Q3 2024 Lument Finance Trust Inc Earnings Call
Good morning and thank you for joining the Lumen Finance Trust 3rd Quarter 2024 Earnings Call. Today's call is being recorded and that 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.
Speaker Change: Good morning, everyone. Thank you for joining our call to discuss Lumit Finance Trust's third quarter 2024 financial results.
Speaker Change: With me on the call today are Jim Flynn, our CEO, Jim Briggs, our CFO, Jim Henson, our President, and Zach Halpern, our Managing Director of Portfolio Management.
Speaker Change: On Tuesday, November 12th, we filed their 10-Q with the SEC and issued a press release to provide details on our third quarter results. We also provided a supplemental earnings presentation, which can be found on our website.
Speaker Change: Before handing the call over to Jim Flynn, I'd like to remind everyone that certain statements made within the course of this call.
Speaker Change: 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: Such forward-looking statements are prone to various risks and uncertainties that could cause actual results to differ materially from those contained in forward-looking statements.
Speaker Change: These risks and uncertainties are discussed in the company's reports filed with the SEC, in particular the risk factors section of our Form 10-K. It is not possible to predict or identify all such risks, and listeners are cautioned not to place undue reliance on those forward-looking statements.
Speaker Change: The company undertakes no obligation to update any of the forward-looking statements. Further, certain non-GATT financial measures will be discussed on this conference call.
Speaker Change: Our presentation of this information is not intended to be considered in isolation, nor as a substitute for the financial information presented in accordance with GAAP. If 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: For the third quarter of 2024, we reported net income of $0.10 and distributed earnings of $0.10 per share of Common Stuff, respectively. In September, we also declared a dividend of $0.08 per common share with respect to the third quarter, in line with the prior.
Speaker Change: I will now turn the call over to Jim Flynn. Please go ahead.
Thank you.
Jim Flynn: Thank you, Andrew. Good morning, everyone. Welcome to the Lumen Finance Trust earnings call for the third quarter of 2024. We appreciate all of you joining us today.
We'll start.
On the U.S. economic outlook, we remain cautiously optimistic.
Jim Flynn: continued signs of cooling inflation, relatively low unemployment figures, all point toward a likelihood of a soft landing.
Jim Flynn: Long-term multifamily market fundamentals remain strong and we were starting to see stability in asset cap rates which translated into modest increase in property acquisition activity as investors came off the sidelines.
Jim Flynn: As we transition to the new government, we will continue to monitor each of these metrics, but continue to have confidence in the future of the multifamily market.
Jim Flynn: We expect to continue to deliver a stable, sustainable dividend to our investors by continuing to focus on multifamily credit.
We continue to see a steady ramp up.
Jim Flynn: of the Manager's Origination Pipeline, and a trend that we expect to continue into the coming year.
Jim Flynn: The ability of our manager and its affiliates to actively pursue and close unattractive lending opportunities
Jim Flynn: Whether or not LFT currently has investment capacity is a significant competitive advantage for the company.
Jim Flynn: During the quarter, LST experienced only $51 million of payoffs, and we were able to quickly and effectively redeploy this capital into two multi-family loan assets acquired from an affiliate of the manager.
Jim Flynn: We rely on the deep experience and expertise of our manager's dedicated asset management team to continue to achieve positive outcomes for the company and to maximize shareholder value.
Jim Flynn: During Q3, our portfolio continues to perform well on a relative basis.
Jim Flynn: The weighted average risk rating of our book held steady versus prior quarter at 3.6. We had no new loans added to the five risk rating category during the period. We also determined no additions needed to our specific loss reserves. Levels were appropriate as of quarter end.
Jim Flynn: We are also pleased to share that late last week we achieved a positive resolution on one of our four five-rated assets that existed as of the end of the quarter on 930. We received full payment of all outstanding loan principles plus accrued interest from the borrower.
Jim Flynn: As mentioned on our last call, we are actively evaluating alternatives to recap our 2021 CLL securitization transaction, which had a reinvestment period that ended in December 2023.
Jim Flynn: As of quarter end, the CLO had a weighted average cost of funds of SOFR plus 164 with an effective advance rate of approximately 79 percent.
Jim Flynn: We have observed relatively favorable new pricing on new theory CLO issuances over the last couple of months, which is an encouraging sign that investor demand may be returning to more normal levels.
Jim Flynn: Securitization via CLO remains one of the potential paths in financing the portfolio, but we will carefully consider the alternatives to ensure our ultimate choice best aligns with our overall financing strategy and creates long-term value for our shareholders.
Speaker Change: With that, I'd like to turn the call over to Jim Briggs, who will provide us details on our financial results.
Riggs.
Speaker Change: Thanks, Jim. Good morning, everyone. Yesterday evening, we filed a 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 investing 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.
Speaker Change: For the third quarter of 2024 we reported net income to common stockholders of approximately 5.1 million or 10 cents per share. We also reported distributable earnings of approximately 5.5 million or 10 cents per share.
Speaker Change: A few items I'd like to highlight regarding the activities during the period.
Our Q3 net interest income was $9.5 million, largely flat.
to Q2 2024.
Speaker Change: While net interest income was generally in line with the prior quarter, the Weighted Average Coupon and Declining Outstanding Portfolio, UPB, drove slightly lower interest income recognition versus the prior quarter, which was substantially offset by approximately $500,000 of additional accelerated purchase discounts.
in connection with loan payoffs.
Speaker Change: Our total operating expenses were $2.9 million in Q3 versus $3.5 million in Q2.
Speaker Change: The majority of the decrease in expenses was driven primarily by a lower sequential accrual of incentive fees to a manager 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.
Speaker Change: Other general operating expenses were largely in line quarter over quarter.
Speaker Change: The approximately $350,000 difference between reported net income and distributable earnings to common was attributable primarily to an increase in our allowance for credit losses.
Speaker Change: As of September 30th, we had four loans risk-rated to five.
Speaker Change: One was a $17 million loan collateralized by a multifamily property in Brooklyn, New York, risk rated a five due to maturity default and on non-accrual status with income recognized on a cash basis. During the period, the company recognized approximately $400,000 of interest on this loan. The other loan was a $1,000,000 non-accrual loan with income recognized on a cash basis. During the period, the company recognized approximately $400,000 of interest on this loan.
Speaker Change: Another was a $20 million loan collateralized by two multifamily properties near Augusta, Georgia. Risk rated 5 due to monetary default and a non-accrual status with income recognized on a cash basis.
Speaker Change: During the period, the company recognized approximately 700,000 of interest on this loan. As Jim mentioned, we had a positive resolution to this loan subsequent to quarter end, which Jim Henson will touch on in his remarks.
Speaker Change: The third was a $15 million loan collateralized by two multifamily properties in Philadelphia, Pennsylvania. Risk rated five due to monetary default and a non-accrual status with cash received from the borrower recognized on a cost recovery basis.
Speaker Change: During the period, the company recognized approximately $300,000 of cash received from the borrower as a reduction in our carrying basis of this loan.
Speaker Change: The fourth five risk graded asset was a $32 million loan collateralized by a multifamily property in Dallas, Texas. That was, and is in technical default.
Speaker Change: We evaluated these four or five graded loans individually to determine whether asset-specific reserves for credit losses were necessary.
Speaker Change: And after analysis of the underlying collateral, we maintained but did not add to the approximately 900,000 in specific reserve, which we recorded during the second quarter of this year.
Speaker Change: The general seasonal reserve increased by approximately 300,000 during the period driven primarily by changes in the macroeconomic forecast.
Speaker Change: The company's total equity at the end of the quarter was approximately $243 million.
Speaker Change: Total book value of common stock was approximately 183 million or three dollars and fifty cents per share, increasing slightly from three dollars and forty eight cents per share as of June 30th.
Speaker Change: We ended the third quarter with an unrestricted cash balance of $46 million, and our investment capacity through two secured financings was fully deployed.
Speaker Change: I will now turn the call over to Jim Henson to provide details on the company's investment activity and portfolio performance during the quarter.
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Jim Flynn: Thank you, Jim. During the third quarter, LFT experienced $51 million in loan payoffs, and we acquired two new loans with an initial principal balance of $45 million and a weighted average coupon of SOFR plus 323 basis points.
Jim Flynn: As of September 30th, our portfolio consisted of 75 floating rate loans with an aggregate unpaid principal balance of approximately $1.2 billion.
Jim Flynn: 100% of the portfolio was indexed to one month SOFR, and 93% of the portfolio was collateralized by multifamily properties.
Jim Flynn: At the end of the third quarter, our portfolio had a weighted floating note rate of SOFR plus 353 basis points.
and an unamortized aggregate purchase discount of $4.3 million.
Jim Flynn: While we endeavor to actively manage the maturity risk in our portfolio, it is worth noting that we have the foresight at the time of loan origination to include appropriate extension features in our transactions.
Jim Flynn: As a result, the weighted average remaining term of our book continues to be approximately 28 months, if all available extensions are exercised by our loan borrowers.
Jim Flynn: As mentioned earlier, our secured financing remains attractive. At the end of the third quarter, the FL1 CRE-CLO transaction, completed in 2021, provided effective leverage of 79% at a weighted average cost of funds of SOFOR plus 164 basis points.
Jim Flynn: The LMF financing, completed in 2023, provided the portfolio with effective leverage of 82 percent at a weighted average cost of funds of SOFR plus 314 basis points.
Jim Flynn: On a combined basis at quarter end, the two securitizations provided our portfolio with effective leverage of 80% and a weighted average cost of funds of SOFR plus 214 basis points.
Jim Flynn: As of September 30th, approximately 60% of our loans in the portfolio were risk rated a 3 or better, compared to 63% at the end of the prior quarter.
Our weighted average risk rating was unchanged sequentially at 3.6.
Jim Flynn: or approximately 7% of the carrying value of our total portfolio.
Jim Flynn: As alluded to previously, subsequent to year-end, we had a positive resolution of the $20.3 million five-rated loan collateralized by two multi-family properties near Augusta, Georgia. Last Friday, the loan, which had been in monetary default, was paid off.
Jim Flynn: In connection with repayment, the company recorded interest income of approximately half a million dollars in the quarter ending, I'm sorry, will record interest income of approximately half a million dollars in the quarter ending December 31, 2024, representing interest and other fees collected from the borrower at payoff.
Jim Flynn: Since this loan was held by the company on an unlevered basis outside of our financing structures.
Jim Flynn: This repayment will increase cash and cash equivalents by approximately $20.8 million.
Jim Flynn: Our manager's investment team continues its proactive management of the company's investment portfolio, working closely with borrowers to manage all of our positions and monitor financial performance of our collateral assets and our borrowers' progress in executing their business plans.
Speaker Change: Thank you, Jim. Appreciate everyone's interest and would like to open the call up to any questions you might have.
Speaker Change: Thank you. Ladies and gentlemen, we will now begin the question and answer session.
Speaker Change: Should you have a question, please press star followed by number one on your touchstone phone.
Speaker Change: You will hear a prompt that your hand has been raised. Should you wish to decline from the polling process, please press star followed by number 2. If you are using a speakerphone, please lift the handset before pressing any keys.
Speaker Change: Once again, to ask a question, please press star followed by number one on your touchtone phone.
Speaker Change: To withdraw your question, please press star followed by number two. One moment, please, for your first question.
Speaker Change: Your first question comes from the line of Jason Weaver from Jones Trading. Your line is now open. Please ask your question.
Jason Weaver: First of all, I wondered if you could comment on your visibility into the pipeline after quarter end today. And as a follow up, we just noticed some whispers among
Jason Weaver: possible prospective borrowers hearing some comments that sponsors might be possibly thinking about delaying projects and this is only in the last week alone so it may be too soon to tell.
Speaker Change: Yeah, I'll give a general, my thoughts there and maybe Zach can give some specifics, but certainly the election has provided some
Speaker Change: Uncertainty, right? The market has reacted in some conflicting patterns, right? In terms of where the overall stock market's gone, where the tenure has gone. We saw the rate cut, which was expected.
Speaker Change: but I think expectations have moderated in some ways until, from my perspective, until we see
You know, the final
Speaker Change: balance in the house, the committee chairs, etc. And all of those things I think have led to this
Speaker Change: you know, hey, what's going to happen with this new government? Are we going to spend more? Are we going to? Is there going to be an expectation that we're going to have a
Speaker Change: a more inflationary market than we thought, right? I think that's what's happening in the market.
Um.
But I also think it's probably...
Speaker Change: Again, I think it's a little overstated until we see what's happening. We've heard a lot of talk going the other way. That expectations are that people are starting, or government officials are starting to recognize the debt problem and that perhaps there'll be...
Speaker Change: You know some moderation as we move forward. We saw the announcement whether it's bells and whistles on
Speaker Change: the new Department of Efficiency which admittedly is a bit of an ironic creation of a department in government that's entirely dedicated to evaluating efficiency of other departments.
Speaker Change: So, you know, the short answer, I think, as you said, in the past week or two, certainly owners and borrowers have said, look,
Speaker Change: I want to see what happens here. I'm not going to transact into this volatile market that's going on over the couple of weeks after the election. But I also have seen and heard that these sponsors may be...
Speaker Change: weighing out some of the uncertainty, there's still expectations that there's business that they need to get done over the next year.
Speaker Change: Whether that's refinancing, whether that's exiting an asset, both of those, you know, on the exit, particularly look for potential investment opportunities.
I don't, I don't see the slowdown.
Speaker Change: looking like it did, you know, in the early part of 2023, where you had this major slowdown and concern around the market. I do see, I have seen and heard anecdotally, as you said, that guys are taking a pause to consider
Speaker Change: You know, hey, do I need to transact in December or can I wait until, you know, the first quarter?
That's real.
Speaker Change: Now in this market, there is still an expectation that the short-term rate is going to continue to come down, perhaps maybe not as low as
Speaker Change: and some people had hoped for, but there's still expectations for it to come down and that does help the bridge market.
but certainly the long-term rates are driving that.
I can't tell you exactly, you can just give it.
Speaker Change: A quick note, I mean, from from a broader standpoint on on our.
Speaker Change: pipeline broadly as a manager for, and this is true of our fixed-rate products that we provide that on and bridge, that our pipelines haven't looked like this, at least in most of the products, I won't say every single one, since 2021.
And so...
Speaker Change: Are we in a transition period? Yes. Is it dire? I don't think so, because I do think the economic outlook broadly for the country is still pretty good. And so that will translate into higher rents.
Speaker Change: higher rents mean that you can cover some of the higher costs. And so as we move forward, again, I think we're in a little period of let's, let's see where this, see where we shake out.
Speaker Change: and then people can move forward. No one likes to transact into uncertainty.
Zach Halpern: But Zach on the pipeline if you want to give a couple.
Thank you.
Speaker Change: I would echo everything that that Jim said. I think that
and really what we need to delineate is
Three rate cuts post the first rate cuts in August.
and I'm Unknown Speaker 0.0.1.
Speaker Change: and activities picked up tremendously. We've got a couple hundred million expected to close in December and additional activity.
along those same
lines into Q1. So positive on that front.
Speaker Change: All right, thank you for that color. And then one sort of clarification during your prepared remarks...
Speaker Change: I get the blended sort of CLO financing cost of funds is S plus 214 but I heard another comment regarding the current market plus 174. Was that just more characterizing what you see is sort of where you put a similarly rated transaction might clear today?
Yeah, I'm looking at the...
Speaker Change: So the comment I made in the first part was today the CLO1, the cost of funds of that CLO, the existing CLO.
So, relative to the market, I think that cost is...
Speaker Change: Yeah, it's still attractive, but obviously it's not permanent. As we de-lever, that will continue to.
Thank you. Bye.
to go up, but.
Speaker Change: We do think that there's opportunity in the market to probably get a slightly higher leverage, but the cost of funds would be above that at this point.
Speaker Change: Your next question comes from the line of Stephen Loss of Raymond James. Your line is now open. Please ask your question.
Stephen Loss: Hi, good morning. Congrats on the five-rated resolution in November. I know that was...
Stephen Loss: you know, looking at, you know, two, even three-year replenishment periods in some of the deals that have been done recently. So,
Speaker Change: You know, how do you think about that as far as timing of collapsing that deal and looking at putting a new one in place? Is that a first half? 25 of them and I guess it may come down to you know, a simpler question or what are your repayment Expectations as you look out the next one or two quarters
Sure. So...
The second one, look, it's been choppy, right? Repayment activities.
But to be honest, you know, some of that is.
Speaker Change: It's always guesswork a little bit, as we say, but because of that choppiness, it could be slightly higher, it could be slightly lower. I don't expect that in 2025 we're going to have this.
Speaker Change: you know, run to the exit for many of these deals. And that's true whether things improve dramatically from a rate and value standpoint or go the other way. I think in both cases, you still are going to have owners that are going to hold on to assets a bit longer.
on the CLO front.
Speaker Change: So, look, we are, as we said, we are actively in discussions with...
Speaker Change: capital markets partners for public transactions but also you know looking at other ways to recap.
that part of our portfolio.
considerations that we're looking at, you know, one is
Speaker Change: is, you know, the weighted average life for the portfolio, how that impacts.
for a transaction to come to market.
Speaker Change: And I think in general, in our, in our history, going back to
2016. Thank you. Thank you. Thank you. Thank you.
Speaker Change: All of our deals have been well-received. I would expect this to be no different.
Speaker Change: but we are focused on what is the most efficient transaction, what is...
Speaker Change: You know, we don't want to come to market with a deal that is going to be penalized because of certain factors or characteristics, whether that's the life of the asset or otherwise. And so we're working with the partners to say, hey, does this make sense?
Speaker Change: Is it a first half event? It definitely could be. Is that guaranteed? No. But we're certainly currently actively evaluating it.
Speaker Change: Appreciate the color there. And then, you know, I wanted to touch off the four rated loans. It's about a third of the portfolio.
Speaker Change: You know, and you know, so 2025 loans, I'm guessing, but can you maybe talk a little bit about, you know, what, what part of that bucket?
Speaker Change: are likely to pay off as a four rated loan or kind of in their life there versus, you know, which loans kind of are going to go one way or the other. And there's some event or catalyst that pushes them back to a three or to a five.
Speaker Change: I'm kind of curious to get a little color on, you know, how you think about the forwarded loans and what the risk is of how many could potentially become fives.
Speaker Change: Well, and Jim Briggs, you can talk a little bit about the process. But as we go through our risk rating every quarter, you know, we model every loan out and we
Speaker Change: We have tried over the years to be very consistent with that model, meaning we're only adjusting it to the extent to the extent that we're seeing
Speaker Change: really egregious errors that were unforeseen or things that we just think are off. But we've tried to maintain very consistent modeling so that as we're reporting, we have very consistent reporting going back years.
Speaker Change: and so we take those outputs and then we evaluate each loan individually.
Speaker Change: Right, and we have a discussion about whether there should be some adjustment made by the management to the modeled outcomes.
Speaker Change: And today, you know, we have a specific reserve on one asset.
Speaker Change: where we've set, it's small, Jim, I don't know if you have that offhand.
Speaker Change: but we go through and look at the value, the recovery expectation that we see based on the value of the asset.
Speaker Change: And that's how we determine if we believe there should be a specific reserve.
Speaker Change: So, the four mated risk assets are mostly assets that have been certainly impacted by the increase in rates, decline in value, and slow business plans.
Speaker Change: and so the risk is elevated from where it was at origination, but based on our view of the current market, the current value of, you know, the asset and it's in its market, that we expect the full recovery.
Speaker Change: The fact that it's rated a 4 means that there's more risk to that than when it was originated at a 2, or whatever it was at origination.
Speaker Change: but based on what we've seen and based on the resolutions we've been able to achieve for the rest of the portfolio, you know, we still remain, you know, confident.
Speaker Change: cautiously optimistic on our ability to get repaid on all of those assets.
Speaker Change: but we stand behind the risk rating of saying, hey, it would be improper and inaccurate to say that they have less risk today than they did at origination.
Speaker Change: Jim, I don't know if you want to add anything to the process on the risk rating side, but.
Jim Flynn: No, I think you covered it from a process perspective and certainly what we're doing on the fives from a specific reserve.
at some point, but...
Speaker Change: Yeah, but we feel good about the process that we bring, you know, that we bring each quarter, including the comments that Jim made around, you know,
Speaker Change: be money good or expecting full repayment on whatever for us today.
Great. Appreciate the comments this morning.
Speaker Change: Thank you. Your next question comes from the line of Steve Delaney from Citizens JMPO Capitals. Your line is now open. Please ask your question.
Steve DeLaney: Thank you, operator. Good morning, Jim. Jim Flynn, I'd like to address this first one to you. I'm just curious. I'd like you to talk a little bit. We understand the runoff in 2021. You can reinvest in 2023.
You made a comment in your entry remarks about Oryx.
being active in the bridge market.
Based on what Oryx is doing, how
would you compare the opportunity set just in terms of
Steve DeLaney: risk return and multifamily bridge lending that Oryx is seeing today versus, you know, what we saw in 2021-2022. Maybe just start with sort of...
Steve DeLaney: The market out there for multifamily bridge loans, and then I want to talk a little bit about how that can
Impact LFT as we move forward. Thank you.
Speaker Change: Sure, well look, I think clearly the risk return, well the risk side, I mean these deals today, in my opinion, as a whole are better.
Speaker Change: Right, you've got a tightening lending standard that has existed in the in the overall market, you have more
Speaker Change: You know more muted kind of growth assumptions You're not coming. You're not in the midst of this extraordinary growth in rent And and obviously super low cap rate environment
And then you also have
Speaker Change: which are very attractive from my perspective as you know we've talked about and everyone has seen this
Speaker Change: typically written as a concern about the deliveries in largely the markets that have performed and grown the most over the past five years, the Sun Belt markets for the most part.
and a couple of the mountain cities.
Looking, in many cases, for lease-up bridge loans.
Speaker Change: at relatively low LTVs, right? Taking out construction financing, just giving them more time to lease up.
Speaker Change: You know, our view of the overall market over the next two to five year period is that all of those markets are going to perform well. So taking risk on a brand new asset in a great long term market at a relatively low leverage point is an attractive asset.
Speaker Change: All right, so both traditional bridge on the value add and the lease up both have, in my opinion, a better.
Overall credit metric.
in large part based on the leverage.
Speaker Change: in smaller part based on the growth. Now, the return profile, you know, spreads have, you know, they've kind of, I think, kind of bottomed out here, but, you know, we're in the twos and threes and maybe in the fours for some assets for the most part, 200, 300, 400.
Speaker Change: So that's probably in line, maybe a touch lower than it was at that period, but again, the risk is better. One of the drivers for this market, which we've seen improvement in, and hopefully continue to see improvement, has been on the financing side.
So
Speaker Change: Spreads coming in on the financing side is a real driver of...
Speaker Change: the overall market, right? It provides for a more attractive return to investors for vehicles like LFTs. It's just a cost of market. I'm using that financing, so.
Speaker Change: That has improved, but it's not better than it was then, right? It's better than it's been.
But it's not...
It's not back to...
Speaker Change: the levels we'd like to see, but it's getting there. So I think that's the one thing that's going to drive
Speaker Change: It could drive the return side of things, but opportunities on the loan side, I think, are attractive. And because of that credit, I think that's part of the reason you've seen some of the financing costs come in, because those providing that, whether it's warehouse...
Speaker Change: or those five bonds also see the same thing we're seeing, which is a low-risk profile of the pool.
That's really great caller leading.
Up to my follow-up, you know, we're
Speaker Change: Obviously, it's not going to move higher and probably could contract a bit until the point
Speaker Change: You decide to pull the truck trigger on a, you know, an early 2025 CLO and can kind of re-lever a bit. As you, as you guys.
Speaker Change: and Andrew Tsang, James Briggs, and Andrew Tsang, James Briggs, and Andrew Tsang, James
Speaker Change: With your capital base today and a new financing, where could your portfolio go from that $1.2 billion figure? Is there upside for the portfolio with your existing capital base just based on your improved financing?
I mean, the short answer is yes, I think that.
Speaker Change: Where current financing in the market is available, we could probably achieve some slightly higher leverage than we have today, at that fixed cost turned out.
Speaker Change: or decide to perhaps enter a refinancing transaction, the closer we are to.
Speaker Change: This period of disruption we've been going through over the last, you know, 18 to 24 months. And so we've kept pretty
Speaker Change: the portfolio to trend back toward $1.5 billion as opposed to going the other way. I'm not sure we get all the way there in one transaction, but I do expect there to be potential to add to the portfolio.
Speaker Change: That's great, Collard, very helpful, and thank you all for your time this morning.
Thank you.
Speaker Change: Thank you. Your next question comes from the line of Christian Love from Piper Sandhu. Your line is now open. Please ask your question.
Speaker Change: Hi, good morning. This is Brad Capuzion for Crispin. Just wanted to ask on, you know, just from a broader perspective, can you just discuss your credit outlook? And do you believe we've reached peak stress in the multifamily credit in this cycle? And what's your intermediate term outlook here, given the current environment?
I've reached peak stress.
I think the short answer is that
Speaker Change: We think that we have, and there may be some blips here and there over the coming months, etc., but...
Speaker Change: Overall, the stress that exists in the market, I think, for multifamily is already outstanding, meaning, you know, we know that loans originated...
Speaker Change: So things that have been financed over the last, say, 12 months, maybe even a little bit longer, are not...
Speaker Change: you know, experiencing as a whole the stress that is from the prior portfolio. And most of those assets were short-term finesse assets. And so,
But I do think that we still have...
You know.
Speaker Change: probably a 24-month period to kind of clear through all of those assets as an industry, as a market.
Speaker Change: and how the economy performs will directly impact that. So even with rates saying high, if we have a very strong economy, strong stock market, strong job market with moderate inflation.
Like where we are now.
Speaker Change: Well, that's going to trend toward, you know, continued supply-demand pressure, increasing in rents, and despite higher rates, probably increasing NOI at most assets or many assets. So I think the answer is yes.
Speaker Change: We think we've probably hit the peak, but there's some time to work through those known problems in the industry.
Speaker Change: Thank you, I appreciate it. It's still a fairly bullish outlook on the overall, you know.
Yes.
Next three to five for multifamily resale.
You know, very good about the overall market fundamentals.
Speaker Change: Thanks, I appreciate that commentary. And then just the last question for me, you know, during the quarter, you added new investments, you know, after not adding the past two quarters, but still peers at the lower end of, you know, what we've seen in past years, what's kind of keeping you from being more active or adding more investments? Is it a concerted effort as you focus on asset management on the loans or lack of opportunities out there? And would you expect more opportunities in the coming months? Thank you.
So look, our reinvestment activity is entirely correlated to payoffs.
Speaker Change: We're fully deployed, and the declining portfolio balance is a result of the DLL1 being through its reinvestment period, and so that's deleveraging. So the lack of reinvestment
in the current quarter is related solely to
Speaker Change: the fewer payoffs or in the CLO with reinvestment or securitization. And if there are payoffs in CLO one, that just goes to the lever. So there's no additional capital to actually invest. You know, and going back several quarters.
Speaker Change: We've discussed keeping relatively high liquidity outstanding. We've used that liquidity to, you know, buy a challenged asset like Augusta out of the CLO and then have that pay off. So now we're going to have that cash.
Speaker Change: So I think as Steve was just asking, as we look to potentially refinance our existing
Speaker Change: finance things and securitizations, you know, we could do so in a way that provides some more capacity than we've had, and then we would be able to fill that with existing loans that we've...
Speaker Change: We currently hold on the manager's balance sheet. So, you know, the reinvestment will be directly driven by what is the capacity within the vehicle. The opportunities are there.
Thank you, I appreciate that.
[inaudible]
Once again, to ask a question, it's star 1.
Speaker Change: We do not have further questions at this time. Presenters, please continue.
Speaker Change: Okay well look we appreciate everyone's interest here and look forward to speaking during the quarter and on our next call and we'll see you then. Thank you for joining.
David