Lument Finance Trust, Inc.

Good morning, and thank you for joining the Lumen Finance Trust first quarter 2021 earnings call. Today's call is being recorded and will be made available via webcast on the company's website. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then one on your touchdown phone. To withdraw your question, please press star then two. I would now like to turn the call over to Charles Duddy with Investor Relations at Lumen Investment Management. Please go ahead.

Thank you, and good morning, everyone. Thank you for joining our call to discuss Lumen Finance Trust's first quarter 2021 financial results. With me on the call today are James Flynn, CEO, Michael Larson, President, James Briggs, CFO, and Priscilla Torres, Head of Real Estate Investment Strategies. On Monday, we filed our 10Q with the SEC and issued a press release which provided details on our first quarter results. We also provided a supplemental earnings presentation, which can be found on our website. Before handing the call over to Jim, I would like to remind everyone that certain statements made during the course of this call are not based on historical information and may constitute forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. When used in this conference, words such as outlook, Evaluate, indicate, believes, will, anticipates, expects, intends, and other similar expressions are intended to identify forward-looking statements. Such forward-looking statements are subject to various risks and uncertainties that could cause actual results to differ materially from those contained in the forward-looking statement. These risks and uncertainties are discussed in the company's reports filed with the SEC, including its reports on Form 8K, 10Q, and 10K. and in particular, the risk factor section of our Form 10-K. Additionally, many of these risks and uncertainties are currently amplified by and will continue to be amplified by or may in the future be amplified by the COVID-19 pandemic. It is not possible to predict or identify all such risks. Listeners are cautioned not to place under reliance on these forward-looking statements, which speak only as of the date hereof. The company undertakes no obligation to update any of these forward-looking statements. Furthermore, certain non-GAAP financial measures will be discussed on this conference call. A presentation of this information is not intended to be considered in isolation, nor as a substitute to 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 at sec.gov. I will now turn the call over to James Flynn. Please go ahead.

Thank you, Charlie. Good morning, everyone, and welcome to the Lumen Finance Trust earnings call for the first quarter of 2021. We appreciate you joining today. To begin, I'd like to provide an update on the recent positive developments for the company. As previously announced via press release, I'm pleased to note that on May 5th, we successfully closed an underwritten public offering of 2.4 million shares of 7 and 7.8 Series A cumulative redeemable preferred stock at the public offering price of $25 per share. We received approximately 58 million of net proceeds from the offering after deducting the underwriting discount, but before estimated offering expenses. The Series A preferred stock has been authorized for listing on the New York Stock Exchange under the symbol LFTPRA. And trading of the Series A preferred stock commenced yesterday, May 10th. Simultaneous with the preferred offering, we amended our term loan, which will provide an incremental $7.5 million that we expect to be funded this quarter. Together, these transactions will produce $65 million of net capital that we will look to deploy over the coming months. I believe this transaction was a great execution for LFT and is consistent with our stated goal of growing our capital base to create additional scale, which we believe will benefit all shareholders. The positive investor interest in our preferred offering reflects strongly upon what LFT has been able to accomplish during a challenging year. The offering provided us the opportunity to tell our story to a broad institutional audience, exhibit the breadth and expertise of the entire Lumen platform, and highlight the credit quality and performance of LFT's investment portfolio. In the coming months, we hope to continue discussions with investors and educate market participants about LFT and the opportunity we believe we offer investors. As we have mentioned on previous calls, although LFT is relatively small in our space, our manager and the larger Lumen platform is not. Our manager is one of the nation's largest capital providers in the multifamily and seniors housing space, with over $16 billion in total transaction volume during calendar year 2020. Our manager services a $47 billion portfolio and has over 550 employees and 25 offices nationwide. The scale of this platform benefits the investors of LFT and provides great support in the execution of our investment strategy. Our strategy is to continue to invest primarily in floating rate bridge loans with a focus on middle market multifamily opportunities. Although we have seen increased competition for these investments, The strength of the Lumen platform and our focus in multifamily in particular continues to provide us with compelling investment opportunities. In fact, we have seen our investment pipeline increase dramatically over the last several months. We intend to use the net proceeds of our recent preferred offering and increased term loan to make additional investments in these types of opportunities. As we continue to grow, we will also identify other investment opportunities and commercial real estate debt to invest a portion of our capital, such as preferred equity, mezzanine loans, and other high-yield theory debt instruments. Before turning the call over to Jim and Mike, I would also like to briefly touch on our portfolio and our financing sources. Our focus in multifamily bridge lending and the strength of our credit and asset management platform continues to prove itself in the performance of our portfolio. As of March 31st, Our portfolio was 100% performing with no loan impairments, no loan defaults, and no loans subject to forbearance. Furthermore, we have not needed to grant a single forbearance, nor have we experienced a single loan default during the COVID era. I believe this is a testament to both our rigorous credit standards as well as our proactive asset management efforts. With regards to our financing sources, we do not currently utilize repurchase or warehouse facilities, and therefore, we are not subject to margin calls on any of our assets from repo warehouse lenders. Our primary source of financing are two match-term non-mark-to-market CRE CLOs as well as a corporate term loan. I'd like to note that our utilization of non-mark-to-market financing proved valuable during the last year's disruption and we continue to see this as an attractive way to finance our investment portfolio. When this management team took over as manager of LFT in January of 2018, we were clear on our goal of deploying our capital into commercial real estate debt investments with a focus in multifamily in order to provide stable book value and earnings that support a market return to our shareholders. We also indicated our desire then to grow LFT to a larger scale, which we felt would prove valuable to our shareholders. With these recent preferred offering and term loan increase, we're continuing to make progress toward that goal, and I'm excited about our continued growth as we focus on executing our business plan. With that, I'd like to turn the call over to Jim Briggs, who will provide details on our financial results.

Jim? Thank you, Jim, and good morning, everyone. Robert Harrison III, A Monday evening we filed our quarterly report on form 10 Q and provided a supplemental investor presentation on our website, which we will be referencing during our remarks, the supplemental investor presentation has been uploaded to the webcast. Robert Harrison III, As well for your reference on pages five, six and seven of the presentation, you will find key updates and an earnings summary for the quarter. For the first quarter of 2021, we reported net income to common stockholders of 2.8 million, or 11 cents per share, which represents a slight increase relative to Q4 2020's net income to common stockholders of 2.5 million, or 10 cents per share. The current quarter was not meaningfully impacted by any non-distributable earnings adjustments. As a result, our distributable earnings attributed to common stockholders for the quarter was 2.8 million, or 11 cents per share, This represents a slight increase relative to Q4 2020's distributable earnings of $2.6 million or $0.10 per share. Relative to the prior quarter, the first quarter of 2021 was positively impacted by higher realized exit fees to the tune of approximately $0.02 per share as a result of elevated level of loan payoffs during the quarter. Such benefit partially offset the decline in earning assets during the quarter, which resulted from net payoffs that Mike will give some more color on shortly. In his opening remarks, Jim mentioned successful closing of our preferred equity offering on May 5th, which resulted in approximately 58 million of net proceeds to the company at a preferred dividend rate of seven and seven-eighths. In accordance with the offering documents for the preferred equity transaction, we anticipate making our first dividend to preferred shareholders. on July 15th in the amount of approximately 38 cents per share. As we work to deploy the proceeds from this offering and the incremental term loan of 7.5 million we expect to fund this quarter, we may see short-term declines in our net income and distributable earnings to common shareholders over the coming months. We expect any such decline to be transitory in nature, and we do not anticipate any negative impact to our medium-term or long-term earnings outlook. However, the risk does exist in the short term for some drag on net income to common stockholders during this initial capital deployment phase. Our book value at March 31st was $114.3 million, or $4.58 per share. This compares favorably to a book value of $113.7 million, or $4.56 per share, as of December 31st. As I've discussed in prior quarters, I'd like to remind everyone that as a smaller reporting company as defined by the SEC, we have not yet adopted ASC 2016-13, commonly referred to as CECL, or Current Expected Credit Losses, which is a comprehensive gap amendment of how to recognize credit losses on financial instruments. As a smaller reporting company, we are scheduled to implement CECL on January 1, 2023. Until then, we can continue to prepare our financial statements on an incurred loss model basis. As of March 31st, we do not consider any of our loans to be impaired under the incurred loss model, and we have not recorded any impairments or allowance for loan losses in the current quarter. While the current performance of our bridge loan portfolio remains healthy, uncertainty about the COVID-19 recovery exists, including its impact on our borrowers, and on the value of properties that collateralize our commercial mortgage loan investments. We will continue to evaluate the loan portfolio for credit losses and will record any impairments or allowance as incurred. As a quick note, with respect to our common dividend, in accordance with normal course timing and process, we have not yet made a dividend declaration for the second quarter of 2021. We expect to make a determination on our dividend in June after discussing with our board in normal course. We'll now turn the call over to Mike Larson, who will provide details on our portfolio composition and investment activity.

Thank you, Jim. Good morning, everyone. I'll first touch briefly on our quarterly investment activity. During the quarter, we acquired three new loans with total incremental fundings of approximately $35 million. All of these fundings were on loans secured by multifamily assets. As Jim mentioned, since January, we have seen a significant increase in our investment pipeline activity, which has been driven by a surge in multifamily value-add acquisitions, newly constructed properties that are in lease-up, and requests for bridges to permanent agency and FHA financing. In general, market confidence in the commencement of an economic recovery from the COVID environment has positively impacted borrower demand for bridge loans during this year. With these improved market dynamics, and the increase in our pipeline, we feel positive about our investment opportunities. In the short term, we anticipate deploying the proceeds from a recent capital raise over the remainder of 2021 and are confident in our ability to keep our capital fully deployed ongoing. We experienced $98 million of loan payoffs during the quarter, and at quarter end, our total loan portfolio had an outstanding principal balance of $484 million. The portfolio consists consisted of 34 loans with an average loan size of $14 million, which provides for significant asset diversity. The portfolio has a weighted average spread to LIBOR of 353 basis points. All of the loans in our portfolio have a LIBOR floor above the current spot LIBOR with a weighted average floor of 154 basis points. Our overall loan portfolio quarter end is 88% multifamily, which is very much in line with prior quarter. Due to our manager's strong focus in multifamily, we continue to anticipate the majority of our loan activity will be related to multifamily assets. At 331, our loan portfolio continued to be financed with two series CLO securitizations with an average cost of financing of LIBOR plus 150 basis points. As we mentioned before, the reinvestment period of our first CLO ended in February of 2020, and our second CLO has a reinvestment period that runs through August of this year. With regard specifically to our first CLO, we experienced approximately $64 million in loan payoffs during the quarter. Since the reinvestment period and that securitization has ended, these payoffs have begun sequentially paying down the CLO bonds. However, even after the impact of that deleveraging, our leverage and cost of funds within the first CLO remain reasonably attractive at 79.8% and LIBOR plus 157 basis points, respectively. As reported on prior calls and in our filings, we are actively pursuing a refinance of our CRE loan portfolio. And subject to market conditions, we expect to refinance our existing CLOs with a new CRE CLO during 2021. We are encouraged by positive developments in the CRE CLO market and across the commercial real estate capital markets so far this year, and we believe conditions are positive for this refinancing. With that, I'll pass the call back to Jim for some closing remarks. Thank you.

Thank you, Mike. As I mentioned, we feel very good about our business plan, and we're excited about the future of LFT. We look forward to updating you all on our progress. We appreciate your time and your interest. And with that, I'd like to open the call to questions.

Thank you. To ask a question, you may press star then one on your touch-tone phone. To withdraw your question, please press star then two. We will now take our first question, which today comes from Steve Delaney at JMP Security. Please go ahead.

Hey, thanks, everyone. Boy, you guys have been busy. Congrats. I'd like to start with the term loan increase. That was actually done in April. I'm sure you were in discussions about the preferred, but in fact, the preferred had not quite closed. So now that you have that additional 50-some million of capital, Is it reasonable to think that there's further upside to the size of the term loan facility as we move forward over the next six to 12 months?

So the term loan facility, as you know, we're subject to certain covenants with respect to debt and normal course corporate governance there. So in our discussions with, with the provider, uh, who's been very supportive of the business plan, uh, they were supportive of our ability to go in and do a preferred offering. Uh, but, but also were, was interested in increasing the size of, of, uh, of their capital, uh, at LFT. Uh, so, so that's, that, that, that started that conversation and they were done. really connected to one another, the increase in the term loan and the preferred offering. I think the answer to your question is, as we've stated in the past, our long-term goal is to continue to grow the overall capital base, and in particular, the overall equity base in the platform. We've done so here with this preferred offering, and we've talked in the past about you know, common stock and other types of offerings that we've looked at. Um, I think that you'll see us continue to focus on, you know, how do we grow the overall base? How do we grow our equity base? Um, at this point, more, more focused than, you know, continuing to look toward the debt market. That doesn't mean we wouldn't consider increases, but, you know, just from a leverage standpoint, I think we feel comfortable with where we are and want to continue to grow. and invite new investors. For the preferred offering, we had a very strong institutional book in interest, and we certainly hope to continue that going forward. Okay.

Thank you, Jim. And I guess for Jim Flynn, Jim, you were pretty clear about we've respected and appreciated the concentration in multifamily. And when we talk about diversification at Lumen Finance Trust, It sounds like rather than property type, you may consider different loan structures to get you to a different return profile. And I'm just curious how, with your multifamily expertise, how the construction loan product, how you see that possibly fitting into the REIT. Thank you.

Sure. As you point out, we're certainly a multifamily, seniors housing-focused platform, and that's not going to change now or in the future. We will obviously diversify it hopefully a bit more in product type, but with a heavy, heavy concentration in multifamily. In terms of construction, so we, the manager, you know, the non-LFT, the manager, we have I've been doing construction loans on our books. You know, the potential for there being, you know, we've typically done kind of non-recourse and multifamily construction loans, things we know very well, you know, higher yielding varieties. So could I see those having potential for a small allocation at the REIT? Yes, that's possible. It's not something that we're saying we're doing it, but that would be an example of You know, something that has, you know, if we use CLO financing, it's fantastic financing. You know it's non-mark-to-market and termed out. Some of these other products would have, you know, structural leverage at the asset level as opposed to corporate leverage, which we think is attractive. Right. Thank you for the comments. Thank you, Steve.

And, ladies and gentlemen, as a reminder, to ask a question, please press star then 1. Our next question today comes from Jason Stewart of Jones Trading. Please go ahead.

Hi, good morning. Thanks. If we could talk for a minute about incremental loans, sort of the economics there, where spreads are, where you're striking LIBOR floors on a new origination. Sure.

Priscilla, you want to field that one for Jason?

Sure. So in terms of the market, I would say that In general, we are able to garner loans that are still accretive to the REIT, would call it up to kind of 350 all-in type levels. You know, the market is pretty dispersed in terms of spread with respect to the type of multifamily. For instance, the Class A lease of assets are heavily bid for. As a result of that, those are much tighter in spread. And we have the middle of the fairway workforce, middle market, multifamily assets that have been the anchor of our portfolio. And I'd say for those given the strength of our infrastructure, originations infrastructure, we are still able to garner, you know, higher or more, you know, some premium relative to, you know, the tighter lease up assets, larger size lease up assets. So we've been able to do so since the year commence and expect to be able to contribute more of that ilk, which is consistent with our historical strategy in the next few months.

Okay, that's helpful. I guess what I think people are trying to get to here is can you originate loans and lever them via the credit facility at an accretive ROE to the REIT. So maybe if you could put that in terms of advance rate at the facility and what that means to the bottom line for the REIT would really be helpful.

Okay, I'll start with the first question and then I'll switch over to Jim or Mike for the second part in terms of bottom line. But in terms of the leverage, obviously what we have right now is the CLO, right? We don't have facilities, as Jim mentioned. So as a result of that, the leverage is what is reflected as the publicly available advance rates from our CLOs, which right now are about 80%. And to the extent we refinance the CLO, obviously the advance rate we will garner then, which hopefully is going to be the same or better, we'll continue to provide accretive returns based on the spreads we're seeing in today's market. In terms of bottom line, Jim or Mike, do you want to speak to that?

Yeah, I mean, go ahead, Mike. Okay. Okay.

I mean, the simple answer is that, yes, we do see opportunities, and I've seen a significant increase in the pipeline, as you mentioned, of opportunities that are accreted to LST based on our current financing with CRA CLOs and where, based on the strength of capital markets today, we see The opportunity is for refinancing of the CLO, which Priscilla mentioned, an 80% advance rate or higher, and financing costs of 150 base points of the LIBOR or range, if you will. So with the existing financing you have in place and where the capital markets are and the spreads we're seeing on new investment opportunities, we do and are seeing quite a robust pipeline of accretive opportunities.

Okay. So I guess we can all appreciate the transitory nature of putting this capital to work, probably funding it at less economic levels than you would want to or certainly could in the CLO market longer term. I think everybody sort of appreciates the longer term financing aspect of it. But when you pull all that together, I mean, I think you noted the transitory nature of the impact on net income. Can you define sort of how long you think that takes to work through and what the impact on the dividends is? could be, or do you think that the conversation with the board is we understand this is short-term and we're going to look through that when we think about the dividend rate?

I was going to say, Jason, that one of the benefits of the REIT being managed by a much larger external organization is that we've continued to make loans. We, the manager, continue to make loans even when the REIT is fully deployed. And that allows us to continue to build a pipeline and build a portfolio of loans that are either already closed or about to close, whether the REIT is fully deployed or not. And so, You know, when we size this deal, when we talk to our bankers and the board, you know, we did so with a consideration toward how quickly can we put this money to work? What assets do we have that we could potentially target for, you know, deployment within the REIT? And also, you know, as we've stated publicly in the past, we are in the process of, you know, evaluating a refinancing of our existing assets. CLOs. So with the combination of that, all of those considerations, you know, we expect that we'll be able to, you know, deploy this capital over the coming months and, you know, hopefully not too much drag, but we certainly consider the negative implications of capital that's not deployed when we sized it.

Okay. Thanks for taking the questions and congrats on on that deal and look forward to things to come. Thanks for taking them. Thank you.

And our next question today comes from Christopher Nolan at Leidenberg Thalmann. Please go ahead.

Hi, just a follow up on Jason's question. Looking at the queue, the weighted average coupon for your investments is 5.1%. And the coupon on your preferred is 7.875%. So that sort of implies a negative carry. Am I looking at this wrong?

The missing piece there is the leverage. So that coupon on the investments is the coupon we do deploy leverage through the non-marked market series that finance our loan portfolio and which on a levered basis produces a return on excess of the coupon on the preferred.

What is the return on a leverage basis, please?

Well, our current cost of capital is about one, LIBOR plus 145, Charlie, if I'm looking at your... And then the weighted average... the leverage is about 80. It's, it's come down because we've been amortized. It's just above 80%. And, and you know, the, you can look at our weighted average spreads of loans, um, and, and see the math and do the math from there. But it's, um, you know, as Priscilla mentioned earlier, the CLO market, uh, in general is, has been very healthy and, and robust and both leverage and pricing, has kind of, is currently, you know, fairly close to what it was when we did our original CLOs. Certainly spreads, loan spreads have come in a bit, but it's still, you know, an attractive overall return profile on a non-mark-to-market, you know, termed-out leverage basis.

Okay. I guess I'll follow this up offline. Okay, thank you.

And, ladies and gentlemen, this concludes the question and answer session. I'd like to turn the conference back over to James Flynn for final remarks.

Yep. Thank you. Thank you all for your interest. Thank you for those that supported our recent offering. As we mentioned, we hope to be out, you know, in the market meeting with participants and investors more regularly going forward. Look forward to speaking to you again next quarter. Thanks, everyone.

Thank you. Thank you, sir. This concludes today's conference call. We thank you all for attending today's presentation. You may now disconnect your lines and have a word.