Q2 2023 Lument Finance Trust Inc Earnings Call
Good morning, and thank you for joining the alumina Finance Trust second quarter 2023 earnings call.
Today's call is being recorded and will be made available via webcast on the company's webcast.
I would now like to turn the call over to Andrew Zhang with Investor Relations at limit, but investment management. Please go ahead.
Thank you and good morning, everyone.
You you for joining our call to discuss women finance Trust's second quarter 2023 financial results.
Yeah.
With me on the call today are James Flynn.
James Briggs CFO , James Hansen, President Zachary.
<unk> senior director of portfolio management.
Yesterday on Tuesday August eight we filed our 10-Q with the SEC and issued a press release provided details on 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 Flynn I'd like to remind everyone that certain statements made during the course of this call are not based on historical information and May constitute forward looking statements within the meaning of section 27, a of the Securities Act of 1933.
Section 21 E of the Securities Exchange Act of 1934.
When used in this conference call.
Words like 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 Companys reports filed with the SEC.
<unk>. It's reports on forms 8-K, 10-Q, and 10-K and then in particular the risk factors section of our Form 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 forward looking statements.
Furthermore, certain non-GAAP financial measures will be discussed on this conference call.
A presentation of this information is not intended to be considered in isolation or as a substitute.
All information presented.
In accordance with GAAP.
Reconciliations of these non-GAAP financial measures the most.
To the most comparable measures prepared in accordance with GAAP can be accessed.
Our filings with the SEC at Www SEC Gov.
For the second quarter, we reported GAAP net income of <unk> <unk> per share.
Well the shrill earnings were four cents per share.
In July we paid a dividend of six cents per share with respect to the second quarter.
I will now turn the call over to Jim Flynn. Please go ahead.
Yeah.
Thank you Andrew.
Everyone and welcome to the Alumina Finance Trust earnings call for the second quarter of 2023, we appreciate you all joining us.
I'll start with the market.
With respect to the overall multifamily market market during the first half this year.
Observe decrease in demand.
They can see rates, resulting in a modest rent growth of approximately 1% of.
Cross across the portfolio.
It's important to know that that the national trends and doesn't apply uniformly to all metro areas.
Some cities being flat or negative rent growth.
You know some of the bigger gainers over the years they get.
San Francisco Phoenix others.
We've seen.
Our rent growth out of right around 2% historic averages and you're seeing that in <unk>.
Boston.
San Diego Knoxville cities like that so there's there is.
Uh huh.
You know as as is typically need to pay attention to.
All of the markets specifically.
Despite lingering economic uncertainty over the long term, we do remain optimistic that the multifamily sector well managed to navigate through these hurdles and continues to be a well performing asset class a commercial real estate.
Multifamily economic backdrop remains constructive positive job growth.
Elevated thing single family prices and affordability in many locations across the country and obviously favorable supply demand demographics.
Our cautious outlook for the multifamily lending environment in the second half of 2023 remains unchanged.
<unk> sales activity remains depressed, we are seeing some stability and rare conditions.
Positive, albeit slowing.
Net operating income growth, we view these signs of increasing stability in asset valuations that we project will translate into greater activity over the remainder of 2023 and into 'twenty 'twenty four.
We believe the credit profile of the middle market housing.
Continues to be supported by favorable supply demand dynamics demographics, and long term rent growth trends, creating an attractive investment opportunity for L. B shareholders.
With respect to the asset financing market.
The CRE CLO securities market experienced significant limitations in Q2.
For quite some time.
Access to the market and its attractive pricing and terms were largely unavailable.
As a result, we pivoted from looking at a public transaction to executing a private collateralized financing transaction, which closed on July 12.
The collateralized theory financing transaction with secured by approximately $386 million of first lien floating rate multifamily mortgage asset.
In connection with this transaction, which just would share similar match term nonrecourse non mark to market features of the CRE CLO approximately $270 million of investment grade rated senior secured floating rate.
Loan was provided by a private lender and approximately $47 million of investment grade rated notes were issued and sold to an affiliate of L. P as manager.
Yeah outstanding liabilities of this financing transaction at an initial weighted average spread of 314 basis points over 30 day terms silver excluding fees and transaction costs.
The initial collateral pool consisted of 25 person lien floating rate mortgage loan secured by 32 multifamily properties located across the United States.
The weighted average spread of the initial collateral was approximately 365 basis points over 30 day terms silver.
The majority of the collateral was acquired from an affiliate of the manager at an aggregate discount to par of approximately one 5%.
We estimate works out to an effective spread on initial collateral cool north of 425 basis points.
All of the mortgage assets were originated by an affiliate of our manager.
This financing transaction provides for a 24 month reinvestment period that allows principal proceeds from repayments of the mortgage asset be reinvested in qualifying replacement mortgage assets.
Certain condition.
Despite disruptions in accessing the traditional CRE CLO market, we were able to successfully pivot.
And execute the private managed transaction structure.
<unk> increases our level of investment capacity at attractive economic terms.
Okay.
We are cognizant of the need to maintain a strong liquidity position.
So we enter challenging part of the market cycle, so to obviously to deploy capital into new investments and to drive positive outcomes on underperforming assets in the portfolio.
The company is well positioned to manage through the changing market conditions as all of our secured financing is matched term non mark to market, including the collateralized connecting traffic transaction. We closed subsequent to the end of this quarter.
Further the company does not have any corporate debt maturities until February of 2026.
With that I'd like to turn the call over to Jim Briggs, who provide us details on our actual results Jim.
Thank you Jim and good.
Morning, everyone last evening, we filed our quarterly report on Form 10-Q, and provided a supplemental investor presentation on our website, which we will be referencing during our remarks.
Supplemental.
The presentation has been uploaded to the webcast as well for your reference on pages four through seven of the presentation, you will find key updates and an earnings summary for the quarter.
For the second quarter of 2023 reported net income to common stockholders of approximately $1 4 million or three cents per share.
There are a few items I'd like to highlight with regard to the Q2 P M.
Our Q2 net interest income was $70 5 million compared to $8 2 million in Q1 of 'twenty three.
This decline occurred primarily because your investable capital was intentionally held a significant unemployed liquidity during the period in anticipation of the execution.
Collateralized financing transaction, which we ultimately closed in mid July .
Our unrestricted cash balance throughout Q2 was in excess of $95 million.
June 30 pro forma unrestricted cash, giving affect your July 12 financing transaction was approximately $40 million.
Increased earnings rates on our cash balances helped mitigate some of the impact of cash drag.
This was more than offset by the increase in incurred interest expense related to our CLO liabilities and so for rose 22 basis points during the quarter.
From 4.87% to 5.9%.
Exit fee. Another prepayment related income was also down by approximately 400000 sequentially.
Our total expenses were $4 4 million during Q2 versus $2 7 million in Q1.
This quarter over quarter increase was driven primarily by $1 7 million or three cents per share of deal costs, we incurred in pursuit of executing a CRE CLO securitization transaction that Jim mentioned us everything from.
Given volatility in the capital markets since you're gonna skin execution risks, we determined to terminate gets transaction before it went to market and instead pursue the transaction closed in July .
For Q2, we reported distributable earnings of approximately $1 9 million or <unk>.
<unk> per share the primary difference between our reported net income and distributable earnings was the approximately 550000 increase to Cecil General reserves in the quarter, primarily due to changes in the macroeconomic forecast.
It's a noncash unrealized items. These charges are adjusted out for purposes of calculating distributable earnings.
Excluding the previously mentioned three cents per share of cost expenses in Q2 relating to the abandon public CRE CLO transaction.
Repeatable earnings for Q2 would have been seven cents per share.
As of June 30, the company's total equity was approximately 239 million total common book value was approximately 179 million or $3.43 per share.
I will now turn the call over to James Hansen will provide details on the company's investment activity during the quarter and portfolio performance.
Thank you Jim Briggs.
I will provide a brief summary of our portfolio activity during the second quarter.
During the second quarter, we experienced $72 million of loan payoffs, which included the loan on our sole retail collateralized asset.
This.
<unk> represents an increase relative to the $52 million of loan payoffs experienced during the first quarter.
The $72 million million dollars of payoffs experienced during the second quarter represented a 28% annualized payoff rate.
While this is pay off rate is below our long term historical average we expect we will continue experiencing similar payoffs fees over the coming quarters due to persistent interest rate volatility and economic uncertainty.
During that period, we acquired approximately $73 million of loans from an affiliate of our manager.
75% of these acquisitions were collateralized by multifamily properties.
And the remaining 25% of our collateralized by health care related properties.
As of June 30, our portfolio consisted of 66% floating rate loans with an aggregate unpaid principal balance of approximately $1 billion.
Approximately 89% of the portfolio was collateralized by multifamily properties located across the country.
Approximately 74% of the portfolio was indexed to LIBOR as of June 30th.
On July six we successfully transitioned all of these loans to sofa.
Portfolio is now 100% indexed to silver.
Our investment portfolio performed well during the second quarter.
While we have experienced some modest risk migration from $3 two.
Averaged 3.2 in the prior quarter to an average of three four in this period.
Only one multifamily loan remains rated a five.
We have not recorded any specific allowance on this loan which remains a monetary default and for which we are pursuing all available remedies.
During the period, we had no additional loans in the portfolio right. It is a five.
As Jim Flynn described earlier after the quarter end, we acquired an additional 25% 25 floating rate mortgage assets in connection with the execution of the $386 million collateralized financing transaction, which closed on July 12.
All of these loans.
Were collateralized by multifamily properties.
Slide 17 in our supplement provides further detail related to the 25 loans in the initial collateral pool for that financing.
Slide 23 in the supplement provides a pro forma capital structure for the company, giving effect to the July 12 transaction.
As discussed earlier on the call we expect to continue to rely on the depth and breadth of our managers active asset management capabilities.
Agate risk within our portfolio and to protect shareholder value.
With that I will pass it back to Jim <unk> for some closing remarks.
Thank you Mr Hanson.
We look forward to updating everyone on our progress we appreciate.
And interest and happy to open the call up to questions.
We will now begin the question and answer session 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.
The first question comes from Crispin Love with Piper Sandler. Please go ahead.
Thanks, and good morning, everyone. I appreciate you taking my questions first one just looking at the weighted average term remaining term of your portfolio about 15 months or so just given the macro and rate environment here in multifamily and I'm curious how you expect maturities to be handled for many of these loans that may mature over the next several quarters.
Would you expect some extensions here any infusions of cash or because otherwise how would you expect maturities to be handled.
Thanks for the question.
I think theres, a little bit of a blend we've actually seen it.
Across our broader platform.
Some higher pay offs frankly than we would might have expected a quarter ago or two.
So we actually do expect.
You know a reasonable amount of payoffs coming here.
Over the next couple of quarters as you pointed out.
We also expect to have some loans extend with Paydowns and other.
Terms changing.
On the lender's behalf too to get those executions.
<unk>.
And yeah, it's going to be a mix, but where are we in all of the borrowings that we've been speaking with them.
You know we've generally had.
They've been positive conversations where we expect their plan is to either.
Move forward with the sale.
And which would get paid off or has plans to refinance that.
Lower leverage.
Alright. Thanks.
I appreciate the color there or not refilling makes sense excuse me yeah, yeah, yeah, Okay, and Jim I think you may have mentioned this in the prepared remarks, but I might've missed at quarter end cash balance was just under $99 million the pro forma cash balance inclusive of L. M. F. 2023 one did you say that was $40 million.
Similar balance excuse me 40, yes.
Okay.
Oh, that's right Kristen perfect. That's what I thought okay. Thanks, and then just if I could sneak one more in how close were you to completing that abandoned CLO transaction can you just explain that kind of the key reasons of going with the private transaction pricing anything else at play and then just any detail on that 1.7 million how.
That was what was spent.
So I would say where we were.
We were very close.
The the reasons why we were not able to get that transaction done are you know.
SBB signature bank.
Yes.
But we were we were very close to.
Getting a launching a public deal or potentially even.
Placing it in in direct accounts when you.
You know all of the.
Banking.
He is in crisis kind of really blew up and maybe where you're ready to go I mean, it was as in weeks in.
But we did continue to explore we had kind of we had been dual tracking looking at different ways. We've talked in the past about looking at private transactions.
So we had no.
The capital markets have been so.
Volatile in.
You know they opened and closed infrequently and for short period.
We had been anticipating a little bit of both.
At that time, we thought we had a window to get the trade done our bankers thought so as well.
So very quickly.
And.
We continue to see if we could get another window, but you know that the shoes kept dropping there on the other.
On the banking side and.
You know spreads even if you could get one done spreads blew out.
We weren't we probably would not have been able to do Oh, yeah dynamic.
Dynamic or reinvest having reinvestment periods.
Things kind of moved against Us pretty quickly.
We pivoted back to.
The private transaction and just kind of a close and then they had to to get that done right around that time.
Unfortunately, we were closed.
Yeah. It was again a static deal I think at the time I would expect pricing maybe would have been a little bit better.
You know as soon as the market changed it was either.
Worse or not even achievable at all.
Alright, all our all makes sense I appreciate the color there. Thanks.
Okay.
The next question comes from Stephen Laws of Raymond James. Please go ahead.
Hi, good morning.
Good morning, Congratulations on the private dealer July on financing something you guys have been looking at for a number of quarters. Now. So you know I know you were happy to see the deal are executed.
You know as I think about it and then on your last point about it being you know managed collateral pool.
The reinvestment period is still open and your your first CLO as well obviously through year end and can can you talk about how accretive or any turnover as you know what are your typical spreads you're seeing on maturing loans that are paying off versus where that are that can be redeployed.
Yeah, I think you know it's.
It is it's obviously a little bit better, but you've had.
Most of the loans paying off would have three handles on them.
Hi.
Uh huh.
You know I think new loans.
That four to $4 54 in a quarter is kind of been where loans that are getting done are better trading I've been I've been kind of in that range. So there'd be.
There should be a modest pick up.
You know I would expect kind of a lower leverage than we've seen in the market as well but.
It's not it'll be there'll be a modest pickup, but it's you know 25 to 50 basis points would be probably my guess on average.
This added scale.
Great and then just I want to make sure. We still got just the one five rated loan that didn't change, but it looks like four rated loans dropped from from 12 to 10, I think I'm guessing maybe one was the retail loan that I think you mentioned in your prepared remarks, but maybe wrong on that so can you talk about what youre seeing in that four bucket.
Any trends either geographic or are you, mostly multi so any geographic trends is there any correlation with sponsor concentration among those.
No I honestly introduced Zach halpern to two to give you guys some color on that and just.
And Stephen on the last question I do want to add.
As I said, the the new transaction.
You know equated to spreads of about 425 based on what we paid for them. So I was.
New transactions for.
Our first CLO.
Excuse me and pay offs have been around 360 in that in that pool of loans that paid off that.
My my point around reinvestment in the pickup in spread is for is really related to the first CLO not exactly sure got it.
Steven.
Oh, Yeah go ahead yeah.
Yeah, I was just going to jump in quickly on on risk ratings I don't think we're seeing any.
Super negative Ah.
Geographic trends or anything Super specific there.
As you know implicit in these risk ratings or X plus it really is.
The debt service and interest rates and as Sofer's ticking up you know, what we're just seeing a little bit of downward migration and debt service coverage.
And so I think that's really what you're seeing reflected here and it's not.
Anything.
Graphics specific or a sponsor specific PRASM.
Great I appreciate the comments this morning.
Thanks, Neil and the next question comes from Matt Matthew Arden or have Jones trading. Please go ahead.
Hey, guys. Thanks for taking the question. So you mentioned Hello reinvestment I'm. The first one expires at the end of this year I believe how much do you have left there.
To reinvest.
So it's full.
Today.
But we do expect to have a couple of pay offs here in the next couple of months.
So it just it really depends on it depends on whether those happen in time, but you know we could see you know.
Reasonably.
Yeah.
A reasonably high number we've got.
Hum.
Within our Q that we're reviewing that we could move in there.
What we're trying to push people to if they're going to pay off that to get it done as.
Correct me if possible so that we're able to.
Putting new assets in the securitization.
I will say in general, even though we've seen elevated payoffs.
They've almost all taken longer than.
Originally projected by the the owners.
So we excuse me but.
But we are very actively.
Managing and engaging with sponsors do not do some payoffs, but obviously that's a critical component right now.
But just in general and so we have a pretty good figure on the pulse, but but sometimes.
Buyers and sellers. So that's item out of our control so I do expect to see.
You know some meaningful pay off here before the end of the year that we are optimistic.
<unk> will be able to.
This.
Put new deals and in time, but.
But it's all it's all the time it came after that it will be.
Yeah, just just delever in the pool.
Okay. Thank you and then as a follow up to that now that ones or ramp is there a plan to kind of drive some possibly increase the dividend, especially with that $1 7 million charge.
Being a onetime thing.
Obviously as we said we do talk about the dividend with the board every quarter and we'll continue to do that this quarter, where we are hopeful that you know based on our.
You know pro forma look at our at our earnings.
Earnings that were we're hopeful to see earnings growth and obviously, we will talk to the to the board about you know how how they want to reflect back on the dividend.
Thanks for taking the questions.
As a reminder, if you have a question please press star one.
The next question comes from Christopher Nolan of Ladenburg Thalmann. Please go ahead.
Oh for the new financing how much do you expect it to add to EPS in 2024.
Jim Briggs do you want to.
Provide some just yes, I mean, we we've generally not guided him from from from that perspective, Yeah. I think you can look at the transaction.
You know, both but the leverage the cost and the effective spread that Jim's talking about their and make some estimates.
Great and then on a follow up on that I think Jim Flynn mentioned us vessel spread of 425 Bips.
I heard correctly.
Does this exactly for the financing that we just completed.
We we we acquire those loans at a discount.
And you know, we we equate that to approximately 425 or just ignore.
Okay, which is above the Q says $3 65.
<unk> 65 is the stated.
Nominal Brad.
The the spread equivalent with a discount and fees.
Yes.
What we're estimating to be about 425.
Chris We we we mentioned just a follow up on that point that we acquired the loans from an affiliate of our manager the majority of our loans at a discount.
So at par of one 5% or $5 9 million.
Which is driving that that effective yield north of effective spread north of 425 to 10 as mentioned.
Okay, and then is it fair to say the advance rate on the new financing is slightly below that.
I get 82%, but I just want make sure I'm in the ballpark.
That's right.
A final question on provisions I'm, given the new financing.
What's our loan loss provision policy on that is what's.
Driving incremental provisions at the reading on the dead as a debt service coverage or little color on that would be appreciated.
Yeah.
As I mentioned in my remarks I'm.
Most of the change we saw in the quarter is primarily being driven by changes in the macroeconomic forecast right system requires you to have a reasonable.
And supportable forecast period, which we consider to be a year. So that that forecast has has just gotten a little bit more more negative.
The risk rating migration was was pretty modest for this quarter.
So it's primarily changes.
And the macro forecast.
Yeah different quarter could get a different answer but this quarter was primarily due to the macro forecast them.
Okay. Thanks, Jim Thanks, guys.
Yeah.
Thank you.
This concludes our question and answer session I would like to turn the conference back over to James Flynn for closing remarks.
I just wanted to thank everyone for joining express an interest we're happy and pleased with getting the transaction done and look forward to speaking to you all next quarter. Thank you.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.