Q4 2022 Lument Finance Trust Inc Earnings Call
Yes.
Good morning, and thank you for joining the alumina finance Trust's fourth quarter 2022 earnings call. Today's call is being recorded and will be made available via webcast on the company's website.
Now I'd like to turn the call over to Charles study with Investor Relations at limit investment management. Please go ahead.
Yeah.
Thank you and good morning, everyone.
Thank you for joining our call to discuss limit finance Trust's fourth quarter 2022 financial results.
On the call today are James Flynn, CEO , Michael Larsen, President James Briggs, CFO and <unk>.
Thursday, we filed our 10-K with the SEC and issued a press release, which provided details on our fourth 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 27, a of the Securities Act 1933, and section 21 E and Securities Act of 1034 when used in this conference words such as.
Outlook evaluate indicate believes will anticipates expects intends and other 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 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 10-K.
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. The company undertakes no obligation to update any of these statements.
Furthermore, certain non-GAAP financial measures will be discussed on this call presentation of this information is not intended to be considered in isolation or as a substitute to the financial information presented in accordance with GAAP.
Filiation of these non-GAAP measures to the most comparable measures.
Prepared in accordance with GAAP can be accessed through our filings with the SEC at Www Dot FCC got Coke I will now turn the call over to James Flynn. Please go ahead.
Yes.
Okay.
Thank you and good morning, everyone welcome to the Lumen Finance Trust earnings call for the fourth quarter of 2022.
For joining.
I'd like to first begin by addressing the economic environment.
We see more news today.
But we're all paying attention to.
As lenders and investors react to the higher interest rates.
The economic uncertainties are the capital markets and overall volatility.
Investment activity has declined relative to.
12 months ago.
I'm inspired themselves work to reassess financing costs and find a new normal for levels of asset valuations and financing structures.
We've seen.
Just anecdotally and a 17% year over year decline in transaction volume on.
On the investment sales side quarter over quarter.
But if you go back to the fourth quarter, you saw almost 70% decline so you've seen obviously.
Hum decline in just market activity.
However, despite the lending recessionary indicators.
Increasing and potential negative impacts of the ongoing banking crisis.
The employment market remains relatively strong and supportive of continued rent growth for many multifamily assets, although we do see a slower rate than we've seen over the previous two years.
And while the margin may be sending we do continue to expect.
Rents to generally outpaced expenses and most of our markets and believe the credit quality of the middle market workforce housing asset remains attractive.
That middle market housing supply demand dynamics demographics, and long term rent growth trends do create and continue to create an attractive investment opportunity for shareholders over the long term.
Our multifamily investment portfolio has performed well.
While we did book an additional.
Realized loss reserve against our Seoul office alone this quarter.
Which we ultimately realize last month.
Which we'll discuss later during the call the remainder of our book continues to perform well overall.
More specifically within the bridge lending market lending standards continue to tighten pricing on new loans has increased industry wide over the past several quarters.
We do expect the average spread on L. P. As the investment portfolio to continue to increase as the portfolio grows.
We experienced payoffs and are able to reinvest.
In our existing CLO.
So all of that backdrop, the broader capital markets have remained extremely volatile.
Conditions in the CRE CLO market, a very recently.
Signs of encouraging trends are relative to where they've been however, the market for new issuances become <unk>.
Significantly more uncertain over just these past few weeks due to the development in the banking industry.
In order to continue to grow our portfolio on a levered basis to fully deploy our capital to take advantage of our managers origination capabilities.
We remain actively focused on executing our loan financing transaction the leverage newly acquired loans.
Eric we utilize the series CLO market finance, our investments and continue to believe that that market provides an attractive financing source due to the favorable leverage as well as nonrecourse non mark to market features.
And while we are prepared to execute a CLO quickly to the extent the market conditions change and improve.
We're actively exploring alternative financing options, including private transactions no doubt note financings structures work.
House facilities.
With regard to our dividend on March 16th we declared a quarterly common dividend for the first quarter of 2023 of <unk> per share.
This is in line with our dividend level over the prior four quarters.
Continue to anticipate that we will have the ability to increase our dividend.
That's such a time that we're able to execute a loan for answering transaction.
We continue to focus on deploying our capital into the CRE debt investments with a focus in multifamily.
As you know our managers one of the nation's largest capital providers in the multifamily and seniors housing space executing over 10 billion in total transaction volume in calendar year 2022.
Servicing a $48 billion portfolio and employing.
Approximately 600 employees in over 30 offices nationwide.
That scale and expertise of the managers broad platform will continue to benefit the investors' ability.
And 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 Thursday evening, we filed our annual report on Form 10-K, 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 pages four through eight of the presentation you will find key updates and an earnings summary for the quarter.
The fourth quarter of 'twenty to reported net income to common stockholders of approximately $880000, where two cents per share.
We also reported distributable earnings of approximately $3 $3 million or six cents per share.
This compares favorably to the distributable earnings of $1 7 million or <unk> per share in the prior quarter.
There are a few items I'd like to highlight with regards to our Q4 P&L.
Beginning with net interest income our Q4 net interest income was $6 9 million.
To $5 5 million in Q3 of 'twenty two.
Which represents a significant 26% increase quarter over quarter.
This increase was primarily driven by higher LIBOR and so forth so for rates during Q4 LIBOR average.
$3 eight 8% versus an average of 2.46% during Q3.
Short term interest rates continue to increase which we expect will continue to benefit all lefties earnings profile over the coming quarters.
During Q4, we experienced $45 million of loan pay offs, which represents an increase relative to $34 million of loan payoffs during Q3.
The $45 million of payoffs experienced during the quarter represents a 17% annually annualized pay off right.
While this payoff rate is below our long term historical averages we expect to continue experiencing similar payoffs speeds over the coming quarters due.
Due to persistent interest rate volatility and economic uncertainty.
Primary difference between our distributable and reported net income during Q4 was $2 4 million provision for loan loss.
In Q4.
This year, we recorded a provision.
For loan loss of $2 4 million or <unk> <unk> per share.
On the $10 3 million dollar loan collateralized by an office property in Chicago, which we have discussed in prior quarters along was originated in July of 2018.
As of year end was L. S. He's only office property investment.
We had previously entered into afford beer Barents agreement with the borrower extending the maturity date to December .
This past year two.
To allow the borrower more time to market and sell the property. However, the bar was unable to execute a sale in that timeframe.
Subsequent to year end on February 27th the borrower. The property was ultimately sold the auction for $6 million and we accepted a discounted pay off from the bar and that amount.
Having established a total of allowance of $4 3 million during the course of 2022 on that loan.
We will not incur any further negative impact to book value or GAAP, EPS and 23 as a result of the discounted payoffs we accept it.
While we accept while we expect no impact to book value or GAAP EPS from this asset.
And disposition in 2023, we do expect a $4 $2 million negative impact to distributable earnings in Q1, reflecting the realized losses unrecoverable.
During the period ended December 31st we identified one additional loan collateralized by a multifamily property with an unpaid principal balance of $12 8 million as compared due to monetary default.
We individually evaluated that asset no reserve has been recorded based on an analysis of the underlying collateral slowness on non accrual status and we are pursuing all remedies on this asset.
As Jim mentioned in his opening remarks, the remainder of our loan portfolio continues to perform and other than the provisions taken this quarter on the office alone, which is now resolved we have not taken any other loss provisions move.
Moving on to expenses, our total expenses were $2 5 million during Q4.
Which represents a decline relative to total expense $2 7 million during Q3.
As of December 31, the company's total book equity was approximately $243 million total common book value was approximately 183 million or $3 50 per share.
As I have discussed in prior quarters, So I would like to remind everyone that as a smaller reporting company as defined by the FCC as of December 31, and through this 10-K, we have not yet adopted ASU 2016 cash 13, commonly referred to as Cecil where current expected credit losses, which is a comprehensive GAAP amendment of how to recognize.
Nice credit losses on financial instruments, our recently filed financial statements were prepared on an incurred loss model basis.
As we disclosed in the 10-K upon adoption of Cecil on January one 2023 of this year we.
We expect that based on current expectations of future economic conditions or general allowance for credit losses on loans held for investment, including future loan funding commitments will be between $3 million and $4 million.
We're 30 basis points, and 40 basis points of the company's total loan commitment balance of $1 1 million as of December 31st.
This implementation impact will be recorded as an adjustment to 2020 three's opening accumulated earnings balance.
Well now turn call over to Mike Larsen Who'll provide details on our portfolio composition and investment activity.
Thank you Jim and good morning, everyone.
There's kimberlin touched on earlier, the broader economic conditions, which have continued to be volatile and uncertain.
And have has driven a decline in new acquisition activity.
And it also expressed the number of bridge loan opportunities that support the current in place cost of financing.
That exists in the market.
At the same time, we have seen and expect payoffs speeds to temper in the near term, reducing our capacity for new investments relative to previous quarters and years, we anticipate that trend to continue throughout 2023, well interest rate increases moderate and the general real estate markets reset to new higher inch.
Crist rate environment.
During Q4 <unk>.
Well if he directly originated five new investments with a total unpaid principal balance of $75 6 million.
These new investments were supported by senior housing assets.
One was secured by multifamily asset.
The new loans acquired as previous period, where index 30 day terms sofa and had a weighted average spread of 398 basis points that level represents a meaningful increase relative to the current portfolio weighted average spread of 343 basis points.
New acquisitions at a weighted average index rate floor of 82 basis points also an increase relative to our average of our portfolio of 37 basis points.
The acquired loans at a weighted average LTV at origination of 65%, which is we believe attractive leverage point and is below our portfolio average LTV of 71, 5%.
As mentioned, we experienced $45 million of loan payoffs during the quarter and at quarter end, our total loan portfolio and that's the principal balance of $1 1 billion, that's a 3% increase in portfolio size quarter over quarter, and a 7% increase relative to.
The fourth quarter of 2021.
The portfolio consists of 71 loans with an average loan size of $15 million, which continues to provide for significant asset diversity.
Our portfolio at quarter end was 90% multifamily.
I just wanted to note our exposure to retail and office continue to remain very low at only 2% of our total at year end.
And 1% after the.
Payoffs was the last office property and portfolio.
Again currently we have no office exposure in the portfolio.
Due to our managers strong focus in multifamily and seniors housing we continue to anticipate the majority of our loan activity will be related to those asset classes.
Our investment return profile is a strong positive correlation with rising interest rates. We have included a rate sensitive sensitivity table on page 11 of our supplemental earnings presentation and overall, we expect <unk> to benefit from elevated short term interest rates as the fed continues to battle inflationary pressures.
Since quarter end, the one month terms so for rate has increased from $4 three 9%.
Two 476% today.
Well there is clearly uncertainty around further increases in short term rates.
We anticipate a continued positive P&L impact from elevated rates in the short term at all.
As of 12 31, our loan portfolio was financed with one series CLO securitization and that's the weighted average spread of 143 basis points over one month, LIBOR and an advance rate of $83 375%.
Hello has a reinvestment period running through December of 2023 that allows principal proceeds from repayments of assets to be reinvested in qualified replacement assets subject to various conditions.
And with that I'll pass the call back to Jim for some closing remarks.
Thanks, Mike.
Well, we look forward to continuing to update on our progress.
Obviously things are changing on a daily basis.
And.
Look forward to some more stability in the market.
But with that I'd like to open it up.
Two questions from the participants.
We will now begin the question and answer session and to ask a question you May Press Star then one on your Touchtone phone.
If youre using a speakerphone please pick up your handset before pressing the keys to withdraw your question. Please press Star then two.
At this time, we'll pause momentarily to assemble our roster.
Our first question comes from Stephen Laws from Raymond James. Please go ahead.
Hi, good morning.
I guess.
Jim Briggs I'll start.
All the color on the office loans that that answered a lot of my questions around the modeling. So appreciate that and then what are the seasonal implementation I just want to make sure I'm clear there the $3 million to $4 million impact.
Well that one through the income statement and then be added back in Q1 or only any change versus that January one adjustment that would run through the income statement.
Steven It will be just the change from that number. So we are anticipating our opening adjustment to equity.
And earnings with no P&L impact will be within that range and then it will be any change from that in the corridor because of moves in the portfolio moves in the economic forecast and other factors that go into the calculation.
That makes sense I just wanted to make sure all of us understand that correctly.
To move maybe to the originations.
For loans thinking that's what some health care can you talk about what youre seeing there that makes it attractive relative to multifamily was this just a unique quarter and maybe too small of a sample size to read anything into another deck.
Obviously, clearly states multifamily all remain the primary focus and then maybe as a follow up on the new investment activity.
LIBOR floors on those were under 100 Bips in you know a little surprised or that low or are you not focused on that more focused on maybe the 55 LTV metrics you put out or can you talk about the things you're pushing for new loans and kind of how you prioritize those things.
Sure I mean, I'll I'll take first on the on the seniors housing piece of it I just a couple of points there and we've discussed in the past.
Our manager is one of the largest providers of financing in the seniors housing health care space and so we do see significant opportunities in that space.
Although we are we are.
Focused on multifamily investments.
We recently did see some attractive opportunities you said lower leveraged.
And made those investments last quarter.
They're there the dynamics of health care properties.
And they have much higher debt yields.
And dynamics that support.
Bridge financing in this market.
And these are these assets, we thought were good opportunity for L. S T.
Two two.
Continue to grow the portfolio despite.
Despite the decline in transaction activity that we've seen.
We.
I don't expect a significant increase.
In seniors housing and expect our continued focus to be on multifamily.
Great and one last one if I might a quick when any any seasonality to think about Q1.
Today, it's a pilot or the CLO that youre looking to get done that modeling.
Hi, I had a little bit of trouble.
You repeat that question sure.
Or any seasonality, we need to think about with expenses in Q1 related to euro.
Our SEC filings or all auditing or potentially what the CLO deal. That's in the market that we should include in our model from an operating expense standpoint.
Jim Briggs do you think you can speak to the the audit I don't believe anything that's different than what we've seen in past years.
No.
That's correct.
Alright, I appreciate the comments this morning.
Again, if you have a question. Please press Star then one.
Our next question comes from Jason Stewart from Jones trading. Please go ahead.
Great. Good morning, guys. Thank you on the multi side what kind of transition rates are you seeing from class a to b to see if you could talk to that and maybe how that impacts your portfolio.
Okay.
When you say transition rates, you mean available investment opportunities.
Oh, well I'm looking for color on the underlying resident movement, so who's going from class a to b to C does that improve.
Occupancy physical.
Right.
Yeah, I think I mean look you obviously have to be you have to look at each each market and micro market.
In general there.
Historically.
We've found that there's less volatility in.
Occupancy at the you know what.
What we've largely described is workforce housing.
Which b C.
And even if you slip into the affordable space there is.
The primary reason for that is the supply demand demographics are or balances as far out of whack and so.
I don't know that I don't know that we're there yet.
Fully identify a trend but typically in a.
A time of distress.
Whether its recessionary or just kind of.
Economic downturn that youre more likely to see more people looking for more affordable housing than where they currently live then going right out of the way.
Alright, I don't I do I would continue to expect.
And you also have yes, we do have.
New builds coming online in certain markets and they are going to be newer and nicer and so they will probably.
Or in many cases will will lease up.
Maybe to the detriment of there.
The comp set and in the area, but in general.
The occupancy levels at those.
Mid and lower level of apartments, which is which is obviously the.
The majority of where we we operate.
Generally improves or remains more stable is probably a better word.
In times of distress.
Yeah, I would expect that to.
Okay. That's helpful. And then how would you characterize the take out financing or.
Transitional projects right now I mean trainee.
Does Freddie K seems to be a little bit of liquid.
How would you characterize the ability to.
Get out of a project.
I think that.
What you just said is true of the agencies. They certainly are we've certainly seen an uptick of a lot of folks looking at more deals and I think.
There is also again very recent history, you know past couple of months.
[laughter] more interest expectation on borrower sides are coming in with cash to put put long term financing on.
The banking crisis.
Ongoing.
Impact and the impact on <unk>.
The banks and regionals.
He was only going to.
Further exacerbate that problem.
You described around.
<unk> financing I think yes.
From our standpoint of what we've seen.
In general when you look at the trends in the space you look at the long term prognosis for multifamily and you know it's still.
From our perspective of long term attractive asset and I think owners feel the same way.
A certainly a.
Naturally optimistic group.
Net.
There's a there's a bit more acceptance of trying to.
Perhaps accepting that they may they may they may need to.
Give up some of their equity.
Potential equity gains in order to get lock in reasonable and attractive long term financing.
And that can be in the form of.
Our cash and if they're well capitalized are able to raise capital fairly easy.
It can also be in the meeting I'd be at the common level.
I think we've seen a significant uptick in the interest for preferred equity.
<unk> met throughout the industry, we've seen you've seen deals getting done, but I know that theres just a lot more.
Borrowers that are that are looking to bring in a new partner.
Actually execute the business plan and hold the asset maybe longer than they originally planned but with new equity in longer term debt I do think we're going to need to see a lot of that.
But for most bridge loans.
And 80% or 85, even an 80 LTV bridge loan.
Not going to get an 80.
L. P V 10 year loan.
So theres right, there's value protection, there, but they are going to need.
Cash infusion in either in the form of common or some other subordinate.
Capital.
The good news is from a borrower standpoint is there is a lot of that capital that either out there being raised or lenders and others expressing interest to.
So.
Got it that's helpful. Thank you.
Yeah.
Yeah.
Okay.
This concludes our question and answer session I would like to turn the conference back over to management for any closing remarks.
Sure.
I just wanted to thank everyone for joining I know.
Another hectic morning.
We will continue to be in touch and look forward to speaking to you all again soon thank you.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.
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Okay.
Yeah.
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