U.S. Markets closed

Edited Transcript of OAKS earnings conference call or presentation 8-Nov-19 1:30pm GMT

Q3 2019 Hunt Companies Finance Trust Inc Earnings Call

New York Nov 10, 2019 (Thomson StreetEvents) -- Edited Transcript of Hunt Companies Finance Trust Inc earnings conference call or presentation Friday, November 8, 2019 at 1:30:00pm GMT

TEXT version of Transcript

================================================================================

Corporate Participants

================================================================================

* Brendan Gover

Hunt Companies Finance Trust, Inc. - VP of IR

* James A. Briggs

Hunt Companies Finance Trust, Inc. - Interim CFO

* James Peter Flynn

Hunt Companies Finance Trust, Inc. - CEO & Director

* Michael P. Larsen

Hunt Companies Finance Trust, Inc. - President

================================================================================

Conference Call Participants

================================================================================

* Christopher Whitbread Patrick Nolan

Ladenburg Thalmann & Co. Inc., Research Division - EVP of Equity Research

* Greg Bennett

* Steven Cole Delaney

JMP Securities LLC, Research Division - MD, Director of Specialty Finance Research & Senior Research Analyst

================================================================================

Presentation

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

Good morning, and thank you for joining the Hunt Companies Finance Trust Third Quarter 2019 Earnings Call. (Operator Instructions)

I would now like to turn the call over to Brendan Gover with Investor Relations at Hunt Investment Management. Please go ahead.

--------------------------------------------------------------------------------

Brendan Gover, Hunt Companies Finance Trust, Inc. - VP of IR [2]

--------------------------------------------------------------------------------

Thank you. Good morning, everyone. Thank you for joining our call to discuss Hunt Companies Finance Trust's Third Quarter 2019 Financial Results. With me on the call today are Jim Flynn, CEO; Mike Larsen, President; Jim Briggs, Interim CFO; and Precilla Torres, Head of Real Estate Debt Strategies.

On Thursday, we filed our 10-Q with the SEC and issued a press release, which provided details on our third quarter financial results. We also provided a supplemental earnings presentation that 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. These statements made within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Act of 1934. When used in this conference, words such as outlook, evaluate, indicate, believes, will, anticipate, expect, intend and other similar expressions are intended to identify forward-looking statements.

Such forward-looking statements are subject to various risks and uncertainties that could cause actual results to differ materially from those contained in the forward-looking statements. These risks and uncertainties are discussed in the company's reports filed with the SEC, including its reports on Form 8-K, 10-Q and 10-K and, in particular, the Risk Factors section of our Form 10-K.

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 in this conference call. A presentation of this information is not intended to be considered in isolation or 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.

I will now turn the call over to Jim Flynn. Please go ahead.

--------------------------------------------------------------------------------

James Peter Flynn, Hunt Companies Finance Trust, Inc. - CEO & Director [3]

--------------------------------------------------------------------------------

Thank you, Brendan. Good morning, everyone. Welcome to the Hunt Companies Finance Trust earnings call for the third quarter of 2019. Thank you all for joining us today. For the third quarter, HCFT reported net income of $2.2 million or $0.09 per share, which is up $0.03 per share quarter-over-quarter. Our core earnings for the quarter were $2.3 million or $0.10 per share, which is up $0.01 per quarter -- quarter-over-quarter. Jim Briggs will discuss our financial results in more detail shortly.

During the quarter, we acquired and funded $62 million of floating rate CRE loans at a weighted average spread of 315 basis points above LIBOR. Competitive markets continue to pressure origination activity and, in particular, loan spreads. With that in mind, we will continue to be thoughtful, patient and opportunistic in our evaluation of CRE debt investment opportunities for HCFT.

We also noted in our Form 8-K that we filed with the SEC on Thursday that the independent members of our Board of Directors are reviewing the previously announced transaction involving Hunt and ORIX. We do not intend to comment further. We'll publicly discuss the independent Board members review of such transaction. Until the independent Board members have approved the definitive transaction or just otherwise determine that further disclosure visibility will be provided by law.

With that, I'd like to turn the call over to Jim Briggs, who will provide further details on the financial results. Jim?

--------------------------------------------------------------------------------

James A. Briggs, Hunt Companies Finance Trust, Inc. - Interim CFO [4]

--------------------------------------------------------------------------------

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 will be referencing during our remarks. The supplemental investor presentation has been uploaded to the webcast as well for your reference. On Pages 4 and 5 of the presentation, you will find key updates and an earning summary for the third quarter. For the third quarter of 2019, we reported comprehensive income to common stockholders of $2.2 million or $0.09 per share compared to comprehensive income of $3.5 million or $0.15 per share for the third quarter of 2018. The quarter was impacted by 2 noncore items, including a $445,000 decline in the value of our legacy mortgage servicing right portfolio, which was driven primarily by falling rates and a corresponding increase in prepayments in Q3 and a $267,000 income tax benefit related to activity at our taxable REIT subsidiary. After adjusting for these 2 items, our core earnings attributed to common stockholders for the quarter was $2.3 million or $0.10 per share. This is in line with Q3 2018's core EPS of $0.10 per share and represents a $0.01 per share increase relative to Q2 '19. Our view is that core earnings provide a better indication of our ongoing earnings capacity. Our Q3 book value per share was $4.61 at quarter end compared to a book value per share of $4.60 as of Q2.

Since becoming the manager of HCFT in early 2018, we have significantly enhanced the stability of HCFT's book value, and total book value per share has changed by less than 1% since Q2 2018, which was our first full quarter as manager.

I will now turn the call over to Michael Larsen, who'll provide details on our portfolio composition and investment activity.

--------------------------------------------------------------------------------

Michael P. Larsen, Hunt Companies Finance Trust, Inc. - President [5]

--------------------------------------------------------------------------------

Thank you, Jim. Good morning, everyone. Just expanding on some earlier comments. Our focus over the last quarter has been to continue to invest in high-quality floating rate first mortgage investments. And during the third quarter, we acquired 6 loans and made future funding advances on 12 loans with total incremental fundings of $62 million. And 94% of these loans were multifamily, and we continue to anticipate the majority of our loan activity will be related to multifamily assets. Our overall loan portfolio at quarter end increased from 88% to 92% multifamily. New loans had a weighted average initial LTV of 73%, which is consistent with our historical origination activity and reflects our continued focus on ensuring we maintain credit discipline. These new loans had a weighted average spread of 315 basis points over LIBOR.

At one point out, we continue to have success in obtaining interest rate floors on our loans with a weighted average LIBOR floor of 198 basis points on Q3 acquisitions. That -- and over 90% of these new loans have floors that are above current LIBOR. We experienced $95 million in loan payoffs during the quarter and also sold a $7 million performing loan participation, which resulted on a net basis on our loan portfolio decreasing by $40 million. Although we saw decline in loan portfolio during the quarter, we do have a strong pipeline that we're continuing to work on as we move into the end of the year.

While payoffs increased this quarter relative to the first half of the year, we believe the successful exits reflect positively on the strength of our bridge lending platform. Payoffs were driven by borrowers who successfully completed their business plan and refinance via stabilized permanent loans and property sale and values well in excess of our loan amounts, resulting in exit LTVs below 70% in all cases.

Our total portfolio of floating rate loans had an outstanding principal balance of $560 million at quarter end. The portfolio consists of 45 loans with an average loan size of $12 million, which provides for asset diversity. There are no defaults or delinquencies in the portfolio, and we've not seen any material change in the portfolio performance over the quarter. Our loan portfolio continues to be financed with 2 CRE CLO securitizations and, therefore, all financing against the portfolio is fully matched term with an average cost of financing of LIBOR plus 141 basis points. Our first CLO has a reinvestment period that runs through February of 2020, and our second has a reinvestment period that runs through August of 2021, providing us with attractive stable, non-mark-to-market financing on an ongoing basis.

As previously announced, we are exploring the refinancing of our first CLO, with plans to potentially execute a new CRE CLO transaction, and we believe the issuance market for CRE CLOs remains attractive.

With that, I will pass the call back to Jim for some closing remarks.

--------------------------------------------------------------------------------

James Peter Flynn, Hunt Companies Finance Trust, Inc. - CEO & Director [6]

--------------------------------------------------------------------------------

Thank you, Mike. In summary, we continue to be excited about the progress that we've made since we've taken over as manager. We remain positive on the company's outlook for growth and prospects in our investment activities. We believe that the company is well positioned for this stage in the cycle, as we've said in the past, and we are continuing to explore ways to improve and increase earnings and grow the overall capital base.

We look forward to updating you on our progress. We appreciate your interest in the company and joining us today on the call.

And with that, I'd like to ask the operator to open the call for questions.

================================================================================

Questions and Answers

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

(Operator Instructions) And today's first question comes from Steve Delaney of JMP Securities.

--------------------------------------------------------------------------------

Steven Cole Delaney, JMP Securities LLC, Research Division - MD, Director of Specialty Finance Research & Senior Research Analyst [2]

--------------------------------------------------------------------------------

So good, solid dividend

(technical difficulty)

--------------------------------------------------------------------------------

Brendan Gover, Hunt Companies Finance Trust, Inc. - VP of IR [3]

--------------------------------------------------------------------------------

Steve? Steve, you broke up a little bit there. Would you mind repeating your question?

--------------------------------------------------------------------------------

Operator [4]

--------------------------------------------------------------------------------

Sir, this is the operator. It looks like Mr. Delaney jumped out of queue. It looks like we got him out of queue.

Mr. Nolan -- Christopher Nolan, your line is open now, sir?

--------------------------------------------------------------------------------

Christopher Whitbread Patrick Nolan, Ladenburg Thalmann & Co. Inc., Research Division - EVP of Equity Research [5]

--------------------------------------------------------------------------------

Good quarter, guys. Jim Briggs, it looked like investment spreads expanded slightly in the quarter. Any color behind that, please?

--------------------------------------------------------------------------------

Michael P. Larsen, Hunt Companies Finance Trust, Inc. - President [6]

--------------------------------------------------------------------------------

This is Mike Larson. Because if you're referring to the spreads on new loans that we've originated, we actually saw a decline in the spreads on new originations during the quarter from a little over 350 to 315. And that really just reflects the continued compression in spreads in the markets that we've seen over the last several quarters, but we're still to look at a lot of good transactions, high-quality credit transactions and still seeing spreads on average above 3%.

--------------------------------------------------------------------------------

Christopher Whitbread Patrick Nolan, Ladenburg Thalmann & Co. Inc., Research Division - EVP of Equity Research [7]

--------------------------------------------------------------------------------

Yes. Actually, what I was referring to is just looking at the income statement and the yield of interest income on earning assets relative to the interest expense on borrowings, the spread seem to change. Mike, I can take that offline. I guess the second question would be, is management still targeting a dividend, 8% to 9% of book value?

--------------------------------------------------------------------------------

James Peter Flynn, Hunt Companies Finance Trust, Inc. - CEO & Director [8]

--------------------------------------------------------------------------------

I mean I think, on the -- yes, I was going to say, obviously, that's at the Board's discretion. But I think as we've said in the past, we take a look at our competitive set. I think the range you described is largely in line with what others or what we see from others in the space. And our goal is obviously to continue to deliver dividend that is competitive and within the expectations of the market. And that's our goal on a go-forward basis for sure.

--------------------------------------------------------------------------------

Operator [9]

--------------------------------------------------------------------------------

(Operator Instructions) Our next questioner is Steve Delaney from JMP Securities.

--------------------------------------------------------------------------------

Steven Cole Delaney, JMP Securities LLC, Research Division - MD, Director of Specialty Finance Research & Senior Research Analyst [10]

--------------------------------------------------------------------------------

Yes. So can you hear me?

--------------------------------------------------------------------------------

James Peter Flynn, Hunt Companies Finance Trust, Inc. - CEO & Director [11]

--------------------------------------------------------------------------------

Yes. We can, welcome back.

--------------------------------------------------------------------------------

Steven Cole Delaney, JMP Securities LLC, Research Division - MD, Director of Specialty Finance Research & Senior Research Analyst [12]

--------------------------------------------------------------------------------

Wonderful. Sorry, I apologize. I don't know what happened the last time, but we're all good. And I'm glad, Chris was there to jump on. Noticed you did some just under $7 million of participations in the quarter. Should we -- are those A note type structures that you just sold off a senior piece to boost your return?

--------------------------------------------------------------------------------

Michael P. Larsen, Hunt Companies Finance Trust, Inc. - President [13]

--------------------------------------------------------------------------------

You're referring to the performing loan participation that we sold?

--------------------------------------------------------------------------------

Steven Cole Delaney, JMP Securities LLC, Research Division - MD, Director of Specialty Finance Research & Senior Research Analyst [14]

--------------------------------------------------------------------------------

Yes.

--------------------------------------------------------------------------------

Michael P. Larsen, Hunt Companies Finance Trust, Inc. - President [15]

--------------------------------------------------------------------------------

Yes. So that is -- that was a participation or a participation of a loan where the controlling participation was sitting within one of our CLOs.

--------------------------------------------------------------------------------

Steven Cole Delaney, JMP Securities LLC, Research Division - MD, Director of Specialty Finance Research & Senior Research Analyst [16]

--------------------------------------------------------------------------------

Okay.

--------------------------------------------------------------------------------

Michael P. Larsen, Hunt Companies Finance Trust, Inc. - President [17]

--------------------------------------------------------------------------------

But due to concentration issues in managing concentration, we had an opportunity to sell off a portion that was not in our CLO.

--------------------------------------------------------------------------------

Steven Cole Delaney, JMP Securities LLC, Research Division - MD, Director of Specialty Finance Research & Senior Research Analyst [18]

--------------------------------------------------------------------------------

Got it. Okay. So it was just a matter of asset concentration in a particular CLO that -- and you can actively manage that. So you try to -- it's basically cleaning up the diversification of the CLO, is what I hear you say.

--------------------------------------------------------------------------------

Michael P. Larsen, Hunt Companies Finance Trust, Inc. - President [19]

--------------------------------------------------------------------------------

We're just managing that, that's right.

--------------------------------------------------------------------------------

Steven Cole Delaney, JMP Securities LLC, Research Division - MD, Director of Specialty Finance Research & Senior Research Analyst [20]

--------------------------------------------------------------------------------

Okay. And the -- Mike, the $80 million of capacity in the CLOs at September 30. Can you comment whether you've made progress in utilizing that in the fourth quarter? And any color you can give us about your pipeline here near-term through the end of the year?

--------------------------------------------------------------------------------

Michael P. Larsen, Hunt Companies Finance Trust, Inc. - President [21]

--------------------------------------------------------------------------------

Sure. So we -- after a little bit of a slower month or 2 in the summer, which isn't always an unusual, we have seen a significant pickup in our pipeline, and today, have over $200 million in loans under application that we're actively working on with the hope of closing this year or early next year. And as we've stated in prior quarters to work to fully deploy all of the cash in CLOs as quickly as possible.

--------------------------------------------------------------------------------

Steven Cole Delaney, JMP Securities LLC, Research Division - MD, Director of Specialty Finance Research & Senior Research Analyst [22]

--------------------------------------------------------------------------------

Okay, great. And then, Jim, if you're still on, I totally respect your comment about.

--------------------------------------------------------------------------------

James Peter Flynn, Hunt Companies Finance Trust, Inc. - CEO & Director [23]

--------------------------------------------------------------------------------

I am on.

--------------------------------------------------------------------------------

Steven Cole Delaney, JMP Securities LLC, Research Division - MD, Director of Specialty Finance Research & Senior Research Analyst [24]

--------------------------------------------------------------------------------

Okay, great. I respect that in a business combination like this, that the management agreement, especially if there are any, like, there's provisions about transferring the management agreement from one entity to another, I totally respect that. And you can't comment on those type of changes. I would say, though, just from a big picture standpoint, looking at where HCFT was positioned and HREC that my first reaction when we saw this in our view to clients who are involved in the stock, and we're asking is that we took the business combination of ORIX and HREC to be a positive because we just naturally assume that to the extent you have a managing entity that has more scale and scope and resources. We just can't imagine how that doesn't benefit an externally managed affiliate of that manager. And it sounded like from your role in the new company that you were pretty positive. Is there anything about the combination that would -- that we should consider that is not a positive? Or is going to present challenges to HCFT?

--------------------------------------------------------------------------------

James Peter Flynn, Hunt Companies Finance Trust, Inc. - CEO & Director [25]

--------------------------------------------------------------------------------

I'll comment at a high level.

--------------------------------------------------------------------------------

Steven Cole Delaney, JMP Securities LLC, Research Division - MD, Director of Specialty Finance Research & Senior Research Analyst [26]

--------------------------------------------------------------------------------

Yes, that's all that.

--------------------------------------------------------------------------------

James Peter Flynn, Hunt Companies Finance Trust, Inc. - CEO & Director [27]

--------------------------------------------------------------------------------

But the way that you are thinking about it and describing it is, I think, a very rational and an appropriate way to think about it. So we are working through the details. But as you point out, I think, a big rationale for the transaction for HREC and ORIX was scale. And in today's market, in today's...

--------------------------------------------------------------------------------

Steven Cole Delaney, JMP Securities LLC, Research Division - MD, Director of Specialty Finance Research & Senior Research Analyst [28]

--------------------------------------------------------------------------------

Competitive landscape, yes.

--------------------------------------------------------------------------------

James Peter Flynn, Hunt Companies Finance Trust, Inc. - CEO & Director [29]

--------------------------------------------------------------------------------

Environment, scale is a very important factor in success. So I think you're thinking about it right.

--------------------------------------------------------------------------------

Steven Cole Delaney, JMP Securities LLC, Research Division - MD, Director of Specialty Finance Research & Senior Research Analyst [30]

--------------------------------------------------------------------------------

Great. Well, I'll leave it there and just say that, you know, congratulations. You guys have, I think, done an amazing job over the past year positioning this company. You've been rewarded with the stock up pretty nicely this year. And I know you're going to be busy through the holidays, but enjoy those. And we look forward to working with you next year.

--------------------------------------------------------------------------------

James Peter Flynn, Hunt Companies Finance Trust, Inc. - CEO & Director [31]

--------------------------------------------------------------------------------

Thank you, Steve.

--------------------------------------------------------------------------------

Operator [32]

--------------------------------------------------------------------------------

And our next question today comes from Greg Bennett of Morgan Stanley.

--------------------------------------------------------------------------------

Greg Bennett, [33]

--------------------------------------------------------------------------------

On a high level, Jim, is ORIX a competitor? Is this 2 competitors that are coming together in the industry?

--------------------------------------------------------------------------------

James Peter Flynn, Hunt Companies Finance Trust, Inc. - CEO & Director [34]

--------------------------------------------------------------------------------

In some areas, yes. On the -- but in the -- with respect to the public REIT in HCFT, they certainly do some activity that we do. But it's largely complementary businesses. There are some areas where we at Hunt and outside of the HCFT management and ORIX currently compete with one another, but there's also many complementary areas as well.

--------------------------------------------------------------------------------

Greg Bennett, [35]

--------------------------------------------------------------------------------

Do they hold their own when they make a loan, a multifamily housing loans for rehabilitation, do they hold that loan in their own portfolio or do they have a vehicle -- the vehicle for passing it off?

--------------------------------------------------------------------------------

James Peter Flynn, Hunt Companies Finance Trust, Inc. - CEO & Director [36]

--------------------------------------------------------------------------------

They don't have to manage vehicle. They do not currently manage vehicles, an external vehicle or a third-party capital vehicle around these types of loans. They hold them on their balance.

--------------------------------------------------------------------------------

Greg Bennett, [37]

--------------------------------------------------------------------------------

So the management contract will go over to ORIX.

--------------------------------------------------------------------------------

James Peter Flynn, Hunt Companies Finance Trust, Inc. - CEO & Director [38]

--------------------------------------------------------------------------------

I mean, that, I can't comment on. That's a Board discussion -- a Board-level discussion, so we'll be back to the market once the Board has gone through their review.

--------------------------------------------------------------------------------

Operator [39]

--------------------------------------------------------------------------------

And ladies and gentlemen, there's no further questions, so this concludes today's question-and-answer session and today's conference call. We thank you all for attending today's presentation. You may now disconnect your lines, and have a wonderful day.