Q2 2024 Lument Finance Trust Inc Earnings Call
Operator: Jason Weaver, Steven Laws, and Christopher Nolan Good afternoon, and thank you for joining the Lumen Finance Trust second quarter 2024 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 call over to Andrew Tsang at Lumen Investment Management. Please go ahead.
Unknown Executive: Good afternoon, and thank you for joining the Lument Finance Trust second quarters 2024 Erning School. Today is being recorded and will be made available via webcast on the company's website.
Speaker Change: Good afternoon and thank you for joining the Lumen Finance Trust Second Quarter 2024 Earnings Call. Today is being recorded and will be made available via webcast on the company's website.
Andrew Tsang: I would now like to turn the call over to Andrew Tsang at Lument Investment Management. Please go ahead.
Speaker Change: I would now like to turn the call over to Andrew Tsang at Lumen Investment Management. Please go ahead.
Andrew Tsang: Good afternoon, everyone. Thank you for joining our call to discuss Lument Finance Trust's second quarter 2024 financial results. With me on the call today are James Flynn, our CEO; Jim Briggs, our CFO; Jim Henson, our President, and Zachary Halpern, our Managing Director of Portfolio Management, on Monday, August 12th.
Andrew Tsang: Good afternoon, everyone. Thank you for joining our call to discuss Lument Finance Trust's second quarter 2024 financial results. With me on the call today, are Jim Flynn, our CEO, Jim Briggs, our CFO, Jim Henson, our President, and Zachary Halpern, our Managing Director of Portfolio Management.
Speaker Change: Good afternoon, everyone. Thank you for joining our call to discuss Blumenthal Finance Trust's second quarter 2024 financial results.
Andrew Tsang: With me on the call today are Jim Flynn, our CEO, Jim Briggs, our CFO, Jim Henson, our President, and Zachary Halpern, our Managing Director of Portfolio Management.
Andrew Tsang: On Monday, August the 12th, we filed their 10-K with the SEC and issued a press release to provide details on our second quarter results. We also provided a supplemental earnings presentation, which can be found on our website.
Andrew Tsang: We filed our 10-Q with the SEC and issued a press release to provide 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 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934.
Speaker Change: On Monday, August the 12th, we filed our 10-Q with the SEC and issued a press release to provide details on our second quarter results. We also provided a supplemental earnings presentation, which can be found on our website.
Andrew Tsang: For 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; they constitute forward-looking statements in the meaning of Section 27A of the Securities Act of 1933 and Section 201E of the Securities Exchange Act of 1934. Such forward-looking statements are subject to various risks and uncertainties that could cause actual results to differ materially from the forward-looking statement. These risks and uncertainties are discussed in the company's reported reports filed with the SEC, in particular the risk factor section of Reform 10K.
Andrew Tsang: Such forward-looking statements are subject to various risks and uncertainties that could cause actual results to differ materially from those in the forward-looking statement. These risks and uncertainties are discussed in the company's reports filed with the SEC, in particular, the risk factor section of the Form 10-K. It is not possible to predict or identify all such risks, and listeners are cautioned not to place undue reliance on these forward-looking statements.
Speaker Change: 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 in the meaning of Section 27A.
Jim Flynn: with the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934.
Speaker Change: Such forward-looking statements are subject to various risks and uncertainties that could cause actual results to differ materially from those in the forward-looking statement.
Speaker Change: These risks and uncertainties are discussed in the company's reported reports filed with the SEC, in particular the risk factor section of Reform 10-K.
Andrew Tsang: It is not possible to predict or identify all such risks, and listeners are cautioned not to place undue reliance on these forward-looking statements.
Speaker Change: It is not possible to predict or identify all such risks, and listeners are cautioned not to place undue reliance on these forward-looking statements.
Andrew Tsang: The company undertakes no obligation to update any of these forward-looking statements.
Andrew Tsang: 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, nor is a substitute for 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.
Speaker Change: The company undertakes no obligation to update any of these forward-looking statements. Further, 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, nor is a substitute for the financial information presented in accordance with GAAP.
Andrew Tsang: Are there certain non-GAAP financial measures that we discussed on this conference call? A presentation of this information is not intended to be considered in isolation, nor is a substitute for the financial information presented in accordance with GAAP. Reconciliation 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.
Speaker Change: 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.
Andrew Tsang: For the second quarter of 2024, we reported GAP net income of $0.7 and distributed earnings of $0.9 per share of common stock, respectively. In June, we also declared a dividend of $0.8 per share with respect to the second quarter, which represented a 14% increase over the first quarter dividend of $0.7 per share of common stock.
Andrew Tsang: For the second quarter of 2024, we reported a gap net income of $0.07 and distributable earnings of $0.09 per share of common stock, respectively. In June, we also declared a dividend of $.08 per share with respect to the second quarter, which represented a 14% increase over the first quarter dividend of $.07 per share of common stock. I will now turn the call over to James Flynn. Please go ahead.
Speaker Change: For the second quarter of 2024, we reported gap net income of $0.07 and distributable earnings of $0.09 per share of common stock, respectively.
Speaker Change: In June, we also declared a dividend of $0.08 per share with respect to the second quarter, which represented a 14% increase over the first quarter dividend of $0.07 per share of common stock.
Andrew Tsang: I will now turn the call over to Jim Flint. Please go ahead.
Speaker Change: I will now turn the call over to Jim Flynn. Please go ahead.
James Flynn: Thank you, Andrew.
James Flynn: Good day, everyone. Welcome to the Lumen Finance Trust earnings call for the second quarter of 2024. We appreciate everyone joining today. To the first half of 2024, the U.S. economy largely outperformed consensus expectations. However, the CPI-measured in June felt that declining rate of growth in the consumer price index, and August shops reports were weaker than expected. As a result, the market seems to have renewed confidence that the Fed will start its easing cycle in September. As reflected in the 10-year treasury remaining growth, water and basis points, a sense of beginning of log. Well, such easing will likely be beneficial to a number of sectors, including commercial real estate.
James Flynn: Thank you, Andrew. And good day, everyone. Welcome to the Lumen Finance Trust earnings call for the second quarter of 2024. We appreciate everyone joining today. Through the first half of 2024, the U.S. economy largely outperformed consensus expectations. However, the CPI measured in June showed a declining rate of growth in the consumer price index, and August jobs reports were weaker than expected.
Jim Flynn: Thank you, Andrew. Good day, everyone. Welcome to the Lumen Finance Trust Earnings Call for the second quarter of 2024. We appreciate everyone joining today.
Speaker Change: In the first half of 2024, the U.S. economy largely outperformed consensus expectations. However, the CPI measured in June showed a declining rate of growth in the consumer price index, and August jobs reports were weaker than expected.
James Flynn: As a result, the market seems to have renewed confidence that the Fed will start its easing cycle in September, as reflected in the 10-year Treasury remaining below 400 basis points since the beginning of August. While such easing will likely be beneficial to a number of sectors, including commercial real estate, we expect to proceed cautiously as the economy remains at an elevated risk of recession. While the economic data has generally outperformed, commercial real estate has suffered through the high rate and inflationary environment.
Speaker Change: As a result, the market seems to have renewed confidence that the Fed will start its easing cycle in September.
Speaker Change: as reflected in the 10-year Treasury remaining below 400 basis points since the beginning of August.
Speaker Change: While such easing will likely be beneficial to a number of sectors, including commercial real estate, we expect to proceed cautiously as the economy remains at elevated risk of recession.
James Flynn: We expect to proceed cautiously if the economy remains the elevated risk of recession. While the economic data has generally outperformed, commercial real estate has suffered through the high rate and inflationary environment. Improvements in the rate environment and the bottoming of property values should translate into a throwing of capital markets and an uneven recovery of transaction flow in the commercial real estate sector. Despite the modest softening of multi-family fundamentals impacted by a large supply of newly constructed units coming online over the last six months, we believe that multi-family, and particularly middle market multi-family, will continue to remain a strong performing asset class in the long term.
Speaker Change: While the economic data has generally outperformed, commercial real estate has suffered through the high rate and inflationary environment.
James Flynn: Improvements in the rate environment and the bottoming of property values should translate into a fall in capital markets and an uneven recovery of transaction flow in the commercial real estate sector, despite the modest softening of multifamily fundamentals impacted by a large supply of newly constructed units coming online over the last six months. We believe that multifamily, and particularly middle market multifamily, will continue to be a strong performing asset class in the long term.
Speaker Change: Improvements in the rate environment and the bottoming of property values should translate into a thawing of capital markets and an uneven recovery of transaction flow in the commercial real estate sector.
Speaker Change: Despite the modest softening of multifamily fundamentals impacted by a large supply of newly constructed units coming online over the last six months, we believe that multifamily, and particularly middle market multifamily, will continue to remain a strong performing asset class in the long term.
James Flynn: We firmly believe the LFP has differentiated itself from its peer group through its deliberate focus on middle market multi-family credit, which is enabled to company to deliver sustainable, stable dividend to our shareholders and preserve shareholder capital during this challenging part of the cycle. Our expertise in the origination, underwriting, and active asset management of multi-family mortgage investments has been, and we expect will remain central to the company's identity for the foreseeable future. Coupled with the strong sponsorship from the broader Lumen and Orrick's platforms, we believe LFP represents a truly unique value proposition in the public markets today.
James Flynn: We firmly believe LFP has differentiated itself from its peer group through its deliberate focus on middle market multifamily credit, which has enabled the company to deliver a sustainable, stable dividend to our shareholders and preserve shareholder capital during this challenging part of the cycle. Our expertise in the origination, underwriting, and active asset management of multifamily mortgage investments has been, and we expect will remain, central to the company's identity for the foreseeable future. Coupled with the strong sponsorship from the broader Lument and Oryx platforms, we believe LFT represents a truly unique value proposition in the public markets today.
Speaker Change: We firmly believe the LFP has differentiated itself from its peer group through its deliberate focus on middle market multifamily credit, which has enabled the company to deliver a sustainable, stable dividend to our shareholders and preserve shareholder capital during this challenging part of the cycle.
Speaker Change: Our expertise in the origination, underwriting, and active asset management of multifamily mortgage investments has been, and we expect will remain central to the company's identity for the foreseeable future.
Speaker Change: Coupled with the strong sponsorship from the broader Lumint and Oryx platforms, we believe LFT represents a truly unique value proposition in the public markets today.
James Flynn: In an environment where others have thought of challenging to sustain stable dividend levels, we are proud to have been able to benefit our shareholders and raise the common dividend in June by the penny, which represents a 14% sequential increase over Q1. Approximately a year ago, we closed the LMF secured financing transactions, which provided the company with additional investment capacity and extended our runway for future reinvestment. By the end of 2020, 2023, we were successful in fully deploying our capital into strong, predominantly multi-family credits. Since that time, we've been focused on actively managing our loan investment portfolio.
James Flynn: In an environment where others have found it challenging to sustain stable dividend levels, we are proud to have been able to reward our shareholders and raise the common dividend in June by a penny, which represents a 14% sequential increase over Q1. Additionally, approximately a year ago, we closed the LMF secured financing transaction, which provided the company with additional investment capacity and extended our runway for future reinvestment. By the end of 2020-2023, we were successful in fully deploying our capital into strong, predominantly multifamily credit.
Speaker Change: In an environment where others have found it challenging to sustain stable dividend levels, we are proud to have been able to benefit our shareholders and raise the common dividend in June by a penny, which represents a 14% sequential increase over Q1.
Speaker Change: Approximately a year ago, we closed the LMF secured financing transaction, which provided the company with additional investment capacity and extended our runway for future reinvestment.
Speaker Change: By the end of 2020-2023, we were successful in fully deploying our capital into strong, predominantly multi-family credits.
James Flynn: Since that time, we've been focused on actively managing our loan investment portfolio. However, we experienced a slight decline in our weighted average risk rating to 3.6 as compared to 3.5 as of March 31st. We believe our investments have continued to perform well on a relative basis. Thanks for our heavy focus on multifamily, which is generally outperformed by other CRE asset classes, our prudent upfront underwriting, and our active approach to asset management. We continue to maintain a strong liquidity position, ending the quarter with approximately $65 million of unrestricted cash on our balance.
Speaker Change: Since that time, we've been focused on actively managing our loan investment portfolio.
James Flynn: Although we experienced a slight decline in our weighted average risk rating to 3.6, as compared to 3.5 as of March 31st, we believe our investments have continued to perform well on a relative basis. Thanks to our heavy focus on multi-family, which is generally outperformed to other CRE asset classes, our prudent upfront underwriting, and our active approach to asset management. We continue to maintain a strong liquidity position, ending the quarter with approximately 65 million of unrestricted cash on our balance sheet. The persistence of elevated short-term rates has allowed us to generate attractive returns on our cash balances while we continue to intentionally take a defensive cash position.
Speaker Change: Although we experienced a slight decline in our weighted average risk rating to 3.6 as compared to 3.5 as of March 31st, we believe our investments have continued to perform well on a relative basis.
Speaker Change: Thanks to our heavy focus on multifamily, which is generally outperformed other CRE asset classes, our prudent upfront underwriting, and our active approach to asset management.
Speaker Change: We continue to maintain a strong liquidity position, ending the quarter with approximately $65 million of unrestricted cash on our balance sheet.
James Flynn: The persistence of elevated short-term rates has allowed us to generate attractive returns on our cash balances, while we continue to intentionally take a defensive cash position to provide us with flexibility in managing the more challenging credits in our portfolio. As discussed on prior earnings calls, our loan portfolio is financed with long-dated, secured financings that are not subject to mark-to-market or margin calls. The LMF financing transaction has a reinvestment period that continues into July 2025, and we intend to reinvest capital into new loan investments as liquidity becomes available through repayments of existing collateral.
Speaker Change: The persistence of elevated short-term rates has allowed us to generate attractive returns on our cash balances while we continue to intentionally take a defensive cash position to provide us with flexibility in managing the more challenging credits in our portfolio.
James Flynn: To provide us with flexibility in managing the more challenging credits in our portfolio. As discussed on prior earnings calls, our loan portfolio's finance was long-dated, secured financing that are not subject to market or margin calls. The LMF financing transaction has a reinvestment period that continues into July 2025, and we intend to reinvest capital into new loan investments, as liquidity becomes available through repayments of existing class.
Speaker Change: As discussed on prior earnings calls, our loan portfolio is financed with long-dated, secured financings that are not subject to mark-to-market or margin costs.
Speaker Change: The LMF financing transaction has a reinvestment period that continues into July 2025 and we intend to reinvest capital into new loan investments as liquidity becomes available through repayments of existing collateral.
James Flynn: General. On the other hand, the re-investment period of our 2021 CLL ended in December of 2023, and we are actively exploring alternatives to recapitalize this structure. As of quarter end, the cost of funds for FL1 was swaps plus 161, and the effective show for swaps, and the effective advance rate was approximately 80%. Which we believe will represent attractive terms relative to other secure financing options currently available in the market.
James Flynn: On the other hand, the reinvestment period of our 2021 CLO ended in December 2023, and we are actively exploring alternatives to recapitalize this structure. As of quarter end, the cost of funds for FL1 was SWAS plus 161, and the effective, show for swaps, and the effective advance rate was approximately 80%, which we believe will represent attractive terms relative to other secure financing options currently available, available in the. We have observed that the issuance of new CRE CLO transactions remains muted with just one managed vehicle pricing in the market last quarter and just three since the start of the year. With that, I'd like to turn the call over to Jim Briggs, who will provide us with details and our financial results. Thank you. Thanks, Jim. Good afternoon, everyone.
Speaker Change: On the other hand, the reinvestment period of our 2021 CLO ended in December of 2023, and we are actively exploring alternatives to recapitalize this structure.
Speaker Change: As of quarter end, the cost of funds for FL1 was swaps plus 161, and the effective advance rate was approximately 80%.
Speaker Change: which we believe will represent attractive terms relative to other secure financing options currently available in the market.
James Flynn: We have observed that the issuance of new CRE COLO transactions remains muted, which is one managed vehicle pricing in the market last quarter, and just three since the start of the year.
Speaker Change: We have observed that the issuance of new CRE CLO transactions remain muted with just one managed vehicle pricing in the market last quarter and just three since the start of the year.
James Briggs: With that, I'd like to turn the call over to Jim Briggs, who will provide us details about our financial results. Jim?
Speaker Change: With that, I'd like to turn the call over to Jim Briggs, who will provide us details on our financial results. Jim?
James Briggs: Thanks, Jim.
James Briggs: Good afternoon, everyone. Now, today 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 4 through 7th of the presentation, you will find key updates in earning summary for the quarter. For the second quarter of 2024, reported net income to common stockholders of approximately 3.4 million, or 7 cents per share. We also reported distributable earnings of approximately 4.8 million, or 9 cents per share. There are a few items I'd like to highlight regarding the activity during the period.
Jim Briggs: Yesterday, we filed our quarterly report on Form 10-Q and provided a supplemental investor presentation on our website, which we'll be referencing during our remarks. The supplemental and best presentation has been uploaded to the webcast as well for your reference. On pages 4 through 7 of the presentation, you will find key updates and earnings summary for the quarter. For the second quarter of 2024, we reported net income to common stockholders of approximately 3.4 million, or seven cents per share. We also reported distributable earnings of approximately $4.8 million, or $0.09 per share.
Jim Briggs: Thanks, Jim. Good afternoon, everyone. Yesterday, we filed our quarterly report on Form 10-Q and provided a supplemental investor presentation on our website, which we'll be referencing during our remarks.
Speaker Change: Supplemental and best presentation has been uploaded to the webcast as well for your reference.
Speaker Change: On pages 4 through 7 of the presentation, you will find key updates and earnings summary for the quarter.
Speaker Change: For the second quarter of 2024, reported net income to common stockholders of approximately $3.4 million, or $0.07 per share.
Speaker Change: We also reported distributable earnings of approximately $4.8 million, or $0.09 per share. There are a few items I'd like to highlight regarding the activity during the period.
Jim Briggs: There are a few items I'd like to highlight regarding the activity during the period. Our Q2 net interest income was $9.5 million compared to $13 million in Q1 of 2015. The sequential decrease was primarily attributable to the company recognizing in the prior quarter approximately $3 million of one-time cash-to-income related to the resolution of two defaulted loans, one collateralized by an office property located in Columbus, Ohio, in which we reduced our carrying value to zero, and another collateralized by a multifamily property located in Virginia Beach, Virginia, which was modified and brought current through Q1 and which remains performing and risk-free. All components of the sequential variance.
James Briggs: Our key to net interest income was 9.5 million compared to 13 million in key 1 of 24. Squential decrease was primarily attributable to the company recognizing in the prior quarter approximately 3.5 million of one-time casted income related to the resolution of two devoted loans, one collateralized by an office property located in Columbus, Ohio, in which we reduced our carrying value to zero, and another collateralized by multi-family property located at Virginia Beach, Virginia, which was modified and brought current through Q1, in which remains performing and risk-graded before. More component of the sequential variance in net interest income was also a result of average outstanding loan portfolio size, increasing versus the prior quarter as we received approximately 98 million of principal payoffs within the FL1 securitization, which is no longer within its free investment period.
Jim Briggs: And net interest income was also a result of average outstanding loan portfolio size decreasing versus the prior quarter, as we received approximately 98 million principal payoffs within the FL-1 securitization, which is no longer within its. Aggregate Payoffs and Paydowns during Q2, totaled $98 million, as mentioned, as compared to $97 million in the prior quarter, with exit and other fees similarly comparable quarter on. Our total operating expenses were $ The majority of the decrease in expenses was driven primarily by a lower sequential accrual of incentive fees due to our manager, which are payable on a quarterly basis and equal to 20% of the excess of core earnings as defined in the management agreement over an 8% per annum return threshold. Other general operating expenses were largely in line quarter over quarter. The approximately $1.4 million difference between reported net income and distributable earnings per share was attributable to an increase in our allowance for credit losses.
Speaker Change: Our Q2 net interest income was $9.5 million, compared to $13 million in Q1 of 2024.
Speaker Change: Sequential decrease was primarily attributable to the company recognizing in the prior quarter approximately 3 million of one-time pass-through income.
Speaker Change: related to the resolution of two defaulted loans, one collateralized by an office property located in Columbus, Ohio, in which we reduced our carrying value to zero, and another collateralized by a multifamily property located at Virginia Beach.
Speaker Change: Virginia, which was modified and brought current through Q1 and which remains performing and risk-rated of four.
Speaker Change: All component of the sequential variance.
Speaker Change: And net interest income was also a result of average outstanding loan portfolio size decreasing versus the prior quarter as we received approximately $98 million of principal payoffs within the FL-1 securitization, which is no longer within its reinvestment period.
James Briggs: Aggregate payoffs and paydowns during Q2, total of 98 million, as mentioned, as compared to 97 million in the prior quarter with exit and other fees similarly comparable quarter on quarter. Our total operating expenses were 3.5 million in Q2 versus 4.3 million in Q1. The majority of the decrease in expenses was driven primarily by a lower sequential accrual of incentive fees through to our manager, which are payable on a quarterly basis equal to 20 percent of the excess of core earnings, as defined in the management agreement, over an 8 percent per annum return threshold. Other general operating expenses were largely in line quarter over quarter.
Speaker Change: Aggregate payoffs and paydowns during Q2 totaled $98 million, as mentioned, as compared to $97 million in the prior quarter, with exit and other fees similarly comparable quarter-on-quarter.
Speaker Change: Our total operating expenses were $3.5 million in Q2 versus $4.3 million in Q1. The majority of the decrease in expenses was driven primarily by a lower sequential accrual of incentive fees due to our manager.
Speaker Change: which are payable on a quarterly basis equal to 20% of the excess of core earnings as defined in the management agreement over an 8% per annum return threshold. Other general operating expenses were largely in line quarter over quarter.
James Briggs: The approximately $1.4 million difference between reported net income and distributable earnings to common was attributable to an increase in our allowance for credit losses. As of June 30th, we had four loans for a graded of five. One was a $17 million loan collateralized by multi-family property in Brooklyn, New York, and was risk-graded of five due to maturity to fall. Another was a $20 million loan collateralized by two multi-family properties near Augusta, Georgia. That was risk-graded five due to monetary to fall. The third was a $15 million loan collateralized by two multi-family properties in Philadelphia, Pennsylvania.
Speaker Change: The approximately $1.4 million difference between reported net income and distributable earnings to common was attributable to an increase in our allowance for credit losses.
Jim Briggs: As of June 30th, we had four loans restricted to five. One was a $17 million loan collateralized by multifamily property in Brooklyn, New York, and was risk rated a five due to maturity to fall. Well, there was a $20 million loan collateralized by two multifamily properties near Augusta, Georgia, that was risk rated five due to monetary default. Third, there was a $15 million loan collateralized by two multifamily properties in Philadelphia, Pennsylvania. It was risk-rated 5 due to monetary default.
Speaker Change: As of June 30th, we had four loans risk rated a five. One was a 17 million dollar loan collateralized by multifamily property in Booking, New York and was risk rated a five due to maturity default.
Speaker Change: Another was a $20 million loan collateralized by two multifamily properties near Augusta, Georgia that was risk rated 5 due to monetary default.
Speaker Change: The third was a $15 million loan collateralized by two multifamily properties in Philadelphia, Pennsylvania, that was risk rated 5 due to monetary default.
James Briggs: That was risk-graded five due to monetary to fall. All three of these loans have been placed on non-accrual status; the cash received on the Philadelphia property is to be recognized on a cost recovery basis. The fourth, five risk-graded asset was a $32 million loan collateralized by a multi-family property in Dallas, Texas. That was in technical default. We evaluated these four five risk-graded loans individually to determine whether assets, specific reserves, and credit losses were necessary, and after an analysis of the underlying collateral, we recorded a specific allowance in Q2 of approximately 900,000. The General Cecil Reserve increased by approximately 500,000 during the period, driven primarily by changes in the macroeconomic forecast, as well as monarchs risk-grading migration in the portfolio.
Jim Briggs: All three of these loans have been placed on non-accrual status with cash received on the Philadelphia property to be recognized on cost recovery. The fourth fibrous graded asset was a $32 million loan collateralized by multifamily property in Dallas, Texas, that was in technical default. We evaluated these four or five risk-graded loans individually to determine whether asset specific reserves for credit losses were necessary.
Speaker Change: All three of these loans have been placed on non-accrual status with cash received on the Philadelphia property to be recognized on a cost recovery basis.
Speaker Change: Fourth, five risk graded asset was a 32 million dollar loan collateralized by multifamily property in Dallas Texas that was in technical default.
Jim Briggs: And after an analysis of the underlying collateral, we recorded a specific allowance in Q2 of approximately $900,000. The General Cecil Reserve increased by approximately 500,000 during the period, driven primarily by changes in the macroeconomic forecast, as well as modest risk rating migration in the portfolio. The company's total equity at the end of the quarter was approximately $242 million, and the total book value of common stock was approximately $182 million, worth $3.48 per share, largely flat from $3.50 per share as of March 30.
Speaker Change: We evaluated these four or five risk-rated loans individually to determine whether asset-specific reserves for credit losses were necessary, and after an analysis of the underlying collateral, we recorded a specific allowance in Q2 of approximately $900,000.
Speaker Change: The General Cecil Reserve increased by approximately $500,000 during the period, driven primarily by changes in the macroeconomic forecast, as well as modest risk rating migration in the portfolio.
James Briggs: The company's total equity at the end of the quarter was approximately $242 million. Total value of common stock was approximately $182 million, worth $3.48 per share, largely flat from $3.50 per share as with March 31st. We ended the second quarter with an unrestricted cash balance of $65 million, and our investment capacity through a two-secured financial was effectively fully deployed.
Speaker Change: The company's total equity at the end of the quarter was approximately $242 million. Total value of common stock was approximately $182 million, or $3.48 per share, largely flat from $3.50 per share as of March 31st.
Jim Henson: We ended the second quarter with an unrestricted cash balance of $65 million, and our investment capacity through two secured financings was effectively fully deployed. I'm going to now turn the call over to Jim Henson to provide details on the company's investment activity and portfolio performance. Thank you, Jim. Good afternoon, everyone.
Speaker Change: We ended the second quarter with an unrestricted cash balance of $65 million and our investment capacity through our two secured financings was effectively fully deployed.
James Henson: I mean, now I'll turn the call over to Jim Henson to throw out details on the company's investment activity and portfolio performance during the quarter. Jim.
Speaker Change: I'm going to now turn the call over to Jim Henson to provide details on the company's investment activity and portfolio performance during the course.
James Henson: Thank you, Jim.
Jim Henson: I will now share a brief summary of the recent activity in our investment portfolio. During the second quarter, LFT experienced $98 million in loan payoffs. A portion of these payoffs related to the defaulted loans discussed by Jim just a few moments ago. We did not acquire or fund any new loan assets during the period. As of June 30, our portfolio consisted of 78 floating rate loans with an aggregate unpaid principal balance of approximately $1.2 billion.
James Henson: Good afternoon, everyone. I will now share a brief summary of the recent activity in our investment portfolio. During the payoffs related to the defaulted loans discussed by Jim just a few moments ago, we did not acquire or fund any new loan assets during the period. As of June 30, our portfolio consisted of 78 floating rate loans with an aggregate unpaid principal balance of approximately $1.2 billion. 100% of the portfolio was indexed to one month so far, and 93% of the portfolio is collateralized by multi-family properties. While we endeavour to actively manage the maturity risk within our portfolios, it is worth noting that we had the foresight at the time of loan origination to include extension features within our loan investment documents.
Speaker Change: program.
Jim Henson: Thank you, Jim. Good afternoon, everyone. I will now share a brief summary of the recent activity in our investment portfolio.
Jim Henson: During the second quarter, LFT experienced $98 million of loan payoffs.
Speaker Change: The portion of these payoffs related to the defaulted loans discussed by Jim just a few moments ago. We did not acquire or fund any new loan assets during the period.
Speaker Change: As of June 30, our portfolio consisted of 78 floating rate loans with an aggregate unpaid principal balance of approximately $1.2 billion.
Jim Henson: 100% of the portfolio was indexed to one month so, and 93% of the portfolio is collateralized by multifamily property, while we endeavor to actively manage the maturity risk within our portfolio. It is worth noting that we had the foresight at the time of loan origination to include extension features within our loan investment documents. As a result, the weighted average remaining term of our book is approximately 30 months if all available extensions were to be exercised by our loan borrower.
Speaker Change: 100% of the portfolio was indexed to one month SOFR, and 93% of the portfolio is collateralized by multifamily properties.
Speaker Change: While we endeavor to actively manage the maturity risk within our portfolios, it is worth noting that we had the foresight at the time of loan origination to include extension features within our loan investment documents.
James Henson: As a result, the weighted average remaining term of our book is approximately 30 months if all available extensions were exercised by our loan borrowers. As of the end of the second quarter, our portfolio had a weighted average floating note rate of SO FAR plus 359 basis points and an unamortized aggregate purchase discount of $5.6 million. dollars. As I mentioned earlier, our secured financing remained attractive. The quarter ended with that L1, our CRE CLO transaction providing effective leverage of 79.5% and a weighted average cost of funds of SO4 plus 161. The LMF financing provided the portfolio with effective leverage of 82.2% at a weighted average cost of SO4 plus 314 basis points.
Speaker Change: As a result, the weighted average remaining term of our book is approximately 30 months if all available extensions were to be exercised by our loan borrowers.
Jim Henson: As of the end of the second quarter, our portfolio had a weighted average floating note rate of SOFR plus 359 basis points and an unamortized aggregate purchase discount of $5.6 million. As mentioned earlier, our secured financing remained attractive. The quarter ended with FL1, our CRE CLO transaction, providing effective leverage of 79.5% at a weighted average cost of funds of SOFOR plus 161. The LMF financing provided the portfolio with effective leverage of 82.2% at a weighted average cost of SOFR plus 314 basis.
Speaker Change: As of the end of the second quarter, our portfolio had a weighted average floating note rate of SOFR plus 359 basis points.
Speaker Change: and an unamortized aggregate purchase discount of $5.6 million.
Speaker Change: As mentioned earlier, our secured financing remained attractive.
Speaker Change: The quarter ended with FL1, our CRE CLO transaction, providing effective leverage of 79.5%, at a weighted average cost of funds of SOFOR plus 161.
Speaker Change: The LMF financing provided the portfolio with effective leverage of 82.2% at a weighted average cost of SOFR plus 314 basis points.
James Henson: On a combined basis at the end of the quarter, our two securitization has provided our portfolio with effective leverage of 80.4% and a weighted average cost of funds SO4 plus 212 basis points. As of 77% in the prior quarter, our weighted average risk rating was 3.6, a slight deterioration from 3.5 sequentially. While both loan assets had been risk-rated, that had been risk-rated 5 as of March 31, we're fully resolved during the second quarter. Our aggregate loan exposure on the newly risk-rated 5 loans was approximately $84 million at the end of the second quarter. Up from the aggregate $38 million at the end of the first quarter.
Jim Henson: On a combined basis at the end of the quarter, our two securitizations provided our portfolio with effective leverage of 80.4% and a weighted average cost of funds of SOFR plus 212 basis points. As of June 30, approximately 63% of the loans in our portfolio were risk rated three or better, down from 77% in the prior quarter. Our weighted average risk rating was 3.6.
Speaker Change: On a combined basis at the end of the quarter, our two securitizations provided our portfolio with effective leverage of 80.4% and a weighted average cost of funds of SOFR plus 212 basis points.
Speaker Change: As of June 30, approximately 63% of the loans in our portfolio were risk-rated 3 or better.
Speaker Change: down from 77% in the prior quarter.
Speaker Change: Our weighted average risk rating was 3.6.
Jim Henson: A slight deterioration from 3.5 sequential. While both loan assets have been risk rated, those that had been risk rated five as of March 31 were fully resolved during the second quarter. Our aggregate loan exposure on the four newly risk-rated five loans was approximately $84 million at the end of the second quarter, up from an aggregate $38 million at the end of the first. As Jim Briggs outlined earlier, we evaluated the four five-rated loans individually to determine whether asset-specific reserves for credit losses were necessary, and after an analysis of the underlying collateral, we recorded a specific allowance of approximately $900,000 in the second quarter.
Speaker Change: a slight deterioration from 3.5 sequentially.
Speaker Change: While both loan assets have been risk rated,
Speaker Change: that had been risk rated five as of March 31 were fully resolved during the second quarter. Our aggregate loan exposure on the four newly risk rated five loans
Speaker Change: was approximately $84 million at the end of the second quarter, up from an aggregate $38 million at the end of the first quarter.
James Henson: As Jim Briggs outlined earlier, we evaluated the four 5-rated loans individually to determine whether asset-specific reserves for credit losses were necessary. And after an analysis of the underlying collateral, we recorded the specific allowance of approximately $900,000 in the second quarter.
Speaker Change: As Jim Briggs outlined earlier, we evaluated the four 5-rated loans individually to determine whether asset-specific reserves for credit losses were necessary.
Speaker Change: and after an analysis of the underlying collateral. We recorded a specific allowance of approximately $900,000 in the second quarter.
James Henson: We expect to continue to rely on the expertise of our talented asset management team to actively resolve these 5 rated loan assets, protecting our investors' capital and maximizing value for our shareholders.
James Flynn: We expect to continue to rely on the expertise of our talented asset management team to actively resolve these five rated loan assets, protecting our investors' capital and maximizing value for our shareholders. I will now pass it back to Jim Flynn for closing remarks and questions. Thank you, Jim, and appreciate everyone joining us, but we'll open the call to questions. Thank you. Ladies and gentlemen, we will now begin the question and answer session.
Speaker Change: We expect to continue to rely on the expertise of our talented asset management team to actively resolve these vibrated loan assets.
Speaker Change: protecting our investors capital and maximizing value for our shareholders.
James Flynn: I will now pass it back to Jim Flynn for closing remarks and questions. Thank you, Jim. Appreciate everyone joining, but we'll open the false questions. Thank you.
Speaker Change: I will now pass it back to Jim Flynn for closing remarks and questions.
Speaker Change: Thank you, Jim, and appreciate everyone joining, but we'll open the call to questions.
Unknown Executive: Ladies and gentlemen, we will now begin the question-and-answer session. Should you have a question? Please press the star button followed by the number one on your touch-tone phone. You will hear your prompt that your hand has been raised. Should you wish to decline from the polling process, please press the star button followed by the number two. If you are using a speaker phone, please lift the handset before pressing any keys. One moment, please, for your first question.
Jim Flynn: Thank you. Ladies and gentlemen, we will now begin the question and answer session. Should you have a question, please press the star button followed by the number one on your touchtone phone. You will hear a prompt that your hand has been raised.
James Flynn: Should you have a question, please press the star button, followed by the number one on your touchtone phone. You will hear a prompt that your hand has been raised. Should you wish to decline from the polling process, please press the star button followed by the number 2. If you are using a speakerphone, please lift the handset before pressing any keys.
Speaker Change: Should you wish to decline from the polling process, please press the star button, followed by the number 2. If you are using a speakerphone, please lift the handset before pressing any keys. One moment please for your first question.
Operator: One moment, please for your first question. Your first question comes from the line of Crispin Love from Piper Sandler. Please go ahead. Thanks, and good afternoon, everyone.
Kristen Love: Your first question comes from the line of Kristen Love of Piper Sandler. Please go ahead. Thanks, and I could have the next one. I'm just first off on credit quality. You have had a pretty stable credit for several quarters now, but did see some degradation here in the second quarter related to some non-performers' migration rate, 5 loans and then the allowance bill that you discussed. Did you just discuss the credit outlook as we stand today? I believe that we've reached peak stress and multi-family credit during this cycle, just your intermediate term outlook, just giving the environment and how you look at the portfolio.
Speaker Change: Your first question comes from the line of Christian Love of Piper Sandler. Please go ahead.
Crispin Love: Just first off on credit quality, you have had pretty stable credit for several quarters now but did see some degradation here in the second quarter related to some non-performers migration, the rate of five loans, and then the allowance bill that you discussed. Can you just discuss the credit outlook as we stand today? Do you believe that we've reached peak stress and multifamily credit during this cycle? And just your intermediate-term outlook, just given the environment and how you look at the portfolio?
Speaker Change: Thanks and good afternoon, everyone. Just first off on credit quality, you have had pretty stable credit for several quarters now, but I did see some degradation here in the second quarter related to some non-performers migration, RAID 5 loans, and then the allowance bill that you discussed.
Speaker Change: Can you just discuss the credit outlook as we stand today? Do you believe that we've reached peak stress in multifamily credit during this cycle, and just your intermediate-term outlook, just given the environment and how you look at the portfolio?
James Flynn: Yeah, I think, I mean, it's hard to, we've all kind of been a little bit off here for the last six quarters on Briggs, the market, but there does seem to be, you know, some expectation that we're kind of at or near that peak stress period. We do see rate reductions on the horizon, both obviously long-term; we've seen their 10-year come down and expectations around. So for cuts, which will, or Fed cuts, which will impact, directly impact the floating rate borrowers. So those things are obviously beneficial to the credit quality of the portfolio, certainly in a vacuum.
Crispin Love: Yeah, I think, I mean, it's hard to, we've all kind of been a little bit off here for the last six quarters in predicting the market, but there does seem to be some expectation that we're kind of at or near that peak stress period. We do see rate reductions on the horizon, both obviously long-term, we've seen their tenure come down, and expectations around SOFR cuts, which will, or Fed cuts, which will directly impact these floating rate borrowers.
Speaker Change: Yeah, I think, I mean, it's hard to, we've all kind of been a little bit off here for the last six quarters on predicting the market, but it, there does seem to be, you know, a
Speaker Change: some expectation that we're kind of at or near that peak stress period.
Speaker Change: We do see rate reductions on the horizon both obviously long-term we've seen their tenure come down and expectations around
Speaker Change: So for which, so for cuts which will, or Fed cuts which will impact, directly impact these floating rate borrowers
James Flynn: So those things are obviously beneficial to the credit quality of the portfolio, certainly in a vacuum. But they come on the heels of other economic data and news, which, you know, generally isn't positive, but I think if you take a look at multifamily and how it's performed throughout cycles, you know, near-term and long-term, it's done pretty well. And the supply-demand dynamic in the country isn't changing, in fact, probably getting worse, and so there's some stability even in times of economic stress.
Speaker Change: So those things are obviously beneficial to the credit quality of the portfolio, certainly in a vacuum. They come on the heels of other economic data and news, which.
James Flynn: They come on the, on the heels of other economic data and news, which, you know, generally isn't positive, but I think if you take a look at multifamily and how it's performed throughout cycles, you know, near-term and long-term, it's shown pretty well. And the supply demands anemic in the country isn't changing; in fact, probably getting worse. And so there's some stability, even in times of economic stress. Now, that being said, with respect to our portfolio, and Zach and others can provide some more detail. I'm sure we'll have some other questions. We've seen, you know, more stress over the last couple of quarters as we continue to go through this cycle.
Speaker Change: You know generally isn't positive, but I think if you take a look at multifamily, and how it's performed
Speaker Change: throughout cycles.
Speaker Change: near-term and long-term, it's done pretty well. And the supply-demand dynamic in the country isn't changing, in fact, probably getting worse. And so there's some stability, even in times of economic stress.
James Flynn: Now, that being said, with respect to our portfolio, and Zach and others can provide some more detail, I'm sure we'll have some other questions. We've seen, you know, more stress over the last couple of quarters as we've gone through this cycle. And we've continued to actively manage those and feel, you know, pretty good about our ability to do so. You know, but we have to work through issues.
Speaker Change: Now, that being said, with respect to our portfolio, and Zach and others can provide some more detail. I'm sure we'll have some other questions we've seen.
Speaker Change: You know more stress over the last couple of quarters as we've gone continue to go through this cycle
James Flynn: And we've continued to actively manage those and feel, you know, pretty good about our ability to do so. You know, but we have to work through issues. We've had, you know, elevated risk assets in the past that we've been able to resolve. You know, from a value standpoint, we still feel pretty good. You know, we did take a reserve on one asset, but as noted in the K, you know, that is consistent with how we look at value throughout our history managing this entity. We do, and we'll continue to work toward, you know, resolution of that without a loss or minimizing a loss, but from a, you know, gap and consistent standpoint, we felt the, it was appropriate to take a reserve on that asset.
Speaker Change: and we've continued to...
Speaker Change: to actively manage those and feel, you know, pretty good about our ability to do so. You know, but we have to work through through issues.
James Flynn: We've had, You know, elevated risk assets in the past that we've been able to resolve, you know, from a value standpoint, we still feel pretty good. We did take a reserve on one asset. As noted in the K, that is consistent with how we've looked at value throughout our history of managing this entity. We do, and will continue to work toward, resolution of that without a loss or minimizing a loss.
Speaker Change: We've had, you know, elevated risk assets in the past that we've been able to resolve. You know, from a value standpoint, we still feel pretty good. You know, we did take a reserve.
Speaker Change: on one asset
Speaker Change: as was noted in the in the K, you know, that is consistent with how we've looked at
Speaker Change: value throughout our history managing this entity. We do and will continue to work toward
Speaker Change: you know, resolution of that without a loss or minimizing a loss, but from a, you know, gap and consistent standpoint, we felt the it was appropriate to take a reserve on that asset. And with respect to the other assets, you know, there's
James Flynn: But from a, you know, gap and consistency standpoint, we felt it was appropriate to take a reserve on that aspect, and with respect to the other assets, you know, there's We have a great team here that is daily managing those and speaking to the sponsors on those assets and helping to participate in creating plans to improve the assets' performance. And, as we've discussed in the past, we do have the ability to really add operational expertise where needed, with our sponsors or without.
James Flynn: And with respect to the other assets, you know, there's, we have a great team here that is in a daily managing those and speaking to the sponsors on those assets and helping to participate in creating plans to improve the assets' performance. And as we've discussed in the past, you know, we do have the ability to really add operational expertise where needed with our sponsors or without. So, yes, we're in a period of elevated stress. We still continue to feel pretty confident in the quality of our portfolio, but do need to continue to work through some of these more challenging assets.
Speaker Change: We have a great team here that is daily managing those and speaking to
Speaker Change: the sponsors on those assets and helping to participate in creating plans to improve the assets performance and as we've discussed in the past
Speaker Change: You know, we do have the ability to really add operational expertise where needed with our sponsors or without.
James Flynn: So yes, we're in a period of elevated stress. We still continue to feel pretty confident in the quality of our portfolio, but we do need to continue to work through some of these more challenging assets. Great. Thank you, Jim.
Speaker Change: So, yes, we're in a period of elevated stress. We still continue to feel pretty confident in the quality of our portfolio, but do need to continue to work through some of these more challenging assets.
Unknown Executive: Thank you, Jim. I appreciate the comments there. And then just on deployment for the second day, of course, didn't add any new investments, but I think you had nearly 100 million to pay off. So what's keeping you from being more active here? Is it a concerted effort as you focus on asset management on the current portfolio, or are there also a lack of opportunities out there? And how would you expect time to be opportunity, landscape to change as rates do come down in the coming months? Sure. So first on the capacity standpoint, so, you know, as I mentioned at the end of my remarks, the larger CLO, the 2001 CLO, is through its investment, reinvestment period.
Crispin Love: I appreciate the comments there. And then just on deployment, for the second quarter, you didn't add any new investments, but I think you had nearly $100 million in payoffs. So what's keeping you from being more active here?
Speaker Change: Thank you, Jim. I appreciate the comments there. And then just on deployment, for the second quarter, didn't add any new investments, but I think you had nearly $100 million of payoffs.
James Flynn: Is it a concerted effort as you focus on asset management in the current portfolio, or are there also a lack of opportunities out there? And how would you expect the opportunity landscape to change as rates do come down in the coming months? Yeah, so first on the capacity standpoint, so, as I mentioned at the end of my remarks, the larger CLO, the 2001 CLO, is through its investment and reinvestment. And so that securitization is the B lever. It's still an attractive financing, SOFR plus 161 and 80% leverage, even with those payoffs.
Speaker Change: What's keeping you from being more active here? Is it a concerted effort as you focus on asset management on the current portfolio? Or are there also a lack of opportunities out there? And how would you expect the opportunity landscape to change as rates do come down in the coming months?
Speaker Change: So first, on the capacity standpoint, so, you know, as I mentioned at the end of my remarks, the larger CLO, the 2001 CLO, is through its reinvestment period.
James Flynn: And so that securitization is deliberate. It's still an attractive financing, so for plus 161 and 80% leverage, even with those payoffs. So, you know, we do intend to continue to evaluate options there as we move through the next few quarters. But that's part of the reason, right? That capacity is just really de-leveraging. On the LMF transaction, we've generally remained fully deployed; you know, some timing as an asset pays off. And we've kept, you know, for the size of our entity, relatively high-cast position. In large part, just to ensure that when needed, we can offensively manage the portfolio with our sponsors.
Speaker Change: and so that securitization is delevering.
Speaker Change: It's still an attractive financing swap. Silver plus 161 and 80% leverage even with those payoffs.
James Flynn: So, you know, we do intend to continue to evaluate options there as we move through the next few quarters, but that's part of the reason, right, that capacity is just really deleveraging. On the LMF transaction, we've generally remained fully deployed, you know; some timing as an asset pays off. And we've kept, you know, for the size of our entity, a relatively high cash position, in large part just to ensure that when needed, we can offensively manage the portfolio with our sponsors.
Speaker Change: So, you know, we do intend to continue to evaluate options there as we move through the next few quarters, but that's part of the reason, right, that capacity is just really deleveraging.
Speaker Change: on the LMF transaction.
Speaker Change: We've generally remained fully deployed, you know.
Speaker Change: Some timing as an asset pays off.
Speaker Change: And we've kept...
Speaker Change: you know, for the size of our...
Speaker Change: entity, a relatively high cast position, in large part just to ensure that when needed we can offensively manage the portfolio with with our sponsors.
James Flynn: In terms of the market, we are seeing more opportunities today than what we've seen over the last, you know, handful of quarters of high-quality deals. There's, you know, it's competitive. It's not the volume that you would like to see, but it's starting to appear. There's, you know, anecdotal evidence out there, and on some of the calls from the peer group you've heard of the competitive environment for acquisition. You know, the thing that's really slowed this market down has been the lack of assets changing hands. There's a very active buyer community out there, and there does seem to be some loosening on the seller side for folks to, you know, exchange assets, and that will help find good deals for the bridge market.
James Flynn: In terms of the market, we are seeing more opportunities. Today, then, then, what we've seen over the last, you know, handful of quarters of high-quality deals, there's, there's, it's competitive. It's not the volume that you would like to see, but it's starting to appear. There is, you know, anecdotal evidence out there.
Speaker Change: In terms of the market, we are seeing more opportunities.
Speaker Change: today than, you know, what we've seen over the last, you know, handful of quarters of high-quality deals. There's, you know, it's competitive. It's not.
Unknown Executive: Today is being recorded and will be made available via webcast on the company's website.
Andrew Tsang: I would now like to turn the call over to Andrew Tsang at Lument Investment Management. Please go ahead. Good afternoon, everyone. Thank you for joining our call to discuss Lument Finance Trust's second quarter, 2024 financial results. With me on the call today, our Jim Flynn, our CEO, Jim Briggs, our CFO, Jim Henson, our president, and Zachary Halpern, our Managing Director of Portfolio Management. On Monday, August the 12th, we filed their 10 key with the SEC and issued a press release to provide details on our second quarter results. We also provided a supplemental earnings presentation, which can be found on our website.
Speaker Change: as well as the volume that you would like to see, but it's starting to appear. There is...
James Flynn: And on some of the calls from the peer group, you've heard of the competitive environment for acquisitions. You know, the thing that's really slowed this market down has been the lack of asset change in hand. There's a very active, by our community out there.
Speaker Change: You know anecdotal evidence out there and on some of the calls from from the peer group you've heard of the competitive environment for acquisitions, you know, the thing that's really slowed this market down has been the lack of asset changing hands
James Flynn: And there does seem to be some loosening on the seller side for folks to, you know, exchange assets, and that will help find good deals for the bridge market. The other tailwind on the transaction side is these deliveries, particularly in the Sunbelt, of all those construction assets coming online or at least coming through the construction period and maybe needing a lease-up period, and that provides some opportunity in the bridge space.
Speaker Change: there's very active
Speaker Change: buyer community out there. And there does seem to be some loosening on the seller side for folks to, you know, exchange assets. And that will help
Andrew Tsang: For 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, they constitute forward-looking statements in the meaning of Section 27A with the Securities Act of 1933 and Section 201E of the Securities Exchange Act of 1934. Such forward-looking statements are subject to various risks and uncertainties that could cause actual results to differ materially from the forward-looking statement.
James Flynn: The other tailwind on the transaction side is these deliveries, particularly in the Sunbelt, of all those construction assets coming online, or at least coming through the construction period, and maybe need a lease-up period, and that provides some opportunity in the bridge space. So, I do think that, you know, we're going to continue to see transaction opportunities increase over the coming quarters. It may be a little slower than we'd like to see, but it will at least be going forward, which is a welcome change to where.
Speaker Change: find good deals for the bridge market.
Speaker Change: Tailwind on the transaction side is the
Speaker Change: deliveries, particularly in the Sunbelt, of all those construction
Speaker Change: assets coming online or at least coming through the construction period and maybe need a lease-up period and that provides some opportunity in the bridge space. So I do think that, you know, we're going to continue to see
Andrew Tsang: These risks and uncertainties are discussed in the company's reported reports filed with the SEC in particular the risk factor section of Reform 10K. It is not possible to predict or identify all such risks and listeners are cautioned not to place undue reliance on these forward-looking statements. The company undertakes no obligation to update any of these forward-looking statements. Are there certain non-GAP financial measures that we discussed on this conference call? A presentation of this information is not intended to be considered in isolation nor is a substitute for the financial information presented in accordance with GAP.
James Flynn: So I do think that, you know, we're going to continue to see transaction opportunities increase over the coming quarters. It may be a little slower than we'd like to see, but it will, at least be going forward. Great. Thank you so much.
Crispin Love: That's all I have for questions. Appreciate it. Your next question comes from the line of Matthew Erdner of Jones Trading. Please go ahead.
Speaker Change: Transaction opportunities increase over the coming quarters. It may be a little slower than we'd like to see but it will it will at least be going forward which is a welcome change to where it's been.
Speaker Change: Thank you so much. That's all I have for questions. Appreciate it.
Speaker Change: Thanks, Kristen.
Speaker Change: Your next question comes from the line of Matthew Erner of Jones Trading. Please go ahead.
Unknown Executive: Good afternoon, guys. Thanks for taking the question. Could you talk about the timing of the payoffs this quarter and kind of what led to the sequential decline in commercial loan income?
Matthew Erdner: Hey, good afternoon, guys. Thanks for taking the question. Could you talk about the timing of the payoffs this quarter and kind of what led to the sequential decline in commercial loan income? Sure, Jim, Jim, and Zach. Zach, do you want to touch just on timing? I mean, I think it was just sort of normal.
Matthew Erner: Good afternoon, guys. Thanks for taking the question. Could you talk about the timing of the payoffs this quarter and kind of what led to the sequential decline in commercial loan income?
Andrew Tsang: Reconciliation of these non-GAP financial measures to the most comparable measures prepared in accordance with GAP can be accessed through our filings with the SEC. For the second quarter of 2024, we reported GAP net income of $0.7 and distributed earnings of $0.9 per share of common stock respectively. In June, we also declared a dividend of $0.8 per share with respect to the second quarter, which represented a 14% increase over the first quarter dividend of $0.7 per share of common stock.
James Flynn: Jim, Jim, and Zach, I guess you guys want to touch just timing. I mean, I think it was just sort of normal. Yeah. Well, we're the payoffs kind of towards the beginning of the quarter rather than the end, which led to it kind of being $5 million less than the prior quarter. Yeah, I mean, you know, when I look at sort of loan balance, the read by month, really simmer around 1.3 at March 31, 1.3, April 30th, and then a drop off to 1.25 May 31st and 1.2 June 30th. So, I don't know. I think it sequentially moved down pretty steadily throughout.
Speaker Change: Sure, Jim, Jim and Zach, I guess, do you guys want to?
Speaker Change: Jason Weaver, Steven Laws, Christopher Nolan
Speaker Change: Thanks for watching, and don't forget to like, share, and subscribe to our channel.
Speaker Change: And Zach, you want to touch just timing? I mean, I think it was just.
Matthew Erdner: Yeah. Yeah, well, were the payoffs kind of towards the beginning of the quarter rather than the end, which led to it being $5 million less than the prior quarter? Yeah, I mean, you know, when I look at, sort of, the loan balance of the REIT by month, really somewhere around 1.3 at March 31, 1.3 at April 30, and then a drop off to 1.25 on May 31st and 1.2 on June 30th. Unknown Speaker, So, I don't know, I think it sequentially moved down pretty steadily throughout.
Speaker Change: and Andrew Tsang. Thank you.
Speaker Change: Were the payoffs kind of towards the beginning of the quarter rather than the end, which led to it kind of being $5 million less than the prior quarter?
Speaker Change: Yeah, I mean, you know, when I look at...
James Flynn: I will now turn the call over to Jim Flint. Please go ahead. Thank you, Andrew. Good day, everyone.
Speaker Change: sort of loan balance the REIT by
Speaker Change: months.
James Flynn: Welcome to the Lumen Finance Trust earnings call for the second quarter of 2024. We appreciate everyone joining today. To the first half of 2024, the U.S, economy largely outperformed consensus expectations. However, the CPI-measured in June felt that declining rate of growth in the consumer price index and August shops reports were weaker than expected. As a result, the market seems to have renewed confidence that the Fed will start its easing cycle in September.
Speaker Change: really somewhere around 1.3 at March 31 1.3 April 30th and then a drop-off to
Speaker Change: 1.25
Speaker Change: May 31st and 1.2 June 30th.
Speaker Change: I don't know. I think it sequentially moved down pretty steadily throughout.
Unknown Executive: Okay. Gotcha.
Matthew Erdner: Okay, gotcha. And then, you know, as a follow-up, what are you guys seeing within your portfolio in the secondary and tertiary markets, given the two Augusta multifamilies, the default, and then the kind of move to non-accrual there? And then also, you know, following up on that, you know, how are you guys working through these loans once they have defaulted? You know, are you looking to get more equity in the deal? Are you guys making the borrowers kind of, you know, list the market or list the property on the market? You know, just how are you guys working through the process?
Speaker Change: Jason Weaver, Steven Laws, Christopher Nolan, James
James Flynn: And then, you know, as a follow-up, you know, what are you guys seeing within your portfolio and the secondary and tertiary markets? Given the two Augusta multi families, the default and then the kind of move to non-accrual there. And then also, you know, following up on that, you know, how are you guys working through these loans once they defaulted? You know, are you looking to get more equity in the deal? Are you guys making the borrowers kind of, you know, what's the market or what's the property on the market? You know, just how are you guys working through the process and going after these logs?
Speaker Change: Okay, gotcha. And then, as a follow-up, what are you guys seeing within your portfolio in the secondary and tertiary markets, given the two Augusta multifamilies?
James Flynn: As reflected in the 10-year, treasury remaining growth, water and basis points, a sense of beginning of log. Well, such easing will likely be beneficial to a number of sectors including commercial real estate. We expect to proceed cautiously if the economy remains the elevated risk of recession. While the economic data has generally outperformed commercial real estate has suffered through the high rate and inflationary environment. Improvements in the rate environment and the bottoming of property values should translate into a throwing of capital markets and an uneven recovery of transaction flow in the commercial real estate sector.
Speaker Change: The default and then the kind of move to non-accrual there and then also You know following up on that, you know, how are you guys working through these loans once they defaulted? You know, are you looking to get more equity in the deal? Are you guys making the borrowers kind of?
Speaker Change: What's the property on the market? How are you guys working through the process and going after these loans?
Matthew Erdner: And going after these loans. So, as it pertains to secondary tertiary, I wouldn't say that we have specific issues that I'd point to there. I'd say that all the issues that we have have been idiosyncratic, ah, you know, things like upcoming maturities and needs for interest rate caps, which have brought borrowers back to the table in terms of negotiation. As it pertains to working through these assets, you know, if and when they default, our asset management team is taking a very active, proactive approach with our sponsors and all the above in terms of bringing them back to the table, whether that be cash contributions or negotiating top line recourse......
James Flynn: So, as it pertains to secondary tertiary, I wouldn't say that we have specific issues that I'd point to there. I'd say that all the issues that we have have been idiosyncratic. You know, things like upcoming maturities and needs for interest rate caps, which have brought forward back to the table in terms of negotiation. As it pertains to working through these assets, you know, if and when they default, our management team is taking a very active, proactive approach with our sponsors. And all the above in terms of bringing them back to the table, whether that be cash contributions or negotiating top line recourse, reviewing business plans, you know, aiming for lower interest rate caps such that they prepaid debt service.
Speaker Change: So as it pertains to secondary tertiary, I wouldn't say that we have
James Flynn: Despite the modest softening of multi-family fundamentals impacted by a large supply of newly constructed units coming online over the last six months, we believe that multi-family and particularly middle market multi-family will continue to remain a strong performing asset class in the long term. We firmly believe the LFP has differentiated itself from its peer group through its deliberate focus on middle market multi-family credit, which is enabled to company to deliver sustainable, stable dividend to our shareholders and preserve shareholder capital during this challenging part of the cycle.
Speaker Change: things like upcoming maturities and
Speaker Change: needs for interest rate caps, which have brought borrowers back to the table in terms of negotiation.
Speaker Change: As it pertains to working through these assets,
Speaker Change: if and when they default, our asset management team is taking a very proactive approach.
Speaker Change: with our sponsors and...
James Flynn: Our expertise in the origination, underwriting, and active asset management of multi-family mortgage investments has been and we expect will remain central to the company's identity for the foreseeable future. Coupled with the strong sponsorship from the broader Lumen and Orricks platforms, we believe LFP represents a truly unique value proposition in the public markets today. In an environment where others have thought of challenging to sustain stable dividend levels, we are proud to have been able to benefit our shareholders and raise the common dividend in June by the penny, which represents a 14% sequential increase over Q1.
Speaker Change: all of the above in terms of
Speaker Change: bring them up to the table whether that be cash contributions or
Speaker Change: negotiating top-line recourse.
Matthew Erdner: , reviewing business plans, aiming for lower interest rate caps such that they prepaid that service. Uh, or..., pushing them along towards refinancing tomorrow. I'll be above our options.
Speaker Change: reviewing business plans.
Speaker Change: Thank you.
Speaker Change: aiming for lower interest rate caps such that they prepaid debt service or...
Unknown Executive: Or who are pushing them along towards refinancing somewhere else. All the above are options; you know, initiating foreclosure is an option as well. As need be, we hope not to generally get there, but you know, we continue to be active in pro-academic, pertains to bill defaults. Got it. Thank you, guys.
Speaker Change: pushing them along towards refinancing somewhere else.
Speaker Change: I'll be above our options, you know, initiating foreclosure is an option as well as need be. We hope not to generally get there, but
Matthew Erdner: You know, initiating foreclosure is an option as well as an option if need be. We hope not to generally get there, but. Oh, you know. We continue to be active and proactive as it pertains to. DeLaney, Got it.
James Flynn: Approximately a year ago, we closed the LMF secured financing transactions, which provided the company with additional investment capacity and extended our runway for future reinvestment. By the end of 2020, 2023, we were successful in fully deploying our capital into strong, predominantly multi-family credits. Since that time, we've been focused on actively managing our loan investment portfolio. Although we experienced a slight decline in our weighted average risk rating to 3.6, as compared to 3.5 as of March 31st, we believe our investments have continued to perform well on a relative basis.
Speaker Change: Thank you. Bye.
Speaker Change: You know, we continue to be active and proactive as it pertains to dealing with the cops.
Speaker Change: Got it. Thank you guys.
Steve DeLaney: Your next question comes from the line of Steve Delaney of Citizens JMP. Please go ahead. Good afternoon, everyone. Thank you for taking the question. You know, we notice that you don't, at this point, have any ARIA real estate owned on your balance sheet. There is an investment-related receivable for about 33 million. Could you tell us what that, what that asset represents?
Matthew Erdner: Thank you, guys. Your next question comes from the line of Steve DeLaney of Citizens JMP. Please go ahead. Good afternoon, everyone.
Speaker Change: Your next question comes from the line of Steve Delaney of Citizens JMP. Please go ahead.
Steve DeLaney: Thank you for taking the question. You know, we noticed that you don't at this point have any REO real estate owned on your balance sheet. There is an investment-related receivable for about 33 million. Could you tell us what you are doing with that asset? Sure, I can take that Steve. It's Jim Briggs here.
Speaker Change: Good afternoon, everyone. Thank you for taking the question.
Speaker Change: We noticed that you don't, at this point, have any REO real estate owned on your balance sheet. There is an investment-related receivable for about $33 million. Could you tell us what that is?
James Flynn: Thanks to our heavy focus on multi-family, which is generally outperformed to other CRE asset classes, our prudent upfront underwriting and our active approach to asset management. We continue to maintain a strong liquidity position, ending the quarter with approximately 65 million of unrestricted cash on our balance sheet. The persistence of elevated short-term rates has allowed us to generate attractive returns on our cash balances while we continue to intentionally take a defensive cash position.
James Briggs: Sure, I can take that, Steve at Stimbriggs, here. When we've gotten borrower proceeds, but it's passed three mitten to date from servicing. So it's cash sitting with them that we haven't received from servicing yet. We'll put it as an investment-related receivable. So there's no risk to the borrower there. We just haven't received the cash from our servicer yet, from the servicer. So it could be a mixture of principal interests, all of that. That's going to be, that's going to be. We'll still have the interest to cruel on the books, but we'll record that as a paydown from the borrower.
Jim Briggs: When we've gotten borrower proceeds, but it's past the remittance date from servicing, so it's cash sitting with them that we haven't received from servicing yet. We'll we'll put it as an investment-related receivable. So there's no risk to the borrower there. We just haven't received the cash from our service, Okay, so it could be a mixture of principal and interest, all of that. That's going to be, that's going to be, we'll still have the interest accrual on the books, but we'll record that as a paydown from the borrower, so you won't see it in the loan balance.
Speaker Change: what that asset represents.
Speaker Change: Sure, I can take that, Steve. It's Jim Briggs here. When we've gotten borrower proceeds,
Jim Briggs: but it's past the remittance date from servicing. So it's cash sitting with them that we haven't received from servicing yet. We'll put it as an investment related receivable. So there's not.
Speaker Change: We just haven't received the cash from from our servicer yet, from the servicer. Okay, so it could be a mixture of principal interest
James Flynn: To provide us with flexibility in managing the more challenging credits in our portfolio. As discussed on prior earnings calls, our loan portfolio's finance was long-dated, secured, financing that are not subject to market or margin calls. The LMF financing transaction has a reinvestment period that continues into July 2025, and we intend to reinvest capital into new loan investments, as liquidity becomes available through repayments of existing class. General.
Speaker Change: All of that.
Speaker Change: That's going to be, we'll still have the interest accrual on the books, but we'll record that as a pay down from the borrower, so you won't see it in the loan balance. You'll see it as the investment-related receivable until we actually receive the cash.
James Briggs: So you won't see it in the loan balance. You'll see it as the investment-related receivable. We actually received the cash. Think of that as money-good. We just haven't gotten it in the next timing. Yeah, correct. Pending liquidity. Just interquarter timing. That is related, just to go back to Kristen's question before, that 33 million is related to an FL1 asset. So that will be used to pay down bonds once the cash is received.
Jim Briggs: You'll see it as the investment-related receivable until we actually receive the cash. So, you know, think of that as money good; we just haven't gotten it in at the same time. Yeah, correct. Pending liquidity. Just interquarter timing, like, yeah.
Speaker Change: and Andrew Tsang.
Speaker Change #100: You know, think of that as money good, we just haven't gotten it in the right timing.
Speaker Change #101: Yeah, correct. Pending liquidity. Just inter-quarter timing. Right.
Jim Briggs: Yep. And that is that that is related, you know, just to go back to Crispin's question before, that 33 million is related to an FL1 asset. So that will be used to pay down bonds once the cash is, Okay, great. And it sounds like you're having some maturity defaults, some business plans not working out, but you know, as evidence, and by the way, that disclosure in the queue on the four new five-rated loans, that was exceptional. We're not accustomed to receiving that detail and really understanding the story.
James Flynn: On the other hand, the re-investment period of our 2021 CLL ended in December of 2023, and we are active exploring alternatives to recapitalize this structure. As of quarter end, the cost of funds for FL1 was swaps plus 161, and the effective show for swaps, and the effective advance rate was approximately 80%. Which we believe will represent attractive terms relative to other secure financing options currently available in the market. We have observed that the issuance of new CRE COLO transactions remain muted, which is one managed vehicle pricing in the market last quarter, and just three since the start of the year.
Speaker Change #102: And that is related, just to go back to Kristen's question before, that $33 million is related to an FL1 asset, so that will be used to pay down bonds.
Steve DeLaney: Okay, great. And it sounds like, you know, you're having some maturity default, some business plans, not working out, but, you know, as evidenced in, by the way, that disclosure and the queue on the four new five rated loans, that was, that was exceptional. We're not accustomed to receiving that kind of detail and really understanding the stories. So thank you to that. But the, you know, those sound like there is a workout or resolution. But are you guys do you envision that as we are, as Jim Flynn said, you know, in a challenging market, it's probably to get, could get a little worse before it gets better.
Speaker Change #102: captures received.
Speaker Change #102: Okay, great. And it sounds like, you know, you're having
Speaker Change #102: some maturity defaults, some...
Speaker Change #103: business plans not working out, but, you know, as evidence, and by the way, that disclosure and the cue on the
Speaker Change #104: four new five-rated loans. That was exceptional. We're not accustomed to receiving that kind of detail and really understanding the story, so thank you for that.
Steve DeLaney: So thank you for that. Um, but the, you know, it sounds like there is a workout or, But, are you guys, do you imagine that... We are, as Jim Flynn said, in a challenging market. It's probably going to get a little worse before it gets better, but
Speaker Change #105: Those sound like there is a workout or resolution, but do you envision that we are, as Jim Flynn said, in a challenging market? It probably could get a little worse before it gets better.
James Briggs: With that, I'd like to turn the call over to Jim Briggs, who will provide us details about our financial results. Jim? Thanks, Jim.
James Briggs: Good afternoon, everyone. Now, today we filed our quarterly report on Form 10Q and provided a supplemental investor presentation on our website, which will be referencing during our remarks. Supplemental investor presentation has been uploaded to the webcast as well for your reference. On pages 4 through 7th of the presentation, you will find key updates in earning summary for the quarter. For the second quarter of 2024, reported net income to common stockholders of approximately 3.4 million or 7 cents per share.
James Flynn: But do you envision that either any of those four loans or that you may end up having to take a property back in the next year? I know that's sort of a what if question, but just curious how much I'll think about that and whether, you know, you see that isn't, you know, as a, a likelihood that you will have some audio on your books at some point. So thank you, Steve. The way I would answer that is obviously our strong desire is to not have any audio. And in most cases, and as you know, you know, lumens and of broader sponsorship than, you know, we have a 51 billion dollar servicing book. You know, we're seeing a lot of activity and assets across the country outside of just what we have here at LFT.
James Flynn: Do you anticipate that either any of those four loans or that you may end up having to take a property back in the next year? I know that's sort of a what-if question, but just curious how much y'all think about that and whether you see that as a likelihood that you will have some REO on your books at some point.
Speaker Change #106: Do you envision that either any of those four loans, or that you may end up having to take a property back in the next year? I know that's sort of a what-if question, but...
Speaker Change #107: Just curious how much y'all think about that and whether, you know, you see that as, you know, as a likelihood that you will have some REO on your books at some point.
James Flynn: The way I would answer that is obviously, our strong desire is to not have any REO. And in most cases, and as you know, Lument and broader sponsorship, and you know, we have a $51 billion servicing book, and we're seeing a lot of activity and assets across the country outside of just what we have here at LFT. Yeah, you know, when we've had good borrowers who have done the right thing and worked with us and are still capable of managing their assets and improving operations, we've been able to work with them to find resolution to what we hope are short-term issues, whether it's valuation, cash flow, or both.
James Briggs: We also reported distributable earnings of approximately 4.8 million or 9 cents per share. There are a few items I'd like to highlight regarding the activity during the period. Our key to net interest income was 9.5 million compared to 13 million in key 1 of 24. Squential decrease was primarily attributable to the company recognizing in the prior quarter approximately 3.5 million of one-time casted income related to the resolution of two devoted loans, one collateralized by an office property located in Columbus, Ohio, in which we reduced our carrying value to zero, and another collateralized by multi-family property located at Virginia Beach, Virginia, which was modified and brought current through Q1, in which remains performing and risk-graded before.
Speaker Change #107: Thank you, Steve. The way I would answer that is obviously our strong desire is to not have any REO.
Speaker Change #107: And in most cases, and as you know, you know, lumens and it's...
Speaker Change #107: broader sponsorship and you know we have a 51 billion dollar
Speaker Change #107: servicing book, you know, we're seeing a lot of
Speaker Change #107: activity and assets across the country outside of just what we have here at LFT. Yeah. You know, when we've had.
James Flynn: You know, when we've had good borrowers who have done the right thing and worked with us and are still capable of managing their assets and, you know, improving operations, we've been able to work with them to find resolution to what we hope are short-term issues, whether it's valuation, cash flow, or both. Where we've discussed are you broadly as an or it's for those are broadly as a platform, not just LFT. Is where we don't have cooperative followers, and in the overwhelming majority of those cases, you know, it's not something that ends up having to come to fruition.
Speaker Change #107: Good borrowers who have done the right thing and worked with us and are still capable of
Speaker Change #108: managing their assets and improving operations, we've been able to work with them to find resolution to what we hope are short-term issues, whether it's valuation, cash flow, or both.
James Briggs: More component of the sequential variance in net interest income was also a result of average outstanding loan portfolio size, increasing versus the prior quarter as we received approximately 98 million of principal payoffs within the FL1 securitization, which is no longer within its free investment period. Aggregate payoffs and paydowns during Q2, total of 98 million, as mentioned, as compared to 97 million in the prior quarter with exit and other fees similarly comparable quarter on quarter.
James Flynn: Where we've discussed REO broadly as a, or foreclosure broadly as a platform, not just as LT, is where we don't have a cooperative. And in the overwhelming majority of those cases, Todd Todd, you know, it's not something that ends up having to come to fruition.
Speaker Change #109: where we've discussed REO broadly as a, or foreclosure broadly as a platform not just as LT, is where we don't have cooperative REO.
Speaker Change #109: And in the overwhelming majority of those cases,
James Flynn: And so, you know, I would like to think that that will be the case here. But we do have a, you know, very seasoned, capable, and, you know, sizable group that manages our Special Servicing, and in particular, REO for LFT and for LUMIT as a whole. And, you know, what we've shown is that, you know, we're more than capable operators. But more importantly, our sponsors say, Hey, we're here to help and work with you. But, you know, we're not going to go down the path of using default as kind of a negotiating technique.
Speaker Change #109: you know it's not something that ends up having to come to fruition and so you know I would like to think that that
James Flynn: And so, you know, I would like to think that that will be the case here, but we do have a, you know, very seasoned, capable and, and you know, sizable group that manages our special servicing and in particular, are you for LFT and for Lument as a whole. And, you know, what we've shown is that, you know, we're more than capable operators, but more important with our sponsors, say, hey, we're here to help and work with you, but, you know, we're not going to go down the path of using the false as kind of a negotiating technique.
Speaker Change #109: will be the case here. But we do have a, you know, very seasoned, capable, and
James Briggs: Our total operating expenses were 3.5 million in Q2 versus 4.3 million in Q1. The majority of the decrease in expenses was driven primarily by a lower sequential accrual of incentive fees through to our manager, which are payable on a quarterly basis equal to 20 percent of the excess of core earnings as defined in the management agreement over an 8 percent per annum return threshold. Other general operating expenses were largely in line quarter over quarter.
Speaker Change #109: you know, sizable group that manages our
Speaker Change #109: Special Servicing and in particular REO for LFT and for LUMIT as a whole and you know what we've shown is that
Speaker Change #110: You know, we're more than capable operators, but more importantly with our sponsors say hey, we're here to help and work with you but you know, we're not going to Go down the path of using default as kind of a negotiating technique. I remember
James Briggs: The approximately $1.4 million difference between reported net income and distributable earnings to common was attributable to an increase in our allowance for credit losses. As of June 30th, we had four loans for a graded of five. One was a $17 million loan collateralized by multi-family property in Brooklyn, New York, and was risk-graded of five due to maturity to fall. Another was a $20 million loan collateralized by two multi-family properties near Augusta, Georgia.
James Flynn: I remember several quarters ago, I think Ivan Kaufman at Arbor mentioned that in a call that he saw borrowers kind of strategically defaulting or trying to use that as a negotiation tactic. We may have been four or five quarters ago. Yes, and I think that largely went away, but I will say that I think with this most recent decline in the 10 year and the rate cuts on the horizon in the very near term and probably, you know, fairly extensive over the next 15 months. I feel like I've seen a little bit of that from some borrowers trying to maybe see if they can take advantage of that.
James Flynn: I remember several quarters ago, I think Ivan Kaufman at Arbor mentioned in a call that he saw borrowers, I'm kind of strategically defaulting or trying to use that as a negotiation tactic when they were four or five quarters ago. Yes. And I think that largely went away. But I will say that with this most recent decline in the 10 year and the rate cuts on the horizon in the very near term and probably, you know, fairly extensive over the next 18 months.
Speaker Change #110: Several quarters ago, I think Ivan Koffman at Arbor mentioned that in a call that these borrowers
James Briggs: That was risk-graded five due to monetary to fall. The third was a $15 million loan collateralized by two multi-family properties in Philadelphia, Pennsylvania. That was risk-graded five due to monetary to fall. All three of these loans have been placed on non-accrual status, the cash received on the Philadelphia property to be recognized on a cost recovery basis. The fourth, five risk-graded asset was a $32 million loan collateralized by a multi-family property in Dallas, Texas.
Speaker Change #111: kind of strategically defaulting or trying to use that as a negotiation tactic. It may have been four or five quarters ago. Yes. And I think that largely went away, but I will say that I think with...
Speaker Change #112: This most recent decline in the 10-year and the rate cuts on the horizon in the very near-term and probably, you know, fairly extensive over the next 18 months.
James Flynn: I feel like I've seen a little bit of that from some borrowers trying to maybe see if they can take advantage of that. You know, we feel very confident in our ability to manage the borrowers and manage the assets. Our goal is to not have any REO.
Speaker Change #113: I feel like I've seen a little bit of that from some borrowers trying to maybe
James Flynn: You know, we feel very confident in our ability to manage the borrowers and manage the assets. Our goal is to not have any area, but if we did, if we were to have our, you know, it would mean that we've done the math on what's the highest value to our shareholders and concluded that, you know, that's the action we can take and they're capable of doing so, but obviously the goal is to not have that.
Speaker Change #114: See if they can take advantage of that.
Speaker Change #114: We feel very confident in our ability to manage the borrowers and manage the assets.
James Flynn: But if we did, if we were to have REO, it would mean that we'd done the math on, What's the highest value to our shareholders? and concluded that that's the action we can take, and we're capable of doing so, but obviously, the goal. Appreciate it, Jim.
James Briggs: That was in technical default. We evaluated these four five risk-graded loans individually to determine whether assets, specific reserves, credit losses were necessary, and after an analysis of the underlying collateral, we recorded a specific allowance in Q2 of approximately 900,000. The General Cecil Reserve increased by approximately 500,000 during the period driven primarily by changes in the macroeconomic forecast, as well as monarchs risk-grading migration in the portfolio. The company's total equity at the end of the quarter was approximately $242 million.
Speaker Change #115: Our goal is to not have any REO, but if we did, if we were to have REO, it would mean that we've done the math on
Speaker Change #115: what's the highest value to our shareholders and concluded that, you know, that's the action we can take and we're capable of doing so, but obviously the goal is to not have that happen.
Unknown Executive: Appreciate them. That's helpful.
Speaker Change #116: Appreciate, Jim. That's helpful.
Stephen Laws: Your next question comes from the line of Stephen Laws of Raymond Jones. Please go ahead. Hi, good afternoon. Just one quick one on the, the three new non-acruals and covered a good bit of the key.
Steve DeLaney: That's helpful. Your next question comes from the line of Stephen Laws on Raymond Jones. Please go ahead. Hi, good afternoon.
Speaker Change #116: Your next question comes from the line of Stephen Laws of Raymond Jones. Please go ahead.
Stephen Laws: Just one quick one on the three new non-accruals. They've been covered a good bit, but can you let us know when those went on non-accrual or ask another way, how much interest income did they contribute to the second quarter? Yeah, I mean, actually, even two of those were fours last quarter or five last quarter, so only two new ones. The two new fives are the Philadelphia loan that I talked about that's going to be on a cost recovery basis, and the Dallas loan that's in technical default. We actually came out of last quarter with the other two.
Stephen Laws: Hi, good afternoon. Just one quick one on the three new non-accruals that have been covered a good bit, but can you let us know when those went on non-accrual or ask another way how much interest income did they contribute to the second quarter?
James Briggs: Total value of common stock was approximately $182 million, worth $3.48 per share, largely flat from $3.50 per share as with March 31st. We ended the second quarter with an unrestricted cash balance of $65 million and our investment capacity through a two-secured financial was effectively fully deployed.
James Briggs: Let us know when those went on non-accrual or asked for the way how much interest and time did they contribute to the second quarter. Yeah, I mean, actually, even two of those were fours last quarter, about five last quarter. So only two new ones: the two new fives are the Philadelphia loan that I talked about that's going to be on a cost recovery basis, and the Dallas loan that's in technical default. We actually came out of last quarter with the other two. We are receiving payments on a cash basis for a couple of those, and I believe it was about 200 grand was the impact for banana crawl in the current quarter, right?
Speaker Change #118: Yeah, I mean, actually, even two of those were fours last quarter, or five last quarter, so only
Speaker Change #119: Only two new ones, the two new fives are the Philadelphia loan that I talked about that's going to be on a cost recovery basis.
James Henson: I mean, now I'll turn the call over to Jim Henson to throw out details on the company's investment activity and portfolio performance during the quarter. Jim. Thank you, Jim.
Speaker Change #120: and the Dallas loan that's in technical default. We actually came out of last quarter with
James Henson: Good afternoon, everyone. I will now share a brief summary of the recent activity in our investment portfolio. During the payoffs related to the defaulted loans discussed by Jim just a few moments ago, we did not acquire or fund any new loan assets during the period. As a June 30, our portfolio consisted of 78 floating rate loans with an aggregate unpaid principal balance of approximately $1.2 billion. 100% of the portfolio was indexed to one month so far and 93% of the portfolio is collateralized by multi-family properties.
Speaker Change #120: with the other two.
Jim Briggs: We are receiving payments on a cash basis for a couple of those. And I believe it was about 200 grand was the impact of non-accrual in the current quarter, right? It's tough to predict those that are non-accrual, whether we're going to continue to get cash payments or not. But in the current quarter, we're looking at about a couple $100,000 shortfall net for Great. You know, switching over to the financing side, another competitor got a CLO done, I think last week or this week with some legacy stuff, but you know, that that market's there. Can you talk about, you know, what you would like to see grow?
Speaker Change #120: We are receiving payments on a cash basis.
Speaker Change #121: for a couple of those. And I believe it was about $200,000 was the impact for nonaccrual in the current quarter. It's tough to predict those that are nonaccrual whether we're going to continue to get cash payments or not.
James Briggs: It's tough to predict those that are not a crawl, whether we're going to continue to get cash payments or not, but in the current quarter, we're looking at about a couple of hundred thousand shortfall net for banana crawl. Great.
Speaker Change #121: But in the current quarter, we're looking at about a couple of hundred thousand shortfall net for for non-accrual.
Unknown Executive: Switching over the financing side, you know, another competitor out of Silo Dunn, I think last week or this week, with some legacy stuff, but that market's there.
Speaker Change #121: Great. You know, switching over to the financing side, you know, another competitor got a CLO done, I think, last week or this week with some legacy stuff, but, you know, that market's there. Can you talk about
James Henson: While we endeavour to actively manage the maturity risk within our portfolios, it is worth noting that we had the foresight at the time of loan origination to include extension features within our loan investment documents. As a result, the weighted average remaining term of our book is approximately 30 months if all available extensions were exercised by our loan borrowers. As of the end of the second quarter, our portfolio had a weighted average floating note rate of so far plus 359 basis points and an unamortized aggregate purchase discount of $5.6 million, dollars.
Unknown Executive: Can you talk about what you would like to see to grow? Do you have a financing facility with the parent you could use to ramp, you know, to pool assets ahead of a deal? You know, would you look to get one possibly at the mortgage read level, a bank line to allow you to use, you know, to pool some loans, new investments, or, you know, how do you think the market, you know, how do you look at potentially doing another deal to grow? Even, you know, I realized the Silo one is still attractive, but it is going to continue to deliver.
Stephen Laws: You know, do you have a financing facility with the parent you could use to ramp up, you know, to pool assets ahead of a deal? You know, would you look to get one possibly at the mortgage rate level, a bank line to allow you to use, you know, to pool some loans, some new investments, or, you know, how do you think the market is going to do, how do you look at potentially doing another deal to grow? I realize the CLO1 is still attractive, but it is gonna continue to de-lever. So, just curious to get your thoughts on, you know, how you may manage the balance sheet in order to price a new deal sometime over the next, say, six or 12 months. Thank you so much.
Speaker Change #122: you know, what you would like to see to grow? You know, do you have a financing facility with the parent you could use to ramp, you know, to pool assets ahead of a deal?
Speaker Change #123: Would you look to get one possibly at the mortgage rate level?
Speaker Change #124: a bank client to allow you to use, you know, to pool some loans, new investments, or, you know, how do you think the market, you know, how do you look at potentially doing another deal to grow even, you know, I realized the CLO-1.
Unknown Executive: So just curious to get your thoughts on, you know, how you may manage the balance sheet in order to price a new deal sometime over the next six or twelve months. Thank you, too.
Speaker Change #125: is still attractive, but it is going to continue to de-lever. So just curious to get your thoughts on, you know, how you may manage the balance sheet in order to price a new deal sometime over the next, say, six or 12 months.
James Henson: As I mentioned earlier, our secured financing remained attractive. The quarter ended with that L1, our CRE CLO transaction providing effective leverage of 79.5% and a weighted average cost of funds of SO4 plus 161. The LMF financing provided the portfolio with effective leverage of 82.2% at a weighted average cost of SO4 plus 314 basis points. On a combined basis at the end of the quarter, our two securitization has provided our portfolio with effective leverage of 80.4% and a weighted average cost of funds of SO4 plus 212 basis points.
Speaker Change #125: So let me just say one thing. Since we
James Flynn: Let me just say one thing. So since we just on the ramp and then exactly give you some when, you know, Hunt took it over and then since Orick acquired, Hunt and we became women, we've always continued to originate bridge assets on our corporate balance sheet outside of LST and will continue to do so. LST is a vehicle that has the first look and where we always look into place assets, but obviously it has, you know, full capacity. We continue to originate and for all of our scuritization, these two, plus the others we've done historically, the at least some, if not the majority of the assets included in those scuritizations were assets that were pooled on the corporate balance sheet and when the read LST out of high capacity would be transferred as part of that scuritization to the read.
James Flynn: Just on the ramp, and then Zach can give you some more detail, but the, You know, since we took over management of this vehicle when Hunt took it over and then since Oryx acquired Hunt and you became Lumen, we've always continued to originate bridge assets on our corporate balance sheet outside of LFT, and we'll continue to do so. LFT is a vehicle that has the first look and where we always look to place assets, but obviously, it has full capacity. We continue to originate, and for all of our securitizations, these two plus the others we've done historically, at least some, if not the majority of the assets included in those securitizations were assets that were pooled on the corporate balance sheet and when the REIT LST had capacity, they would be I'll let Zach handle the Capital Markets.
Speaker Change #126: Just on the ramp, and then Zach can...
Speaker Change #126: I'll give you some more detail, but the...
Speaker Change #127: You know, since we took over management of this vehicle
Speaker Change #128: when Hunt took it over and then since Oryx acquired.
Speaker Change #129: We've always continued to originate bridge assets on our corporate balance sheet outside of LFT.
Speaker Change #130: and we'll continue to do so. LT is a vehicle that has the first look and where we are always looking to place assets, but obviously has...
James Henson: As of 77% in the prior quarter, our weighted average risk rating was 3.6, a slight deterioration from 3.5 sequentially. While both loan assets had been risk-rated, that had been risk-rated 5 as of March 31, we're fully resolved during the second quarter. Our aggregate loan exposure on the newly risk-rated 5 loans was approximately $84 million at the end of the second quarter. Up from the aggregate $38 million at the end of the first quarter.
Speaker Change #131: you know, full capacity, we continue to originate. And for all of our securitization, these two plus the others we've done historically,
Speaker Change #131: the at least some if not the majority of the assets included in those securitizations were
Speaker Change #132: assets that were pooled on the corporate balance sheet and when the REIT LST had a high capacity would be transferred as part of that securitization.
James Flynn: So from that standpoint, we'll continue to operate that way. We operate that way today. And nothing about that will change.
Speaker Change #133: So from that standpoint, we'll continue to operate that way. We operate that way today, and nothing about that will change. I'll let Zach handle the...
James Henson: As Jim Briggs outlined earlier, we evaluated the four 5 rated loans individually to determine whether asset-specific reserves for credit losses were necessary. And after an analysis of the underlying collateral, we recorded the specific allowance of approximately $900,000 in the second quarter. We expect to continue to rely on the expertise of our talented asset management team to actively resolve these 5 rated loan assets, protecting our investor's capital and maximizing value for our shareholders.
James Flynn: Oh, that's that kind of the from Capital Market standpoint, we're continuing to explore, really starting to explore options as FL1 tips below 80% advance rate. Options include an entirely new sterilization or a combination of warehouse financing with a smaller securitization, or warehouse financing remains to be decided based on prevailing market conditions. These are our active conversations, at least internally, and yeah, I'm getting to explore.
Speaker Change #134: Thank you.
Zachary Halpern: Yeah, from a capital markets standpoint, we're continuing to explore and really starting to explore options as FL One dips below 80% of the advance rate. Options include an entirely new securitization or a combination of warehouse financing with a smaller securitization or warehouse financing remains to be decided based on prevailing market conditions. These are our active conversations, at least internally, and yeah, thanks for that. Okay, and then I guess, follow-up on that. I mean, around timing, sounds like it depends a lot on... on repayments. So can you give us an outlook over the back half of the year on what your repayment expectations are? I've been running about $90 million a quarter.
Zach: capital markets aspect there.
Zach: From a capital markets standpoint, we're continuing to explore, really starting to explore options as FL1 dips below 80% advance rate.
Zach: Options include an entirely new securitization or a combination of warehouse financing with a with a smaller securitization or warehouse financing remains to be decided based on prevailing market conditions.
James Flynn: I will now pass it back to Jim Flynn for closing remarks and questions. Thank you, Jim. Appreciate everyone joining, but we'll open the false questions. Thank you.
Zach: These are our active conversations, at least internally, and yeah, things we're exploring.
James Flynn: Okay, and then I guess to follow up with that, I mean around timing sounds like it depends a lot on repayments. So can you give us an outlook over the back half of the year of what your repayment expectations are? I've been running about 90,000,000 quarters. Is that level likely to continue, or more or less than that over the back half of the year? I think that's a good estimation at the moment. Just over the near term, in the next month or two, it looks like another 70 to 80. It's right in that range. Great.
Unknown Executive: Ladies and gentlemen, we will now begin the question and answer session. Should you have a question? Please press the star button followed by the number one on your touch tone phone. You will hear your prompt that your hand has been raised. Should you wish to decline from the polling process, please press the star button followed by the number two. If you are using a speaker phone, please lift the handset before pressing any keys. One moment, please for your first question.
Speaker Change #136: Okay, and then I guess to follow up with that, I mean, around timing, it sounds like it depends a lot on repayments. So can you give us an outlook over the back half of the year of what your repayment expectations are? I've been running about $90 million a quarter. Is that level likely to continue or do you expect more or less than that over the back half of the year?
Stephen Laws: Is that level likely to continue, or do you expect more or less than that over the back half? I think that's a good estimate at the moment. Um, just over the near term, in the next month or two, it looks like another 70 to 80, so it's right in that range. It's possible that it accelerates.
Speaker Change #136: I think that's a good estimation at the moment.
Kristen Love: Your first question comes from the line of Kristen Love of Piper Sandler. Please go ahead. Thanks, and I could have the next one. I'm just first off on credit quality. You have had a pretty stable credit for several quarters now, but did see some degradation here in the second quarter related to some non-performers migration rate 5 loans and then the allowance bill that you discussed. Did you just discuss the credit outlook as we stand today?
Speaker Change #137: just over the near term, in the next month or two, it looks like.
Speaker Change #138: Another 70 to 80, so it's right in that range.
Unknown Executive: It's possible that it accelerates. Yeah, it's possible that it accelerates as maturity are coming, but tough to say. Yep, great. Appreciate comments this afternoon. Thank you.
Speaker Change #139: It's possible that it accelerates, yeah, it's possible that it accelerates as maturities are upcoming, but...
Zachary Halpern: Yeah, it's possible that it accelerates as maturities are upcoming, but... Tough to say at this point. Yep, great. Appreciate the comments this afternoon. Thank you. Your next question comes from the line of Christopher Nolan of Leidenberg-Thalmann. Please go ahead.
Speaker Change #140: It's tough to say at this point.
Speaker Change #140: Great. Well, I appreciate the comments this afternoon. Thank you.
Christopher Nolan: Your next question comes from the line of Christopher Nolan of Layton Brook Faltman. Please go ahead. Hi, thanks for taking the question. The loan-to-value ratio is on your 10-Q. Are those at the time of origination of the loan? Yes. Okay, and then if I'm looking at the table correctly, it looks like a lot of the loans were originated in 2021 and then to 2022. So it looks like a fair number of your loans or predate the Fed tightening cycle. Is that a correct view of that? Yes. And so on that basis, is it fair to say that the loan to value ratio is now significantly higher than what's shown in the queue?
Speaker Change #140: Your next question comes from the line of Christopher Nolan of Leidenberg-Thalmann. Please go ahead.
Kristen Love: I believe that we've reached peak stress and multi-family credit during this cycle, just your intermediate term outlook, just giving the environment and how you look at the portfolio. Yeah, I think, I mean, it's hard to, we've all kind of been a little bit off here for the last six quarters on Briggs, the market, but there does seem to be, you know, some expectation that we're kind of at or near that that peak stress period, we do see rate reductions on the horizon, both obviously long-term we've seen their 10-year come down and expectations around.
Christopher Nolan: Hi, thanks for taking the question. The loan to value ratios on your 10Q, are those at the time of origination of the loan? Yes. Okay, and then if I'm looking at the table correctly, it looks like a lot of the loans were originated in 2021 and into 2022. So it looks like a fair number of your loans sort of predate. Thank you. On that basis, is it fair to say that the loan-to-value ratio is now significantly higher? It depends.
Speaker Change #141: Hi, thanks for taking the question. The loan-to-value ratios on your 10-Q, are those at the time of origination of the loan?
Speaker Change #142: Jason Weaver, Steven DeLaney
Speaker Change #142: Yes.
Speaker Change #143: Okay. And then if I'm looking at the table correctly, it looks like a lot of the loans were originated in 2021 and then to 2022. So, it looks like a fair number of your loans sort of predate the Fed tightening cycle. Is that a correct view of that?
Speaker Change #143: Yes.
Speaker Change #144: And so on that basis, is it fair to say that the loan-to-value ratio is now significantly higher than what's shown in the queue?
James Flynn: It depends. Keep in mind these are all transitional properties with business plans. And so when you do a bridge loan, you have the as is valuation. And you also receive a stabilized valuation from the appraiser, assuming that the business plan has been executed. And so, as an example, today as the valuation was 75 and the stabilized valuation was 65. You assume that if the borrower asked you their business plan and market conditions did not change, the value. He would do the asset, then be 65 LTV to your point, overlaying market movements on there. The LTV could be higher.
Kristen Love: So for which, so for cuts, which will, or Fed cuts, which will impact, directly impact the floating rate borrowers. So those things are obviously beneficial to the credit quality of the portfolio, certainly in a vacuum. They come on the, on the heels of other economic data and news, which, you know, generally isn't positive, but I think if you take a look at multifamily and how it's performed throughout cycles, you know, near-term and long-term, it's shown pretty well.
Unknown Executive: Keep in mind, these are all transitional properties with business plans. And so, when you do a bridge loan, you have the as-is valuation, and you also receive a stabilized valuation from the appraiser, assuming that... The business plan has been executed. And so, as an example of that, the valuation was 75, and the stable line valuation was 65. You would assume that if the borrower asked you their business plan and market conditions did not change, the value would, or the asset would then be 65 LTV, to your point of overlaying market movement on there. The LTV could be higher.
Speaker Change #144: Thanks for watching, and don't forget to like, share, and subscribe to our channel.
Speaker Change #145: It depends. Keep in mind these are all transitional properties with business plans and so
Speaker Change #146: When you do a bridge loan, you have the as-is valuation and you also receive a stabilized valuation from the appraiser, assuming that
Speaker Change #146: The
Speaker Change #147: business plan has been executed. And so, as an example, let's say that the evaluation was 75 and the stabilized valuation was 65.
Speaker Change #147: You would assume that if the borrower asks you their business plan and market conditions did not change, the asset would then be 65 LTV.
Kristen Love: And the supply demands anemic in the country isn't changing, in fact, probably getting worse. And so there's some stability, even in times of economic stress. Now, that being said, with respect to our portfolio, and Zach and others can provide some more detail. I'm sure we'll have some other questions. We've seen, you know, more stress over the last couple of quarters as we continue to go through this cycle. And we've continued to actively manage those and feel, you know, pretty good about our ability to do so, you know, but we have to work through issues.
Speaker Change #148: to your point overlaying market movement.
Speaker Change #148: on there. The LTV could be higher.
James Flynn: So it's a kind of convoluted way of saying it depends on how all the borrowers executed their business plan to market movements and some market movements.
Unknown Executive: So it's a kind of convoluted way of saying it depends on how well the borrower executes their business plan, its market movements, and its submarket. Okay, I guess just a logical follow-up to that is... And it just sort of dovetails into your earlier comments that it sounds like a lot of these borrowers are upside down on their loans. I would say it's more of a case that... that they're, well, that their equity has been impacted, right?
Speaker Change #148: So, it's a kind of convoluted way of saying it depends on how well the borrower executed their business plan relative to market movements and sub-market movements.
James Flynn: Okay, I guess just a logical follow-up to that is just sort of dovetails into your earlier comments that sounds like a lot of these borrowers are upside down on their loans potentially. I would say that equity has been impacted. So yes, maybe they're expected LTVs when they answer the deals are higher than when they thought there would be. But their equity, I don't know if I'd say upside down, but their equity has been impacted. There's no question about that, and that's probably true on most assets. But that doesn't necessarily translate to the loan being upside down.
Speaker Change #149: Okay, I guess just a logical follow-up to that is, and just sort of dovetails into your earlier comments, that it sounds like a lot of these borrowers are upside down on their loans potentially.
Kristen Love: We've had, you know, elevated risk assets in the past that we've been able to resolve, you know, from a value standpoint, we still feel pretty good. You know, we did take a reserve on one asset, but as noted in the K, you know, that is consistent with how we look at value throughout our history managing this entity. We do, and we'll continue to work toward, you know, resolution of that without a loss or minimizing a loss, but from a, you know, gap and consistent standpoint, we felt the, it was appropriate to take a reserve on that asset.
Speaker Change #149: I would say it's more the case that...
Unknown Executive: So, so maybe their LTVs when they entered the deals were higher than what they thought they would be, but their equity, I don't know if I'd say it was upside down, but their equity has been impacted. There's no question about that. And that's probably true for most, But that doesn't necessarily translate to, you know, the lone being.
Speaker Change #149: that they're, well, that they're...
Speaker Change #150: their equity has been impacted. Right? So, so yes, maybe they're, they're expected LTVs when they entered the deals are are higher than when they thought they would be. But they're
Speaker Change #151: Their equity, I don't know if I'd say upside down, but their equity has been impacted. There's no question about that, and that's probably true on most assets.
Speaker Change #151: but that doesn't necessarily translate to...
James Flynn: I think it is fair to say that perhaps the value today, the loan to value today, is higher than where it was projected to be. It may not be that much higher depending on which loan and the performance than where it was entering. The reality is those owners invested capital into the deals and haven't gotten the full recognition of value that they anticipated, at least that yet, which is frankly why I think we've seen so many multi-family deals being held. Because of the expectation that if you're able to hold on to assets, you will realize that value over the next couple of years, just not necessarily the full value today.
Unknown Executive: I think it is fair to say that, you know, perhaps the value today, the loan to value today, is higher than where it was projected to be. It may not be that much higher, depending on which loan and the performance that you know where it was. The reality is that those owners, you know, invested capital into the deal, and haven't gotten the full... Recognition of Value that they anticipated, at least not yet, which is, frankly, why I think we've seen so many multifamily deals being held because of the expectation that if you're able to hold on to ask, you will realize that value over the next couple of years, not necessarily the full value.
Speaker Change #152: you know the the lone being upside down. I think I think it is fair to say that
Kristen Love: And with respect to the other assets, you know, there's, we have a great team here that is in a daily managing those and speaking to the sponsors on those assets and helping to participate in creating plans to improve the assets performance. And as we've discussed in the past, you know, we do have the ability to really add operational expertise where needed with our sponsors or without. So, yes, we're in a period of elevated stress.
Speaker Change #152: you know, perhaps the value, the, the,
Speaker Change #152: The value today, the loan-to-value today is higher than where it was projected to be.
Speaker Change #153: it may not be that much higher depending on which loan and the performance than you know where it was entering. The reality is those owners, you know, invested capital into the deals and haven't gotten the full
Speaker Change #154: recognition of value that they anticipated, at least not yet, which is frankly why I think we've seen so many multifamily deals being held because of the expectation that if you're able to hold on to assets
Kristen Love: We still continue to feel pretty confident in the quality of our portfolio, but do need to continue to work through some of these more challenging assets. Thank you, Jim. I appreciate the comments there. And then just on deployment for the second day, of course, didn't add any new investments, but I think you had nearly 100 million to pay off. So what's keeping you from being more active here? Is it a concerted effort as you focus on asset management on the current portfolio, or are there also a lack of opportunities out there?
Speaker Change #155: you will realize that value over the next couple of years, just not necessarily the full value today. I don't think that trend is going to dramatically change, but I do think there is.
James Flynn: I don't think that trend is going to dramatically change, but I do think there is, with this reduction in race, and you know, you may see more transactions, more people put a curve financing on things like that, but that's where we are.
Unknown Executive: I don't think that trend is going to dramatically change, but I do think there will be, with this reduction in rates, more transactions, more people putting current financing on things. Okay, and Jim Briggs, so were there any non-recurring items in Erdner?
James Briggs: Okay, Jim Briggs, are there any now recurring items in earnings? Not for this quarter, there was a big impact from the non recurring from from last quarter. So if you were looking sequentially as I spoke to interesting come, net interesting come has come down pretty significantly from last quarter, but we had a, you know, we had a bunch of one time last quarter for catch up on a couple of resolutions that we spoke about last quarter. So outside of that. No, I do speak to the operating expenses came down. If you recall, you know, the incentive fee that we accrued last quarter was about a million three.
Speaker Change #155: That's where we are.
Speaker Change #156: Okay, and Jim Briggs, were there any non-recurring items in earnings?
Kristen Love: And how would you expect time to be opportunity, landscape to change as rates do come down in the coming months? Sure. So first on the capacity standpoint, so, you know, as I mentioned at the end of my remarks, the larger CLO, the 2001 CLO, is through its investment, reinvestment period. And so that securitization is deliberate. It's still an attractive financing, so for plus 161 and 80% leverage, even with those payoffs. So, you know, we do intend to continue to evaluate options there as we move through the next few quarters.
Jim Briggs: I'm not for or against this quarter. There was a big impact from the non recurring revenue from last quarter. So if you were looking sequentially, as I spoke about interest income, or net interest income, it has come down pretty significantly from last quarter. But we had a bunch of one-timers last quarter to catch up on a couple of resolutions, outside of that. No, I do speak to the fact that operating expenses came down. If you recall, the incentive fee that we accrued last quarter was about $1.3 million.
Speaker Change #157: Not for this quarter. There was a big impact from the non-recurring from last quarter. So if you were looking sequentially.
Speaker Change #158: as I spoke to interest income or net interest income has come down pretty significantly from last quarter but we had a you know we had a bunch of one-timers last quarter for catch-up on a couple of resolutions that we spoke about last quarter.
Speaker Change #158: outside of that.
Speaker Change #158: No, I do speak to the
Speaker Change #158: Operating expenses came down.
Speaker Change #159: If you recall, the incentive fee that we accrued last quarter was about $1.3 million. It was around $700,000 for this quarter. So that came down, I'd expect that $700,000 as it's trailing 12-month calc.
Kristen Love: But that's part of the reason, right? That capacity is just really de-leveraging. On the LMF transaction, we've generally remained fully deployed, you know, some timing as an asset pays off. And we've kept, you know, for the size of our entity relatively high-cast position. In large part, just to ensure that when needed, we can offensively manage the portfolio with our sponsors. In terms of the market, we are seeing more opportunities today than what we've seen over the last, you know, handful of quarters of high-quality deals.
James Briggs: It was around 700,000 for this quarter, so that came down. I'd expect that 700,000 as it's trailing 12-month calc. That takes into account payments over those 12 months that that'll that'll come down, so you can maybe look at that as a bit of a one time or on the expense side that will come down for the next quarter or two before it.
Jim Briggs: It was around $700,000 for this quarter, so that came down. I'd expect that $700,000, as it's trailing 12-month cal, that takes into account payments over those 12 months, but that'll come down, so you can maybe look at that as a bit of a one-timer on the expense side that will come down for the next quarter or two before it.
Speaker Change #159: that takes into account payments over those 12 months, but that'll come down. So you can maybe look at that as a bit of a one-timer on the expense side that will come down for the next quarter or two before it normalizes.
Unknown Executive: Okay, for me, thank you. Once again, ladies and gentlemen, should you have a question? Please press the star button, followed by the number one on your touch time phone. You will hear a prompt that your hand has been raised.
Operator: Thank you. Once again, ladies and gentlemen, should you have a question, please press the star button followed by the number one on your touch screen phone. You will hear a prompt that your hand has been raised.
Speaker Change #159: Okay. This is for me. Thank you.
Unknown Executive: There are no further questions at this time. I'd now like to turn the call back over to our speakers for their final closing remarks. Please go ahead. I just want to thank everyone for joining us today. We'll look forward to speaking again next quarter. Thanks, all. Ladies and gentlemen, this concludes your conference call for today. We thank you for participating and ask that you please disconnect your lines.
Speaker Change #159: Thank you.
Speaker Change #160: Once again, ladies and gentlemen, should you have a question, please press the star button followed by the number one on your touch-tone phone. You will hear a prompt that your hand has been raised.
Kristen Love: There's, you know, it's competitive. It's not the volume that you would like to see, but it's starting to appear. There's, you know, anecdotal evidence out there, and on some of the calls from the peer group you've heard of the competitive environment for acquisition, you know, the thing that's really slowed this market down has been the lack of assets changing hands. There's very active buyer community out there, and there does seem to be some loosening on the seller side for folks to, you know, exchange assets, and that will help find good deals for the bridge market.
Unknown Executive: There are no further questions at this time.
Unknown Executive: I'd now like to turn the call back over to our speakers for final closing remarks. Please go ahead. I just want to thank everyone for joining today. We'll look forward to you speeding again next quarter. Thanks all.
Speaker Change #162: There are no further questions at this time. I'd now like to turn the call back over to our speakers for final closing remarks. Please go ahead.
Speaker Change #159: I just want to thank everyone for joining today. We'll look forward to speaking again next quarter.
Unknown Executive: Ladies and gentlemen, this concludes your conference call for today. We thank you for participating, and as such, please disconnect your lines.
Speaker Change #160: Thanks, all.
Speaker Change #162: Ladies and gentlemen, this concludes our conference call for today. Thank you for participating and as such a pleased disconnect your lines.
Speaker Change #162: Episode 2
Kristen Love: The other tailwind on the transaction side is these deliveries, particularly in the sunbelt, of all those construction assets coming online, or at least coming through the construction period, and maybe need a lease up period, and that provides some opportunity in the bridge space. So, I do think that, you know, we're going to continue to see transaction opportunities increase over the coming quarters. It may be a little slower than we'd like to see, but it will at least be going forward, which is a welcome change to where.
Kristen Love: Good afternoon, guys. Thanks for taking the question. Could you talk about the timing of the payoffs this quarter and kind of what led to the sequential decline in commercial loan income? Jim, Jim and Zach, I guess you guys want to touch just timing. I mean, I think it was just sort of normal. Yeah. Well, we're the payoffs kind of towards the beginning of the quarter rather than the end, which led to it kind of being $5 million less than the prior quarter.
Kristen Love: Yeah, I mean, you know, when I look at sort of loan balance, the read by month, really simmer around 1.3 at March 31, 1.3, April 30th, and then a drop off to 1.25 May 31st and 1.2 June 30th. So, I don't know. I think it sequentially moved down pretty steadily throughout. Okay. Gotcha. And then, you know, as a follow up, you know, what are you guys seeing within your portfolio and the secondary and tertiary markets?
Kristen Love: Given the two Augusta multi families, the default and then the kind of move to non accrual there. And then also, you know, following up on that, you know, how are you guys working through these loans once they defaulted? You know, are you looking to get more equity in the deal? Are you guys making the borrowers kind of, you know, what's the market or what's the property on the market? You know, just how are you guys working through the process and going after these logs?
Kristen Love: So, as it pertains to secondary tertiary, I wouldn't say that we have specific issues that I'd point to there. I'd say that all the issues that we have have been idiosyncratic. You know, things like upcoming maturities and needs for interest rate caps, which have brought forward back to the table in terms of negotiation. As it pertains to working through these assets, you know, if and when they default, our management team is taking a very active proactive approach with our sponsors.
Kristen Love: And all the above in terms of bringing them back to the table, whether that be cash contributions or negotiating top line recourse, reviewing business plans, you know, aiming for lower interest rate caps such that they prepaid debt service. Or who are pushing them along towards refinancing somewhere else. All the above are options, you know, initiating foreclosure is an option as well. As need be, we hope not to generally get there, but you know, we continue to be active in pro-academic, pertains to bill defaults. Got it. Thank you guys.
Steve DeLaney: Your next question comes from the line of Steve Delaney of Citizens JMP. Please go ahead. Good afternoon, everyone. Thank you for taking the question. You know, we notice that you don't, at this point, have any aria real estate owned on your balance sheet. There is a investment-related receivable for about 33 million. Could you tell us what that, what that asset represents? Sure, I can take that Steve at Stimbriggs here. When we've gotten borrower proceeds, but it's passed three mitten to date from servicing.
Steve DeLaney: So it's cash sitting with them that we haven't received from servicing yet. We'll put it as an investment-related receivable. So there's not risk to the borrower there. We just haven't received the cash from our servicer yet, from the servicer. So it could be a mixture of principal interests, all of that. That's going to be, that's going to be, we'll still have the interest to cruel on the books, but we'll record that as a paydown from the borrower.
Steve DeLaney: So you won't see it in the loan balance. You'll see it as the investment-related receivable. We actually received the cash. Think of that as money-good. We just haven't gotten it in the next timing. Yeah, correct. Pending liquidity. Just interquarter timing. That is related, just to go back to Kristen's question before, that 33 million is related to an FL1 asset. So that will be used to pay down bonds once the cash is received.
Steve DeLaney: Okay, great. And it sounds like, you know, you're having some maturity default, some business plans, not working out, but you know, as evidenced in, by the way, that disclosure and the queue on the four new five rated loans, that was, that was exceptional. We're not accustomed to receiving that kind of detail and really understanding the stories. So thank you to that. But the, you know, those sound like there is a workout or resolution.
Steve DeLaney: But are you guys do you envision that as we are as Jim Flynn said, you know, in a challenging market, it's probably to get, could get a little worse before it gets better. But do you envision that either any of those four loans or that you may end up having to take a property back in the next year?
Steve DeLaney: I know that's sort of a what if question, but just curious how much I'll think about that and whether, you know, you see that isn't, you know, as a, a likelihood that you will have some audio on your books at some point. So thank you, Steve. The way I would answer that is obviously our strong desire is to not have any audio. And in most cases, and as you know, you know, lumens and of broader sponsorship than, you know, we have a 51 billion dollar servicing book, you know, we're seeing a lot of activity and assets across the country outside of just what we have here at LFT.
Steve DeLaney: You know, when we've had good borrowers who have done the right thing and worked with us and are still capable of managing their assets and, you know, improving operations, we've been able to work with them to find resolution to what we hope are short term issues, whether it's valuation cash flow or both. Where we've discussed are you broadly as an or it's for those are broadly as a platform, not just LFT is where we don't have cooperative followers and in the overwhelming majority of those cases, you know, it's not something that ends up having to come to fruition.
Steve DeLaney: And so, you know, I would like to think that that will be the case here, but we do have a, you know, very seasoned, capable and, and you know, sizable group that manages our special servicing and in particular, are you for LFT and for Lument as a whole. And, you know, what we've shown is that, you know, we're more than capable operators, but more important with our sponsors, say, hey, we're here to help and work with you, but, you know, we're not going to go down the path of using the false as kind of a negotiating technique.
Steve DeLaney: I remember several quarters ago, I think Ivan Kaufman at Arbor mentioned that in a in a call that he saw borrowers kind of strategically defaulting or trying to use that as a negotiation tactic, we may have been four or five quarters ago. Yes, and I think that largely went away, but I will say that I think with this most recent decline in the 10 year and the rate cuts on the horizon in the very near term and probably, you know, fairly extensive over the next 15 months.
Steve DeLaney: I feel like I've seen a little bit of that from some borrowers trying to maybe see if they can take advantage of that. You know, we feel very confident in our ability to manage the borrowers and manage the assets. Our goal is to not have any area, but if we did, if we were to have our, you know, it would mean that we've done the math on what's the highest value to our shareholders and concluded that, you know, that's the action we can take and they're capable of doing so, but obviously the goal is to not have that. Appreciate them, that's helpful.
Stephen Laws: Your next question comes from the line of Stephen Laws of Raymond Jones, please go ahead. Hi, good afternoon. Just one quick one on the, the three new non-acruals and covered a good bit of the key.
Christopher Nolan: Let us know when those went on non-acrual or asked for the way how much interest and time did they contribute to the second quarter. Yeah, I mean, actually, even two of those were fours, last quarter, about five last quarter. So only two new ones, the two new fives are the Philadelphia loan that I talked about that's going to be on a cost recovery basis, and the Dallas loan that's in technical default.
Christopher Nolan: We actually came out of last quarter with the other two. We are receiving payments on a cash basis for a couple of those, and I believe it was about 200 grand was the impact for banana crawl in the current quarter, right? It's tough to predict those that are not a crawl, whether we're going to continue to get cash payments or not, but in the current quarter, we're looking at about a couple of hundred thousand shortfall net for banana crawl.
Christopher Nolan: Great. Switching over the financing side, you know, another competitor out of Silo Dunn, I think last week or this week, with some legacy stuff, but that market's there. Can you talk about what you would like to see to grow? Do you have a financing facility with the parent you could use to ramp, you know, to pool assets ahead of a deal? You know, would you look to get one possibly at the mortgage read level, a bank line to allow you to use, you know, to pool some loans, new investments, or, you know, how do you think the market, you know, how do you look at potentially doing another deal to grow?
Christopher Nolan: Even, you know, I realized the Silo one is still attractive, but it is going to continue to deliver. So just curious to get your thoughts on, you know, how you may manage the balance sheet in order to price a new deal sometime over the next six or 12 months. Thank you, too. Let me just say one thing. So since we just on the ramp and then exactly give you some when, you know, Hunt took it over and then since Orick acquired, Hunt and we became women, we've always continued to originate bridge assets on our corporate balance sheet outside of LST and will continue to do so.
Christopher Nolan: LST is a vehicle that has the first look and where we always look into place assets, but obviously it has, you know, full capacity. We continue to originate and for all of our scuritization, these two, plus the others we've done historically, the at least some, if not the majority of the assets included in those scuritizations were assets that were pooled on the corporate balance sheet and when the the read LST out of high capacity would be transferred as part of that scuritization to the read.
Christopher Nolan: So from that standpoint, we'll continue to operate that way. We operate that way today. And nothing about that will change. Oh, that's that kind of the from Capital Market standpoint, we're continuing to explore, really starting to explore options as FL1 tips below 80% advance rate options include an entirely new sterilization or a combination of warehouse financing with a smaller securization or warehouse financing remains to be decided based on prevailing market conditions.
Christopher Nolan: These are our active conversations, at least internally, and yeah, I'm getting to explore. Okay, and then I guess to follow up with that, I mean around timing sounds like it depends a lot on, on repayments. So can you give us an outlook over the back half of the year of what your repayment expectations are? I've been running about 90,000,000 quarters. Is that level likely to continue or more or less than that over the back half of the year?
Christopher Nolan: I think that's a good estimation at the moment. Just over the near term, in the next month or two, it looks like another 70 to 80. It's right in that range. Great. It's possible that it accelerates. Yeah, it's possible that it accelerates as maturity are coming, but tough to say. Yep, great. Appreciate comments this afternoon. Thank you.
James Flynn: Your next question comes from the line of Christopher Nolan of Layton Brook Faltman. Please go ahead. Hi, thanks for taking the question. The loan to value ratio is on your 10Q. Are those at the time of origination of the loan? Yes. Okay, and then if I'm looking at the table correctly, it looks like a lot of the loans were originated in 2021 and then to 2022. So it looks like a fair number of your loans or predate the Fed tightening cycle.
James Flynn: Is that a correct view of that? Yes. And so on that basis is it fair to say that the loan to value ratio is now significantly higher than what's shown in the queue? It depends. Keep in mind these are all transitional properties with business plans. And so when you do a bridge loan, you have the as is valuation. And you also receive a stabilized valuation from the appraiser assuming that the business plan has been executed.
James Flynn: And so as an example, today as the valuation was 75 and the stabilized valuation was 65. You assume that if the borrower asked you their business plan and market conditions did not change the value. He would do the asset then be 65 LTV to your point overlaying market movements on there. The LTV could be higher. So it's a kind of convoluted way of saying it depends on how all the borrowers executed their business plan to market movements and some market movements.
James Flynn: Okay, I guess just a logical follow up to that is just sort of dovetails into your earlier comments that sounds like a lot of these borrowers are upside down on their loans potentially. I would say that equity has been impacted. So yes, maybe they're expected LTVs when they answer the deals are higher than when they thought there would be. But their equity, I don't know if I'd say upside down, but their equity has been impacted.
James Flynn: There's no question about that and that's probably true on most assets. But that doesn't necessarily translate to the loan being upside down. I think it is fair to say that perhaps the value today, the loan to value today is higher than where it was projected to be. It may not be that much higher depending on which loan and the performance than where it was entering. The reality is those owners invested capital into the deals and haven't gotten the full recognition of value that they anticipated at least that yet, which is frankly why I think we've seen so many multi family deals being held.
James Flynn: Because of the expectation that if you're able to hold on to assets, you will realize that value over the next couple of years, just not necessarily the full value today. I don't think that trend is going to dramatically change, but I do think there is with this reduction in race and you know, you may see more transactions, more people put a curve financing on things like that, but that's where we are.
James Briggs: Okay, Jim Briggs, are there any now recurring items in earnings? Not for this quarter there was a big impact from the non recurring from from last quarter. So if you were looking sequentially as I spoke to interesting come net interesting come has come down pretty significantly from last quarter, but we had a, you know, we had a bunch of one time last quarter for catch up on a couple of resolutions that we spoke about last quarter.
James Briggs: So outside of that. No, I do speak to the operating expenses came down. If you recall, you know, the incentive fee that we accrued last quarter was about a million three. It was around 700,000 for for this quarter, so that came down. I'd expect that 700,000 as it's trailing 12 month calc. That takes into account payments over those 12 months that that'll that'll come down so you can maybe look at that as a bit of a one time or on the expense side that will come down for the next quarter or two before it.
Unknown Executive: Okay, for me, thank you. Once again, ladies and gentlemen, should you have a question? Please press the star button, followed by the number one on your touch time phone. You will hear a prompt that your hand has been raised.
Unknown Executive: There are no further questions at this time. I'd now like to turn the call back over to our speakers for final closing remarks. Please go ahead. I just want to thank everyone for joining today. We'll look forward to you speeding again next quarter. Thanks all.
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