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spk14: Good morning, and thank you for joining the Lument Finance Trust first quarter 2023 earnings call. Today's call is being recorded and will be made available via webcast on the company's website. If you require operator assistance, please press star then zero. I would now like to turn the call over to Charles Duddy with Lument Investment Management. Please go ahead.
spk10: Thank you and good morning, everyone. Thank you for joining our call to discuss Lumen Finance Trust's first quarter 2023 financial results. With me on the call today are James Flynn, CEO, and James Briggs, CFO. On Thursday, we filed our 10Q with the SEC and issued a press release which provided details on our fourth 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 in 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 FCC, including its reports on Form 8K, 10Q, and 10K, and in particular, the risk factor section of our Form 10K. 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 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 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. 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 sec.gov. I will now turn the call over to James Flynn. Please go ahead.
spk02: Thank you, Charlie.
spk13: Good morning, everyone. Thank you for joining. Welcome to the Lumen Finance Trust earnings call for the first quarter of 2023. As we typically do, we'd like to start by addressing the current economic environment. While we've seen some movement towards stability, the multifamily investment market has continued to experience a period of transition as lenders and investors react to the higher interest rates, economic uncertainties, capital markets, volatility. CRE investment activity in the market has declined year over year as buyers and sellers work toward reassessing financing costs and finding a new normal for levels of asset valuations and structures despite leading recessionary indicators increasing and the potential negative impact of the most recent banking crisis the strong employment market remains supportive of continued growth in the multi-family market although at a slower rate than we've seen over the past two years or longer we continue to expect to see rents outpace expenses and we do believe that the credit quality of the middle market workforce housing where we focus remains to be an attractive opportunity. During the first quarter, we saw annual growth across the industry, annual growth for multifamily assets in the US of 4.5%. And while that's a significant decline from the 15% increase we saw in Q1 of 2022, it remains well above the pre-COVID average of 2.7%. In terms of vacancy, the overall multifamily rate increased by 30 basis points quarter over quarter in Q1 up to 4.9%. But that was less than the 70 basis point increase we saw in Q4 of 2022 and the 90 basis point increase we saw in Q2 of 2022, indicating that supply and demand dynamics may begin to stabilize. We saw new construction deliveries of 58,600 in Q1, which brought the four-quarter total to 332,200 units. That is slightly lower than the calendar year annual total of 343,000 units in 2022. If that trend is sustained in the coming quarters, the slowdown deliveries could help improve market fundamentals. That being said, property sales volumes which directly drive acquisition financing opportunities have declined significantly. We saw a decrease of 64% in Q1 relative to Q1 of last year, and it represents the lowest Q1 transaction volume in the industry since 2014, and 25% less than the average between 2013 and 2019. Over the long term, we do believe that the credit profile of the middle market housing continues to support favorable supply-demand dynamics, demographics, long-term rent growth trends, and creates an attractive investment opportunity for our shareholders. Our multifamily investment portfolios perform well, and while we did book a realized loss on our sole office loan this quarter and increased the risk rating on some of our multifamily assets to account for the continued elevated interest rate environment, The remainder of our book continues to perform well. Within the bridge lending market, we continue to see lending standards tighten. Pricing on new loans has increased, although stabilized over the last quarter or two or certainly over the last few months. Opportunities have declined, as I pointed out, with the acquisition transaction volume declining. But we do expect the average spread on our investment portfolio to increase as we reinvest as loans pay off. With regards to the ongoing volatility in the banking industry, particularly with regards to smaller regional banks, we have seen a pullback in credit and softening of aggressiveness from banks when we often compete for financing opportunities. We believe this pullback can create meaningful opening for non-bank platforms such as Lumint to access attractive opportunities and grow market share as investment sales volumes begin to increase. This backdrop to broader capital markets have remained volatile. Conditions in the CRE-CLO market have begun to show encouraging trends relative to Q4 of 2022. However, the market has had a few new issuances and has become increasingly uncertain over the last few months due to the developments in the banking industry. According to research from Wells, AAA's managed CRE-CLO bond spreads averaged 260 basis points as of May 5th, which is in line with where the spread sat at the end of last year. BBB- bond spreads have increased from 660 basis points to 850 basis points, again, expressing the volatility that we continue to see in that market. As you know, we have historically used CRE CLOs to finance our investments and do believe that they provide an attractive financing source due to favorable leverage, as well as non-recourse, non-mark-to-market features. In order to fully deploy our capital on a leverage basis and take advantage of our origination capabilities, we remain actively focused on executing a loan financing transaction. And while we are prepared to execute a CLO to the public markets quickly to the extent conditions improve, We are actively exploring financing options, including note-on-note financing, ANO structures, warehouse facilities, and private transactions to attempt to replicate the CLO market. With regards to our dividend, on March 16th, we declared a quarterly common dividend for the first quarter of 2023 of $0.06 per share. This is in line with our dividend level over the prior four quarters. I would note that our GAAP EPS of $0.09 during Q1 represented a strong coverage ratio on this dividend, and we continue to anticipate that we will have the ability to increase our dividend at such a time that are able to execute a long-term loan financing transaction. We will continue to deploy our capital into commercial real estate debt investments with a focus on multifamily. As you know, our manager is one of the nation's largest capital providers in the multifamily and seniors housing space. executing over $10 billion in total transaction volume in 2022 and servicing nearly $50 billion in assets and employing approximately 600 employees in over 30 offices. We believe that that scale and expertise of our broader platform will continue to benefit the investors of LFT. With that, I'd like to turn the call over to Jim Briggs, who will provide more details on our financial results. Jim?
spk01: Thank you, Jim, and good morning, everyone. On Thursday evening, we filed our quarterly report on Form 10-Q and provided a supplemental investor presentation on our website, which we'll be referencing during our remarks. The supplemental investor presentation has been uploaded to the webcast as well for your reference on pages four through eight of the presentation. You will find key updates and an earnings summary for the quarter. The first quarter of 2023, we reported net income to common stockholders were approximately $4.6 million or nine cents per share. We also reported distributable earnings of approximately 173,000 zero cents per share. There are a few items I'd like to highlight with regards to our Q1 P&L. Beginning with net interest income, our Q1 net interest income was 8.2 million compared to 6.9 million in Q4 of 22, which represents an approximate 20% increase quarter over quarter. Short-term interest rates continue to remain elevated, which we expect will continue to benefit LFT's earnings profile over the coming quarters. Primary contributor to the increase over Q4 was approximately $1 million in exit fees and prepayment penalty interest on loan payoffs in Q1, where we saw approximately $200,000 in Q4 in the form of credits for waived exit fees that reduce expenses reimbursed to our manager. Speaking of payoffs during Q4, We experienced 52 million of loan payoffs, which represents a slight increase relative to 45 million of loan payoffs during Q4. The 52 million of payoffs experienced during the quarter represents a 19% annualized payoff rate. While this payoff rate is below our long-term historical averages, we expect to continue experiencing similar payoff speeds over the coming quarters due to persisting interest rate volatility and economic uncertainty. The primary difference between our distributable and reported net income during Q1 was a $4.3 million, or $0.08 per share, realized loss on the Chicago office property loan, which was fully reserved for at year-end, which we discussed during the year-end call. As discussed on our year-end call, on February 27, 2023, the property was ultimately sold via auction for $6 million, and we accepted a discounted payoff from the borrower in that amount. We no longer have any exposure to the office sector. Moving on to expenses, our total expenses were $2.7 million for Q1 versus $2.5 million in Q4. This quarter-over-quarter increase was primarily driven by some seasonality and professional fees. I'd like to also point out that as we long signal on these calls, we adopted CECL on January 1 of 23. As noted in our filing, We use a probability of default loss given default model that is combined with a subset of historical loan loss data licensed from TREP that most closely represents our focus on transitional bridge loans. We recorded an approximately $3.6 million or 7 cent per share implementation adjustment on January 1, which was recorded as a reduction to stockholders' equity. Changes in our allowance subsequent to the January 1 implementation will be reflected through earnings. In the current quarter, we recognized an approximately $200,000 benefit from the change in allowance, which was a function of some loan payoffs, partially offset by an uptick in reserve for the remaining portfolio that is a function of changes in macroeconomic forecast and changes in the portfolio risk profile. As of March 31st, the company's total book equity was approximately $241 million, Total common book value was approximately $181 million, or $3.46 per share. Excluding the impact of CECL in the quarter, both the January 1 implementation and the change in the quarter, book value per share would have increased sequentially over Q4 by approximately $0.02 per share. I will now turn the call over to Charles Duddy, who will provide details on our portfolio composition and investment activities.
spk10: Thank you, Jim. Jim Flynn, you know, at the top, touched on the broader economic conditions, which have continued to be volatile. Due to these conditions, new acquisition activity in the market has remained relatively slow, and the number of bridge opportunities has declined. However, we are continuing to evaluate new opportunities on a selected basis, with a heightened focus on new construction lease-up transactions, as well as timing bridges to HUD and and less of an explicit focus on value-add deals while we are still reviewing attractive value-add opportunities. At the same time, we have seen and expect payoff speeds to temper in the near term as well, reducing our capacity for new investments relative to prior quarters. We anticipate this trend continuing for the remainder of 2023 while interest rate increases moderate and the general real estate markets reset to the new interest rate environment. During Q1, LFP did not originate or acquire any new loan investments. We experienced $52 million of loan payoffs during the quarter, and at quarter end, our total loan portfolio outstanding principal balance was $1 billion. The portfolio consisted of 67 loans with an average loan size of $15 million, which provides for significant asset diversity. Our portfolio at quarter end was 90% multifamily, and we have no exposure to office. regards to retail as of 3 31 we own one 17 million dollar loan backed by a retail property subsequent to quarter end this retail asset ultimately paid off via successful refinance therefore as of today other than one self-storage asset the lft portfolio is backed 100 by multi-family and seniors housing assets due to our manager's strong focus in multi-family and seniors housing We continue to anticipate that the majority of our loan activity will be related to these asset classes. I'll also touch on risk ratings. As of 3-31, we classified one $12.7 million multifamily loan as risk-rated 5. This loan was also risk-rated 5 as of 12-31. And while we have not reserved for any specific loss on this loan and do not currently expect any loss, We have filed a foreclosure receivership and guarantee enforcement case, and we'll continue to monitor and keep our shareholders informed. Our investment return profile has a strong positive correlation with rising interest rates. We have included a rate sensitivity table on page 11 of our supplemental earnings presentation. Overall, we expect LFT to benefit from elevated short-term rates. Since quarter end, the one-month term SOFA rate has increased from 4.8% to over 5% today. We anticipate a continued positive impact over the coming quarters. On the financing side, as of 3-31, our loan portfolio was financed with one series CLO securitization with an average weighted spread of 143 basis points over one month LIBOR and an advance rate of over 83%. This CLO has a reinvestment period running through December of 2023 that allows principal proceeds from repayments of the mortgage assets to be reinvested, qualifying replacement assets subject to certain conditions.
spk02: With that, I'll pass the call back to Jim Flynn for some closing remarks. Thank you. Thank you, Charlie.
spk13: Look forward to continuing to update you on our progress and in this volatile market, continuing to keep you informed. Now I'd like to open the call to questions.
spk14: We will now be... Thank you. We will now begin the question and answer session. To ask a question, you may press star then one on your telephone keypad. If you're using a speakerphone, please pick up your handset before pressing the keys. If at any time your question has been addressed and you would like to withdraw your question, please press star then two. At this time, we will pause momentarily to assemble our roster. The first question comes from Crispin Love with Piper Sandler. Please go ahead.
spk09: Thanks, and good morning, everyone. First on fundings and acquisitions, I think this is the first quarter that I can recall where he didn't have any funding. Just going forward on fundings, would you expect fundings to remain depressed over the near term, just given multifamily dynamics, or are there other sectors, maybe seniors, that you would expect to grow over the next few quarters? And then just looking at the second quarter, would you expect fundings to match payoffs in the second quarter, or do you think they'll fall short?
spk13: Yeah, so thanks for the question. With respect to fundings in terms of the quarter, it's really timing. So I think answering the second question is informative of that, which is, yes, we would expect our fundings to match our payoffs. As I mentioned earlier in the call, we continue to evaluate potential opportunities, private transactions, to replicate or find a potential levered solution that looks or is as attractive as a CLO. If we're able to execute on a transaction such as that, then obviously our fundings would increase above payoffs because we would have more capital to deploy. We do have assets that we hold up the manager's balance sheet that meet the investment criteria for So from that standpoint, you know, we're not concerned about fundings. In terms of the overall market, I mean, the biggest driver of this market or the bridge market in particular is clearly acquisitions. You heard my comment earlier about acquisitions being down nearly 70% quarter over quarter just in the market. Anecdotally, I can tell you in other areas of our business, including agency world, we've seen significant levels of refinance activity relative to acquisition activity, relatively consistent in terms of the overall market. And I will also say that at recent conferences and discussions with peers across the industry, I think most people have suggested that they've seen an increase in business activity that they're evaluating. Um, that hasn't fully translated into increased activity in terms of transactions getting completed. Um, but we've seen a lot more transactions being evaluated. Um, I think that suggests that buyers and sellers are moving closer together in terms of, uh, you know, the bid ask spread on valuations. I think by owners are, um, more accepting and familiar and understanding of the financing options that are available today, not the ones that were available a year ago. And despite the challenges in the market with the banking industry, as the most recent example, we have seen some relative stability in terms of, you know, spreads and pricing. Some of that is lower transactions, but, you know, I think there's, There's some reason to have some cautious optimism that we're moving towards something that becomes a more stable environment, and that's a much better one for all of us to operate in.
spk09: All right. Thanks. That's all helpful. And then just on credit quality, I heard your comments on the portfolio and the shift in risk ratings. Do you have the rates and uncertainty out there. But as it relates to your CLO, are you able to share any underlying credit stats on the Cree CLO and how it's performing?
spk13: In terms of the assets, in terms of the individual assets, I mean, virtually all of the assets that are held on the balance sheet are held in the CLO. So, you know, if you look in our If you look in the supplemental and the information we've provided, you know, those assets are virtually all in the CLO. I mean, as Charlie mentioned, and Charlie, feel free to add here, you know, we've seen, you know, we had our retail deal payoff, the last one that we had. We had the office deal that we've talked about for a couple of quarters. And for the most part, you know, you know, the rest of the transactions are, you know, the biggest challenge they're facing is obviously inflationary, its interest costs, and whether their rental increases in their business plans can outpace expenses enough relative to what their original plan was. And for the most part, we feel that that's the case in our portfolio, that they're performing on a relative basis well in this environment. I mean, they're when you consider that their overall interest rates, not the spread, but their overall interest rates have, you know, approximately doubled for many of these guys since they implemented their business plan. And that does not include any, you know, inflationary pressure on other expenses. They're still getting rental increases. They're still moving forward with their plans. And, you know, frankly, I think in the recent months, we've seen a lot of particularly larger and and well-capitalized sponsors look at trying to refinance or when they can refinance because of uh you know where the cost of short-term financing is uh charlie if you want to add anything on the the overall uh portfolio yeah bill three sure so yeah i'm just specific on that question so we historically have not um you know reported performance or excuse me um credit criteria of the clo separate from
spk10: LFP as a whole, primarily because 90% plus of LFP's assets are within the CLO, so you can look through to that. Everything's current, as we stated earlier. I would also point out that all deals, or 100% of the deals in the portfolio have interest rate caps, which is certainly helping from a DSCR perspective in this environment with SOPR having increased so quickly. And then just lastly, if you think about kind of the bucket of loans that are risk-rated for this quarter. There's only one within that book that is expected to mature within the next six months, so we do have a little bit of runway before the maturity wall starts growing a bit. And that deal, which is a $13 million multifamily deal, is performing well, and we have received a payoff request from the borrower on a refinance, so we don't expect any... maturity default or any other type of issue with that bill.
spk02: Thanks, appreciate all the color there.
spk09: Appreciate you taking that question, thanks.
spk14: The next question comes from Steve Delaney with J&P Securities. Please go ahead.
spk00: Good morning, everyone. It's nice to be on your call this morning. Following up on the risk weighting question, you reported a weighted average risk rating of 3.2 times. Can you comment on how many, specifically, how many four and five rated loans there are as of March 31? Thanks.
spk10: Hey, Steve. Thanks for joining. I can start on that one. So the total portfolio is 67 loans. Of those 67, one is risk-rated five, and that deal was risk-rated five as of 12-31 as well, so no change there. And 12 of the deals are risk-rated four. So that works out to 12 out of 67 is 18% of the portfolio. And as Jim mentioned, none of those risk rating score are performance issues. They're all just generally, as we look through the book and think about business plans and debt service coverage ratios and where the market is, we thought it made sense to be a little more prudent on that. you know, where we were rating things. Similar to what happened during COVID when, you know, I think across the board and across the industry, folks just kind of ticked their risk ratings up a bit. So similar story this time around as opposed to any specific asset concerns.
spk00: Got it. And thanks for the comment on the retail loan. That was actually my first question is give us an update and profile of that. But since it's paid off, we won't need to talk about that. I was curious that you have a $12 million multifamily loan that you put it as a five, but I think there was additional comments that you do not expect. At this time, you do not expect a loss. I'd comment on that just because we've been kind of, I guess, coached by the commercial mortgage REITs that, you know, since Cecil's been out there over the last couple of years that, okay, we put it at five when we expect a principal loss. And that's probably an oversimplification, but It seemed a little incongruent to hear you say, okay, we're rating it five, but we don't expect a loss. Just maybe add a little color around that as to, one, why it's a five, and what's the overriding characteristic that is positive that causes you to believe you will be taken out in full? Thanks.
spk01: Hey, Steve, thanks for the question. It's Jim Briggs here. Yeah, hey, Jim. Yeah, I mean, as it relates to Cecil, you're right, the fives – you're right from the perspective of the fives are the risk rating that folks are generally pulling out of their pool and then doing specific evaluations on. And more often than not, you're right in that those have some level of loss associated with it. This loan is in monetary default, right? So I think that's the thing that's driving the five for us. And based upon our analysis at this point in time, we do think we'll recover our full investment there.
spk00: Got it. So no interest reserve. They're not paying out of pocket. And I guess you probably have it on non-accrual. Would that be accurate?
spk01: Yes, that's right. It's correct on all of those.
spk00: Okay, excellent. And Jim, just one final thing. I think we're still suffering from the Fed's aggressive hiking. I think everybody thinks that this last 25 was it. And just as that brought tremendous pain and uncertainty over the past year or so into the market, the futures market is telling us that by Thanksgiving, the Fed is going to be reversing. And then 2024 could be a pretty significant drop, well over 100 basis points in the short rates. I mean, just as rates kind of caused all this, are you feeling... The one thing to be positive looking out to 2024 is the possibility of lower rates. And does that cure the majority of the problems that have locked up the real estate markets. Thanks.
spk13: Thanks, Steve. Cure probably is a strong word.
spk00: Okay.
spk13: Relieve, relieve. From my perspective, and you guys have heard me say this before, the biggest or the most important factor in transactions, right? We're all looking for transactions to happen, right? For buyers and sellers to exchange assets. And for that to happen, there needs to be stability around pricing expectations, around financing expectations. And that, to me, has been the biggest driver. Obviously, the unprecedented increase in rates in terms of speed and magnitude relative of where we were is hard to um you know have anything but this dramatic slowdown but but then as as we've gone through this period we've had this constant um you know back and forth now we haven't had it for a few quarters where i think there was this built-in expectation of continued fed increasing of rates but if you go back to you know the fall of last year there was a debate on every single Fed meeting on whether they're increasing rates or decreasing rates, or at least were they going 50, 75, 25. I mean, we've had, you know, pretty, I would say pretty consistent consensus on, you know, this most recent one, maybe there was some question whether they would raise. And so that, you know, has started to kind of, it desensitized people a little bit to, everything that was going on and created a bit more view of stability. So I do think the lower interest rates certainly will help unlock a lot of portfolio issues that people may be facing or sponsors in terms of just their costs. I do caution that lower interest rates could also, you know, be accompanied by, you know, deteriorating economic conditions. It doesn't have to, right, if inflation gets under control. But I do think in general, if we see rates even stay where they are and with some modest decline, maybe not the full 100 or 100 plus, I think you're going to see more transactions get done. I think, you know, we touched a little bit on it in the remarks today, but there is still a massive supply-demand shortage in housing broadly. in middle market housing specifically. And when you look at kind of, you know, construction deliveries and as we clean out what's kind of come to market, we have another lull here where there were very few starts. And so, you know, there's not something on the horizon that's going to fix that problem. So at least in terms of the housing industry, there just seems to be, you know, a this ongoing momentum that until that dynamic shifts, there's just going to be an appetite for, uh, for more, uh, transactions and assets in that, in that space trading hands, um, lower rates will help so long as we're not, you know, that the economic, any economic downturn is not so severe that, you know, it dampens that. And yeah, in general, I, I am, I believe that the second half of this year, in my opinion, particularly into the middle of the third quarter or beyond, um, you know, we're going to see transaction volumes pick up, I think significantly compared to the first quarter, which is obviously on a relative basis, not saying a ton, but, um, overall, I think it will be a more healthy environment for transactions as we approach the end of the year.
spk00: Jim, thank you so much. I really appreciate that perspective. You've got a front row seat and, um, Thank you for that detailed response. Stay well. Thanks Steve. You too.
spk14: The next question comes from Steven laws with Raymond James. Please go ahead.
spk12: Hi, good morning. Good morning. Kind of combination of the credit and Cecil comments. And I think a couple of loan payoffs were to a number of downgrades. Um, but I was surprised that even with the, I guess, average rating, I think went from 3.0 to 3.2. The Cecil Reserve actually released a couple hundred thousand during the first quarter and didn't build in conjunction from a general reserve standpoint. Can you kind of connect the disconnect between the rating downgrades versus the Cecil Reserve release?
spk01: Sure. One, the loans that paid off, you know, just from the basis point reserve perspective, we're carrying a bit more of reserves than the remainder of the portfolio. Um, so you had the release, um, there, um, while I'd say, while the risk ratings, um, have the increased, um, the, the fundamentals, uh, from the collateral perspective are, are still there. Right. So, um, you know, the, any, any magnitude of loss there has not, um, has not increased much. So, um, Yeah. The weighted average increase in the ratings has not had a significant impact on the value of the collateral itself and the cushion we have because of the underwritten levels there. Okay.
spk12: Thanks. And then as a follow-up, I wanted to touch base on you know, options and possibilities around non-CLO financing. You know, when would, are you looking to put something like that in place? I mean, are you, you know, waiting closer to the replenishment period? You know, you've got that through the end of the year. So, I mean, you know, are there any lead options, kind of what do ROEs look like with any pricing or options you've got? Can you talk about the, you know, how we might see that play out over the next, or over the balance of the year? Sure.
spk13: Well, look, you know, I think for those who were, you know, closely paying attention to that market, you know, as we are, you know, the early part of this year suggested a window was coming that would, that was reasonably attractive for Securitas Financing and Siri Silos in particular. You know, we, along with, you know, I know several of our of our peers were actively evaluating similar public transactions that we've done and others have done. And just as quickly as that stability and expectation came, we got the second and third largest bank collapses in US history. And, you know, as the story goes, that stability was history along with it. So, you know, from, I would, if you had asked, you know, back in February, I would have expected to see probably a number of public financings happen between then and now. That would have been my view at that point. Obviously, that's changed. Along the way, we have continued to talk to a couple of our banking partners and some other private parties about appetites for a private transaction. And I do believe that if the public markets continue to be kind of frozen for this type of activity, that there is appetite from private investors to find a way to to execute on transactions that they might otherwise have taken part of in the public market. I can't predict if or when we're going to be able to necessarily get that done, but I can say just in discussions with regular market participants, there is reasonably elevated interest to talk to folks about, well, if we can't get a public deal done, is there a way for us to do a private deal? So we're going to continue to evaluate all of those options. We're going to monitor the public markets. And we've also even turned to some of our banking partners for more traditional financing of our assets with some modest, hopefully, changes in terms around, you know, the match term aspect and, you know, lower or eliminated mark to markets. proposals and things of that nature. I won't say that any of that is terribly different in terms of how we've been thinking over the past, you know, four or five quarters, but the interest from the counterparty side is probably a bit greater today than it's been very most of that time.
spk12: Yeah, no, certainly that window was very short and the bank issues closed that quickly to your earlier points. Hopefully some stabilization rates can help things unfold. I do have one last follow-up. As you have discussions around extensions, any pushback or hesitancy of borrowers to buy new caps? Are you looking for other structural protections and loans around extensions?
spk13: Look, I think every borrower has looked at it and been not terribly excited about the cost of a new cap or buying a new cap. I think it's So resistant is not the right word, but certainly other ways we could work with them. We haven't had to do too many of those yet, but in general, we've been pretty clear that that's going to be a part of any kind of modification or anything that we do on an extension. And I think for the, I would say for the most part, our borrowers have been reasonably accepting of that and tried to focus on, okay, where else can we you know, make things better. Um, you know, what I would say borrowers are considering is, is, is, you know, the, the, the cost of financing has increased the cost of taxes have increased. And so, you know, there's, there's probably a bit more, um, appetite or appetite, but, but borrowers making, um, pay downs to reduce principal, is probably something that we've talked about more than certainly during times when everything was going the other way. That wasn't usually part of the discussion. But I think just the overall cost of financing, the cost of caps, the cost of the short-term rates that people are saying, well, maybe if I pay down, if I'm able to reduce the leverage here, can you help me out in these other areas? And from our perspective, often the answer would be yes, right? De-leveraging is a nice way to lower the risk profile. I also think that many borrowers are looking at, as Steve pointed out, if you look at the curve and you look at where the consensus expectation is on rates short term, most borrowers are expecting a decline in their interest costs if they can get through this year. And so they're They're very motivated to work with us to make sure that we're comfortable with their loan and them. I would say I've been, in the few instances where we've had these active negotiations, I've been fairly pleased with the fairness in which both sides have been coming to the table. Some of the payoffs that we've had, frankly, were assets that you know, we were a little concerned about in terms of their leverage, not kind of asset quality or condition. And then they went ahead and paid off. So sometimes we can't figure it out, I guess.
spk12: Yeah. Well, no, it's been a great discussion in the Q&A, and I've certainly enjoyed it. Appreciate it.
spk14: The next question comes from Matthew Erdner with Jones Trading. Please go ahead.
spk07: Hey, guys. Matthew on for Jason this morning. Thanks for taking the question. You mentioned long-term rent growth on multifamily. Could you describe, I guess, what the business plans were that were underwritten two years ago, say, compared to now and the expectation for rent growth? And then could I get your guys' view on rent growth going forward as well?
spk02: Yeah, I mean, I think on rent growth...
spk13: you really have to look at an asset by asset basis. Well, first of all, macro level, I think, you know, we do believe that you're going to continue to see rent growth in the, you know, plus or minus 2% range may, may approach three, but not, not there, but that's a national average. And I think you have to really specifically identify micro or at least at least some markets to get there in terms of the business plans, you know, and we don't, publicly kind of go out and give it statistically, but just the rent growth has largely been in line with where our expectations were in terms of the markets that these buyers were buying in. Not everywhere, but for the most part, they're getting rental growth. It's close, some cases above where they were, but that's being accompanied by elevated expenses on the debt side and you know, some of the inflationary pressure. So that has been the bigger, you know, issue for sponsors to deal with. There are obviously sub-markets that we have assets in that have seen, you know, rent growth not be achieved or, you know, after, you know, rehabbing units, the magnitude of the rental growth is not what was expected. And those are the ones where we've been you know, working more closely with borrowers, one of which, as I just mentioned, we had pay off recently. So, you know, but on a go forward, so on the deals that we're, that we have in the portfolio, I think the issue is more, is about total NOI and less about the pure rental growth. On a go forward basis, you know, I think the opportunities, some opportunities may may lie in recapping prior bridge loans to a more appropriate debt level. I mean, from say competitors or other deals out there that gives them the opportunity to experience these potential lower rates and deal with some of the expense cost savings measures that they've already taken, but to have those implemented. but albeit at a lower rent growth. But you're still seeing areas where people are going to be able to get rent growth in the 5% to 10% range in some markets, say. Whereas over the prior years before that, we were seeing 20-plus for rehab deals. I mean, you could pick 20, 30 markets across the country. So I think that That is not something I foresee in the next couple of years. But like I said, there's still a need for rental housing, and I believe that we'll continue to see opportunities, although I don't believe that the dollar volume of those opportunities is going to, in the near term, match what we saw in 2020 and 2021. late 2019. But overall, I think rental growth in our portfolio and I suspect in others has not been the primary driver of performance issues. It's really been around the increase in cost of leverage and inflationary costs.
spk02: That's helpful. Thanks for your answer.
spk14: The next question comes from Ward Bloom with UBS Financial Services. Please go ahead.
spk08: Hi. Just looking out into the future, if you see these continued problems with regional banks in the real estate area, is it reasonable to expect, you know, spreads to widen and giving us, you know, better returns in terms of new loans?
spk13: I think that the short answer is yes, that's a logical conclusion. In the past five or six years anyway, what we've seen is as that opportunity arises, there are pockets of capital that come to market fairly quickly, debt funds obviously in particular, to keep those levels somewhat muted um but i do see i mean overall the spreads in our portfolio are lower than spreads on a new portfolio just because of the vintage so you know i do expect there to be it spreads you know spreads in the forest you know a few years ago spreads in the forest maybe more than a few but um was when things were declining um you know we're still seeing some transactions done even below that. But I think that your point is accurate. I mean, there's a massive pullback in lending, right? Life companies are not really participants in this space, right? So they've been the most active lender out there. Fannie and Freddie and FHA are not participants in this space. So you have mortgage rates, you have debt funds, and you have banks. Banks are certainly going to pull back. and that leaves a lot of that opportunity in the form of REITs and public and private debt funds. And so there should be an opportunity for some spread expansion. That would need to, in my opinion, need to be accompanied by transaction volume increasing because if you have a number of guys all chasing the same deal without other opportunities, that tends to keep things depressed.
spk02: Thank you.
spk14: The next question comes from Greg Bennett, a private investor. Please go ahead.
spk11: Good morning. A couple of clarifications. You entered the second quarter with, what, $50 million. Did you indicate whether that's been reinvested or not? Where are you right now with your cash positions?
spk02: Greg, Charlie, I can start.
spk10: Yeah, go ahead. Okay. Historically, we are currently working on transferring some assets. So we would expect there to be acquisitions by LFT during the quarter. We don't have a final number yet, and we haven't historically reported kind of mid-quarter asset balances. But, you know, there are assets on the matters balance sheet that we're working through transferring. So... We do expect the cash balance to decline from 331 to 630.
spk11: Okay. Second question. Just from a retail investor's point of view, on, you know, you look at table or page number 10, weighted average, you know, risk rating. When loans are, when you all buy a loan from your parents, are you buying a one or a two loan? to put in the portfolio, or what is the criteria?
spk02: I mean, the short end, yeah, go ahead. They're all performing.
spk10: Okay. Yeah, I think that's right. I think, so the criteria in acquiring assets from the parents, one, all loans are transferred at fair market value. Number two, assets need to be performing. Number three, they need to be eligible to the financial facilities. So it's possible that, you know, whether it's a one or a two or a three, I think those all fall within the performing bucket as long as our asset management group has no concern with the performance and that it's priced appropriately from a MARC perspective. We wouldn't expect to transfer anything that, you know, is considered higher risk.
spk11: I guess I would say visually when you look at this chart and if you are a retail investor and you're looking at it, what is the difference in pricing if you're looking at buying a one or acquiring a one from your parent versus a three? Is there a huge difference in pricing for the trust?
spk10: I mean, I think, you know, one thing I'll say, and then, Jim, feel free to jump in. You know, typically the things that drive the pricing are LTV, debt service, occupancy, which are the same things that drive risk rating. So, you know, I wouldn't say there's a massive difference. So if, let's say, a one rating is a 60% LTV loan and a three rating is at a 75%, you'll see that there would be some difference. theoretical change in the mark based on, you know, just where the leverage is on the loan and the risk profile. But it's a little, it's kind of asset by asset. Go ahead, Jim.
spk13: And the spread, right? So, I mean, we've lived through a pretty dramatic change in everything, spreads, rates, et cetera. But if you were to originate a loan today, like a brand new loan today, the one that or one that you thought was more like a two. We don't do that up front. It's just the underwriting exercise. But often that's addressed at the spread. So apples to apples, a deal that's originated at the same time where one has what we would say that's a slightly higher risk, well, we expect to be paid for that risk. So it's not necessarily that's an asset that trades below par. It just is an asset that may trade at a higher spread. Or have a house.
spk11: And all the loans are acquired from the parent, which your business model in the past has been these are all underwritten by the parent. You eat your own cooking, so to speak. You're not buying loans from regional banks. Do I have that right? You do. That's correct. And that's what you intend on continuing to do, or your parent may consider buying a loan If regional banks need to sell loans for liquidity purposes, is that something that you guys would consider after you've done your own underwriting?
spk13: I mean, I don't want to say at the parent level, there's a lot of considerations and things that we talk about with the capital there. So I wouldn't preclude saying, oh, we would never do that. But that's not really the business plan of our parent or of, you know, limit to parent or of LFT. So our expectation would be to continue to originate loans, you know, from our own production team and underwrite the loans ourselves at inception. Does that mean if there was some great opportunity that were presented to us because of the turmoil and disruption in the banking market, We may take a look at it, but that doesn't necessarily mean that LFT would need to or want to participate in that either, something we would have to talk to the board about. But generally, that's not really something we're thinking about.
spk11: All right. Well, just a suggestion from a shareholder's point of view, I'd rather have a less spread and have more ones and twos, and I think maybe your stock price would improve by reverse. I understand loans that were taken in a year ago that were underwritten, but going forward, if you told your investors that you were going to start out with ones and twos and you were going to take less spread, I mean, your stock's yielding 14%. People are more... We want return of our capital, not return on the capital. And I think I'd rather take less return on the capital, but have a one or a two in the environment that we're in right now. And maybe the investment community would reward us with a higher stock price.
spk13: Well, I hope that that's true. And to be clear, we don't underwrite deals that are starting out at a
spk11: higher risk rating right so i mean i'm not suggesting you said that but just want to click clarify but yes uh point well taken so if we were to go if we look forward or if you do your next dlo uh i'm sure you guys are working on it but if we were to look forward and see this chart change i mean everybody's concerned about risk right now um Anyway, just a comment from a retail point of view. Thanks very much. Appreciate the quarter.
spk02: Great. Thank you.
spk14: Again, if you have a question, please press star then 1. The next question comes from Christopher Nolan with Landberg-Dahlman. Please go ahead.
spk05: Hi. Given where your stock price is, are you giving any consideration to share repurchases?
spk02: It's something we've talked about always with the board.
spk13: The challenge that this platform has, as we've discussed, is we're trying to raise more capital and not less. The challenge with share repurchases is it just takes even more flow out of the market. It's not a no, but that is a big part of the consideration that we've talked to the board about. We do believe certainly that the yield that the stock is trading at is far in excess of where the risk is. So, yeah, it's something we'll continue to look at. It's not at the forefront of what we're thinking, admittedly, but it is something that we continue to evaluate and discuss.
spk06: How low does the stock price have to go relative to book for it to be in the forefront of capital market, you know, capital planning discussions?
spk13: I don't think that there's a direct answer to that that we've stated publicly, but it is something that we've talked about with the board.
spk04: Thank you.
spk14: This concludes our question and answer session. I would like to turn the conference back over to James Flynn for any closing remarks.
spk13: I want to thank the group. That was a good call. I'm glad for all of the questions. Please feel free to reach out to me or the team here with any follow-ups. We'd be happy to keep everyone informed and look forward to speaking to you again next quarter. Thanks all.
spk14: The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.
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