Q1 2022 Lument Finance Trust Inc Earnings Call
[music].
Yeah.
Good morning, and thank you for joining the Meramec Finance Trust first quarter 2022 earnings call. Today's call is being recorded and will be available via webcast on the company's website.
I'd now like to turn the call over to Charles <unk> with Investor Relations that limit investment management. Please go ahead.
Thank you and good morning, everyone.
Thank you for joining our call to discuss finance Trust's first quarter 2022 financial results.
With me on the call today are James Flynn CEO , Michael Larsen, President James Briggs, CFO , and <unk> 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 first quarter results.
We also provided a supplemental earnings presentation, which can be found on our website.
Before handing the call over to Jim I would like to remind everyone that certain statements made during the course of this call are not based on historical information and May constitute forward looking statements within the meaning of section 20 <unk> of Securities Act of $19 33, and section 21 E of the Securities Exchange Act of 1034.
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 set.
<unk> of our Form 10-K.
Additionally, many of these risks and uncertainties are currently amplified by and will continue to be amplified by or in the future may be amplified by the COVID-19 pandemic.
It is not possible to predict or identify all such risks listeners are cautioned not to place undue reliance on these forward looking statements, which speak only as of the date hereof and 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. Our 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 reckon.
Reconciliations of these non-GAAP financial measures to the most comparable measures.
Repaired in accordance with GAAP can be accessed through our filings with the SEC at Www Dot SEC Gov.
I will now turn the call over to James Flynn. Please go ahead.
Thank you Charlie.
Good morning, everyone and welcome to the Lumen Finance Trust earnings call for the first quarter of 2022. Thank you for joining.
During Q1.
Continue to observe very strong performance in our investment portfolio.
We need to make significant incremental investments to grow the asset base.
First I'd like to begin by recapping, our Q1 equity capital rate raise which we discussed in detail on our year end earnings call.
February 22nd <unk> closed on the transferable rights offering which resulted in the company raising approximately approximately $83 5 million of gross common equity proceeds.
This was an important transaction that provides <unk> with growth capital required to meet our objectives of achieving appropriate operating scale and expanding our capacity to make investments in target assets.
We believe this raise enables the company to improve operating expense efficiencies.
We anticipate that the general and administrative expenses as a percentage of stockholders equity will decrease as a result of the offering.
We also expect that the offering will increase the liquidity and trading volume of our common stock.
Finally, I'd note that the transaction demonstrated a strong alignment of interest between <unk> and its external manager limit fulfilling.
The affiliate manager exercised oversubscription privilege. It made a total investment of $40 million in the transaction.
With this recent capital raise in mind I would describe our overall investment performance in Q1 of 2022 is in line with expectations as we began to deploy the new capital.
So with our existing strategy and expertise, we acquired 14 multifamily assets from an affiliate of our manager.
As a result, we increased the size of the investment portfolio by approximately $76 million or seven 5% during the quarter.
In order to continue growing the portfolio on a leverage basis to fully deploy our recently raised capital and take advantage of the manager's significant pipeline of loans.
We focused on executing in line with the loan financing traction transaction to leverage our newly acquired assets.
Shortly we will utilize series CLO to finance our investments continue to believe.
Or do you feel has provided an attractive financing source.
The favorable leverage as well as the nonrecourse and non mark to market features.
Yeah.
Clearly, we have experienced volatile capital markets over the last few months with elevated concerns around inflation, the speed and size of the fed rate hikes or supply chain issues, the Russian invasion of Ukraine, and broader U S and world Economic health.
There has been limited CRE CLO CLO.
CLO activity during the four months of the year, but we have seen new issue AAA spreads widened by 40% to 50 basis points or more since the beginning of the year.
In recent in coming weeks, we expect to see more new activity in this market and we are.
We'll be working on the new CRE CLO transaction for LLP.
Seeking to execute in the coming months, assuming market conditions permit.
It is clear that the cost of liabilities has increased and the corresponding market spreads on assets are also increasing.
We believe it likely that newly originated assets going forward.
Wider spreads in existing assets with similar characteristics.
Those increases will be in line with the increases in the cost of financing.
We also expect to continue to see increasing short term interest rates, which over time provide some economic benefit to LLC.
With regards to our dividend, we previously declared a quarterly dividend of <unk> <unk> per share for the first quarter of 2022.
This level reflected resetting of our dividend taking into account our recent capital raise and the increased share count.
In addition, the dividend reflected the anticipated drag on net income and income to common shareholders in the short term as we work to deploy the newly raised capital on a levered basis.
Overall, however, I would like to emphasize that once our capital is fully deployed on that leverage basis, we expect to support a stable consistent run rate market yield on a go forward basis.
It is also important to acknowledge that our folks in multifamily bridge lending and the strength of our credit and asset management platform have allowed the portfolio to continue to perform well.
As of March 31, our loan portfolio was 100, 100% performing with no impairments no monetary loan defaults and no loans subject to forbearance.
As stated in the past we are still not granted a single forbearance nor have we experienced a single monetary default during the Covid era.
Testament to both our rigorous credit standards as well as our proactive asset management efforts.
We continue to maintain our simple and straightforward strategy of deploying our capital into commercial real estate debt investments with a focus on multifamily in order to provide stable earnings supportive market returned to our shareholders.
We're making progress towards <unk> long term goals and remain excited about our continued growth as we focus on executing the business plan.
The coming months, we will continue discussions with investors and educate market participants about <unk> and the opportunity we offer investors.
Our manager has one of the nation's largest capital providers in the multifamily and seniors housing space executing over $17 billion in total transaction volume in 2021.
Servicing a $50 billion servicing loan servicing portfolio and employing over 600 employees and more than 30 offices nationwide.
The scale of this platform benefits investors' ability to provide strong support in the execution of our investment strategy.
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.
On Monday evening, we filed our quarterly report on Form 10-Q, 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 on pages four through eight of the presentation you will find.
Key updates and an earnings summary for the quarter.
For the first quarter of 2022.
We reported net income to common stockholders of approximately $1 $8 million or <unk> <unk> per share.
Also reported distributable earnings of approximately $1 $7 million or <unk> <unk> per share.
Represents a decline versus Q4, 'twenty one's distributable EPS of $2 6 million or <unk> 11 per share.
There are a few primary drivers of the quarter over quarter decline in distributable EPS. The first of these is share count.
As mentioned by Jim in his opening remarks on February 22nd we closed on a transferable rights offering as a result of this transaction the company's total equity inclusive approach permanent preferred increased by approximately $80 million quarter over quarter.
From approximately $169 million as of year end to $249 million as of March 31.
The offering caused our total shares issued and outstanding to increase from $24 9 million shares as of December 31 to $52 2 million shares as of March 31.
Our weighted average share count during Q1 based on February 22nd issuance State was $36 4 million shares.
And share count contributed <unk> <unk> per share EPS decline.
Next I would like to touch on the exit fees, which we have highlighted on prior calls our <unk> loans are typically structured exit fees, which are recognized as interest income when a loan pays off in the fee is collected in cash therefore, the timing of loan pay offs and associated exit fee income can cause some variability in our <unk> earnings.
Quarter to quarter.
<unk> may also be entitled to yield maintenance Pelling, Please and extension fees on loans from time to time.
In Q1, 2022, due to lower level of loan payoff activity, our exit fee income was 528000.
Compared to $1 $5 million of fees on loan payoffs in Q4 of 'twenty one.
Lastly, our gross interest income declined in Q1 due to the weighted average coupon of our portfolio decreasing from three 9%.
As of year end to three 8% as of March 31.
This decline was primarily driven by lower interest rate floors on new acquisitions.
As a result of the Q2 rights offering transaction. The Companys total book equity increased to approximately $249 million total common book value increased to approximately $189 million and book value per share of common stock declined to approximately $3.62.
Per share we stated last quarter that we did anticipate a drag on distributable EPS is to redeploy the proceeds of this rights offering on a leverage basis.
Would expect distributable EPS to continue to be pressured during Q2 until such time as we were able to execute a CLO where alternative forms of financing transaction.
As discussed in prior quarters, I would like to remind everyone that as a smaller reporting company as defined by the SEC, we have not yet adopted ASC 2016 Dash 13, commonly referred to as seasonal for current expected credit losses, which is a comprehensive GAAP amendment of how to recognize credit losses on financial instruments.
As a smaller reporting company, where you are scheduled to implement Cecil on January one 2023.
Then we continue to prepare our financial statements on an incurred loss model basis.
At March 31st 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.
While the current performance of our bridge loan portfolio remains healthy.
Uncertainty about the broader economy and COVID-19 recovery continues to exist. We will continue to evaluate the loan portfolio of credit losses, and we recorded impairments or allowance has occurred.
I will 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.
We continue to experience a robust level of origination activity and that started this year and the LSD portfolio continues to grow.
During the first quarter as mentioned earlier, we acquired 14, new investments from our manager with a total principal balance of $185 million.
All of these acquisitions were secured by multifamily assets.
$19 million of these new loans are indexed to one month LIBOR and the remaining $66 million of loans were indexed to 30 day terms sofa.
The first quarter acquisitions had a weighted average spread to the index of the optical index of 340 basis points and a weighted average index rate floor of nine basis points in the acquired loans had a weighted average loan to value at origination of 75%.
We experienced $109 million of loan payoffs during the quarter and at quarter end, our total loan portfolio outstanding principal balance was 1.08 billion.
It represents a seven 5% increase in portfolio size quarter over quarter and over 100% increase relative to the first quarter of last year.
The portfolio consisted of 71 loans with an average loan size of $15 million portfolio at quarter end with 94% multifamily despite increased from 92% multifamily adds of the year and 'twenty one.
Our second highest asset type concentration with self storage, which represents 3% of the portfolio.
Our exposure to retail and office continues to remain very low at 3% total principal balance on a combined basis.
We continue to believe the middle market workforce housing multifamily asset class, it's the best real estate asset class for investment today, Despite rising rates and the current inflationary environment, we believe that the supply demand dynamics demographics and strong rent growth trends in this space continue to support multifamily.
The assets and created an attractive investment opportunity for our shareholders.
Due to our managers strong focus in multifamily we continue to anticipate that the majority of our loan activity will be related to multifamily. However, as we've said in the past we will look to supplement multifamily investments with strong quality investments in other asset types that can offer a strong return profile relative to multifamily.
With respect to pricing our portfolio has a weighted average spread of 336 basis points and a weighted average index for 27 basis points.
Due to continued market interest in investing in multifamily debt assets, which are our anchor investments.
Competition in the bridge space continues to be strong. However, we have begun to see an increase in loan spreads on new originations. This year, driven by economic uncertainty, great volatility and spread widening in the broader capital markets, whereas a few months ago, we were seeing loans priced with spreads generally in the low to mid 300 basis.
Since we are now seeing in pricing in the high three hundreds, which we expect over the short term to continue to trend up.
This movement is in line with other increases in the overall market.
We anticipate this adjustment of market spreads on our loans to align with increases seen in the capital markets continue to occur throughout the remainder of this year.
Jim mentioned earlier that our investment return profile has a strong positive correlation with rising interest rates. We have included a rate sensitivity table on page 11 of our supplemental earnings presentation.
Overall, we expect <unk> to meaningfully benefit from a continued rise in short term interest rates.
Fed battles inflationary pressures.
Current forward curve.
Here's one month's software increasing to over two 5% by the end of the year, which holding all else equal would increase our distributable earnings by approximately eight per share on a run rate full year basis.
On the financing side as of 331, our loan portfolio was financed with one series CLO securitization the weighted average spread of 143 basis points over one month LIBOR.
And an advance rate of $83, 375%.
The CLO has a reinvestment period running through December of 2023, providing continued attractive financings through this year and next.
We do not currently utilize repo or warehouse facility financing, yeah, that'll key and therefore.
As we've noted before we are not subject to margin calls or any of our assets from repo or warehouse lenders.
Overall as we have continued to show over the last three years, we are utilizing the strength of our manager to focus our investments in low marketing.
Market multifamily floating rate bridge loans.
That has continued to perform extremely well.
The pipeline remains strong.
Yes.
With lending opportunities through our management pipeline and we expect that will continue.
With that I will pass the call back to Jim for some closing remarks.
Thanks, Mike as I mentioned, certainly we've seen.
Market volatility and changes, but we still remain confident in the business plan and are excited about <unk> future are we like the asset class that we participate in we believe we're well positioned.
Two two.
Progress in this market and we look forward to updating you all in the future.
In future quarters, and with that we'd like to open the call to questions.
We will now begin the question and answer session.
I'll ask a question you May press Star then one on your telephone keypad.
If you are using a speakerphone please pick up your handset before pressing the keys.
Withdraw your question. Please press Star then channel at this time level pause momentarily to assemble our roster.
First question comes from Christian <unk> with Piper Sandler Sandler. Please go ahead.
Thank you good morning.
<unk> made some comments on the Cree CLO in your opening remarks, I mentioned, the 40 to 50 bps of widening in the market and I think on the last call. You mentioned 30 to 40 bps. The widening so that 40% to 50 bps. That's was about 10 or so more bps, a widening I just want to make sure I have that right and then relatedly to that how confident are you.
Thank you. Thank you.
You will be able to complete a pre CLO in the coming months given the market volatility we're facing right now.
Sure. So the answer to the first one is.
As you described it in terms of the widening is yes, it's incremental to our prior call.
The statements on our prior call and in fact, there is.
There is.
Deal in the market and we know there are several others that are expected to come to market over the next call. It 60 days or so.
So we have seen that widening.
When you when you look at.
The fed funds rate rises or.
Or increases.
Its not terribly surprising, but obviously it is it is disruptive.
To the market at least in the short term.
What is is less.
Transparent to the.
The market and investors are individuals spreads on assets as thats going on.
And obviously that doesn't get reset those don't get reset at one time like a CLO that's issued assets originated over.
A period of months and if you look at.
The deals that have hit the market you look at our portfolio.
Can you bifurcate deals by month.
Without even dissecting the credit characteristics or risk parameters, you'd see generally a steady increase on a monthly basis, probably going back certainly for the year and probably going back maybe a little bit further and so.
There is.
There is a dual process year of rates going up on both sides, which is obviously <unk>.
Healthy and critical for the market to continue to function.
In terms of.
The CRE CLO.
Our conversations with our partners in bankers.
And those in the market.
There's still a ton of liquidity and cash interested in this type of security and rated securities.
At this moment based on those conversations I feel fairly confident that the market will remain.
Healthy and open.
As we said pricing and price discovery will continue to be.
Something that we'll have to monitor but.
I, certainly all signs point towards towards the market being open.
And again, the nature of our assets the short term nature of the assets.
And those liabilities in the floating rate nature allow us to.
Take advantage of.
There's increasing spreads as we originate new product and by example.
Assets that we that pay off that are in our current book.
I mentioned earlier, but I do expect that.
All things being relatively equal meeting credit.
That.
Perhaps it will be higher on new assets and this is a phenomenon that phenomenon, but a characteristic that I think all financial firms, particularly those that are.
On the CRE side, or we're all kind of.
Facing the same the same challenges.
In terms of the speed at which.
This is happening.
On the other side, having kind of a stable market.
That will that will hopefully level off over the.
Rest of this year.
Long run healthy for our ability to move forward finance assets.
Our assets and offer financing to our to our borrower clients.
To answer that fully yeah, no that was great. Thank you for thank you for the color there.
Another one from me so.
Would you characterize your core earnings power right now with how the portfolio stand at least right now I know that first quarter is a little bit of an anomaly here given the rights offering.
And the likely the cash drag for a portion of the quarter. So I'm curious how Q2 and then even beyond <unk> looks for earnings power compared to the current dividend.
It's it can be a tough question because it's okay.
Absent that precede yellow or kind of post pre.
Hello.
Considering.
Yes, I think so look I think you said it right. It's a little it's a little difficult, but if you.
If you assume some relative stability and I don't mean no increases right.
Know that there are there are priced in and anticipated increases in short term rates for the rest of this year and maybe beyond.
We've seen it on the asset level of deals coming in that we see.
We are pricing deals wider on the asset side.
And there seems to be a general receptiveness in the market.
To both of those trends.
And obviously if those are if those trends continue in a relatively proportionate and stable manner. The earnings are.
We feel we feel pretty good.
Confident in our ability to.
Deliver core earnings that deliver that market return.
It's not all.
Costco up rate, we also have.
A.
Miss match in a positive way, meaning are our assets are greater than our liabilities in terms of short term rates, though short term rates go up.
<unk>.
Over time should be a benefit to.
Financial entity like <unk> so.
In terms of how we feel about it I think.
We're certainly cautiously optimistic but we feel.
Net.
Without significant.
Incremental disruption in the market.
Ukraine type of event that we have some reasonable stability moving forward with with how people are looking.
Towards the rest of the year on a consensus basis.
We will be able to deliver that market and competitive return.
Similar to our peers.
Thank you I appreciate it thanks for taking my questions. This morning.
Thank you. Our next question is from.
Stephen laws with Raymond James Please go ahead.
Hi, Good morning, you covered a lot in the.
The prepared remarks, and the last question. So I appreciate everything you've provided so far.
I guess I had a question on a couple of different loans. It looks like two of the loans number two and nine so to your top 10 months to mature in the next coming.
<unk> months and Youre only retail exposure.
Supposed to mature in July .
Curious to get your thoughts around that do you expect those to pay off do you expect extension just so will we see any extension fees or other fees tied to those.
Any thoughts on those three loans.
Sure I'll let.
Charlie you can identify those and give thoughts in a second but broadly speaking.
You mentioned the retail assets, it's pretty.
Pretty.
Relative small percentage exposure of both of those assets are.
<unk>.
Performing assets, so we feel very good about.
In Austin asset so.
I don't know we have an answer on the sponsors plans there.
<unk>.
Yeah.
I'm just pulling up the.
The loans here.
Brazil, if you have it in front of you and we can speak to yes. It's on page 13 of the supplement.
Got it so number.
We expect <unk> nine we expect to pay off for sure.
They're moving forward.
Number two.
Okay.
Each.
Jim If I may I'll, just say that generally.
Loans are.
Thanks.
Well credit for that.
Based on various data points, whether they be.
Or.
Potential purchase offers and certainly from a refi perspective.
And again as Jim said.
I cannot comment on specific borrower plans, but.
We have currently no concerns on the credit of those assets.
Therefore, it can you rank Russia theme.
Payment ability.
I'd say it would be high.
Great I appreciate the color. It does it does yes, it does raise.
Just just.
Anecdotally I guess, a little bit if you look at if you look at the and this is reflected in payoff rates, but if you look at the last couple of years, probably probably few years.
Business plans, particularly in the business and the floating rate space, where to do some work as quickly as you can and sell the asset that was the majority of that that was a shift from the middle of the decade.
Towards 17 18 because of.
The market was extraordinarily hot values were going up as housing shortage was real.
And these are people taking advantage of value so.
I think.
Brazil is point for some of our sponsors who may have planned to exit they may of executing their plan they may be doing.
Exactly where they thought they were going to be there has been some increase in value for performance as well.
But they may be considering.
Considering our hold versus sell more than.
Maybe they thought they were going to when they went into the asset.
I will say I'm somewhat speculating, but.
That's kind of my view, because they have to put that money to work again and so some some some sponsors may be looking at.
Moving to staying in the bridge loan maybe a bit longer.
Moving to a.
Fixed rate financing and holding the asset rather than selling it. So there is some.
You know I'll call it price discovery or.
Kind of modification to business plans that I do think is happening in the market.
I don't think its a.
I don't think its a negative I think it's a function of.
People people executing in and thinking well I might as well keep the current asset I have rather than buy another one.
With.
At a price I don't like or in a market I don't like so.
I do think we're going to we're going to see a bit more of that but we feel very good in our portfolio I mean, the one.
Characteristic that just isn't changing is.
The multifamily market and in particularly the assets we plan.
Still just.
A real shortage across the country again, we said this in the past or specific markets or submarkets that might have.
Might not be there, but the housing shortages.
Israel and rising rates prop.
Probably impact that residential market are arguably more than the multifamily market I don't know affordability basis. So.
The reality is that there's just.
An enormous need there and I think even with <unk>.
Some of the concerns that I mentioned earlier that the market is still pretty healthy.
And rents are.
Continuing to increase while I may expect them to increase at a lower rate.
Even with inflation concerns because of those.
As I do expect there.
To see a balance unlikely.
Rents.
Yes.
The pace or outpace expenses, even with some of the concerns outlines.
Great. So so I guess as a follow up Jim I know in your.
Your prepared remarks, you talked about exit fees.
Half a million this quarter.
Or what do you expect that normalized number to be is it a 1 million bucks right in the middle or is one of these more indicative of a typical quarter or is it seasonal <unk> always being light.
It is it is a little bit seasonal, though I think it would be it would be unfair to.
Maybe say that that's where it's going to that's where it's going to end up I think.
The first quarter, sorry, I have that.
One of my colleagues because we were just looking at this.
Historically, I think we've said 30% to 40%.
I think we saw and we saw that elevated probably in the last year.
And it's I think started to move toward that rate in the first quarter and I think thats probably.
That's probably a more realistic.
Average long term, 30% to 40%.
Annually.
Great. Thanks for the comments this morning.
Yes.
Thank you.
The next question is from Steve Delaney with JMP Securities. Please go ahead, thanks, and good morning, everyone.
I'd like to start with your F L. Three.
That I believe was reworked second quarter of last year.
That reinvestment period is it two years or two and a half years just trying to.
Find out when that's going to close I think two and a half okay. Great number of 23 I believe right.
That's right Tim.
Yeah, three investor owned that's a nice with nice run rate, okay, great nice work.
Runway I guess for you there.
And just observation I think in my model, we've got that with a weighted average spread of about like 143 basis points something in that ballpark.
The Arbor deal last week was.
Weighted average plus $2 35.
I understand and agree with your comments about plus 40 or 50, but again, if we look back.
Our year to win.
Yeah.
Yes.
No.
Barbara.
<unk> was $2 35, all in last Friday.
Lastly, we still.
But didn't you bet. That's that's good that you've got that ramp and it sounds like your preference is to consider another CLO.
As watching the market and when things, maybe tighten up a little bit.
Im not hearing that youre.
If you were at capacity and F. L. Three that you necessarily would go out to repo bank clients, whatever and build sort of an additional small portfolio with with non CLO financing.
Hey, Mike Am I correct in that that that would be.
I know youre not going to say you would never do something like that but it would be your is it would it be your.
Objective to grow the portfolio overall, but beyond that fell three when you could you could see the potential for an additional CLO financing. Thanks.
Yes.
Thanks, Steve and obviously, we're watching the Arbor deal very closely there is a couple of in the market now and those couple more coming.
Look I think so as you said I'm not ever going to say, we're not going to say Oh, we would never do that.
Our preference is to use CLO financing right.
Yes.
When you price it youre accepting the market pricing at that time for a period of.
At least 24 months before you would really consider refining but you are locking in financing you still have and one thing we haven't seen much.
Much pressure on from an from bond investors as the Leverages very attractive.
It's stable, it's non mark to market, so that completely eliminates some of the.
The largest challenges with repo and warehouse financing.
<unk>.
And you are able to.
In the current structures with the two and a half or longer reinvestment periods youre able to.
Replace assets as we see the market go up so I look at the pricing on the Arbor deal.
A little surprising that it was that it was.
Not a little tighter, but it was kind of within a reasonable range of where we were expecting.
I do think that Arbor us anyone thats in the space if they if they were putting newly originated assets.
In the in that vehicle from today forward.
It's it's still a great vehicle and so.
The assets are the current assets are.
Catching up in line with their financing.
But you still have to finance your existing book, So yes, we want.
<unk> expect to use the CRE CLO market, we still think it's the best way to finance. These types of assets, we think the bond investors seem to agree because theres still a strong appetite for.
For the bonds here.
Excuse me and we like the overall risk so.
Overall.
You know until somebody tells chosen.
Sure.
A better alternative that has all of the characteristics of our mark to market nonrecourse.
Good leverage.
Kind of a fixed spread for for term with reinvestment rates.
No.
I think it's the best I think it's the best source of financing and if markets are working you know your assets and liabilities should.
Move in a correlated direction.
We continue that trend.
No question from our perspective as analyst.
We agree with you we think it's by far the preferred so getting away from leverage and just one quick follow up if I may.
Your thoughts on.
Yes.
Over a period of time, a small capital allocation given your multifamily expertise to either equity or mezz loans on multifamily and I'll leave it at that thank you.
Sure and look we thought Thats a.
I appreciate that question, Steve and all of them, but.
We've talked about that for.
For those of US those of you that have been on these calls we've talked about that for.
Quite a few quarters now.
We would like to have.
And allocation toward those assets.
They're at the asset level have obviously some leverage in them, but they are unlevered. So it serves a purpose of.
For the corporate entity to have.
Somewhat of a lower overall leverage.
Ratio and historically or at least since we've been talking about I mean the.
Those options have not been terribly attractive from a return standpoint for LLC.
Yields have been really compressed.
In our opinion.
And liquidity was great in the market high leverage was available.
From a lot of.
<unk>.
Some peers a lot of debt funds and private vehicles et cetera. So.
Borrowers didn't really need to turn to that as much as they maybe have historically in commercial real estate more broadly.
Thank the raising and Thats. It is a function of how low interest rates at that rate, it's hard to it's hard to price in a senior mezz and oppressed without even tracking those out when your rates are in the low single digits right. There's just not a lot of room to.
Two.
To have that construction was probably the one area, where there continues to be.
Demand for that that measure prep piece at a high level with rates rising.
I expect that to provide opportunities you'll see more of those assets.
So and I think we have we have a focus on it we've got some folks really looking at it we think the yields are starting to make more sense. So.
Whether that happens.
In the next quarter or two is going to be a function of the market or over time, but it is something that we've had on our radar for quite some time.
Thanks for the comments.
Thank you the next.
The next question is from Jason Gilbert with Jones trading. Please go ahead.
Hey, This is Matt your dinner on for Jason.
I had a quick question again about the exit fees given that rates have gone up.
And the environment kind of change, but theres still a lot of competition are you guys still able to get the same exit fees on current ones right now that you would've been a year ago.
On average, yes, I mean, we've seen so our typical loans were still trying to get a point of exit.
There have been instances, where we've we've taken a lower fee for.
A variety of reasons usually competitive.
But in general we've really tried to stick to that.
That.
One exit fee threshold.
There was a lot of pressure put on over the last year I think maybe it will wane a little bit because.
Yeah.
Just in general there is a little bit less.
Fewer.
Meters out there but in general.
We've been able to maintain that with some exceptions.
Got you. Thanks, and then a follow up would be you know the multiple that you guys have on the MSR and is that still a strategy that you guys believe in going forward.
It is.
It is it's not a go forward strategy for us that's an old.
Legacy asset from.
Prior to when we took over management.
Multiple Charlie you might know off the top of your head but.
It is.
And so it's a three <unk> payout.
Yes, thanks, Rob.
Next question.
Rob.
I'm sorry.
Okay.
Question is from Christopher Nolan with Ladenburg Thalmann. Please go ahead.
Hi.
In your comments early you mentioned that the capital raise was to achieve scale do you believe you have enough.
Equity capital now to achieve the scale that you.
We need to compete.
Yeah.
Yes broadly speaking.
Broadly speaking, though I think I think we still.
If you look at the size of.
Some of our peers.
And we don't have to get.
You don't have to be the biggest but I do think there is.
A reasonable room for.
For for growth in order to.
Fully achieve that operating scale.
In terms of expenses and asset diversification size et cetera. So we have.
Sure.
Bigger and broader plan to continue to grow over the coming years.
Okay, and then given that.
Would you consider another dilutive equity raise.
I mean, what I'd say is.
Very.
Long discussion with our advisers and our board.
To get to the point, where we did it the rights offering which was.
What what we thought was in the best interest of the existing shareholders.
Obviously, I don't think I can give you a direct answer says would we or would we not.
Do something in the future like that but I think you can you can assume that.
We're going to do everything we can to.
Benefit of our shareholder base.
It would only make a decision that we thought was in the long term best interests of the shareholders.
Any consideration to giving a management fee waiver to support the dividend.
It's not something we've discussed with the board but.
Like I said any any decisions like that that we've made.
It would be it would be.
Made in consultation with their.
Management team and our board.
Alright, thank you.
And if you have a question. Please press Star then one.
Next question comes from Matthew Howlett with B Riley. Please go ahead.
Hey, guys can you give a sense of.
How large the CLO would be if you do pursue that route and then if you get coupons above let's just say LIBOR.
Plus 400.
We're still talking about it.
Low mid teens return the equity given maybe 200 basis points spreads inside that.
Yes, I mean, so in terms of the return profile at the at that level.
I think I think right now low teens is.
What what we're pushing for I'd like to see it move up.
I think it can with with asset spreads but.
That's our that's our goal and our bogey.
In terms of the size, depending on whether we utilize all of the capital and also the advance rate, but just kind of looking at where the deals are now and expectations. It would be likely somewhere in the five to 600 range.
Okay got you and then.
When I think about the dividend and I think about the core earnings power of the company I guess the first question is would you consider refinancing the term loan.
High cost term loans second when you talk about ROE as being similar to your peers.
It would put your core EPS run rate, the 8% to 10% sort of range that we're talking about it.
<unk> nine and 10% Roe.
Can we expect over time the dividend.
To get up to that range, if you hit your.
<unk> targets.
Yes, I mean, I think look I think that are creating value value relative to the book has declined.
Obviously with the market and.
During 2022.
So our hope is to grow the grow the overall yield.
On a market yield basis, that's obviously reflective of the stock price. So there is a.
Sure.
Push pull there and we typically are measuring against book.
Internally in terms of what we're able to deliver but as.
As you've described it.
I think I think that that.
Makes sense.
I'm, sorry, I lost my train of thought the other piece of part of your question on the term loan.
On that 7% ish.
Yes, the term loan is.
I think we said this.
Some some protections that are that are built in for the for the lender in terms of lockout and ore.
Prepayment fees so the cost has been.
It is fairly high to refinance it at this point.
I mentioned I think on our prior call on another call.
We've worked with that lender.
Modify that and worked with us because they like it.
We like the risk profile they understand.
Where it where it was.
Relative to market and we're continuing to monitor that.
Measure the timing the prepayment penalty is obviously declining over time, but it's something that we evaluate.
Regularly.
We're hoping to be able to refinance that in some form or another.
Over the next.
Several quarters or a little bit beyond that.
But obviously market dependent.
Negotiations with our current lender and things like that but.
The market's around five 6% today I was just curious on what where you think the term loan market is today for you.
Caliber.
Quality.
Yes.
I mean, thats, probably right its a little bit with the <unk>.
Volatility.
It might be a little bit.
I mean.
Yeah.
We are actively talking to folks who are regularly talking to folks about.
How low the cost that we need in order to make the prepayment makes sense.
If it's at the very low end are lower from where you were talking you start to say that maybe maybe that does work, but I think realistically. It's it's got to be a few quarters out but.
I think that's about where the market is.
It's hard.
Things have moved so quickly in the capital markets.
It's hard to put your thumb on it I guess right now, but that is the number about where it's been in.
In recent past.
Okay, well that will be substantial obviously, if you get it done up there could be substantial savings and any more thoughts on the preferred market or it's just at this point in time.
To focus on.
CLO.
Well right now I would want to focus on the CLO and I want to go on.
And to get that done you mentioned the term loan that's something we want to continue to explore.
But certainly as we grow we really want to look at the equity markets common and preferred.
But you know that.
Obviously the.
Depending on the cost of what that.
That preferred it looks like we're going to need to.
Evaluate so.
Thanks, a lot.
Thank you.
A question and answer session I would like to turn the conference back over to Jim Ryan for any closing remarks.
I just wanted to thank everyone a lot of good questions. Obviously, please follow up with me or the team here at <unk>.
The support and continued interest and look forward to speaking to you over the coming quarters have a good day.
The conference has now concluded.
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