Lument Finance Trust Q1 2023 Earnings Call Transcript

Quartr
Provided by Quartr
May 12, 2023

There are 9 speakers on the call.

Operator

Good morning, and thank you for joining the Lumen 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. I would now like to turn the call over to Charles Duddy with Lumen Investment Management. Please go ahead.

Speaker 1

Thank you, and good morning, everyone. Thank you for joining our call to discuss Lumen Finance Trust's Q1 2023 financial results. With me on the call today are James Flynn, CEO and James Briggs, CFO. On Thursday, we filed our 10 Q with the SEC and issued a press release, Provided details on our Q4 results. We also provided a supplemental earnings presentation, which can be found on our website.

Speaker 1

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 statements. These risks and uncertainties are discussed in the company's reports filed with the SEC, including its reports on Form 8 ks, 10 Q and 10 ks, and in particular, the Risk Factors section of our Form 10 ks. It is not possible to predict or identify all such risks.

Speaker 1

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 atsecdot I will now turn the call over to James Flynn.

Speaker 1

Please go ahead.

Speaker 2

Thank you, Charlie. Good morning, everyone. Thank you for joining. Welcome to the Lumin Finance Trust earnings call for the Q1 of 2023. As we typically do, we'd like to start by addressing the current economic environment.

Speaker 2

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 multifamily market, although at a slower rate than we've seen over the past few years 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 Q1, We saw annual growth for across the industry, annual growth for multifamily assets in the U. S. Of 4.5%.

Speaker 2

Pre COVID average of 2.7%. In terms of vacancy, the overall multifamily rate increased by 30 basis points We saw in Q2 of 2022 indicating that spine demand dynamics may begin to stabilize. We saw new construction deliveries of 58,600 in Q1, which brought the 4 quarter total to 332,200 units, that is slightly lower than the calendar year annual total of 300 and If that trend is sustained in the coming quarters, The slowdown in 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 2019.

Speaker 2

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 increased an attractive investment opportunity for our shareholders. Our multifamily investment For the continued elevated interest rate environment, 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 2 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 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 and we often compete for financing opportunities.

Speaker 2

We believe this pullback can create meaningful opening for non bank platforms such This backdrop to broader capital markets have remained volatile. Conditions in the CRE CLO market had begun to show 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 2 50 basis points as of May 5, which is in line with where spreads sat at the end of last year. BBB- bond spreads have increased from 6.60 basis points to 8.50 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.

Speaker 2

In order to fully deploy our capital on a leverage basis and take advantage of our origination capabilities, we remain actively focused on And while we are prepared to execute a CLO in the public markets quickly to the extent conditions improve, We are actively exploring financing options, including note on note financing, A and O structures, warehouse facilities and private transactions to attempt to replicate the CLO market. With regards to our dividend, On March 16, we declared a quarterly common dividend for the Q1 of 2023 of $0.06 per share. This is in line with our dividend level over the prior 4 quarters. I would note that our GAAP EPS of $0.09 during Q1 represented 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 As you know, our manager is one of the nation's largest capital providers in the multifamily and seniors housing space, Excusing over $10,000,000,000 in total transaction volume in 2022 and servicing nearly $50,000,000,000 of assets and employing approximately 600 employees in over 30 offices.

Speaker 2

We believe that that scale and expertise of our broader platform will continue to benefit the Investors of LFP. With that, I'd like to turn the call over to Jim Briggs, who will provide more details on our financial results. Jim?

Speaker 3

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 4 through 8 of presentation, you will find key updates and an earnings summary for the quarter. In the Q1 of 2023, we reported net income to common stockholders were approximately $4,600,000 or $0.09 per share.

Speaker 3

We also reported distributable earnings of approximately 173,000 0 dollars per share. There are a few items I'd like to highlight with regards to our Q1 P and L. Beginning with net interest income, our Q1 net interest income was $8,200,000 compared to $6,900,000 in Q4 of 2022, 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 $1,000,000 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.

Speaker 3

Speaking of payoffs, during Q4, We experienced $52,000,000 of loan payoffs, which represents a slight increase relative to $45,000,000 of loan payoffs during Q4. $52,000,000 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 $4,300,000 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, 23, the property was ultimately sold via auction for $6,000,000 and we've accepted a discounted payoff from the borrower in that amount.

Speaker 3

We no longer have any exposure to the office sector. Moving on to expenses. Our total expenses were $2,700,000 for Q1 versus $2,500,000 in Q4. This quarter over quarter increase was primarily driven by some seasonality in professional fees. I'd like to also point out that as we've launched signal on these calls, we adopted CECL on January 1, 23.

Speaker 3

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 TRAP that most closely represents Our focus on transitional bridge loans. We recorded an approximately $3,600,000 or $0.07 per share implementation adjustment on January 1, which was recorded as a reduction to stockholders' equity. Changes to the January 1 implementation will be reflected through earnings. In the current quarter, we recognized an approximately As of March 31, the company's total book equity was approximately $241,000,000 Total common book value was approximately 100 $81,000,000 or $3.46 per share. Excluding the impact of CECL in the quarter, Both the January 1 implementation and change in the quarter, book value per share would have increased sequentially by Q4 over Q4 by approximately $0.02 per share.

Speaker 3

I will now turn the call over to Charles Studdy, who will provide details on our portfolio composition and investment activity.

Speaker 1

Thank you, Jim. Jim Flynn, at the top, touched on the broader economic conditions, which have Due to these conditions, new acquisition activity in the market has remained relatively slow and the number of bridge opportunities has 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 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 payoffs, speeds to temper in the near term as well, by 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.

Speaker 1

We experienced $52,000,000 of loan payoffs during the quarter and at quarter end our total loan portfolio outstanding principal balance was $1,000,000,000 The portfolio consisted of 67 loans with an average loan size of $15,000,000 which provides for significant asset diversity. Our portfolio at quarter end was 90% multifamily and we have no exposure to office. In regards to retail, as of threethirty 1, we owned one $17,000,000 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 multifamily and seniors housing assets.

Speaker 1

Due to our manager's strong focus in multifamily 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 threethirty one, we classified $112,700,000 Multi family loan has risk rated 5. This loan was also rated risk rated 5 as of twelvethirty one. 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 of receivership and guarantee enforcement case, We'll continue to monitor and keep our shareholders informed.

Speaker 1

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. And overall, we expect LFT to benefit from elevated Since quarter end, the 1 month term SOFR 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 threethirty one, our loan portfolio was financed with 1 Series CLO securitization with an average weighted spread of 143 basis points over 1 month LIBOR and an advance rate of over 83%.

Speaker 1

This CLO has a reinvestment period running through With that, I'll pass the call back to Jim Flynn for some closing remarks.

Speaker 2

Thank you. Thank you, Charlie. Look forward to continuing to update you on our progress And in this volatile market, continue to keep you informed. Now I'd like to open the call to questions.

Operator

Before pressing the keys. The first question comes from Crispin Chris Van Bove with Piper Sandler. Please go ahead.

Speaker 1

Thanks and good morning everyone. First on fundings and acquisitions, I think this is the Q1 that I can recall where you didn't have any funding. So just going forward on fundings, would you expect Fundings to remain depressed over the near term just given multifamily dynamics or other sectors, maybe seniors That you would expect to grow over the next few quarters. And then just looking at the Q2, would you expect fundings to match payoffs in the Q2 or do you think they'll fall short?

Speaker 2

Yes. So thanks for the question. The 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 leverage solution that looks or is as attractive as a CLO. If we're able To execute on the transaction such as that, then obviously our fundings would increase above payoffs because we would have more capital to deploy.

Speaker 2

We do have assets that we hold up to managers balance sheet that meet the investment criteria for LFT. So from that standpoint, 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, it's 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.

Speaker 2

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, that hasn't fully translated into Increased activity in terms of transactions getting completed, but we've seen a lot more transactions being evaluated. I think that suggests that buyers and sellers are moving closer together in terms of the bid ask spread on valuations. I think bought owners are more accepting and familiar and understanding of the financing options that are available today, not the ones We're 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 spreads and pricing. Some of that is lower transactions.

Speaker 2

But I think 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.

Speaker 1

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 due The rates and uncertainty out there, but as it relates to your CLO, are you able to share any underlying credit stats on the CRE CLO and how it's performing?

Speaker 2

In terms of the asset, 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 If you look in the supplemental and the information we've provided, those assets Virtually all in the CLO. I mean, as Charlie mentioned, and Charlie feel free to add here. We've We had our retail deal pay off the last one that we had. We had the office deal that we've talked about for a couple of quarters.

Speaker 2

And for the most part, the rest of the transactions are the biggest challenge they're facing is obviously inflationary, It's interest costs and whether their rental increases in their business plans cannot pay its expenses enough relative to what the original plan was. And for the most part, we feel

Speaker 1

that that's

Speaker 2

the case in our portfolio that they're Performing on a relative basis well in this environment. I mean, when you consider that Their overall interest rates, not the spread, but their overall interest rates have approximately doubled for many of these guys since they Implement their business plan and that does not include any inflationary pressure on other expenses. They're still getting rental increases. They're still moving forward with their plans. And Yes.

Speaker 2

Frankly, I think in the recent months, we've seen a lot of particularly Larger and well capitalized sponsors look at trying to refinance or when they can refinance because of where the cost of Short term financing is. Charlie, if you want to add anything on the overall portfolio for Field Creek.

Speaker 1

Sure. So yes, just specific on the question. So we historically have not reported credit criteria From LFP as a whole, primarily because 90% plus of LFP's assets are within the CLO. So you could look through to that. Everything is current as we stated earlier.

Speaker 1

I would also point out that all deals are 100% of the deals in the portfolio have interest rate caps, which is certainly helping from a DSCR perspective in this environment with sulfur 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 6 months. So we do have a little bit of runway before The maturity will all start growing a bit and that deal which is a $13,000,000 multifamily deal is performing well and we have Thanks. I appreciate all the color there. I appreciate taking my questions.

Speaker 1

Thanks.

Operator

The next question comes from Steve DeLaney with JMP Securities. Please go ahead.

Speaker 4

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 4 and 5 rated loans there are as of March 31? Thanks.

Speaker 1

Hey, Steve. Thanks for joining. I can start on that one. So the total portfolio is 67 loans. Of those 67, 1 is risk rated 5 and that deal was risk rated 5 as of Twelvethirty 1 as well, so no change there.

Speaker 1

And 12 of deals are risk rating 4. So that works out to 12 out of 67 is 18% for the portfolio. And as Jim mentioned, None of those risks were in store or 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 Where we were rating things. Similar to what happened during COVID when I think across the board and across the industry folks just kind of ticked their risk ratings up a bit.

Speaker 1

So similar story this time around as opposed to any specific asset concerns.

Speaker 4

Got it. And thanks for the comment on the retail loan. That was my 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 your You have a $12,000,000 multifamily loan that you put it as a 5, 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 Since CECL has been out there over the last couple of years that, okay, it's a we put it at 5 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 5, but we don't expect a loss.

Speaker 4

Just maybe add a little color around that as to one, why it's a 5? And what's the overriding characteristic that is

Speaker 3

It's Jim Briggs here.

Speaker 4

Yes. Hi,

Speaker 3

Jim. Yes. I mean, as it relates to CECL, 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.

Speaker 3

This loan is in monetary default, right? So

Speaker 2

I

Speaker 3

think that's the thing that's driving That's driving the 5 for us. And based upon our analysis at this point in time, we do think we'll recover our full investment there.

Speaker 4

Got it. So stop, no interest reserve, they're not paying out of pocket. And I guess you probably have it on non accrual, would that be accurate?

Speaker 3

Yes, that's right. It's correct on all of those.

Speaker 4

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, Fed is going to be reversing, and then 2024 could be pretty significant drop, well over 100 basis points in the short rates.

Speaker 4

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.

Speaker 2

Thanks, Steve. Cheer probably is a strong word. Okay. Relieve, relieve. No, look, from my perspective and you guys have heard me say this before, the biggest The most important factor in transactions, right?

Speaker 2

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 was it's hard to have anything but this Dramatic slowdown, but then as we've gone through this period, we've had this constant 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.

Speaker 2

But if you go back 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 where they're going 50%, 75%, 25%. I mean we've had pretty, I would say, pretty consistent Consensus on this most recent one, maybe there was some question whether they would raise it. So that Yes, has started to kind of 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 that people may be facing or sponsors in terms of just their costs. I do caution that Lower interest rates could also be accompanied by deteriorating economic conditions.

Speaker 2

Right. 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. We have 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 construction deliveries and as we clean out what's kind of comes to market, we have another low here where there were very few starts.

Speaker 2

And so 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 This ongoing momentum that until that dynamic shifts, there's just going to be an appetite for more transactions and assets in that space trading hands. Lower rates will help so long as we're not Any economic downturn is not so severe that it dampens that. In general, I believe that the second half of this year, in my opinion, particularly into the middle of Q3 or beyond, we're going to see Transaction volumes pick up, I think, significantly compared to the Q1, which is obviously on a relative basis, not saying a ton. But Overall, I think it will be a more healthy environment for transactions as we approach the end of the year.

Speaker 4

Jim, thank you so much. I

Operator

The next question comes from Stephen Laws with Raymond James. Please go ahead.

Speaker 2

Hi, good Good morning. I wanted to

Speaker 5

follow-up, kind of combination of the credit and CECL comments. I think a couple of loan payoffs were 2, a number of downgrades. But I was surprised that even with the, I guess, average rating, I think, went from 3.0 to 3.2, The CECL reserve actually released a couple of 100,000 during the Q1 and didn't build in conjunction from a general reserve standpoint. Can you connect the disconnect between the rating Downgrades versus the CECL reserve release?

Speaker 3

Sure. 1, the loans that paid off Just from a basis point reserve perspective, we're carrying a bit more of reserves And then the remainder of the portfolio. So you had the release there. Well, I'd say while the risk ratings have increased, the fundamentals From the collateral perspective are still there, right? So Any magnitude of loss there has not increased much.

Speaker 3

So Yes. I mean, it's 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. So Okay. Thanks.

Speaker 5

And then as a follow-up, I wanted to touch base on options and possibilities around non CLO financing. When would are you looking to put something like that in place? I mean, are you waiting closer to the replenishment You've got that through the end of the year. So I mean, are there any lease options kind of what are ROEs look like with any pricing or options you've got? Can you talk about how we might see that play out over the next or over the balance of the year?

Speaker 2

Sure. Well, look, I think for those who were Closely paying attention to that market as we are, the early part of This year suggested a window was coming that would, that was reasonably attractive for securities financing and CLOs in particular. We along with I know several Of our peers, we're 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 2nd and third largest bank collapses in U. S.

Speaker 2

History, and As the story goes, that stability was history along with it. From I would if you had asked back in February, I would have expected to see probably a number of Public financing happened 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 execute on transactions that they might otherwise have taken part of in the public market.

Speaker 2

I can't predict If or when we're going to be able to necessarily get that done, but I can't 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 The match term aspect and lower or eliminated mark to market Proposals and things of that nature. It's I won't say that any of that is terribly different in terms of how we've been thinking over the past 4 or 5 quarters, but the interest from the counterparty side is probably a bit greater today than it's been very most of that time.

Speaker 5

Yes. No, certainly that window was very short and the bank issues closed that quickly. To your earlier point, hopefully some stabilization rates Can help things unthaw. I do have one last follow-up, if I had. As you have discussions around extensions, Any pushback or hesitancy of borrowers to buy new caps?

Speaker 5

Are you looking for other structural protections in loans around extensions?

Speaker 2

Look, I think every borrower has looked at it and been and not terribly excited About the cost of the new cap or buying a new cap. I think it's so resistant is not the right word, but certainly Are there 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 make things better?

Speaker 2

What I would say borrowers are considering The cost of financing has increased, the cost of cash have increased. And There's probably a bit more appetite or you don't know appetite, but borrowers making Paydowns to reduce principal is probably something that we've talked about more than certainly During times when everything was going the other way, that was 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 Yes. From our perspective, often the answer would be yes, right?

Speaker 2

Deleveraging is a nice way Too low 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 very motivated to work with us to make sure that we're comfortable with their loan and them. And 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. And some of the payoffs that we've had, frankly, were assets that we were a little concerned about in terms of their leverage, Not kind of asset quality or condition.

Speaker 2

And then they went ahead and paid off. So sometimes you can't figure it out, I guess. Yes. Well, no, it's been

Speaker 5

a great discussion in the

Speaker 3

Q and A and I certainly enjoyed it. Appreciate it.

Operator

The next question comes from Matthew Erdner with Jones Trading. Please go ahead.

Speaker 5

Hey guys, Matthew on for Jason this morning. Thanks for taking the You mentioned long term rent growth on multifamily. Could you describe, I guess, what the business plans were that were underwritten 2 years ago, say, compared to now and the expectation for rent growth. And then can I get your guys' view on rent growth going forward as well?

Speaker 2

Yes. I mean, I think on rent growth, You may have to look at an asset by asset basis. Well, first of all, macro level, I think we do believe that you are going to continue to see rent growth in the plus or minus 2% range may approach 3%, but Not there, but that's a national average and I think you have to really specifically identify micro or at least some markets to get there. In terms of the business plans, 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 some of the inflationary pressure.

Speaker 2

So That has been the bigger issue for sponsors to deal with. There are obviously Submarkets that we've where we have assets in that have seen rent growth not be achieved or after Rehabbing units, the magnitude of the rental growth is not what was expected and those are the ones where we've Working more closely with borrowers, one of which, as I just mentioned, we had payoff recently. But on a go forward so on the deals 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, I think the opportunities Some opportunities may lie in recapping Prior bridge loans do a more appropriate debt level. 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 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.

Speaker 2

But I mean, you could pick 20, 30 markets across the country. So I think That is not something I foresee in our in the next couple of years. But we like I said, we still have 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 2021, Late 2019. But overall, I think rental growth in our portfolio and I and others has not been the primary driver of performance issues. It's really been around the increasing cost of leverage and inflationary costs.

Speaker 5

That's helpful. Thanks for your answer.

Operator

The next Question comes from Ward Blum with UBS Financial Services. Please go ahead.

Speaker 6

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 spreads to widen and giving us better returns in terms of new loans?

Speaker 2

I think that the short answer is yes, that's a logical conclusion. In the past 5 or 6 years anyway, What we've seen is that opportunity arises, there is there are pockets of capital that Our come to market fairly quickly, debt funds, obviously, in particular, to keep that keep those levels Somewhat muted, 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 I do expect there to be Spreads in the 4s, a few years ago, spreads in the 4s, maybe more than a few, but Was when things were declining. We're still seeing some transactions done even below that, but I think that Your point is accurate. I mean, if there's a massive pullback Lending, right?

Speaker 2

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 So you have mortgage REITs, 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

Speaker 6

Thank you.

Operator

The next question comes from Greg Vinit, a Private Investor, please go ahead.

Speaker 7

Good morning. A couple of clarifications that You entered the Q2 with what $50,000,000 Did you indicate whether that's been reinvested or not Where are you right now with your cash position?

Speaker 1

Greg, it's Charlie. I can start.

Speaker 7

Yes, go ahead.

Speaker 1

Okay. Just see, historically, we are currently working on transferring Sam. Assets. So we would expect there to be acquisitions by LFT during the quarter. We don't know a final number yet and we haven't historically reported kind of mid quarter asset balances, But there are assets on the Manner's balance sheet that we're working through transferring.

Speaker 1

So we do expect the cash balance to decline from 3.31 to 6.30.

Speaker 7

Okay. 2nd question, just from a retail investors point of view, You look at table or page number 10, weighted average risk rating. When loans are when you all buy a loan from your parent, are you buying a 1 or a 2 loan To put in the portfolio or what is the criteria?

Speaker 2

I mean the short yes, we yes, go ahead. They're all performing.

Speaker 1

Yes, I think that's right. I think so the criteria in acquiring assets from the parents, 1, all loans are transferred at Fair market value. Number 2, assets need to be performing. Number 3, they need to be eligible to the financing facilities. So it's possible that whether it's a 1 or a 2 or a 3, 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 market perspective, we wouldn't expect to transfer anything that is considered higher risk.

Speaker 7

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 1 or acquiring a 1 from your parent versus a 3, is there a huge difference in pricing

Speaker 1

for the trust? I think Yes. One thing I'll say and then Jim feel free to jump in. Typically, the things that drive the pricing are LTV, debt service, occupancy, which are the same things that drive risk rating. So, yes, I wouldn't say there's a massive difference.

Speaker 1

So if, let's say, a one rating is a 60 percent LTV loan and the free rating is at a 75%, you'll see that there would be some Theoretical change in the mark based on just where the leverage is on the loan and the risk profile, but it's a little it's kind of

Speaker 2

asset by asset. And the spread, right? So I mean, we've lived through a pretty dramatic change And everything spreads, rates, etcetera. But if you were to originate a loan today, like a brand new loan today, 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.

Speaker 2

Well, we're going to 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 I heard

Speaker 7

you? 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. Is that do I have that right?

Speaker 2

You do. That's correct.

Speaker 7

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?

Speaker 2

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 LST. So our expectation would be continued to continue to Originate loans with our from our own production team and underwrite the loans ourselves at inception. Does that mean if there were some great opportunity that represented to us because of the turmoil and disruption in the banking market.

Speaker 2

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.

Speaker 7

Hi. Well, just a suggestion or from a shareholders' point of view, I'd rather have a less spread and have more ones and twos. And I think your 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 1s and 2s and you're going to take less spread.

Speaker 7

I mean, your stock's yielding 14%. People are We want return of our capital, not return on the capital. And we'd rather I'd think I'd rather take less return on the capital, But I have a 1 or a 2 in the environment that we're in right now and maybe the investment community would to reward us with a higher stock price.

Speaker 2

Well, I hope that that's true. And to be clear, we don't Underwrite deals that are starting out at a higher risk rating, right? So I mean, I'm not suggesting you said that, but just want To clarify. But yes, point well taken.

Speaker 7

So if we were to go if we look Forward or if you do your next CLO, I'm sure you guys

Speaker 2

are working on it, but if we were

Speaker 7

to look forward and see This chart changed. I mean, everybody is concerned about risk right now. Anyway, just a comment from a retail point of view. Thanks very much. Appreciate the quarter.

Speaker 2

Great. Thank

Operator

question comes from Christopher Nolan with Ladenburg Thalmann. Please go ahead.

Speaker 2

Given where your stock price is, are you giving consideration to share repurchases? So it's something we've talked about Always with the Board. The challenge that this platform has as we've discussed is, we're trying to raise more capital and not less. And the challenge with share repurchases, it just takes even more flow out of the market. So it's not It's not a no, but it is that is a big part of the consideration that we've talked to the Board about.

Speaker 2

We do believe certainly that The yield that the stock is trading at is far in excess of where the risk is. So, yes, 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.

Speaker 8

How low does the stock price have to go relative to book for it to be in the forefront of capital planning discussions?

Speaker 2

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. Yes. Thank you.

Operator

This concludes our question and answer session. I would like to turn the conference back over to James Flynn for any closing remarks.

Speaker 2

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.

Speaker 2

Thanks all.

Operator

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.

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Earnings Conference Call
Lument Finance Trust Q1 2023
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