Q2 2022 Lument Finance Trust Inc Earnings Call
via webcast on the company's website.
I would now like to turn the conference over to Charles Duddy with Investor Relations at Lumen Investment Management. Please go ahead, sir. Welcome, everybody.
Thank you and good morning everyone.
Thank you for joining our call to discuss Lumen Finance Trust second quarter 2022 financial results. With me on the call today are James Flynn, CEO , Michael Larson, President, and James Briggs, CFO .
On Monday we followed our 10Q with the SEC and issued a press release which provided details on our first quarter results, excuse me, our second 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 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934.
When used in this conference, words such as outlook, evaluate, indicate, believes, will, anticipates, expects, intends, and other similar expressions are intended to identify forward-looking statements.
Such forward-looking statements are subject to various risks and uncertainties that could cause actual results to differ materially from those contained in the forward-looking statement. These risks and uncertainties are discussed in the company's reports filed with the FCC, including its reports on Form 8K, 10Q, and 10K, and in particular the Risk Factors Section of Airborne 10K.
Additionally, many of these risks and uncertainties are currently amplified by and may 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 as of the daycare of. 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. Presentation of this information is not intended to be considered in isolation, nor is it substitute to 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 at www.SEC.gov.
I will now turn the call over to James Flynn. Please go ahead. I will now turn the call over to James Flynn.
Thank you, Charlie. Good morning, everyone. Welcome and thank you for joining the Lumen Finance Trust earnings call for the second quarter of 2022.
During Q2, we continued to deploy our capital into commercial real estate debt investments with a focus in multifamily assets.
Our manager is one of the nation's largest capital providers in the multifamily and seniors housing space, executing over $17 billion in transaction volume last year and servicing over a $50 billion portfolio, employing 600 employees and more than 30 offices nationwide.
We believe the scale and expertise of this broad platform has and will continue to benefit the investors of LFT and provide strong support in the execution of our investment strategy.
First, I'd like to begin by addressing the current economic environment.
The multifamily market has experienced a period of transition over the last few quarters as lenders and investors react to inflationary pressures, geopolitical risks, capital markets volatility, and higher interest rates.
Investment activity in the market has declined as asset buyers and sellers work towards reassessing financing costs and finding a new normal for levels of asset valuations and financing structures.
Despite technical recessionary indicators increasing, the strong employment market remains supportive of continued rent growth for multifamily assets, and we believe that the middle-market workforce housing asset class remains extremely attractive.
Despite rising debt service costs for borrowers, we believe that the supply demand dynamics, demographics, and rent growth trends continue to support the asset class, which creates an attractive investment opportunity for shareholders of LFT over the long term.
Our multifamily investment portfolios performed extremely well, and while we did book a one cent per share unrealized loss reserve against an office loan this quarter, which we will discuss in more detail later during the call, the remainder of our book continues to demonstrate very strong performance.
More specifically, within the bridge lending market, lending standards have tightened and spreads on new loans have increased industry-wide over the last few quarters.
We are being more selective with regards to credit, and the average as-is appraised loan to value on new loans being offered by our manager has decreased meaningfully.
Armando is currently quoting new transactions that spreads above 4%, whereas a few months ago we were seeing loans price to spreads in the low to mid threes and sometimes lower.
We would expect that the average spread on LFT's investment portfolio will increase from today's average level as the portfolio grows.
With this backdrop, the broader capital markets have remained volatile and dislocated.
The CRE CLO market had a relatively strong start to the year, but market conditions have deteriorated considerably since March.
and several transactions have been completed with increasing costs, with total spread on the investment grade bonds growing to more than 300 basis points over silver.
That compares to a spread of...
143 basis points over LIBOR on LST's $1 billion CRE CLL, which we financed in June of 2021.
While the most recent new issue multifamily CRE CLO in the market priced above a 300 total spread above the investment grade bonds, it was a modest decrease to the prior transactions, which we have not seen in many months.
In order to continue growing our portfolio on a leverage basis to fully deploy the capital we raised in Q1 of this year and take advantage of our managers' significant pipeline of loans, we are actively focused on executing a loan financing transaction to leverage newly acquired loans. We have historically utilized CRE CLOs to finance our investments.
and continue to believe that market provides an attractive financing source.
due to the favorable leverage structure of non-recourse and non-mark-to-market features.
However, due to the dislocated capital markets, we elect it to delay our next year of the oilUk financing effort.
While we are prepared to execute a CLO quickly to the extent market conditions are approved, we are also actively exploring alternative financing options including note-on-note financing and A-B node structures.
In fact, we have received preliminary feedback from rating agencies suggesting the credit quality of our pool will be received well by the market.
Overall, it is clear that the cost of liabilities is $2.5 million.
An increase in market spreads on assets are also increasing.
We believe it is likely that newly originated assets going forward will have wider spreads than existing assets in line with the increases in the cost of financing.
We believe that the increase in short-term rates will also have a benefit to LFT over the short and long term.
With regards to our dividend, we previously declared a quarterly common dividend of six cents per share for the first and second quarter of 2022.
This level reflected a resetting of our dividend, taking into account our Q1 capital raise and increased share count.
In addition, the dividend reflected the anticipated drag on net income to common shareholders as we work to deploy the newly raised capital on a leverage basis.
We would expect our earnings to continue to be pressured during Q3 until such time as the capital market conditions normalized and we were able to execute a financing transaction.
Overall, however, I would like to emphasize that once our capital is fully deployed on a leverage basis, we expect to support a stable, consistent run rate market yield on a go-forward basis.
We are cautiously optimistic of a return to a more stable capital markets environment in the near future.
We continue to make progress toward our goals and I'm excited about the continued growth as we focus on executing our business plan. And with that, I'd like to turn the call over to Jim Briggs.
We'll provide details on our financial results.
Thank you, Jim, and good morning, everyone. On Monday evening, we filed our quarterly report on Form 10Q and provided a supplemental investor presentation on our website, which we will be referencing during our remarks.
The supplemental investor presentation has been uploaded to the webcast as well for your reference.
On pages four through eight of the presentation, you will find key updates and an earnings summary for the quarter.
For the second quarter of 2022, we reported net income to common stockholders of approximately $2.2 million or $0.04 per share.
We also reported distributable earnings of approximately $2.5 million or $0.05 per share.
This compares to distributable earnings of $1.7 million or $0.05 per share in the prior quarter.
While distributable earnings did increase by approximately $800,000 quarter over quarter, our push-share distributable EPS was flat due to an increase in share count during Q1.
As Jim noted in his opening remarks, we would expect distributable EPS to continue to be pressured during Q3 until such time as we are able to execute a loan financing transaction.
There are a few items I'd like to highlight with regards to our QT.
Okay, now...
First, I will note that our net interest income increased from $5.1 million in Q1 to $6.4 million in Q2.
While the average spread on our investments did not change meaningfully relative to the prior quarter, we did benefit from a larger invested capital basis or common equity rights offering closed midway through.
Q1. In addition, we have begun to experience a benefit from higher LIBOR and SOFR rates.
As Jim briefly referenced in his opening remarks, during the quarter, management identified a bridge loan with a current unpaid principal value of $11.7 million as impaired.
The loan, which is collateralized by an office property in Chicago, was originated in July of 2018 and is LFT's only office property investment.
The office of market in general has been negatively impacted due to COVID, and the Chicago office market in particular has been challenged.
The office property collateralizing our loan has experienced recent and near-term vacancies, all of which have negatively impacted valuations of collateral.
The loss provision of 352,000 that we've taken this quarter reflects all of these factors.
As we noted in our 10Q MD&A, as of yesterday, this loan is in maturity default. We are working closely with the borrower and anticipate entering a forbearance agreement and extending the maturity date to December 2022 in order to facilitate an asset sale in the near term and repayment of our loan.
The borrower remains current on debt service payments.
The loan was purchased by LFT out of the CLO on August 2nd and is currently being held on LFT's balance sheet unlevered.
As Jim mentioned in his opening remarks, the remainder of our loan portfolio continues to demonstrate very strong performance, and other than the provision taken this quarter on the office loan, we have not taken any other loss provisions this quarter or historically.
Given the unrealized nature of the loss provision taken up in the Chicago office loan, that provision is not reflected in our distributable earnings.
Moving on to expenses, I would note that base management fees increase during the quarter.
From $925,000 in Q1 to $1.1 million in Q2, this increase was driven by the timing of our Q1 capital raise.
As of June 30th, the company's total book equity was approximately $248 million, which represents a meaningful increase in scale relative to total book equity of $169 million as of December 31st, 2021.
Total common book equity was approximately $188 million or $3.60 per share.
As discussed in prior Quarriers, I would like to remind everyone that as a smaller reporting company, as defined by the FCC, we have not yet adopted ASC 2016-13, commonly referred to as CECL.
for current expected credit losses, which is a comprehensive gap amendment of how to recognize credit losses on financial instruments.
As a small reporting company, we are scheduled to implement CECL on January 1, 2023.
Until then, we continue to prepare our financial statements on an incurred loss model basis.
We'll now turn the call over to Mike Larson who will provide details on our portfolio composition and investment activity.
Thanks, Jim.
While broader economic conditions have continued to be volatile, our manager continues to actively originate attracting new investment opportunities.
During Q2 LFT acquired four new investments from an affiliate of our manager with total unpaid principal balance of 37 million
All of these acquisitions were secured by multifamily assets.
$18 million of these new loans were indexed to one-month LIBOR, and the remaining 19 were indexed at 30-day term SOFR.
The acquisitions had a weighted average spread to the actual index of 348 basis points and the weighted average index rate for 40 basis points.
I'd highlight that we did see an increase in spreads on loan acquisitions as the quarter progressed.
The three of the new loan acquisitions were completed beginning of the quarter in April and had an average spread of 332 basis points and the final loan is acquired at the very end of the quarter on June 30th at a 375 basis point spread.
The acquired loans had a weighted average LPV at origination of just over 71%.
We experienced 81 million of loan payoffs during the quarter and a quarter end our total loan portfolio had an outstanding principal balance of just over a billion dollars, 1.03 billion.
That represents a 4% decrease in our portfolio size quarter over quarter. It's still a 69% increase relative to the second quarter of 2021.
The slight decrease in portfolio size relative to Q1 was simply due to the timing of certain loan payoffs occurring at quarter end and is not reflective in any way of our ability to maintain full deployment.
The total portfolio consisted of 69 loans with an average loan size of 15 million. Our portfolio quarter-end was 95% multifamily, a slight increase from 92% multifamily as of year-end 2021.
Our exposure to retail in office continues to be very low at 3% of total UPB on a combined basis.
Due to the manager's continued strong focus on multifamily, we anticipate the majority of our loan activity will be related to multifamily assets. But as we've indicated in the past, we will continue to look to supplement our multifamily investments with strong quality investments and 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 335 basis points and a weighted average index for 24 basis points.
As Jim mentioned, our manager has seen an increase in load and spreads on new originations recently driven by economic uncertainty, rate volatility and spread widening.
And we anticipate this adjustment of market spreads on our loans and in the capital markets to continue to occur throughout the remainder of 2022.
Our investment return profile has a strong positive correlation with interest rates.
We've included a rate sensitivity table on page 11 of our supplemental earnings presentation and overall we expect LFT to meaningfully benefit from continued rise in short-term interest rates as the Fed battles inflationary pressures.
The current forward curve implies one month's SOPHRA increasing to approximately 330 basis points by year end.
which would, holding all else equal, increase our distributable earnings by approximately 6 cents per share on the run-rate, full-year basis.
As of the quarter end, our loan portfolio continues to be financed with one-series COO securitization with a weighted average spread of 143 basis points over one month LIBOR and an advance rate of over 83%.
The seal has reinvestment period running through December of 2023 that allows principal proceeds from repayments to be reinvested in replacement mortgage assets.
We do not currently utilize repo or warehouse facility financing and therefore not subject to margin calls on any of our assets.
from repo or warehouse lenders.
Overall, as we've continued to show over the last three years, we're utilizing the strength of our manager to focus on investments in middle market multifamily floating rate bridge loans that have continued to perform well. We also continue to see a pipeline of multifamily bridge lending opportunities through our manager, which we expect will continue.
With that, I'll pass the call back to Jim for closing remarks.
Thank you, Mike. I look forward to updating you all on the progress over the coming quarters. And with that, we'll open it up to questions. Operator? Yes, thank you. At this time, we will begin the question and answer session.
To ask a question you press star then 1 on your touchstone phone.
If you are using a speakerphone, please pick up your handset before pressing the keys.
To withdraw your question please press star then 2.
At this time, we will pause momentarily to assemble the roster.
And the first question comes from Chris from Love with Piper Sandler.
Thank you. Good morning. First, I'm just curious on what your thoughts are on the potential of that.
the potential recession that could be coming and how Lumen would be positioned and if your underwriting has changed at all recently due to the changes in the macro environment. I'm thinking about any changes in LPD, geography, property types or anything else.
So overall,
In general, our underwriting has generally tightened a bit. I think that's relatively true or consistent across the market. You've seen lower LTVs entering or as is LTVs at the time of loan is issued. We've seen or underwritten to higher debt yields on exit. What would you suggest in terms of a lower debt or mentioned on short terms? And the question is, how do you define risk of exit ego when
writing is generally tightened a bit. I think that's relatively true or consistent across the market. So you've seen lower LTVs entering or as is LTVs at the time of loan as issued. We've seen or are under into higher debt yields on exit. In general, we've seen higher debt
Lips, meaning the increase in reds from
the rehab that occurs at the asset have been lower. So then they have over the last.
in a couple years, frankly, which
You know is generally just kind of consistent with where the market is We still continue to see rent growth. We still continue to see attractive investment opportunities, but I do think there's been a...
a relatively
broad acceptance by borrowers that leverage in particular.
lower than what they could have expected to receive, you know, two, three quarters ago, and certainly a year plus and beyond. So the 80% deals, the higher than 80% deals are fewer and further between, certainly for us, but I think across the market. In terms of asset class and markets.
We generally approach that the same today as we always have, which is really focusing on the micro market and the supply demand dynamic in that market.
So there are really particular areas that we're seeing as a general.
rule but certainly the dynamics in markets have shifted. You know the demand and demographics have moved around a bit in certain markets but you know there's still generally been attractive opportunities. We do look at the concentration in our portfolio and whether we feel
just from a normal risk.
standpoint whether we should or how significant we should have exposure in certain cities sponsors etc but in general I think across the board the prior quality is.
has probably largely improved because of the changes. But it was never bad and its improvement from frankly what I think was already a pretty strong position.
All right, thank you. I appreciate the color there. And then just looking at the – this quarter's funding and payoffs, payoffs weren't outsized relative to historical levels, but were a good amount higher than funding. Can you speak to this, the forward outlook here from Michael's comments? I got the sense that funding should roughly match payoffs in coming quarters. Does that make sense to you, or should it be skewed one way or the other? No.
Yeah, I mean depending on…
the timing of a leverage transaction.
That is true, with most of the capital deployed. The payoffs this quarter were roughly in line with where we've historically guided, which is about a third of the portfolio on a run rate basis.
You know, so we were right in that low 30% range.
that could change.
with where rates are. I'm not sure that we have
petition evidence has suggested it will, meaning it would get lower. We've seen assets pay off that we weren't expecting to pay off, or at least at that time.
the market continues to be strong. And the market has changed a bit, I think.
From a borrower perspective, we've seen
a bit more or anecdotally a bit more of a return to longer term holds in general, which would suggest folks trying to lock in permanent financing perhaps sooner than the strategy of the past couple of years, which for many has been focused on flipping assets by doing some rehab, not all the rehab, selling it to a new party who completes a rehab and then they sell it to a new party who holds.
the asset long term. That certainly can still happen, but I think the environment is, that opportunity is not quite as lucrative to owners as it may have been over the last couple of years, and so holding assets has become an attractive option.
Which, I think, has turned folks to, if they can convert to a longer-term fixed-rate loan.
maybe through the agencies or the banks.
that we've seen a return to that. So I think we'll see over the rest of this year, how that plays certainly the overall economy and where things head the rest of this year and into next Will be
you know, telling. I think we've seen some stability over the past couple of weeks, even months plus, where people thought.
I think we're headed. Certainly no one knows for sure, but I think the shock of inflation and rates jumping up has begun, I hope, and it goes in listening to Pundit and reading, you've seen some, one, acceptance and two, perhaps leveling off there, which I think will lead to a healthier market, both in the capital markets and in the capital markets.
of the transaction levels over the coming quarters. Great, thank you. Just one last quick one for me. Can you disclose what exit fees were in the quarter?
Jim or Charlie, I don't know if that's actually identified or not.
That was not separately identified.
Is not a problem.
Are you able to disclose it or is there not?
I don't have that on my head, but we can get it. The typical fee structure is
You know, a 1%.
exit 50 basis points to 50 to 100 basis points I'd say is where
the general averages. We can get the exact number for you though.
All right, thank you, I appreciate it. Thank you for taking our questions.
Thank you. Yeah, I just, let me just, I found that S&P number for you, Chris. So S&P and Q2, including prepayment and yield maintenance penalties was $1.5 million for Q2 of this year. Will wouldn't it look familiar to you, Chris if I'm not following him? Yes.
Thank you. And the next question comes from Stephen Laws with Raymond James.
Good morning.
Morning. Mike, you mentioned the replenishment period, your prepared remarks, and you touched on a lot of these things. But, you know, as we're thinking about incremental returns as the portfolio turns over, you know, it sounds like spreads, so new investments are 75 or maybe 100 bits wider. And from the repayment expectations, maybe about 8% of the portfolio turns over per quarter. So, you know, should we take that to look at, you know, 500, 5% higher returns on those new investments you're putting into the
reinvest assets with that leverage at higher spreads and higher short-term rates will directly...
impact and improve our returns. We are, on the flip side, as we discussed, we are looking to deploy the capital we raised earlier this year with a new financing structure which we anticipate would be at wider levels in line with the increased levels at the loan level. So I think there's the financing that we have in place and then there's new financing we put in place at higher levels.
And you mentioned, you know, evaluating options on other financing possibilities, you know, mentioned note on note or AB structures by name. And can you talk about, you know, given where your spreads on investments today and kind of how those discussions are, what you think levered returns would be, you know, if you pursue those avenues?
I think we're still exploring what the levels would be for the financing. I mean, clearly we're looking there because we think it could be attractive relative to where the CECO market is today. But we're still exploring where we think where levels would be for those types of financing.
Great. Well, Jim, Jim, Mike, thanks for the time. Appreciate it.
Thank you, Stephen.
Thank you.
And the next question comes from Steve Delaney with JMP Securities.
Thanks. Good morning, everyone. Curious on the loans transferred from the manager in the second quarter. Obviously, they were closed.
earlier than the market really moved in terms of spreads, but when they were transferred, were they transferred at par or was there any discount applied to those to reflect current market spreads?
So all assets that we transferred really –
Really have been have been transferred at or around par. Those assets have been.
really have been transferred at or around PAR. Those assets have been at PAR and they were
The timing of getting that done was, you know, they were pretty close to par. I mean, if you think about the floating rate market and even in our pricing grid.
you know, you probably have 100 to 150 basis points of...
of kind of market depending on the characteristics of the asset and where it is and where it's located.
So those assets...
We're at par.
One thing to.
to think about or just to recall from for LFT.
The manager continues to originate assets and put assets on its books and incur the cost of financing those assets, both in terms of setting up warehouse and obviously paying the line for the benefit of LFT. One of the reasons we haven't done that at LFT is frankly the cost. We would prefer to avoid that cost and continue to avoid that cost.
which is one reason why we haven't done it. The warehousing market has also become, or has been almost as volatile as if...
if not more frankly than the CRS-CLL market. So that's not
for the reasons we've mentioned on many calls.
not certainly our focus. It's not that we never do it, but we prefer to continue in the structure and the manner in which we've...
finance our assets historically. And so for that, LFT gets the benefit.
Like if we look at the CRI CLO market, personally I do see potential for the market to have a bit more of a stable environment in the second half of the year than the first half, and hopefully beyond. And there are assets available to immediately execute a transaction, right? That's a benefit that the LFT has. So, it's something we've continued to speak to the board about and continue to have.
The support of the manager to ensure we have assets to transfer to LFT, but the shifts in the market are something we have to pay attention to both in terms of spread, pricing, credit parameters, all of those things. In general, we feel that the
you know, pretty good and relatively competent at assets.
can be and will continue to be available at or around PAR.
Right. Well, and to be clear, there's no question that the manager warehousing loans for LFT is a great benefit to the REIT for sure. And there's just this volatility that I don't think any of us really expected the magnitude of that. Correct. Looking forward.
So it sounds like, and I appreciate the clander there. The only design highly customizable
The
portfolio sounds like you guys are saying you know you're still not optimal in terms of you know investing you know just in terms of payoffs and things you were at like 1.03 billion on the portfolio at June 30 is there a target size I mean is it 1.1 1.2 that you're trying to get to in the portfolio given your asset base say by the end of this year what would that round
size of the portfolio look like that would you know make you guys happy I Think the numbers probably somewhere closer to 1.3 to 1.5
With leverage, because if you think about the rights offering and the capillary rates incremental with the
the term log, that's been deployed on an unlevered basis. Right? The only reason we've
we've done that is because you know, and then we continue to evaluate this with the board and regularly when we discuss but as you mentioned, right, the volatility in the market is what was
really most troublesome and difficult to manage. And we didn't want to find ourselves executing a CRO transaction, one that maybe couldn't execute, or two that was going to come in at terms that we felt.
you know, we're just not attractive for LFT. I believe we can execute a CLO at a higher cost, even at today's cost and have it be on a long-term basis accreted for the REIT. We're hopeful, you know, we saw a deal recently that was still high. Like this, I'd like to think that that spreads will come in a bit, maybe as we get through the summer year and into the fall. But I do think there's...
still a market demand. We've had, in fact just yesterday, had an investor reach out to me asking.
whether we were going to issue a CRE CLL, and can you put in an order? Interesting. Now, that's one investor, that's not a market, but I didn't receive that call in May. Interesting. I think it's just that kind of...
you look at again, I think macro people are starting to
understand the market where environment operating in. I think investors still have.
significant capital that they'd like to deploy. The multifamily space is, continues to clearly be, I would say the winner if not the A winner in terms of stability and where investors feel comfortable putting capital out, particularly on the debt side. So I think that if we're able to, I think we're gonna be able to.
or I'd like to say we expect to be able to and have.
cautiously optimistic that we're going to be able to execute a transaction, whether it's a CLL, which I think is ideal, but there are other alternatives that we're speaking to folks about that would be.
you know, perhaps as attractive and as Mike pointed out, if the markets don't change, could be more attractive. I would expect us to.
pointed out if the markets don't change could be more attractive but I would expect us to you know
pushed for some leverage finance transaction of the assets that are unlevered over the coming
push for some leverage finance transaction of the assets that are unlevered over the coming two quarters or before the end of the year.
Jim, was that last CLO that you're referencing, was that the deal from MF1? And if so, where did you guys see the weighted average spread on that most recent deal?
that you're referencing, was that the deal from MF1? And if so, where did you guys see the weighted average spread on that most recent deal? Its a Ridge Would good up five the good the
Yes, it was MF1.
That deal came in, I think around 300.
minus for the total investment grade stack which is
a bit inside of the prior deal that had gone out. We saw a lot of
We saw a lot of just a dramatic increase from.
the deals done in 2021 and earlier, starting at the end of the second quarter, first quarter and second quarter. We know that a lot of issuers, a few issuers, just pulled their deals to decide to kind of wait it out.
And as we've discussed on the asset level, right, even.
even if you have a deal that has
you know assets in the in the threes or high threes and And that's where the financing is You know you have a two and a half year reinvestment period where you expect to replace those assets with you know Fours and four and a half etc. So it's not
It's been a little bit more about, from my perspective, just looking at the investor demand. That's obviously driving spread. I think some of the early trades during volatility.
there was an ability to take advantage of the dislocation. And I think bond holders were able to, or bond investors were able to invest at attractive spreads, I think, relative to risk.
Thank you for the comments.
Thank you, and the next question comes to Matthew Erder with Jones Trading.
Hey guys, phone in for Jason this morning. Thanks for taking the question. Sorry if I missed this, but if you were to execute a CLO today, what would you guys expect the ROE to be?
Well, I think as we just mentioned to Steve, we saw a transaction and I've seen transactions with total cost of funds in the past.
in the low 300 for...
for leverage in the...
Well, high 70s to low 80s. So, depending on...
Obviously, the leverage is a critical component of that ROE, probably even more than the spread. We feel historically our assets have received attractive levels from rating agencies based on the multifamily concentration and the quality of the assets. We'd expect that to continue even in preliminary discussions. That part doesn't seem to change. It's a matter of cost. The ROE is going to be a derivative of...
of what the total pool initial funding is, right? So the weighted average spread of the assets.
at 80% leverage and
you know, 4% coupon.
We would give you a the ROE.
If it's a little bit less than that, it's lower initially and grows etc. So we continue to think.
that we can achieve a double digit.
ROE for a COO here, or a COO financing, but
Yeah, the market's been...
extremely volatile and you know if you ask me that question in three months I'm hopeful that I'm able to answer it with you know a lot more specificity both for us but you know for LFP but just for the broader market.
six months ago, a year ago, we could answer that pretty specifically.
be close within probably 10 or 15 basis points. That has been the case for.
basis points. That has been the case for most of this year, at least.
the last six months.
Gotcha, yeah, and that makes sense. And then, thanks for that also. And then is there any migration in the portfolio credit ratings that could possibly lead to further credit provisions or is the office just a one-off thing?
Look, obviously we can never say never, but we feel very comfortable with the credit quality of the asset as a whole.
The office transaction was, it is a one-off. It's the only deal like that that we have. We're hopeful to.
minimalized the impact that that deal has, but the rec portfolio continues to perform. We have not seen any crack on the multifamily side in particular, and from a leverage and coverage standpoint, right now, things feel pretty good.
Awesome. Thank you.
Thank you. And this concludes the question and answer session. I would like to return to Florida management for any closing comments.
I'm going to throw it to him to do.
We may have lost Jim, but I think we just wanted to thank everyone for going down here.
All right, there we are.
Good. Yeah, I don't know. My apologies. My phone cut out there for a minute. But yeah, if there are no more questions, thank you all for joining.
Any other questions? We'll get back to you as soon as we can and look forward to speaking again next quarter.
Thank you. The conference has now concluded. Thank you for attending today's presentation. We now disconnect your lines.