Q3 2023 Lument Finance Trust Inc Earnings Call
Good morning, and thank you for joining the limit Finance Trust third quarter 2023 earnings call.
Today's call is being recorded and will be made available via webcast on the company's website.
I would now like to turn the floor over to Andrew Zhang with Investor Relations at Lumen investment management. Please go ahead.
Thank you and good morning, everyone.
Thank you for joining our call to discuss Finance Trust third quarter 2023 financial results with me on the call today are James Flynn CEO, James Briggs CFO.
James Hansen President.
Halpern senior director of portfolio management.
Yesterday on Monday November 13, we filed our 10-Q with the SEC and issued a press release to provide details on our third quarter results.
We also provided a supplemental earnings presentation, which can be found on our website.
Before handing the call over to Jim Flynn.
Remind everyone that certain statements made during the course of this call.
Not based on historical information and May constitute forward looking statements within the meaning of section 27 a.
Securities Act of 1933.
Section 21 E Securities Exchange Act of 1934 when.
When used in this conference call words like outlook evaluate indicate believes will anticipate.
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 company.
<unk> filed with the SEC, including its reports on forms 8-K, 10-Q, and 10-K and in particular in the risk factors section of our Form 10-K.
It's not possible to predict or identify all such as.
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.
Presentation of this information is not intended to be considered in isolation northern substitute for financial information presented in accordance with GAAP.
Reconciliations of these non-GAAP financial measures the most comparable measures compared in accordance with GAAP can be accessed through our filings with the SEC.
Www SEC Gov.
The third quarter, we reported GAAP net income of 10 cents per share while distributable earnings were <unk> 11 per share.
Tober, we paid a dividend of <unk> per share with respect to the third quarter.
Which represented approximately 17% quarter over quarter increase.
I'll now turn over the call to Jim Flynn. Please go ahead.
Yeah.
Thank you Andrew Good morning, everyone. Welcome to the live in final Trust earnings call for the third quarter of 2023, we appreciate everyone joining us today.
The macroeconomic environment continues to be a challenging one.
A mild recession beginning in the first half of 'twenty 'twenty four remains a possible outcome as higher for longer rate environment seems to be the consensus economic forecast.
Given the surprising resiliency of the labor market consumption continues to outpace incomes.
And government spending and interest cost concerns.
As we await the impact of the recent and dramatic monetary policy tightening to fully work its way through the system. We were also faced with heightened geopolitical uncertainty further modeling in the near term outlook.
Given the interest rate volatility and multifamily and other commercial real estate property types continue to trade friendly.
Overall U S commercial real estate investment sales.
Volume was down greater than 50% year over year in Q3.
Despite deceleration of rent growth and widening of year over year year over year cap rate multifamily continues to be the preferred sector and is supported by strong fundamentals well.
Well deliver deliveries are elevated in certain markets. This year and next muted new construction starts suggest limited supply in the medium term, which is supportive of higher asset values as we move forward.
Demand for multifamily continues to be driven by historic homeownership affordability gap with prices of single family homes remaining high and residential mortgage rates currently north of 7%.
Yeah.
Yeah.
Given these positive signs in the long term L. T remains committed to its investment roots and seeking middle market multifamily investment opportunities that are accretive to the earnings and long term shareholder value.
The CRE CLO market continues to see significant dysfunction with only two minutes here CRE CLO transactions price during the third quarter and year to date issuance volumes through October are down 60%, 66% year over year.
From a already depressed prior year.
Given the uncertainty in the capital markets were priced proud to have successfully executed.
On July 12 for 386 million floating rate.
Floating rate mortgage portfolio financing transaction.
That we will subsequently reference as Elm out 2023 dash one.
In connection with Alan that 2023, that's one transaction $270 million of an investment grade rated senior secured floating rate loan was placed with a private lender and approximately $47 million of investment grade notes were issued and so to solve to an affiliate of our external manager.
L O C retained 67 million subordinate notes in that transaction.
The outstanding liabilities of this financing transaction have an initial weighted average spread of 314 basis points over 30 day terms silver.
Excluding fees and transaction costs.
The initial collateral pool consists of 21 25 first lien floating rate mortgage loan secured by 32 multifamily properties located across the United States.
You already have the collateral was acquired from an affiliate of the manager at an aggregate discount to par of approximately one 5%.
The weighted average spread of the initial collateral was approximately 365 basis points over 30 day terms silver, which we estimate works out to an effective spread on the initial collateral pool north of 425 basis points.
<unk> 2023 Dash one provides for a 24 month reinvestment period.
Allows principal proceeds from repayments of the mortgage asset can be reinvested and qualify replacement mortgage assets subject to certain conditions.
Consummation of this financing allowed the company to increase its investment capacity to approximately $1 4 billion at a relatively attractive incremental cost of capital.
Closing a valve Alan F 2023, that's one coupled with our CRM CRE CLO debt previously issued 2021.
Certain corporate term loan, which matures in 2026.
Currently maintains an attractively priced and long dated liabilities.
Profile that positions us well as we enter an uncertain part of the market cycle.
<unk> investment strategy of acquiring floating rate mortgage.
Asset positions.
Positions it well for higher for higher for longer rate environment. We believe the company consistently differentiate itself from its peer group. There is continued focus on middle market multifamily credit opportunities.
I'll share of active asset management and its strong sponsorship from the broader <unk> platform.
With that I'd like to turn the call over to Jim Briggs, who will provide us details on our financial result.
Yes.
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 investor 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 third quarter of 'twenty, three we reported net income to common stockholders of approximately $5 2 million or 10 cents per share.
There are a few items I'd like to highlight with regard to the third quarter P&L.
Our Q3 net interest income was $9 5 million compared to $7 5 million in Q2.
Primarily as a result of the growth of our loan portfolio facilitated through the execution of the L. M. F 2023 dash one financing transaction in July.
So for increased 23 basis points during the quarter from five 9% to 5.32%.
Driving an increase in the interest income on our portfolio in excess of the increase in the cost of our floating rate liabilities.
Extra fees and other prepayment related income were relatively fat flat sequentially, despite payoffs being higher than prior quarter.
Due to a larger portion of the multifamily payoffs this quarter being refinanced with agency debt provided by an affiliate of the manager.
Note that in such situations a portion of the manager's expense reimbursements are waived pursuant to the terms of the management agreement.
Our total operating expenses were $2 4 million during Q3 versus $4 4 million in Q2. This.
This quarter over quarter decrease was driven primarily by the $1 7 million or <unk> <unk> per share of deal costs, we expensed in Q2.
And which had been incurred in pursuit of executing a broadly marketed CRE CLO securitization transaction, which we ultimately abandoned in Q2 and move to more attractive L. M. F 2023 dash, one private financing transaction.
For Q3, we reported distributable earnings of approximately $6 million or <unk> 11 per share.
The primary difference between our reported net income and distributable earnings what's the approximate 800000 net increase deceitful general reserves in the quarter.
Primarily due to the increase in the overall size of the floating rate loan portfolio as well as changes in macroeconomic forecast in the period.
It's a noncash unrealized item. These charges are adjusted out for purposes of calculating distributable earnings.
We did not take any asset specific provisions in Q3.
As of September 30, the company's total equity was approximately $241 million.
Total common book value was approximately 180 million or $3 46 per share up <unk> <unk> per share from Q2.
We ended the third quarter with an unrestricted cash balance of $43 million and we also had an additional 30 million of aggregate reinvestment capacity through our two secured financings.
I will now turn the call over to Jim Henson to provide details on the company's investment activity during the quarter and portfolio performance Jim.
Pardon me. This is the conference operator, Mr. Hampson is it possible your phone is on mute.
Yes. Thank you.
Thank you Jim Briggs Thank you.
I will now provide a brief summary of our recent activity within our investment portfolio during.
During the third quarter, we experienced a net $341 million increase in our loan portfolio after accounting for $111 million of loan payoffs.
$111 million of loan payoffs experienced during the quarter represented approximately 33%, 33% annualized payout rate, which was relatively relatively in line with our long term historical averages and our short term expectations.
Of the $452 million loan investments acquired or funded during the quarter, 99% of our collateralized by multifamily properties.
Loans acquired during the quarter from an affiliate of the manager were acquired at an aggregate discount to par of $7 $1 million.
As of September 30, our portfolio consisted of 87 floating rate loans with an aggregate unpaid principal balance of approximately $1 4 billion.
Yeah.
Of which 93% was collateralized by multifamily properties.
100% of our portfolio rate floating rate portfolio is index to one month sofa.
Our investment portfolio performed well we ended the third quarter was 75% of the portfolio risk rated a three or better and we have maintained a weighted average risk rating of three four quarter over quarter.
Several offsetting factors impact would be average risk rating for the quarter.
On one hand, the average risk rating would have shifted toward improvement during the quarter due to the company acquiring four new two rated loan investments with an aggregate unpaid principal balance of $64 million.
And two existing loan investments totaling $31 million of unpaid principal balance moving to a two rating during the quarter due to improved property performance metrics.
In addition, several assets migrated from a three to a four rating and to own assets migrated from a four to a five rating.
We had three one investments each collateralized by multifamily property.
We're rated a five for the third quarter.
These loans with an aggregate unpaid principal balance of $69 million are currently considered collateral dependent due to the actual or expected monetary default.
One of these three loans, we have discussed in prior quarters, and we continue to pursue all available remedies with regard to that loan.
African conducting our analysis of the underlying collateral.
Have concluded we have not recorded any specific reserves with respect to these restaurants.
We continue to proactively monitor the health of our portfolio and we rely on the depth and breadth of our managed capabilities to drive positive asset management outcomes, while protecting shareholder value.
With that I will pass it back to Jim Flynn for some closing remarks.
Thank you Jim has been.
Yes.
I appreciate everyone's time and interest I want to open the call up for questions I know, there's a few early in the queue.
Ladies and gentlemen at this time, we'll begin that question and answer session to join the question queue. You May Press Star and then one using at Hudson and telephone.
Draw your questions you May press star two.
If you are using a speaker phone, we do ask that you. Please pickup your handset, reflecting the key to ensure the best sound quality.
That its star and then one to join the question queue.
Our first question today comes from Stephen Laws from Raymond James. Please go ahead with your question.
Hi, good morning.
Great.
Hey, good morning, guys.
Three multifamily loans can you give us some details kind of where the things you've talked about one before but where are they located are they the same borrower different different sponsors there.
Whats the timeline and kind of resolving that.
Recycling capital and performing investments.
So I will let.
Zach Kathryn talk on the details there all different sponsors.
All different locations.
And in different stages of.
Under performance.
But but as Jim pointed out we still feel comfortable that we're going to be repaid on the collateral.
But we're working with with the borrower they all have different.
Issues.
And so I'll, let <unk> give you give you the high level of kind of.
Generally where they are but.
One is primarily a partnership dispute.
One is behind this business plan and one is.
<unk> had significant issues at the physical property and is working through.
Proceeds on insurance et cetera.
Jack you want to go ahead and give a high level.
Sure. So the asset that we've been talking about for the last three quarters.
In Ohio.
<unk>.
Yes.
Ah Theres another asset in Virginia.
That is the one that.
Partnership dispute and then Theres naphtha in Florida.
This plan.
When we.
Consider all three assets and look at them in.
So.
Information on that in site visits et cetera.
Finding that with the exception of the first half that which.
But you had some net.
Legal revenue done.
Also do not expect the other two.
While there is some monetary issue.
<unk> appear.
Appears to be lower than the value at present.
Yeah.
The borrowers and sponsors with incentives to procure the then.
Work towards resolution and therefore Tonight.
Static losses.
And you had asked us even on the on the Taiwan. There are there are payments being made.
There.
And variety of ways paying down principal paydown paying interest rate those kinds of things.
The timeline is.
As you know you know, there's there's some uncertainty to it all.
But we're certainly expecting these to be resolved.
Yeah.
You know in the next in the next couple of quarters is kind of how im looking at it at least at least.
One or two of them and maybe all three.
But.
For better or worse things, sometimes seem to take longer.
For example, the partnership with <unk>.
<unk> is really it.
It's impacting us as lender, but it's an issue between the two owners and.
They they have.
Settle there they're their own dispute and then I think we would be rare.
Ready to move forward, the likely through a sale or whatever they decide to do.
So.
We're pursuing our remedies to push them to get to their conclusion, but that's an example of just.
Working through the legal process.
But hopefully a.
First half of 'twenty four event.
But it could it could be longer.
It sounds like its unique issues that each asset not anything that's.
Correct.
Yes, Matt.
Yes.
Is that.
These two assets are within the securitization, whose reinvestment periods ending.
There's not too much we can do.
Near term anyway.
Even if the payoff to redeploy capital.
We're going to have to.
With the securitization in probably late 2024, so it sounds like we're losing investment capacity.
Understood.
And then did they go on non accrual in the quarter, where they were the interest income from a full <unk> or did some of them only contribute partial.
None of the quarter.
We reversed out when we.
Put it in nonaccrual around 300 Grand.
As Jim mentioned, we talked in our filing about them being on a cash basis.
So we are seeing we are seeing some payments there what's really reflect an income.
Got it.
It was around 300 Grand.
They can come to that got reversed in the quarter.
Helpful. Great I appreciate the time this morning. Thank you.
Okay.
Our next question comes from Steve Delaney from JMP Securities. Please go ahead with your question. Thanks, Good morning, Jim Jim and Jim.
Jim Flynn.
The portfolio at $1 3 billion about four 5% debt to equity do.
Do you consider a lumens portfolio to be to be fully invested currently based on your capital base. Thanks.
Yes, Thanks, Steve.
Good to hear from you.
We have.
So the answer is yes, it's around one four is the total.
Total capacity give or take you know once the cash we have.
A couple of assets that we've discussed, but but generally speaking.
It's you know upwards of.
Of one three and close to one four.
Sure.
We're obviously we're.
Where we have.
Yes.
As long as work themselves out and things like that we generally kind of made the decision to maintain the liquidity the elevated liquidity for.
For obvious reasons.
But that's that's the kind of Max of our portfolio today.
Because many times, obviously you want to.
Yes think about growth, but right now it's really focused on.
Our portfolio asset quality, working with sponsors and making sure that we're position.
Positioned to take advantage of.
The market as it improves them down the road here.
That's helpful. I mean, we really are in a market. It would seem would emphasize quality over quantity at this point and you can kind of wait and see so.
The net interest income that you had not in a half a million. It was I think seven and a half.
In the prior quarter.
I realize repayments you get acceleration is there anything you know in that $9 5 million that you would point out to be.
Materially large one time accrual of.
Of revenue that you had on the or did either discount or deferred fees that you had on the books.
Yeah.
Jim you want to go ahead, yes, no I Wouldnt say theres anything one timer.
In there as.
As we talked about the economics around them.
Prepayment and fee there.
And were relatively flat quarter on quarter. Some of that is coming through a reduction in expense reimbursements, but I don't consider it they're going to be anything material in there Steve Okay. Great and then just one final point the $7 1 million that you pointed out discount specifically to a L. M. F 2023, one should we look at.
That I don't know if theres loans were already originated which would would a three year average life would that be a reasonable approach to creating that that money into the net interest income.
Yes, I think that's reasonable.
Okay, well, great quarter and good job on the big financing and we'll look forward to fourth quarter. Thank you very much.
Thanks, Steve.
Our next question comes from Matthew Earner from Jones trading. Please go ahead with your question.
Hey, good morning, guys. Thanks for taking the question. So could you just talk a little bit about what the opportunities you're seeing out there currently and I know that you guys focus on multifamily you know, but can I just get an idea of what you guys are looking at at the moment and just the health of the pipeline.
Sure.
Well look I mean the opportunities are.
Our.
Less than they've been in prior quarters.
As we've discussed just in terms of transaction volume being so significantly down so assets aren't trading hands. So that's that opportunity has significantly declined.
But so has so have lenders.
And lenders that are either can or willing to.
Uh huh.
To make new loans, so so when we have seen.
Assets come in.
We are looking at.
Yes generally speaking.
More conservative looking underwriting lower leverage.
High quality sponsors that does have an impact I think with rates being so high spreads have kind of stabilized around.
4%, but you've seen a lot of <unk>.
Pressure on that Im sorry spreads at four but I think you see a lot of pressure on that to be lower when you've gone with.
Very low low Levered bridge loans, and kind of pushing things down towards 3% for this high quality loans I think youll see lenders probably take a look at those deals.
And trade, a little spread for for risk or low risk.
In terms of some of the things we've talked about in the past around.
The board and is that opportunities around mezz financing a preferred equity et cetera. There is theres a lot of <unk>.
Market chatter around those particular products, there's a lot of lenders and people looking to.
<unk> participate in that market.
Including us both that RFP and then our broader platform the reality is that.
There's not a tremendous amount of deals that that works for today.
Given where the rates are expected to be for that for that product in the teens mid teens even.
And it's hard to replace.
Your.
Prior debt capital, if you're kind of refinancing.
Something with a mid single digit with it with a two X on preferred and so there's just I think that we haven't yet seen kind of the the dam break so to speak of of transactions I think as.
Values by buyers and sellers kind of except values the spread between buyers and sellers narrows I think we're going to see more opportunity for you know for new loans for bridge to bridge transactions that are kind of <unk>.
Moving finishing off our prior strategy at a different <unk>.
Cap stack.
Transitioning some of these are assets that are being delivered off of construction loans to lease up bridge loans.
I think youll see opportunities both on the bridge space.
It's not going to be 2020, or 2019, but I do think well see some opportunity.
Increase and I also think that that other space.
Hum.
<unk> capital as you start to see actual transactions assets changing hands there'll be more opportunity there, but we really need the transaction flow to pick up.
For that I think we need buyers and sellers too.
Except where where values are and come to a agreement.
Agreement narrow gap and then we'll see some of those opportunities and as we noted we retain.
Some of the low investment grade rated bonds in our last transaction.
And that was because it was an attractive spread.
So there's there might be some opportunities opportunistic.
Trades in the in the secondary market for some of these.
Cielo that are out there, but that's going to be very.
Very portfolio.
Specific.
Got it. Thank you that's good color there I appreciate that and then on the recent CLO I don't know if you mentioned it or not but is there a reinvestment period and then if there is you know when does that expire and how much of it is open at the moment. Thanks.
It's it's two years and to be clear I may have said cielo, but it's it's it's a financing transaction its not technically a deal just to clarify but it is a.
Very similar structure and it has a two year reinvestment period.
Thank you.
Once again, if you would like to ask a question. Please press star and then one with your all your questions you May press Star and two.
Our next question comes from Christopher Nolan from Ladenburg Thalmann. Please go ahead with your question.
Jim Briggs.
Just a clarification were there any nonrecurring expense items in the quarter.
No nothing unusual or one time or as I pointed out we did have the big one time or last quarter.
For the dead deal costs for you know a widely distributed public CLO that we expensed in Q2, but.
Nothing I would consider one time or in the current quarter.
Great and then I guess or just the panel in general any change in non accruals in the fourth quarter to date.
Yeah.
Nothing today.
Yeah no.
And then finally on <unk>.
Looking through the deck and looking at the Ltvs, which are roughly 70, 580% or so what sort of rent haircut or you're applying.
When you evaluate those ltvs.
I don't think that the I mean, we when we're looking at the assets at each one as an individual.
Evaluation, meaning.
You know basically.
It's going to be a view of what are the in place rents.
Most markets today have.
You know either.
Somewhere in plus maybe two or three at the Max to minus.
You know the same the same level, but some markets and sub markets are slightly different but in general.
We'd be looking at in place rents.
Particularly if there.
A lot of these assets are still renovating and they're still moving through their business plans, albeit with whatever changes in market conditions have warranted.
And so there's real time data on.
What is what does it look like for <unk>.
Renting new unit today, but we're certainly youre using this youre using the state is rent right.
We're we're often getting rent rolls right. So.
This is this is real information I think that.
Perhaps it's helpful to make a distinction between evaluating something like that see MBS bond in which youre looking at a type of data provided by the servicer versus.
Looking at multifamily loans the way, we're looking at it which is.
Asset management data as rent roll information, that's coming directly from the borrower.
That's not necessarily the path.
<unk> et cetera.
It's a lot more.
Boots on the ground than you might.
C versus.
We're looking at CBS.
Well here.
And then and I guess, just FYI I used to run a portfolio for rent stabilized apartment buildings in New York City with 218 rent stabilized units.
And when you talk to bankers in this space at least in New York City.
They gave a haircut there reported rent roll of 20, 25%.
Simply because what you reported renters could.
Be different to what the actual rent is like if you get one month free or something like that.
And.
If you're using what the stated rent roll.
Doesn't that sort of over inflate the value of the property on LTV basis.
So let me just address that specifically so when we look at rents we are taking into account.
The leases the concessions right, but we're not we're not saying someone's, giving two months free and then charging.
We're using what the real but the real ramp is right. So so concessions and things like that or not and but just also for context.
Yeah, we we've seen or will see by the end of this month every asset in our portfolio within the last.
Since June or July.
The summer so over four months, we've gone out and visited every asset.
With someone from our team and visiting with the sponsor.
To <unk> point as you know these are transitional assets right.
The business plan Theyre, not stabilized assets, where a servicer pay someone to go out every two years to look at the asset right. We are in.
In contact with our sponsors.
On a regular basis weekly monthly quarterly whatever whatever is appropriate for the given asset.
Are physically out there seeing that so theres, a little bit more engagement, there and real time access to financial information.
Then you know receiving.
A.
Appointing a visit to a large portfolio, where you're receiving information second hand, and you're making some assumptions.
We don't have to make those assumptions because we have the real data.
Theres not to know what it is.
Yeah I would.
On top of that.
So a couple of things right. One is the ltvs that are reported on.
Yeah, the earnings supplemental our LTE.
Time of origination which is never there.
But the underwriting that.
In evaluating these assets.
Not all bad news for not simply taking what the bar gives us.
As.
Our underwriting.
Any nuance.
It would be.
Yes.
Free rent for a month or two or.
No issues on stabilization or if she's on occupancy that that's all.
Put into our underwriting and analysis.
We're evaluating.
But that underwriting in an ongoing basis.
Okay. Thank you.
Ladies and gentlemen, with that we'll close today's question and answer session as well as today's presentation. We thank everyone for joining today's conference call. You may now disconnect your lines.