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spk12: Good morning, and thank you for joining the Lumen Finance Trust fourth quarter 2021 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 Charles Duddy with investor relations at Lumen Investment Management. Please go ahead.
spk03: Thank you, and good morning, everyone. Thank you for joining our call to discuss Lumen Finance Trust fourth quarter and full year 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 Tuesday, we filed our 10K with the SEC and issued a press release which provided details on our fourth quarter and full year 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, anticipate, expects, intends, and other similar expressions are intended to identify forward-looking statements. Such forward-looking statements are subject to various risks and uncertainties that could cause actual results to differ materially from those contained in the forward-looking statements. These risks and uncertainties are discussed in the company's reports filed with the SEC, including its reports on Form 8-K, 10-Q, and 10-K, 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 in the future may be amplified by the COVID-19 pandemic. It is not possible to predict or identify all such risks. Listeners are cautioned not to place undue reliance on these forward looking statements which speak only as of the day care of. The company undertakes no obligation to update any of these forward looking statements. Furthermore, certain non-GAAP financial measures will be discussed on this call. The 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. 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 at www.sec.gov. I will now turn the call over to James Flynn. Please go ahead.
spk04: Thank you, Charlie. Good morning, everyone. Welcome to the Lumen Finance Trust earnings call for the fourth quarter of 2021. Thank you all for joining. 2021 was a busy and important year for Lumen Finance Trust. During the year and over the first few months of 2022, we've executed several significant capital transactions that have allowed us to meaningfully grow our equity capital and institutional investor base. At the same time, we made significant incremental investments and observed continued strong performance in our loan portfolio. Those were all accomplished in an environment marked with uncertain economic considerations around interest rates, unemployment, asset values, all exacerbated by the continuing impact of variables such as COVID and the tragic events going on in Ukraine and Europe. I'd like to begin by discussing our recent transferable rights offering, which was announced on January 7th, 2022, and closed on February 22nd, 2022. This transaction, which entitled shareholders to purchase newly issued common stock in LFT at a discount to the market price, resulted in the company raising approximately 83.5 million of gross common equity proceeds. We believe this is a transformative transaction that provides LFT with the growth capital necessary to further our objectives of achieving appropriate operating scale, expanding our capacity to make investments in target assets. We intentionally structured the equity raise as a rights offering to allow stockholders to participate in the company's growth by purchasing shares at a discount to the market price and avoiding ownership dilution. We believe this raise enables the company to improve operating expense efficiencies and we anticipate that G&A expenses as a percentage of stockholders' equity will decrease as a result of this offering. We also expect that the offering will increase liquidity and trading volume of our common stock. Finally, I note that the transaction demonstrates a strong alignment of interest between LFT and its external manager, Lumen. An affiliate of the manager exercised its oversubscription privilege and made a total investment of $40 million in the transaction. As we look to the coming quarters, we intend to deploy this capital into the portfolio of multifamily-centric assets consistent with the existing strategy and expertise on a similarly levered basis. We have historically utilized CRE CLOs to finance our investments and continue to believe that the CRE CLO market provides an attractive financing source due to favorable economic terms as well as non-recourse, non-mark-to-market features. I will note that we have seen the broader markets weaken over the last few weeks due to the risks and uncertainties around the Russian invasion of Ukraine and inflation. The new issue of AAA CRE CLO spreads have widened by as much as 30 to 40 basis points since the beginning of the year, and we will remain cognizant of these levels as we look to deploy our capital on a levered basis. With regards to our dividend, We declare a quarterly common dividend of $0.06 per share for the first quarter of 2022. This dividend reflects a resetting of our dividend, taking into account our recent capital raise, which meaningfully increased our share count during the quarter and resulted in a reduction in book value from $4.37 to $3.65. In addition, this dividend reflects the anticipated drag on net income into common shareholders as we deploy the newly raised capital over the coming months. Overall, however, I would like to emphasize that once our capital is fully deployed, we expect to be able to support a greater quarterly dividend than $0.06 per share. Pivoting to the company's 2021 results, LFT's fourth quarter tapped off a banner year from a portfolio perspective with record volume and portfolio growth. During Q4, we invested over $300 million in new floating rate bridge loans, fully deploying the capital from 2021's successful $1 billion CLO issuance and the $60 million preferred equity raise. As of year end 2021, our total loan portfolio outstanding principal balance exceeded $1 billion. This represents an 83% increase in portfolio size year over year. It is also important to acknowledge that our focus in multifamily bridge lending and the strength of our credit and asset management platform has continued to allow the portfolio to perform well. As of December 31st, our loan portfolio was 100% performing with no loan impairments, no loan defaults, and no loans subject to forbearance. As stated in prior calls, we still have not granted a single forbearance, nor have we experienced any monetary default during the COVID era. And I believe this is a testament to both our rigorous credit standards as well as our proactive asset management efforts. Perhaps most importantly, our ability to continue to execute on the business plan is reflected in our results. For the full year of 2021, our total distributable earnings was 39 cents per share, which represents 108% dividend coverage ratio for the full year. We continue to maintain a simple and straightforward strategy of deploying our capital into commercial real estate debt investments with a focus in multifamily in order to provide stable earnings that support market return to our shareholders. We also feel it is important to grow LFT to a larger scale REIT, which we feel will provide long-term value to our shareholders. We are continuing to make progress towards these goals, and I'm excited about the continued growth as we focus on executing the business plan. In the coming months, we hope to continue discussions with current and new investors to educate market participants about LFT and the long-term opportunity we believe we offer investors. Our manager is one of the nation's largest capital providers in the multifamily and seniors housing space, executing over $17 billion in total transaction volume in 2021, servicing a greater than $50 billion loan portfolio, and employing over 600 people in more than 30 offices nationwide. The scale of this platform benefits the investors of LFT and provides great support in the execution of our long-term investment strategy. As we've continued to show over the last three years, We're utilizing the strengths of our manager to focus our investments in middle market, multifamily, floating rate bridge loans, and they've continued to perform extremely well. With that, I'd like to turn the call over to Jim Briggs, who will provide details on our financial results.
spk08: Thank you, Jim, and good morning, everyone. On Tuesday evening, we filed our annual report on Form 10-K and provided a supplemental investor presentation on our website, which we'll be referencing during our remarks. The supplemental investor presentation has been uploaded to the webcast as well for your reference. On pages four through eight of the presentation, you'll find key updates and an earnings summary for the quarter and the full year. For the fourth quarter of 21, we reported net income to common stockholders of approximately 2.5 million or 10 cents per share. This result compares favorably to the prior quarter in which we reported net income to common stockholders of 1.2 million or 5 cents per share. For the full year of 2021, we reported net income to common stockholders of approximately $7.4 million or $0.30 per share. This compares to $8.4 million or $0.34 per share for the full year of 2020. With regards to the year-over-year comparison, I would like to note that our Q221 results included a $1.7 million or $0.07 per share loss on extinguishment of debt pertaining to the refinance of our prior CRE CLOs. Excluding the impact of this non-recurring expense, our full year net income to common stockholders would have been $0.36 per share, representing an approximate 5% increase year over year. For the fourth quarter of 21, we reported distributable earnings of $2.6 million, or $0.11 per share. And for the full year, we reported distributable earnings of $9.7 million, or $0.39 per share. Q4's distributable EPS represents an increase relative to the prior quarter's distributable EPS of 1.4 million or six cents per share. This increase was driven in part by our ability to fully deploy our CLO and preferred equity capital during the quarter, which Jim noted and which we have alluded to on prior calls. I'd also like to touch on exit fees, which we have highlighted on prior calls as well. LFT's loans are typically structured with exit fees, which are recognized as interest income when the loan pays off and the fee is collected in cash. Therefore, the timing of loan payoffs and the associated exit fee income can cause some variability in LFT's earnings from quarter to quarter. LFT may also be entitled to yield maintenance penalties and extension fees on loans from time to time. In Q4, LFT earned $1.5 million on loan payoffs of $137 million. In the prior quarter, LFT earned exit fees of approximately $800,000 on loan payoffs of approximately $118 million. Our total stockholders' equity at December 31st was approximately $169 million, and our common book value per share was $4.38 as of December 31st. As Jim noted in his opening remarks subsequent to year end, we closed on the previously announced transferable rights offering. As a result of this transaction, the company's total shares issued and outstanding increased on February 22nd to 52.2 million shares. As a result of the transaction and on a pro forma basis, the company's total book equity increased to approximately 250 million, total common book value increased to approximately 190 million, and book value per share of common stock declined to approximately $3.65. As Jim previously mentioned, we do anticipate drag on EPS as we deploy the proceeds of this rights offering over the coming months and quarters. As discussed in prior quarters, I would 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 GAAP amendment of how to recognize credit losses on financial instruments. As a smaller reporting company, we are scheduled to implement CECL on January 1st, 2023. Until then, we continue to prepare our financial statements on an incurred loss model basis. As of December 31st, we do not consider any of our loans to be impaired under the incurred loss model. 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 continues to exist, including its impact on our borrowers and on the values of the 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. We'll now turn the call over to Michael Larson, who will provide details on our portfolio composition and investment activity.
spk11: Thank you, Jim, and good morning, everyone. As Jim and Jim noted, our strong fourth quarter results were driven in part by the full deployment of the capital that we raised last year. This was accomplished due to continued strong investment activity over the last three months of the year. During Q4, we acquired 23 new investments from an affiliate of our manager with total outstanding principal balance of $336 million. All of these acquisitions were secured by multifamily assets. The fourth quarter acquisitions had a weighted average spread to LIBOR of 321 basis points and a weighted average LIBOR for 12 basis points with a weighted average loan to value at origination of 70%. For the full year 2021, LFT acquired and funded 984 million of new loans. That represents a significant increase compared to just $58 million of new loan acquisitions during the full prior year of 2020. We continue to maintain a very strong pipeline of new multifamily bridge lending opportunities, and we see no indications of a slowdown in our activity as we move into 2022. During the quarter, we experienced $137 million in loan payoffs, which is in line with our recent prior quarters. And at quarter end, our total loan portfolio had an outstanding balance exceeding $1 billion. This is really a milestone for us. It's the first time that we've exceeded a billion in loan balance. The portfolio consisted of 66 loans with an average loan size of $15 million. Our overall loan portfolio at year end was 92% multifamily. That's a slight increase from 90% multifamily as of year end 2020. Our second highest asset type concentration is self-storage, which represents 5% of our portfolio. And we continue to believe that generally self-storage and industrial property provide the least volatility and performance outside of multifamily. This diverse portfolio reflects our focus in the middle market multifamily space. We've touched on that. It's very important. We continue to believe that middle market workforce housing asset class is the best real estate asset class for investment today. Market dynamics and demographics continue to support multifamily, and we believe this creates an attractive investment opportunity for our shareholders. With respect to pricing, our portfolio has a weighted average spread to LIBOR of 346 basis points and a weighted average LIBOR floor of 46 basis points. As we discussed in prior quarters, due to the number of non-bank bridge lenders in the market and the market's priority for multifamily debt assets, competition in the bridge space continues to be very strong. Despite this competition, we've seen some stabilization, slight increase in spreads over the last few weeks and months. The competition does remain strong. I'll note our exposure to retail and office property types continue to remain very low. which is 3% of our total balance on a combined basis as of year end. And that represents a decline relative to our 1231.20 level of 9% on a combined basis. We continue to anticipate the majority of our loan activity will be related to multifamily assets, but we will look to supplement our multifamily investments with strong quality investments and other asset types that we feel can offer strong return profile relative to multifamily. At year end, our loan portfolio was financed with one series CLO securitization that has a weighted average spread of 143 basis points over one month LIBOR and an advance rate of just over 83%. The CLO has a reinvestment period running through December 2023. It allows principal proceeds from repayments to be reinvested subject to various conditions. And we do not currently utilize repo or warehouse facility financing LFT and therefore not subject to margin calls in any of our assets from any repo or warehouse lenders. Overall, we continue to over the last three years and over the last year, we're utilizing the strength of our manager to focus on investments in middle market, multifamily, floating rate bridge loans, which have continued to perform extremely well. And we continue to see a very strong pipeline of these multifamily bridge lending opportunities, which we expect will continue. With that, I'll pass the call back to Jim.
spk04: Thank you, Mike. As I mentioned earlier, we feel that we are making great progress in the execution of our business plan to grow our capital lease and deploy our capital prudently and continue to be excited about the long-term future for LFT. We look forward to updating you on our continued progress and appreciate your time and interest. With that, I'd like to turn the call over to questions. Operator?
spk12: We will now begin the question and answer session. To ask a question, you may press star then 1 on your telephone keypad. If you're using a speakerphone, please pick up your hands before pressing the keys. To withdraw your question, please press star then 2. At this time, we will pause momentarily to send Barb Oster. Our first question comes from Crispin Love with Piper Sandler. You may now go ahead.
spk10: Crispin Love Thanks. Good morning and thank you for taking my question. So first on the dividend reduction for the first quarter, can you just speak to some of the aspects that you and the board are seeing that warrants the 3 cent reduction and just also what that means for the core earnings power for Lumen over the next several quarters. I understand the near-term drag here from the offering, but I assume kind of the key of the offering was to grow the portfolio and earnings over time. So I'm just kind of curious thoughts over the next couple of quarters and how long it should take to deploy that capital.
spk04: Sure. So, look, just to reiterate, we don't believe that, you know, fully deployed, that's the right dividend, and we do believe we can support something higher. Effectively, you know, we went through the rights offering. We raised, you know, the 80, almost $84 million. We obviously executed that offering successfully. you know, when you look at the timing of hitting the market there, it was not ideal with the inflationary pressure really having an impact on the markets in the early part of 2022. And then bookended with, you know, the beginnings of what is now a crisis in Eastern Europe that has caused, you know, further market disruption. And so those, obviously that has played into you know, the timing of all of our investment decisions. So, you know, we feel we'll be fully deployed, you know, in the next couple of quarters and be able to move forward. But we've considered, you know, what that drag has, what impact that drag has on, you know, the earnings per share, what impact the increased number of shares that were a result of the rights offering, you know, issued at a discount, as we've discussed. and also the current market conditions, given where they are, volatility and lack of stability. All of those things we expect to, at least the latter part, the market components, we're reasonably optimistic that those things will dissipate over time. But as we sat with our board, looked at the earnings, not wanting to create any incremental dilution of our book share price, we looked at those and decided that we think the prudent decision would be to make this reduction to six cents. Knowing and looking at our earnings power and looking at what we've been able to do over the last few years and feeling very confident that that is generally temporary and that you know our business plan and what we've been able to do will continue to be executed by the people that we have here so it was it was really looking at all of the factors and wanting to ensure that you know we've we've continued to you know state to all of you how important it is for us to create stable earnings and to ensure that we cover our dividend and didn't want to put ourselves in a position of potentially not being able to do so. But we also feel that we've taken a relatively prudent view. And I think as you look at the earnings on a go-forward basis, investors and shareholders will see that. And over the long-term basis, we're very comfortable and confident.
spk10: Great. Thank you. I appreciate the comments there. And would you say it's fair to say that you're, for right now, on hold on putting that 80 million of equity capital work before you can lever it up and do a pre-CLO transaction? And part of that right now is just the markets are limiting that just as spreads widen.
spk04: Yeah, I mean, look, the reality is, we'll put it to work on a, certainly on an unlevered basis, you know, relatively, you know, in short order. The timing of executing any securitization would take time, a couple of months anyway, regardless of the market conditions, just to go through the rating agency process and working with the banks and meeting with investors and structuring the deal. So we are in the midst of doing that, but we're also looking and evaluating all of our potential options for leverage or financing the assets. Again, there's still high demand in the CLO market for that type of paper. There's been a couple of deals that I think the characteristics of those transactions are different than ours that provide for, I think, some rationale for the wider spread. And I don't expect that, you know, we're all hopeful for some resolution to start resolutions to things that are going on in Europe and hopefully the impact that that will have on supply chain issues and material costs and all the things that flow through on the economic side of this crisis to get us to a more stable environment. We could execute a deal now. Those levels would be um not the same as as we've done in the past but they're still um you know they're not unattractive but you know from a timing standpoint we actually think you know we we've we've got a little time under a normal operating environment before we would even have to make that decision okay great thank you i appreciate you taking my questions our next question
spk12: comes from Steven Laws with Raymond James. You may now go ahead. Hi, good morning.
spk09: To follow up kind of on the previous questions, you know, as you think about, you know, fully deployed, how much, you know, and considering other types of financing, will you use some warehouse financing to ramp ahead of a potential, you know, future CLO? And if so, kind of how do we think about how much leverage you'd be willing to put on there?
spk04: So historically, as you know, Stephen, we haven't used that because we haven't had to. We've been able to effectively warehouse loans on the manager's balance sheet. And, you know, given the current kind of market conditions, it's something we're going to look at. and decide whether we want to go ahead and go through the process of putting a warehouse in place. Eventually, we would need to have some warehouse capacity. We would want some. So it is, we are talking with, you know, our banking partners to explore potentially putting something in place. I don't think that we would, you know, we wouldn't utilize the warehouse at a max leverage kind of level. that you see in a CLO where you have the match term and the non-mark-to-mark basis. But, you know, we could see, we are looking at that. That will take, you know, a little bit of time to put in place. We're kind of going through the pluses and minuses of, you know, the cost and time to do so and comparing that to, you know, the options that exist to just continue down the path of putting a CLO in the market as soon as possible. Again, I think we are in the midst of significant turmoil in the market. I mean, broader markets. I don't mean just CLO or real estate market. In fact, fundamentals are still pretty good despite inflation and other matters. But the geopolitical risk that's that's overshadowing everything it's it's it's hard to put a pin in it and say okay in a month things are going to be different so we should take this path you know as I just said I think we have we want to deploy the capital as quickly as possible we still have some some there's work to be done whether it's on the warehouse or securitization financing under in any market condition so we have you know, the benefit, if you will, if you want to call it a benefit of having to undertake those actions anyway. But I think if we sit here and say, look, if there's some reasonable outcome in Europe that stops the fighting and stops, you know, people dying and puts some stability in the market, it's hard to imagine that that doesn't trickle through into a more stable environment in the capital markets overall very quickly. But that could be a month. It could be a few months. It could be a week if talks change. But again, I think we're still well-positioned. Our portfolio is doing great. Our pipeline is... you know, more than sufficient to utilize the capital. And we just want to ensure that we've, you know, put in place, especially if we're putting in place long-term financing of any sort, that we do so in the most efficient manner that we can.
spk09: Great. Appreciate those comments. Definitely a lot going on out there impacting the markets. Michael, maybe this is for you, but can you talk about, you know, competition, you know, certainly multifamily, you know, a lot of, you know, interest in lending, a lot of competition out there. Can you talk about what you're seeing, a lot of repeat business or kind of how, you know, how does your competition among pipeline look?
spk11: Sure, I'll touch on it and then Crystal and others feel free to jump in. You know, there is a lot of competition in the market for these floating rate bridge loan investments, and particularly for multifamily. It is kind of the favorite asset class today. I think the big picture, we continue to see a very strong pipeline and very attractive opportunities, and that's driven by the strength. that our manager has in that space. We're really an expert and a leader in the multifamily housing and seniors housing space with a large sales platform spread across 30-plus offices and are out in the market executing transactions in the multifamily space every day. The manager, that's across product types. So that drives investment opportunity and pipeline that creates opportunities for LFT. That's through quite a few repeat borrowers, borrowers that the larger platform has a long-term relationship with, and being able to offer a wide set of products brings loyalty from our clients and allows us to drive pipeline. Where I think we see the competition reflected most is on the pricing side and continued tighter pricing, although, as I said, I think we've seen it somewhat stabilized. But in terms of building pipeline up and opportunities, that has not been an issue, and it's just managing the pricing. But Priscilla or Rose, if you have anything to add, please do.
spk01: No, I agree with that. Notably, in the fourth quarter of last year, there was some widening of spreads that we expected to dissipate at the beginning of this year. But to Mike's point, what we have seen actually is that spreads have held. If anything, over the past few weeks, I'd say there's been some slight widening, obviously because of the volatility. But very importantly is really what Mike mentioned, which bears reiterating, which is the pipeline is extremely strong and that the theme of middle market workforce housing continues to be the anchor of that pipeline.
spk09: Great. Thanks for the comments this morning.
spk12: Our next question comes from Steve Delaney with JMP Securities. You may now go ahead.
spk06: Good morning, everyone, and congratulations on your successful rights offering. Wondering just how much cash is currently available in FL1. And where I'm really going with that is to see, you know, where do you see the maximum portfolio size capping out at with today's capitalization and financing sources? Thank you.
spk04: So within the current CLO, you know, it's fully deployed, plus or minus, you know. And, you know, there are anticipated payoffs, but that will be fully deployed. You know, from the standpoint of where we could get what the total size would be, you know, we think it's – it's somewhere, you know, an incremental call it 500 million of assets could be a little bit higher. Um, and it could be a little bit lower depending on the nature of the assets and spreads, but that's, um, that's a, that's, that's probably about the, the, the max number. Um, yeah, because we do have cash. We do have cash in the entity, right? We have cash, in, in, in LFT, um, not that's not currently in the CLO. So, so from that standpoint, um, you know, we do have some, some, or I should say we had cash, some cash prior to, um, the offering of, of, or the, uh, rights offering. So, you know, we think the number is somewhere between 400 to 500 plus of, of, of assets.
spk06: Jim, that struck me as being a big number. And then just looking over at my press release, I forgot that the rights offering added 75% additional common equity, 75% of which you had before. So it certainly is in line there. And my follow-up is, any considerations? I know you've very much targeted on multifamily, but given competition, given around where the CLO market kind of ends up. Are you giving any consideration to, you know, other multifamily debt investments, you know, such as maybe MES loans or PREF equity in that sector?
spk04: Yeah, I mean, so we, the Lumenta manager, right, we look and participate in those markets already. We would consider... um you know potentially some some portion of the capital going into going into those types of assets um you know frankly the the the yields are are are kind of in line with in some cases below what you could get from a from a levered senior position but again i think the market is moving at at pretty dramatic um pretty dramatic pace so you know opportunistically there are some you know we've we've we've done some structured finance we've done some construction some mass some craft um on our on our manager's balance sheet that that result in in securities or positions that would that would fall in the high yield category again the yields are similar um you know they're either they're either a little bit below or a little bit above um so we We are contemplating that, to your point, depending on where the best place is to put the capital. We have a number of equity investments in self-storage. Mike mentioned that on the debt side. We have some other opportunities in seniors housing. We're one of the largest seniors housing lenders in the entire country on the manager's platform. there's opportunities to potentially add a little bit of mix to the portfolio. I think we've said that in prior earnings calls. I think any sort of volatility always provides for some assessment of what the opportunities are to improve the risk return profile. I think we've been in a very, the market has been very stable and very consistent, right? It's been increasing values and, you know, extraordinary transaction volume for the past, you know, five plus years. You know, I expect now we still have significant volume, but we're starting to see some change, right? You've had low interest rates, now you have higher interest rates. So there's a bit more, you know, I think, opportunity for us to look at some other investments that we've we generally participate in and have experience in and expertise in at the manager level that still fit within our LFT strategy that could be beneficial. But again, we still think the CLO market is still attractive and we'll expect it to become even more attractive as things stabilize in the capital markets.
spk06: Understood, and thank you for the comments.
spk12: Our next question comes from Jason Stewart with Jones Trading. You may now go ahead.
spk05: Good morning, and thanks for taking the question. Briefly, are there assets that you can buy from the manager today, or would that create a mark-to-market loss for LFT?
spk04: No, there are assets that we can buy from the manager. They would be par assets. I mean, the The book that we have is a par book. I mean, we're closing loans daily or weekly at least, if not daily, on the manager's book. So, you know, typically if we were moving assets over, you know, they're all almost – I don't want to put a time frame on it, Priscilla, but they're all newly originated assets. So they're not – they're transferred at par. Okay.
spk01: That's correct.
spk04: If they're not transferred at par, it would require us to go to the board, which we've never done, to be clear.
spk05: And can you share with us sort of a run rate of originations at the current point in time?
spk04: Patil, you can give a run rate, but I can tell you in our fiscal year, which ends in two weeks, we're going to do over $2 billion in of bridge loans this year. That includes the loans that we've – that's the total loans that Lumen, the manager, has closed, including those that have been new to LFT. And more than half of that has probably been since December. But, Priscilla, you can give more specifics on that.
spk01: right so in terms of run rate obviously it will in terms of lst itself it will depend on capacity freeing up from our existing clo because as mentioned um you know it's already fully deployed but basically with respect for instance the existing clo i can say that we're very confident that prepayments this year will be um fully reinvested very fairly quickly um And we are obviously also confident if we did do a CLO market conditions permitting, we are also confident of high deployment for that particular issuance. So our confidence on the robustness of production and transfer of that to the manager is very strong.
spk05: Okay. All right. That's helpful. And I guess just one more question on the dividend. I mean... I think you were pretty thoughtful about the rights offering. It was pretty substantial dilution of book value. What was the board's thought process to not just take a longer-term view on the dividend and maybe you have two or three cents a quarter of additional book value reduction?
spk04: Well, it's something that we talked about as a group with the board. I think that... you know, the view of the management team and the board was that, you know, this is a short-term reduction that we think makes sense. We think it's important to cover the dividend. You know, ideally, we would have preferred the rights offering to be done at a higher price with less solution, right? There was a lot of, you know, those considerations and didn't want to... you know, put ourselves in the position of paying back, paying dividends with capital that we raised. I mean, that's fundamentally the biggest component. I mean, but we did talk about that, I think, you know, from the standpoint of, well, if we believe that we can do better than $0.06 on a go-forward basis or, you know, as we get fully deployed in some of the factors I talked about, you know, those investors that have come into the stock will receive and achieve that value. And, you know, just felt that that was a better message to send to shareholders more broadly, not just those who participated, than everyone to say, look, we're going to cover our dividends. We hope that you see the long-term value and strategy here. We've got, you know, our manager put in $40 million. Every officer and every board member fully subscribed to the rights offering. So, you know, we all believe in the long-term strategy and just think it's important for us to continue the pressing incentive, ensuring that we recover our dividend. You know, we certainly took into account the market conditions and whether that would perhaps delay deployment. I'm not saying that it will, but just, you know, that was certainly part of the discussion weighing on the overall decision.
spk05: Great. Thank you.
spk12: Our next question comes from Howard Bloom with UBS. You may now go ahead.
spk07: Good morning. In the supplemental chart you put up, you showed a sensitivity analysis to increasing LIBOR rates up to an increase of 1%. You know, while none of us can predict the rate of increase of interest rates, clearly the direction is clear. Beyond 1%, is there any sensitivity or does it flatten out at that point?
spk04: No, that trend would continue. That interest rate sensitivity is focused solely on the index rate. If the index goes up, in general, we have more assets than liabilities, so that trend would actually be a positive. That relates to steady spreads. So part of the reason for the sensitivity, again, this is as you look through the long-term investment of the platform as we put new assets on, you know, some of our legacy assets burn off, but those assets that we put on are, you know, going on. You know, we have assets that were put on when LIBOR was, you know, extraordinarily low, close to zero. We have assets that are going on today. So the floors and the, you know, the impact of dramatic swings will have probably the greater the change to the index, the bigger the impact because of the floors that we have in our loans that are set at whatever the levels are at the time that we originate the loan. So some of that, some of the interest rate sensitivity is is muted because of floors that exist on the asset side of our balance sheet.
spk07: So in other words, if rates were to go up 2%, the number would be even larger than you showed as a negative impact. It would flip. It would flip. Okay. Thank you.
spk11: In general, increase in short-term rates is positive to our earnings Because, as Jim said, of the current floors that we have that are above LIBOR, initial increases in the short term have a negative impact, but longer term and in general an increase would have a positive impact.
spk07: Thank you very much.
spk04: The further back the asset was originated, you can assume that the impact would be the impact would be, you know, worse or nonexistent unless it were very high. But, again, that's why I'm saying if we moved into a year from now, you know, a lot of the assets that are not impacted by 25 or 50-year basis point shifts would be impacted, right? So we would have a positive impact.
spk07: Thank you.
spk12: Again, if you have a question, please press star and 1. Our next question comes from Matthew Howlett with B. Riley. You may now go ahead.
spk02: Hi, good morning. Thanks for taking my question. First, is the goal to get through that mid-teens, call it, return on a CLO retained interest? I know you sort of said that the market needs to calm down. You're going to wait to see where spreads shake out. But one, if that's the goal, am I thinking the math right that that the capital raise, the $82 million, could add something like $10 million to net income after management fees. Is that math? Am I thinking about that sort of correctly, directionally, where the pro forma net income could go?
spk04: Directionally, yes. I mean, a couple of things. One would be I think the leverage is probably a little bit lower than if I understood correctly. I think it's going to be roughly 20%, so four to one. We might be able to get a little bit inside of that like we have in the past, but CBD. And the return profile, yeah, I think it's currently kind of in a low team return profile if you executed a trade today on a gross basis. I don't think that we're suggesting that we're slowing down, just to be clear. We are moving forward, but we don't have to make, you know, by moving forward today, we're not making a decision to do something two months from now. You know, so along the way, we're going to, you know, evaluate and explore all alternatives, but we're still moving forward under the assumption that we execute a CLO in the short term. And if we're not going to execute a CLO, it means because we've we've chosen a different strategy. And that's not, you know, in terms of probability and things that we're talking about, that's not our goal and that's not our expectation. It's just, I think, in the last two or three years that you haven't really had to consider other strategies. And I think today's capital markets environment at least requires us to explore alternatives But I think as the management team, we still believe that the series CLO market is the appropriate financing tool for these types of loans. Got you.
spk02: I guess the way I want to summarize this is thinking about understanding where market conditions are and thinking about the CLO market and other areas. Is there any reason to believe that once the capital is fully deployed, if at that point So the rates you feel are proven that the core EPS couldn't go back up to sort of that $0.9, $0.10 per quarter area once fully deployed. And then on that note, you talked with some of the G&A savings that will happen. And then that secured term loan, I want to ask you about possibly refinancing that. I think it's over 7%. Just talk about how we should think about the earnings picture when it all comes together.
spk04: Right, so the total deployed capital, sorry, incremental deployed capital is probably closer to 100 because it's the capital, the excess capital we had on balance sheet plus what we've raised in the rights offering.
spk03: Okay.
spk04: So it's, you know, maybe it's in the mid-90s, but it's closer to 100 than it is to 80. So, yes, the earnings will go up by that much or expected to go up by that much as we deploy that capital. We do expect to visit the refinancing or potential refinancing of our term loan and even look at how favorable the preferred market is. We've said on prior calls that the You know, the prepayment penalties on the term loan make that, you know, prohibitive to think about right now. But over the next, you know, 12 months or so, we will be working with our existing lender and looking at alternatives to refi that that would be agreed to from an earnings standpoint. So, yes, that's part of it as well. On a per share basis, we've been undersized since we took over management. You know, one of the reasons we continued down the path with the rights offering and we still need to continue our capital raising is to get to a better operational expense efficiency level. And, you know, this will help. So our per share G&A should go down, should be more in line or, you know, approach more approach the levels that some of the larger competitors are at. But we need to continue on that growth trajectory to fully realize that benefit. So, you know, again, the long-term view, ongoing refinancing or evaluation of our existing fixed capital stack that's at the corporate level, you know, reducing expenses on a per share basis, fully deploying the capital. into, you know, accretive, you know, hopefully long-term investments that deliver that return. And yes, our expectation is that the six cents per share is something that we are hopeful we can increase as we move forward with all of those considerations.
spk02: Got it. So just to summarize, it's $100 million in excess capital. You think you can refinance the term loan after 12 months. should go down, and then you said the last part, the preferred, I looked at it, it looks like your current preferred is trading a little bit above par. Can you reopen that? I mean, how much would you, with the new equity, common equity base, how much could that be increased?
spk04: Well, there's not a stated limit. We could raise incremental capital there. you know, if the market would bear it. We do have to, we have considerations around leverage. That preferred structure is attractive from the standpoint of being perpetual. So there's not a limit to it. It's just a matter of what is the market, you know, what is the market calling for in terms of rates and whether we think it's accretive from an earning standpoint. So, you know, we, We still believe that we have to continue to deliver earnings and return to what we've been doing for the last three years, but continue to raise our equity base, certainly our common base, but really any equity base is really important for us so that we can deleverage the entity at the corporate level a little bit more than we have. And that will continue to be the goal. And one of the ways will be to look at, you know, refining what we already have and whether the preferred market is an attractive market to continue to raise capital. That's certainly on the table. On the term loan, I think that we looked at the step down. I'm going to put Charlie on the spot to give me the exact quarter where we think it starts to make sense. but I think it's the first or second quarter of next year, first quarter of 2023. So about a little less than a year from now. Got it.
spk02: Just real quick on MSR. It's now a good time to sell it. If you haven't sold it already, it's now a good time with the moving rates. Appreciate the question.
spk04: Thank you. In addition to In addition to just thinking about market and refinancing, we're already speaking to that lender, you know, to have a discussion about whether there's a way to do something without having to go to market to make that a more attractive piece of financing for the entity.
spk02: Got it. Thank you.
spk11: And the question on the MSR, as I say, that is, you know, it is at a point now where it's a very small asset relative to our portfolio. You know, we consider all options with respect to that, although we'll just note that it is very small. So, you know, the options for that are more limited just by its size. Thank you.
spk12: This concludes our question and answer session. I would like to turn the conference back over to Jim Flynn for any closing remarks.
spk04: Thank you all for joining. Thank you for the interest in LFT and the questions today. Please feel free to reach out with any additional questions or follow-up. We'd love to talk to any investors or any of our analysts to give more information on or more detailed information on our strategy and where we are, but appreciate the support that you've provided and appreciate you all joining us today. Thanks, and we'll talk soon.
spk12: The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.
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