
From the standpoint of where we could get.
What the total size would be we think it is.
It's somewhere.
An incremental call it $500 million of assets could be a little bit higher.
And it could be a little bit lower depending on the nature of the assets and spreads but thats.
That's probably about the Max number.
If you can say on that cap.
It sounded like.
We do have cash in the entity, we have cash in LST.
Not thats not currently in the CLO so from that standpoint.
We do have.
Some some or I should say, we had cash some cash prior to.
The offering of <unk>.
The rights.
Price offering.
Got it.
We think that number is somewhere between 400 to 500 plus.
Of asset.
Jim that struck me as being a big number and then just looking.
Our press release.
Forgot that they kept the rights offering added 75% additional comment common equity so 75% of what you had before so it is it certainly is in line there.
And my follow up is.
Any considerations I know you're very much targeted on multifamily.
But given competition given.
Uncertainty around where the CLO market kind of ends up.
Have you given any consideration to other multifamily debt investments such as maybe mezz loans or press equity in that sector.
Yes, so we so we there is.
Limit the manager right.
We look in participate in those markets.
Already.
We would we would consider.
Potentially some some portion of the capital going into going into those types of assets.
Frankly, the yields are.
Or kind of in line with in some cases below what you could get from a from a levered <unk>.
Senior position.
But again I think the market is moving at.
Pretty dramatic.
That's pretty dramatic pace so.
Opportunistically there are some.
<unk>.
Done some structured finance, we've done some construction to mass.
On our on our managers balance sheet that that result in in securities are positions that would that would fall in the high yield category again the yields are similar.
They're either there is a little bit below or a little bit above. So we we are contemplating that to your point depending on.
Where the best places to put the capital we've also.
We have a number of equity investments in self storage, Mike mentioned that on the debt side, we have.
Some other opportunities in seniors housing, where one of the largest seniors housing lenders in the entire country on our on the on the managers.
Platform so.
There's opportunities to potentially add a little bit of mix.
So the portfolio I think we've said that in prior prior earnings calls.
Sure.
Right.
I think I think any sort of volatility always provides for some assessment of what the opportunities are too.
The risk return profile I think we've been in a very.
The market has been very stable and very consistent right, it's been increasing values.
And an extraordinary transaction volume for the past.
<unk> plus years.
I expect now we still have significant volume, but we're starting to see some change rate you've had low interest rates are you have higher interest rates. So there is there is a bit more.
I think opportunity for us to if you look at some other.
Investments that we've we generally participate in and have the experience and expertise in at the manager level.
It's still fit within our our MLP strategy that could be could be beneficial, but again, we still think the CLO market is is is still attractive and we will.
It to become even more attractive.
As things as things stabilize in the capital markets.
Understood and thank you for the comments.
Okay.
Our next question comes from Jason Stewart with Jones trading.
Good morning, and thanks for taking the question.
Briefly are there assets that you can buy from the manager today or would that create a mark to market loss.
<unk>.
No. We've got there are assets that that we can buy from the manager.
They would be.
It would be par asset.
The book that we have.
As is the par book I mean, we originate we're closing loans daily or weekly at least if not daily.
On the manager's books.
Typically.
If we removing assets over they're all they're all almost.
I don't want to put a timeframe on Brazil, theyre all newly originated assets Theyre not.
They're transferred at par.
That's correct, if theyre not transfer that if theyre not transferred at par it would require us to go to the board.
Which we've never okay to be clear.
And can you.
Can you share with us sort of a run rate of originations at the at the current point in time.
Yeah.
First of all you can give a run rate, but I can tell you in our fiscal year, which ends in two weeks, we're going to do over $2 billion of bridge loans. This year that includes the loans that we have.
That's the total loans that limit the manager is closed including those that have been.
Ben.
New to LST and more than half of that is probably been since December of facility you can give more specifics on that.
So.
In turn from run rate, obviously equal in terms of the LSD itself. It will depend on capacity freeing up from our existing CLO because I just mentioned.
And it is already fully deployed but basically with respect for instance in the existing CLO.
Can say that we're very confident that prepayments this year will be reinvested.
We invested fairly quickly.
Yeah.
And we are obviously also constant than if we did do a if we did do a CLO market conditions.
Permitting.
Also coincident of high deployment for that particular issuance, so our coincidence R&R robustness.
Production and transfer of that through the manager is very strong.
Okay, Alright thats helpful.
I guess, just one more question on the dividend.
Thank you, we're pretty thoughtful about the rights offering you know it was pretty substantial dilution to book value. What was the board's thought process to not just take a longer term view on the dividend and maybe you have two or three a quarter.
Additional book value reduction.
Well, it's something that we've talked about.
Group with the board.
That.
The view of the management team and the board was that.
Yeah.
This is a.
This is a short term.
Short term reduction that we think makes sense, we think it's important to cover the dividend.
Ideally we would have preferred the rights offering can be done at a higher price with less solution right. There there was a lot of.
Those considerations in.
Didn't want to.
Put ourselves in a position of.
Paying back paying dividends with capital that that we raised I mean, that's that's.
Fundamentally the biggest component I mean, we did we did talk about that I think from the standpoint of well.
If we believe that we can do better than 6% on a go forward basis.
Or as we get fully deploy it in some of the factors I talked about.
As investors that are that have come into the stock will will receive and achieve that.
That value.
And.
Just felt that that was a better.
Message to send to to shareholders more broadly not just those who participated and then everyone to say look we're going to cover our dividends with the hope that you see the long term value and strategy here we forgot.
Our manager put in $40 million every every.
Officers in every board member fully subscribe to the rights offering. So we all believe in the long term strategy and just.
I think it's important for us.
To continue this depressing incentives ensuring that we cover our dividend.
We certainly took into account.
The market conditions, and whether that would that would perhaps delay deployment.
I'm, not saying I'm, not saying that it will but just.
That was certainly part of the discussion waiting on on the overall decision.
Alright, thank you.
Our next question comes from Howard Blum with UBS you May now go ahead.
Good morning, and a supplemental chart you put up you saw you showed a sensitivity analysis to increasing LIBOR rates.
Up to an increase of 1%.
While none of us can predict the rate of increase of interest rates clearly the direction is clear.
And 1% is there any.
Sensitivity or does it flatten out at that point.
No it would.
Would be.
That trend would continue right.
Got it.
It's hard to get that interest rate sensitivity is focused solely on.
The index rate right. So if you use.
If the index goes up.
In general.
We have more assets and liabilities, so that trend would actually be a positive but if if.
That relates to steady spreads so.
Part of the reason for the sensitivity again. This is as you look through the long term.
Investments.
The platform as we put new assets on.
Some of our legacy assets burn off but those assets that we put on are going on.
We have assets that were put on when LIBOR was.
Extraordinarily low close to zero.
Assets that are going on today.
So the floors and the.
The impact of of dramatic swings will have.
Probably the greater the greater the the change to the index to the bigger the.
The impact because of the floors that we have in our loans.
Whenever the levels are at the time that we would take a look so some of that some of the interest rate sensitivity is.
<unk>.
Is muted because of because of floors that exist on the asset side of our balance sheet.
So in other words, if rates were to go up 2%. The the number would be even larger than you showed.
As the negative impact.
Just to clear it.
It would flip okay. Thank you yes in.
In general increase in short term rates as a positive to our earnings.
Because as Jim said of the crude floors that we have that are.
Above LIBOR.
Initial increases and in the short term.
The negative impact, but but.
Longer term and in general an increase should have a positive.
Thank you very much.
The longer the further back the asset was originated you can assume that.
The impact would be.
The impact would be would be.
Worse or nonexistent unless it were very high.
But again Thats why im saying is if we moved into a year from now.
A lot of the assets that are not impacted by 25% or 50 year.
Basis points shifts would be impacted right. So we would have to have a positive impact.
Thank you.
And then if you have a question. Please press star and what our next question comes from Matthew Howlett with B Riley.
You May now go ahead.
Hi, Good morning. Thanks for taking my question first is the goal to get to that mid teens call. It return on a CLO retained interest and I know you said it said that the market needs to come down youre going to wait to see where spreads shakeout, but one if that's the goal and I think the math right that the cap.
Raised $82 million could add something like 10 million to net income after <unk>.
After management fees is that map my thinking about that sort of correctly, directionally, where where the pro forma net income could go.
Directionally, Yes, I mean, a couple of things one.
One would be I think the leverage is probably a little bit lower than if I understood I think I think it's going to be roughly 20%.
So 401, we might be able to get a little bit inside of that like we have in the past, but you know.
TBD.
<unk>.
And the return profile, yes, I think I think it's.
Currently kind of in a low teen return profile. If you did it executed trades per day.
On a gross basis I don't think that.
We're suggesting that we're slowing down just to be clear.
We are moving forward.
But we don't have to make.
By moving forward today, we're not making a decision to do something two months from now.
So along the way we are coming to.
Evaluate and explore all alternatives, but we're still moving forward under the assumption that we execute a CLO.
The short term and if we're not going to ask you to feel though it means because we leave.
Chosen a different strategy.
And that's not.
In terms of probability and things that we're talking about that's not our goal and that's not our expectation.
It's just I think in the last two to three years.
You haven't really had to consider other strategies and I think today's capital markets environment.
At least requires us to explore alternatives.
But I think as a management team, we still believe the CRE CLO market.
The appropriate.
Financing tool for these types of loans.
Got you.
Yes.
The way I wanted to summarize this as you're thinking about understanding where market conditions are and thinking about.
No.
I think when the CLO market other other areas I mean is there any way.
Is there any reason to believe that once the capital is fully deployed if at that so the way you feel are proof.
The core EPS Couldnt go back up to sort of that 90 10.
Per quarter area once fully deployed and then on that note with some of the G&A savings that will happen and then debt secured term loan.
Terminal I wanted to ask about possibly refinancing that I think it's over 7% just just talk about how we should think about.
The earnings picture when it all comes together.
Alright, so the total deployed capital sorry incremental deploy capital is probably closer to 100.
Because it's the capital the excess capital we had on balance sheet plus.
Plus what we've.
Raced in the rights offering.
Okay.
Maybe it's in the mid <unk>, but it's not it's closer to 100 than it is to <unk>.
So yes.
The earnings will go up by that much or expected to go up by that much as we as we deploy that capital.
We do expect to visit the.
Refinancing or potential refinancing of our term loan and even look at you know.
How we would how we would.
How favorable the preferred market is weak.
Said.
Prior calls that the.
The prepayment penalties on.
The term loan and make that prohibited to think about right.
Right now but over the next.
12 months or so.
We'll be working with our existing lender and looking at alternatives to refi that that would be accretive to earnings.
Earnings standpoint, so so yes, that's part of it as well on a per share basis.
We've been under size since we took over management one of the reasons, we continued down the path with the rights offering and we still need to continue.
Capital raising is to is to get to a better operational.
Expense.
Patiency.
Level.
And.
This will help so our per share G&A should should go down should be more in line or.
Approach.
Approach to levels that some of the larger competitors are at but we need to.
Continue on that growth trajectory to fully.
To fully realize that benefit so.
Yes.
Again long term view ongoing.
Refinancing or evaluation of our of our existing fixed capital stack that.
At the corporate level.
Reducing expenses on a per share basis fully deploying the capital.
Into accretive.
Long term investments that deliver that return.
And yes, our expectation is that that the <unk> per share is something that we.
We are hopeful we can we can increase.
As we move forward with all of those considerations.
Got it so just to summarize it's a $100 million in excess capital.
Thank you can refinance the term loan after 12 months.
G&A.
So I should go down and then you said the last part the preferred.
Is that I looked at it it's trading it looks like your current depreciating, a little bit above par can you reopen that in half.
How much would you be with the new equity common equity base, how much could that be increased.
Well, there's not there's not a there's not a stated limit we call them, just we could raise incremental capital there.
Okay.
If the market would.
We do have to we have considerations around.
Leverage that preferred structure is.
Attractive from the standpoint of being perpetual.
So there is not a limit to it it's just a matter of what does the market.
What does the market calling for in terms of rates and where we think it's accretive from an earnings standpoint. So.
We still believe that we have to continue to deliver earnings and returns to what we've been doing it for less.
Three years, but.
Is it continuing to raise our equity base certainly are common base, but really any equity base is really important for us.
So that we can we can deleverage the entity is.
Yes.
At the corporate level.
A little bit more than we have.
And that will continue to be the goal and one of the ways will be to look at.
When you find what we already have and whether the preferred market is an.
An attractive market to continue to raise capital that's certainly on the table on the on the term loan.
I think that we looked at the step down in the chart.
On the spot to give me the exact quarter, where we think it starts to make sense.
But I think it's the first or second quarter of <unk>.
Of next year.
Quarter of 2023, so about a little less than a year from now.
Got it.
Just last real quick on the MSR. It sounds good time to sell it if you haven't sold already is now a good time.
The move in rates I appreciate the question. Thank you.
So in addition to two.
In addition to just thinking about market and refinancings were already speaking for that.
Lenders.
I have a discussion about whether there's a way to.
Do something without having to go to market.
To make that a more attractive.
Piece of financing for the entity.
Thank you.
Okay.
And the question on the MSR is I would just say that as it is at the point now where it's a very small relative to our overall portfolio.
We considered all options with respect to that although this note that.
It is very small.
So the option for.
Or more.
Limited just by itself.
Thank you.
This concludes our question and answer session I would like to turn the conference back over to Jim Flynn for any closing remarks.
Yeah.
Thank you all for joining thank you for the interest in LLC and the questions today.
Please feel free to reach out with any additional questions or follow up we'd love to talk to any investors or any of.
Our analysts.
To give more information on our more detailed information on our on our strategy and where we are.
But I appreciate the support that you provide and I appreciate your joining us today.
Thanks, and we'll talk to you.
Yeah.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.