Lument Finance Trust, Inc.

Q1 2024 Earnings Conference Call

5/10/2024

spk01: Good morning and thank you for joining the Lumen Finance Trust First Quarter 2024 Earnings Call. Today's call is being recorded and will be made available via webcast on the company's website. I would now like to turn the call over to Andrew Chang with Investor Relations at Lumen Investment Management. Please go ahead.
spk10: Good morning, everyone, and thank you for joining our call to discuss Lumen Finance Trust First Quarter 2024 Financial Results. With me on the call today are Jim Flynn, our CEO, Jim Briggs, our CFO, Jim Henson, our President, and Zach Halpern, our Managing Director of Portfolio Management. On Thursday, May 9th, we filed the 10Q with the SEC and issued a press release to provide details on our first quarter results. We also provided a supplemental earnings presentation, which can be found on our website. Before handing the call over to Jim Flynn, I'd like to remind everyone that certain statements made during the course of the 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. 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 results and uncertainties are discussed in the company's filings reported with the SEC, in particular the risk factors section reform 10-K. It is not possible to predict or identify all such risks, and listeners are cautioned not to place undue reliance on these forward-looking statements. The company undertakes no obligation to update any of these forward-looking statements. Further, certain non-GAAP financial measures will be discussed on this conference call. A presentation of this information is not intended to be considered in isolation nor as a substitute for the financial information presented in accordance with GAAP. Reconciliations of these non-GAAP financial measures to the most comparable measures prepared in accordance with GAAP can be accessed through our filings with the SEC. For the first quarter of 2024, the company reported GAAP net income of 11 cents and distributable earnings of 15 cents per share of common stock, respectively. In March, we also declared a dividend of 7 cents per common share of stocks with respect to the first quarter.
spk03: I will now turn the call over to Jim Flynn. Please go ahead. Thank you, Andrew.
spk11: Good morning, everyone. Welcome to the Lumen Finance Trust earnings call for the first quarter of 2024. We appreciate everyone joining today. Let's start just as we entered 2024, we were cautiously optimistic the lending environment would begin to improve during the first half of the year. We are now in early May. The Fed has yet to implement any rate cuts, and the economic data suggests inflation has remained stubbornly elevated. The economy and labor market have remained broadly resilient despite the historic increases in short-term rates that began over two years ago. And although the Fed has indicated that it did not expect future hikes during its remarks a couple of weeks ago, the consensus view of higher for longer seems prudent until the trend in economic data suggests otherwise. The multifamily sector continued to be challenged during the first quarter with muted property sales activity leading to limited acquisition financing opportunities. Given the persistence of elevated interest rates, borrowers have also been reluctant to refinance their portfolios unless compelled to do so. Just this week, the NBA announced first quarter lending volume with multifamily down 7% year-over-year in Q1 and down 29% from Q4 of 2023. Despite the challenging short-term environment, Nearly $500 billion of multifamily mortgage debt is expected to reach initial maturity by the end of 2025, according to NDA estimates. And combined with a perhaps causing property sales transaction volume to move toward a new normal level activity, we expect to see a return of attractive lending opportunities in the medium and long term. Multifamily as an asset class continues to outperform other CRE property types, and we believe this is the reason our company provides its shareholders with a unique value proposition. LFT has a deliberate focus on middle market multi-family credit, success in active asset management, and strong sponsorship provided by the broader Lumen and Oryx platforms. As a result, the company has been able to maintain stable dividends with better than average credit performance within its investment portfolio, and a superior dividend yield relative to many of our peers. Having effectively fully deployed our investable capital in the second half of 2023, our focus this quarter was on proactively managing our portfolio to protect shareholder principal. We successfully resolved the two five-rated assets from our December 31st report and maintained a stable weighted average risk rating of 3.5 for the quarter ended March 31st, with no specific reserves recorded during the period. We increased our available unrestricted cash quarter over quarter, ending Q1 with approximately $65 million compared to $51 million as of December 31st. We believe the increased liquidity will allow us to maintain flexibility in achieving positive asset management outcomes for our shareholders and provide us with the potential to deploy capital into attractive investment opportunities outside of our two existing securitization structures. In the meantime, we have earned relatively attractive returns on our cash deposits given the elevated short-term rate. Our portfolio continues to be financed with long-dated, secure financing that is not subject to market or margin calls. SL1, the CRE CLO we closed back in 2021, is now beyond its reinvestment period and has begun to de-lever with repayments of its collateral. We continue to explore opportunities to refinance the portfolio. As of quarter end, the cost of funds for SL1 was silver plus 157, and an effective advance rate of approximately 82%, levels which we believe are still attractive relative to other portfolio financing alternatives available in the market. The LMF financing transaction we executed mid-last year has a remaining reinvestment period that extends into July 2025, and we fully intend to reinvest capital as liquidity within that structure becomes available. With that, I'd like to turn the call over to Jim Briggs who will provide us details on our financial results. Jim?
spk04: Thanks, Jim. Good morning, everyone. Last evening, we followed our quarterly report on Form 10Q and provided a supplemental investor presentation on our website, which we will be referencing during our remarks. The supplemental investor presentation has been uploaded to the webcast as well for your reference. On pages four through seven of the presentation, you will find key updates and earnings summary for the quarter. For the first quarter of We reported net income to common stockholders of approximately $5.8 million, or $0.11 per share. We also reported distributable earnings of approximately $7.6 million, or $0.15 per share. There are a few items I'd like to highlight regarding activity during the period. Our Q1 net interest income was $13 million compared to $9.1 million in Q4 of 23. The sequential increase was primarily driven by higher exit fee income due to greater quarter-over-quarter payoff activity within the portfolio and $3 million related to the resolution of two defaulted loans, one collateralized by an office property located in Columbus, Ohio, in which we reduced our current value to zero, and the other collateralized by a multifamily property located in Virginia Beach, Virginia, which was modified during the quarter with, among other things, previously passed through interest being brought current. Payoffs during Q1 totaled $97 million as compared to $43 million in the prior quarter. Associated Q1 exit fees totaled approximately $825,000 as compared to $210,000 recognized in the prior quarter. The majority of loan payoffs we experienced were driven by borrowers either refinancing with another lender or selling the underlying properties. As a reminder, when one of our loans are refinanced with a permanent agency loan provided by an affiliate of our manager, the borrower exit fee is waived pursuant to the terms of our management agreement. In these instances, we do, however, receive a credit equal to 50% of the waived exit fees against our reimbursable expenses due to our manager. Our credit for waived exit fees was flat quarter on quarter. Our total operating expenses were $4.3 million in Q1 versus $2.7 million in Q4 of 23. The majority of the sequential increase in expenses was driven by the accrual of incentive fees due to our manager, which are accrued and payable on a quarterly basis equal to 20% of the excess of core earnings as defined in our management agreement over an 8% per annum return threshold. Distributable earnings can be used synonymously with core earnings in this context. Outside of that, operating expenses were largely flat quarter on quarter. The primary difference between reported net income and distributable earnings to common was approximately $1.8 million, attributable to the increase in our allowance for credit losses, all with respect to our general CECL reserves. Property acquisition volume continues to remain depressed, leading to limited visibility in the market with respect to valuation and cap rates. The increase in general reserve is reflective of changes in the macroeconomic forecast, including current higher rates for longer sentiment, as well as cautiousness in our modeling as it relates to CRE pricing during this period. As of March 31st, we had two loans risk-rated 5 for default risks. One is a $17 million loan collateralized by a multifamily property in Brooklyn, New York, and risk-rated five due to imminent maturity default. The other asset is a $20 million loan collateralized by two multifamily properties near Augusta, Georgia, but is risk-rated five due to monetary default. Both of these loans have been placed on non-accrual status, although both of these loans have since made their April interest payments, which will be recognized in income on a cash basis. We evaluated both of these five-rated loans individually to determine whether asset-specific reserves for credit losses are necessary, and after analysis of the underlying collateral, determined that none were necessary as of March 31st. As of year end, the company's total equity was approximately $243 million. Total book value of common stock was approximately $183 million, or $3.50 per share, up from $3.46 per share as of year end. We ended the first quarter with an unrestricted cash balance of $65 million, and our investment capacity through our two secured financings was effectively fully deployed. We'll now turn the call over to Jim Henson to provide details on the company's investment activity and portfolio performance during the quarter. Jim?
spk06: Thank you, Jim. I will now share a brief summary of the recent activity in our investment portfolio. During the first quarter, LFT experienced $97 million of loan payoffs. A portion of these loan payoffs related to the defaulted loans discussed by Jim Briggs earlier. We did not acquire or fund any new loan assets during the first quarter. As of March 31st, our portfolio consisted of 81 floating rate loans with an aggregate unpaid principal balance of approximately $1.3 billion. 100% of the portfolio was indexed to one month SOFR, and 94% of the portfolio was collateralized by multifamily properties. An analysis of our net interest income sensitivity to shifts in term SOFR appears on page 12 of the earnings supplement. Our investment portfolio continued to perform well during the first quarter, and we ended the period with slightly more than 77% of the loans in portfolio risk-rated A3 or better. marking a slight improvement versus the fourth quarter of 2023. Our weighted risk average rating remains stable at 3.5, sequentially. Our five-rated aggregate loan exposure decreased to approximately $38 million this quarter versus $46 million as of year end. At the time of our last earnings call, we had two five-rated loans that have now been fully resolved. As expected, we received additional insurance proceeds in the amount of $13.5 million on the defaulted loan on the property in Columbus, Ohio, reducing the carrying value of this loan to zero and, after taking into consideration legal and other costs, resulting in the recognition of one-time income of approximately $2.5 million during the first quarter. The other five-rated asset at the end of 2023 was a defaulted loan on a multifamily property in Virginia Beach, Virginia. Loan modification with the borrower and received a $3.6 million partial principal pay down during the first quarter. Last week, the borrower repaid the remaining loan balance in full in accordance with the terms of that loan modification. We are very pleased to have achieved positive asset management outcomes for these loans thanks to the deep experience and diligent efforts of our team. With that, I will pass it back to Jim Flynn for closing remarks and questions.
spk11: Thank you, Jim. Thanks to Our attendees and your interests and operator, please open the call for questions.
spk01: Thank you. Ladies and gentlemen, we will now begin the question and answer session. Should you have a question, please press star followed by one, and you will hear a prompt that your hand has been raised. Should you wish to decline from the polling process, please press star followed by two. And if you are using a speakerphone, please lift the handset before pressing any keys. Our first question comes from the line of Christine Love from Piper Sandler. Your line is open.
spk05: Thanks. Good morning. So no new investments in the quarter, but you did have some payoffs. So can you speak to some of the drivers and expectations going forward in the quarter? Was it lack of opportunities, cautiousness in the market, or anything else you would call out? And then just how would you expect new investments to compare to payoffs in coming quarters? Thanks.
spk11: uh thanks uh so yeah go ahead sir didn't you want that okay yeah so um as noted in uh on the call earlier fl1 which is our 2021 securitization is out of its reinvestment period uh new investments previously uh were often reinvestment of that securitization so right now We're basically at capacity given that FL1 is out of reinvestment period and LMF, the 2023 financing transaction is at capacity. We do have 60 plus million of cash. It's just a matter of strategically looking to refinance FL1 and planning with that excess cash accordingly. So something to consider over the next couple quarters as FL1 continues to deleverage. But over the near term, over the next quarter to two quarters, I don't know that we'll see FL1 refinance, but that'll all be market condition dependent. The answer is we're effectively fully deployed with obviously the elevated cash. In answer to your question, I would expect to be able to fill any reinvestment capacity that we have in a reasonably, unless it's at the very end of the quarter, we'll be able to, despite the
spk05: relatively slow market there are lending opportunities right okay that makes sense i appreciate that and then second question for me just do you just do with your views on credit and the portfolio provision increased a bit here credit metrics were stable and the resolutions were good to see but but other some other competitors have been having tougher experiences as of late um so anything on credit that you're seeing would be helpful and then why you think you might be performing better than some of the peers in the space here?
spk11: Well, you know, the honest answer is I think that we've done a very good job of putting together a quality portfolio, you know, and, you know, we've had good sponsors who have worked with us to come up with resolutions to challenging situations. And, you know, we feel pretty confident and comfortable that we'll continue to be able to do that in the existing portfolio. We've had the structure of our loans have always had rate caps. We've had milestones for drawing down new capital in terms of rental increases and actual business plan milestones that I've provided opportunities to work with sponsors sometimes sooner in the process than others may have been able to. In general, I think we did a good job on the front end and have a very, very good asset management and portfolio management group that spend a lot of time at the assets and with the sponsors and making sure that we're timely on top of issues. There's not something more secret than that, other than I think we have a really good credit team.
spk03: Great. Thank you, Jim. Appreciate you taking my questions. Thank you.
spk01: Our next question comes from the line of Jason Weaver from Jones Training. Please go ahead.
spk07: Hey, good morning. Thanks for taking my question. First of all, you spoke to this in the last question regarding the wind down of FL1. I was curious, you know, with how much credit spreads have tightened in here quarter to date and over the first quarter, if the opportunity is more immediate to pursue that refinancing and where you're seeing generalized spreads out there.
spk11: So, I mean, on the credit side, from at 80, you know, 82% and 157 over, there's no opportunity that's really even close to that in rather private or public. But, you know, as you point out, you know, as time goes by and we continue to deliver, the cost of those funds will increase. You know, you ask the media, we're evaluating it we have been and continue to do so depending on how you define immediate. We think that there's potential this year or early next year to potentially refinance that, but it's really going to be dependent on the capital markets. Obviously, we can get it done, I think. I shouldn't say obvious, but I think you can get a refinance done in the public markets. I think there's other structures with private or non-capital markets transactions that would provide for refinancing. But today, frankly, they're economically not as attractive to pull the trigger, in our opinion, but we're getting closer to that. And we are working with our banking partners who have been thinking of ways we might refinance that portfolio in a way that does make sense, you know, perhaps sooner than later. But, you know, the short answer is we feel comfortable with the financing today and want to continue to take advantage of the relative cost of capital and, frankly, you know, higher leverage than we might otherwise achieve outside of or in a new deal. But it is something we're going to be continuing to do every month. Look at the market, look at what we can get and compare long-term what we're doing. And I'll also note, I mean, we said this, you know, I mentioned the 500 billion of maturities coming up, you know, we're already almost halfway through 2024. So that number is probably been pushed into 25 already with extensions. We just don't have that data in the market yet. um so the opportunity is coming um we're already seeing more for sure but it's nowhere near where it's been you know a couple of years ago uh so you know there that's also a consideration just in terms of you know taking advantage of of refinancing and creating more more capacity you know we want to make sure that we have attractive investment opportunities at that time as well so so that's that's part of the equation as well um so not a Not a direct answer, but that's our thought process. And we talk about it internally and with the board every time we meet.
spk07: No, that's still very helpful. And I was also curious, with the liquidity build that you've seen to date and taking your answer into account with what you're likely to see on more repayments, any change in your posture towards how you're thinking about possible share repurchases?
spk11: It's something – look, it's been on the table with the board. I mean, one of the – there's obviously a number of issues, right, the size of the float being a big one. It's something we – it's certainly something we consider. But it's weighing the benefits of liquidity, future investment capacity, and the immediate kind of benefit to shareholders and how that might impact the long term.
spk03: value. Okay. Thank you very much for taking my question.
spk01: Our next question comes from the line of Stephen Loss from Raymond James. Please go ahead.
spk09: Hi. Good morning. Nice start to the year. Good number out of the gate. I know it's nice to get the two five-rated loans resolved. Can you touch on the resolution path for the new five-rated loans? I know you've Uh, said both paid April, no specific reserves. So, so, uh, you know, good updates there, but can you talk about timing or resolution path on those two, uh, I guess two loans, but three assets.
spk03: Yeah, exactly. Yeah.
spk11: Yeah. I mean, uh, I think that that is, uh, you know, a very real time conversation, uh, I don't think we're prepared to share the exact resolution path at present, but just like what you've seen from us in the past, this involves hands-on active management, negotiation with the sponsors, and a push towards quick resolutions.
spk09: Okay, and then to circle back to the CLOs, I guess, or FL1 specifically, looking at Q4, that spread was 155 and only increased even with 70-some-odd million of repays to 157. Can you help me with the math there, how I think about that going forward? Is it a pro-rata pay structure in some way, or I was a little surprised with that level of prepays that that financing cost didn't increase by more than two basis points sequentially?
spk11: Yeah, I mean, what I'd say is that the 2021 securitization with the big AAA and then pretty flat spreads down the stack, meaning that this isn't a 600 basis point BBB spread. We don't have exactly offhand where the BBB is, but I want to say it's in the 300s. you're only seeing a marginal increase in, uh, spread from that, that AAA paying down. It is the AAA paying down. It's not a parata of the, uh, of the other tranches. Um, it's just mechanically, uh, what the number is. Um, it will shift up as, as the AAA continues to pay down, but, uh, not excessively. Frankly, the, um, The larger issue there is just the deleveraging, right?
spk08: The fact that you have less debt on your equity.
spk11: And that will be the primary driver of the need for a command, ultimately. Okay. Appreciate that. Yeah. And it's size. You know, it's a bigger securitization than the other ones. Yeah. Yeah.
spk09: It will. It's the triple B. The triple B is that tight. It probably stays pretty attractive for some time. You know, I guess to think about, you know, incorporating other financing structures you mentioned, I mean, would you look at bank lines and along those lines, you know, where are spreads on new investments for what you see as you look at opportunities? And how do those spreads compare with, you know, what bank lines banks are charging these days? if you were to go that route and kind of considering the lower advance rate on those facilities, you know, what would a fully levered ROE look like if you chose a path like that to, you know, open up the growth opportunity?
spk11: Well, I think there's two questions there or two answers. One is the refinancing of the – if we were to refinance FL1, with a you know a termed out bank line just kind of i think how you're asking that spread and that leverage would be negotiated and i don't think you know it would certainly be um related and correlated to a market but it wouldn't be the same as you know a new warehouse setting um you know those spreads so new asset spreads are There's a wide range because the credit is a wide range. You have high quality new construction deals that are coming out of construction into lease up at relatively low leverage pricing in the mid to high 200s, low 300s, depending on where and what. You have extended business plans for bridge loans that have taken longer and are maybe getting recapped with the new sponsor or same sponsor for an extra couple of years that are probably more in the 300s. And then you could go into the maybe higher leverage, different markets above that, which we're not typically seeing too much. But those are So the asset spreads, we're trying to balance some of the credit risk versus the return, obviously, as we've done. So we'll have a balance of those opportunities. And I think warehouse and bank spreads, when you're thinking about what those look like in the market, which we don't have at LFT, but the sponsor obviously we do, those credit spreads and leverage relate to the assets I just said. So you have I'd say in the high 100s to the low 200s for new deals, newly originated deals. And leverage, you know, 70%, 75% is pretty, you know, market, I would say.
spk08: Zach or Andrew or anyone, if you guys have more to add there, but I think that's about where things are. Yeah, that's fun. Yeah, well, that's great color, and I really appreciate you walking through those numbers for me.
spk03: Appreciate it. Thanks for the comments this morning.
spk01: Our next question comes from the mind of Christopher Nolan from Lattenburg, Maryland. Please go ahead.
spk06: Thanks for taking my questions.
spk03: The Brooklyn non-accrual, is that a rent-stabilized building? Zach, you have the exact answer. I'm sure there's some. I'd have to check on it.
spk11: Right. It's primarily market rate. To be clear, on that deal, there's no – I mean, I'll state unequivocally that that is not an issue. Value is not an issue on that one.
spk03: We'll say that.
spk06: Okay. And then for the loan portfolio in general, do you have any interest-only loans?
spk03: Well, they're all – Yeah, I mean, for the floating stuff, it's all interest only. Which is the portfolio, I mean, the bridge portfolio is interest only.
spk11: There are rebalancing requirements that would require principal pay downs, and those exist in all of the forms. Okay, and then in the final question, I have a recap of what these underlying bridge loans are. They're typically either two or three-year terms. floating rate and interest only.
spk08: They do have interest rate steps which are purchased by the sponsors. But bridges primarily, whether it's us or competitors in the space, they are interest only.
spk06: And I guess given that, how does that affect your reserving methodology just because these borrowers sort of have a larger balloon payment at the end than normally.
spk11: So, I mean, I'll let Jane and Greg speak to the process, but just in general, I mean, so when we look at our, when we do an asset by asset analysis of our portfolio, you know, from my perspective, and, you know, there's an actual process, but the key metric we're looking at to start is what's our basis, our loan-to-value. And so, you know, that's the primary driver. So whether, you know, in some cases, we obviously have assets that maybe started at a 70, as is LTV, and might be 75 or 80 today. And that's not, you know, that means the equity has lost value, but our credit position is pretty good. So that's where we're kind of evaluating and then obviously looking at the market and the comps. So we're doing a true asset by asset analysis on whether we think there's an impairment or risk of loss. On the general reserves, on the feeble side, that is a more macro market driven analysis and that is less focused on the specifics of our portfolio and more focused on you know, industry and macro trends. And, you know, Jim, I don't know if we've generally taken, we think of fairly conservative.
spk04: Yeah, I mean, it's going to be a combination, you know, of both. CECL requires a look forward, you know, on what the macro environment and the forecast is going to be. We choose a one-year period for that. But to Jim's point on collateral value and LTVs, That is a big driver as well, and you're seeing that in our general reserve, right? I talked about our general cautiousness in this period as we model where there's not a lot of activity getting done and the observability of cap rates and valuation. You know, that's sort of speaking to LTVs, right, and collateral value. The same drivers that Jim talks about is going to be a big driver of the reserve. There is going to be this macro economic look as well because it's expected losses over life. And we need to be forecasting. And we saw that macro for us, that macro forecast move. to a more of a we're not going to see rate cuts as soon as we thought we were going to, and they're going to come later in the year potentially. So it's a combination of both, but I would say that LTV is going to be a driver there and was a driver of the reserve.
spk03: Okay. Thank you.
spk01: Again, as a reminder, if you wish to ask a question, please press star 1. Thank you. Our next question comes from the line of Red Blum from UBS. Please go ahead.
spk00: Good morning. Good report. The recoveries on the commercial building, I guess to me, sort of look like an extraordinary gain. if we strip out that gain, what do distributable income per share numbers look like?
spk04: Those one-timers work out to be about six cents for the one-timers. And I spoke about the incentive fee, so that's sort of going the other way for about three cents. But the one-timers in particular were We're about six cents.
spk03: Thank you very much.
spk02: There are no further questions at this time.
spk01: I will now turn the call over to our presenters. Please go ahead.
spk11: I want to thank everyone for your time and interest and look forward to catching up again next quarter. Take care.
spk01: Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. You may now disconnect.
Disclaimer

This conference call transcript was computer generated and almost certianly contains errors. This transcript is provided for information purposes only.EarningsCall, LLC makes no representation about the accuracy of the aforementioned transcript, and you are cautioned not to place undue reliance on the information provided by the transcript.

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