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Edited Transcript of OAKS earnings conference call or presentation 17-Mar-20 12:30pm GMT

Q4 2019 Hunt Companies Finance Trust Inc Earnings Call

New York Mar 17, 2020 (Thomson StreetEvents) -- Edited Transcript of Hunt Companies Finance Trust Inc earnings conference call or presentation Tuesday, March 17, 2020 at 12:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Brendan Gover

Hunt Companies Finance Trust, Inc. - VP of IR

* James A. Briggs

Hunt Companies Finance Trust, Inc. - CFO

* James Peter Flynn

Hunt Companies Finance Trust, Inc. - CEO & Director

* Michael P. Larsen

Hunt Companies Finance Trust, Inc. - President

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Conference Call Participants

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* Christopher Whitbread Patrick Nolan

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

* Lee Zulch

* Steven Cole Delaney

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

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Presentation

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Operator [1]

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Good morning, everyone, and thank you for joining the Hunt Companies Finance Trust Fourth Quarter 2019 Earnings Conference 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 Brendan Gover with Investor Relations at OREC Investment Management. Please go ahead.

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

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Thank you. Good morning, everyone. Thank you for joining our call to discuss Hunt Companies Finance Trust's fourth quarter 2019 financial results. With me on the call today are Jim Flynn, CEO; Mike Larsen, President; Jim Briggs, CFO; and Precilla Torres, Head of Real Estate Debt Strategies. On Monday, we filed our 10-K with the SEC and issued a press release, which provided details on our fourth quarter 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 within the meaning of Section 27A, Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934.

When using 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-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 compared in accordance with GAAP can be accessed through our filings with the SEC. I'll now turn the call over to Jim Flynn. Please go ahead.

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

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Thank you, Brendan. Good morning, everyone. Happy St. Patrick's Day, and welcome to the Hunt Companies Finance Trust earnings call for the fourth quarter of 2019. Thank you, again, for joining us today. These are certainly unprecedented times. I'm sure this will be the most unique St. Patrick's Day in New York City and around the country, perhaps

ever, but certainly, in anyone's recent memory or extended memory. First, I'd like to acknowledge the disruptions caused by the coronavirus outbreak and the related measures being taken to combat the spread. Those of us on the call today are all doing so remotely as we as a firm are taking all recommended measures to protect our employees while maintaining our business operations with as little disruption as possible.

We currently have the ability to continue to execute on all investment management, asset management, servicing, portfolio monitor -- monitoring and related functions on a daily basis.

Leadership not only in the real estate segment, but across all business lines of ORIX, are actively monitoring the situation as it continues to unfold.

We are closely watching the financial markets and the impact that the outbreak is having on our assets.

While the bridge lending market remains competitive, the extreme market volatility and economic concerns associated with coronavirus have created uncertainties around loan risks, pricing and credit. With that in mind, we will continue to be thoughtful, patient and opportunistic in our valuation of CRE debt investment opportunities for HCFT.

I'll touch briefly on our year-end results. Net income for the fourth quarter was $1.22 million or $0.05 a share, for the full year, $2.66 million or $0.11 per share. Core earnings for the fourth quarter were $1.32 million or $0.06 per share, and for the full year, $7.55 million or $0.32 per share.

Jim Briggs will discuss the financial results in more detail shortly. During the quarter, we acquired and funded $121 million of floating rate CRE loans at a weighted average spread of 303 basis points over LIBOR. For the full year, we acquired and funded $300 million of floating rate CRE loans at a weighted average spread of 329 basis points above LIBOR. I'm pleased to announce that in accordance with our business plan, we have successfully invested the substantial majority of HCFT's undeployed restricted cash in Q4, and we remain substantially fully deployed as of today.

Subsequent to the quarter-end, and as noted in the 8-K we filed with the SEC on January 6, 2020, HCFT announced that its independent directors unanimously approved the entry into a new management agreement with OREC Investment Management, LLC, a subsidiary of ORIX Corporation USA, and the concurrent mutual termination of its management agreement with Hunt Investment Management, LLC.

A subsidiary of ORIX Corporation, a publicly traded Japan-based financial services company, ORIX USA, provides a wide range of innovative capital solutions for clients in the corporate real estate and municipal finance sectors.

ORIX Corporation assets exceed $110 billion, and it has approximately $400 billion of assets under management. OREC Investment Management is part of ORIX Real Estate Capital's finance and investment management platform, which was created through the combination of RED Capital Group, Lancaster Pollard and Hunt Real Estate Capital.

The combined platform has an annual loan production in excess of $9 billion and a servicing portfolio of more than $40 billion.

In connection with the transaction, an affiliate of ORIX USA purchased 1.25 million shares of the company's common stock in a private placement by the company at a purchase price of $4.61 per share, resulting in the aggregate capital raise of about $5.7 million.

We are excited to be part of ORIX USA platform and believe that the platform provides HCFT with support from a strong institutional quality manager with a strong and very large balance sheet.

We look forward to enhancing the scale of HCFT value through leveraging ORIX USA's expenses, originations, asset management and servicing platform.

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

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

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Thank you, Jim, and good morning, everyone. On Monday evening, we filed our annual report on Form 10-K 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 Page 10 and 11 of the presentation, you will find key updates and an earnings summary for the fourth quarter. For the fourth quarter of 2019, we reported net income to common stockholders of $1.2 million or $0.05 per share. This compares to net income to common stockholders of $2.2 million or $0.09 per share for the third quarter of 2019 and a comprehensive loss of $546,000 or negative $0.002 per share for the fourth quarter of 2018.

Our core earnings attributed to common stockholders for the quarter was $1.3 million or $0.06 per share. This compares to core earnings of $0.10 per share for the third quarter of 2019 and $0.08 per share for the fourth quarter of 2018.

The primary driver of quarter-over-quarter decline in core earnings is that we began Q4 of 2019 with $81 million of undeployed cash in our CLOs, and therefore, experienced lower interest income due to the fact that our capital was not fully deployed during the quarter.

As Jim Flynn mentioned in his opening remarks, we invested the substantial majority of HCFT's undeployed restricted cash in Q4, and we remain substantially fully deployed as of today. Therefore, we do not expect to experience this underinvestment drag in Q1 of 2020.

Another driver of the quarter-over-quarter decline in core earnings was the timing of loan payoffs and exit fees.

In Q4 of 2019, we experienced $45.5 million of payoffs, which generated $0.01 per share of exit fees, while in Q3 of 2019, we experienced approximately $102 million of payoffs, which generated $0.03 per share of exit fees.

We expect our normalized quarterly run rate exit fee income to be approximately $0.02 per share. I'd like to note that on our GAAP financials, exit fee income is recognized via interest income if earned by HCFT, and via reduction in expense reimbursements to the manager if the exit fees are waived. Our Q4 book value per share was $4.59 compared to a book value per share of $4.61 as of Q3 and $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, in total, book value per share has changed by only 1% since Q2 2018, which was our first full quarter as manager.

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

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

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Thank you, Jim, and good morning, everyone. Expanding on the earlier comments, our focus over the last quarter has been to continue investing in high-quality floating rate first mortgage investments.

During the fourth quarter, we acquired 10 loans and made future funding advances on 28 loans with total incremental fundings of $121 million. 96% of these loans were multifamily and our overall loan portfolio at quarter-end increased from 92% to 94% multifamily.

We continue to anticipate the majority of our loan activity will be related to multifamily assets. And we believe this is particularly relevant to note in the current environment. Multifamily assets have historically reflected the greatest resiliency among the different property types during the downturn, and we anticipate the same being true during this market uncertainty.

This quarter's new loans had a weighted average initial LTV of 71%, which is consistent with our historical origination activity and reflects our continued focus on ensuring we maintain credit discipline. New loans originated during the quarter had a weighted average spread over LIBOR of 303 basis points.

We have historically obtained interest rate floors on our loans with a weighted average LIBOR floor of 173 basis points on our Q4 acquisitions.

We currently have LIBOR floors on 100% of the loans in our portfolio, with a weighted average of 156 basis points across the portfolio.

Based on the drastic decline in LIBOR over the last 30 days, 99% of our portfolio has a LIBOR floor above current LIBOR. Should current LIBOR rates persist, and we are able to maintain LIBOR floors, we anticipate that these floors will positively impact our earnings.

With that being said, it's currently difficult to see with clarity where the market pricing for transitional bridge loan stands and what impact the current market dynamics will have on both LIBOR floors and spreads. Therefore, in this environment, it's difficult to say where the current portfolio economics, including LIBOR floor levels will be maintained.

We experienced $45.5 million in loan payoffs during the quarter. On a net basis, our loan portfolio increased by $75.7 million at year-end. And we invest -- and at year-end, we invested the substantial majority of our undeployed restricted cash.

Our total portfolio of floating rate loans had an outstanding principal balance of $635 million at quarter-end.

Portfolio consisted of 51 loans with an average loan size of $12 million, providing significant asset diversity.

There are no defaults or delinquencies in the portfolio, and we have not seen any material changes in portfolio performance over the quarter. However, we will continue to actively monitor the performance of the portfolio and the impact the current market disruption may have on our assets.

Our loan portfolio is financed with 2 CRE CLOs securitizations with an average cost of financing of LIBOR plus 141 basis points. With the current market uncertainty, this non mark-to-market match term financing provides us with additional stability on the right side of our balance sheet.

The reinvestment period on our first CLO ended in February of this year, and our second has a reinvestment period that runs through August of 2021.

We have been exploring the refinance of our first CLO. However, there is no requirement for us to refinance the CLO. And with the current market volatility, the timing or structure of refinancing is uncertain.

We will continue to evaluate our options for refinancing as the status of the capital markets develops. With that, I'll pass the call back to Jim for closing remarks.

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

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Thank you, Mike. In summary, we continue to be pleased with the progress we've made to date. We still remain positive and optimistic about the company's long-term growth prospects but do remain cautious in this period of volatility and uncertainty. We look forward to updating you all on our progress and appreciate your time and your interest. And with that, I'll ask the operator to open the call to questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) And our first question today comes from Steve Delaney from JMP Securities.

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

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Jim, thank you very much for the detailed explanation of the dip in 3Q earnings. That was, I think, front of mind for everyone here. I guess the other thing is current market conditions, operational conditions, Jim, but you and Mike gave us some insight there. Can you tell me, as we went into this over the last month or so, do you have any loans that are in process of closing? And is anything happening there in terms of anything moving from a commitment to an actual closing here in the last 30, 45 days?

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

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Yes. So we do have a handful of loans. Now as we stated on the call, the HCFT is essentially fully deployed, but we do have loans. As we stated in the past that we continue to put on our balance sheet in order to have assets as assets pay off in the REIT. So we have a handful of loans that are under application and moving through the process and close, frankly, to -- under normal circumstances, what would be a final commitment in closing.

We do expect to close those loans. What I will say is we are speaking with the borrowers and trying to evaluate the current risk of that asset and whether I think need to be repriced or potentially delayed, but there's no requirement for us to do that.

We have certainly taken a step back in terms of evaluating the assets and the types of assets that we're looking to finance, certainly focused on our best clients, our most long-term clients and sponsors and best markets to continue to support them. We certainly don't want to close the door without any opportunity to provide necessary capital. But we're certainly doing so on a much more cautious and perhaps, slow might be the best way to describe it, just with everything going on.

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Steven Cole Delaney, JMP Securities LLC, Research Division - MD, Director of Specialty Finance Research & Senior Research Analyst [4]

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Sure. So...

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James Peter Flynn, Hunt Companies Finance Trust, Inc. - CEO & Director [5]

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And to that end what I would say is sponsors have been very understanding in that regard as well as have sellers and in instances where there's an acquisition, there's been a general -- fairly easy negotiation and discussion around the issues where all of the parties are just trying to do the right thing. At least that's what we've been seeing, and that's certainly a positive.

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Steven Cole Delaney, JMP Securities LLC, Research Division - MD, Director of Specialty Finance Research & Senior Research Analyst [6]

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Great. That's great to hear. Any sense of -- given that obvious condition where kind of pricing and it's hard to make commitments when we really don't know where the market ends up. But do you have a sense for prepays that you're expecting to come through here in the first half of the year in the portfolio?

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James Peter Flynn, Hunt Companies Finance Trust, Inc. - CEO & Director [7]

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I think it's fair to say that I would expect -- to the extent we have any that are absolutely ready to potentially go to, say, an agency financing where they can price that, that perhaps those might try to accelerate.

Many of our borrowers, as you know, are maybe looking to provide a value-add in a sale. So in those instances, I suspect that we're just going to have maybe an extension of -- or not an extension, an extended period rather than a prepayment.

So it does depend on the business plan of the sponsor. Typically, we expect something like 40% over the year.

I expect that to be probably a bit lower, but not -- certainly not 0.

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Operator [8]

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Our next question comes from Christopher Nolan from Ladenburg Thalmann.

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Christopher Whitbread Patrick Nolan, Ladenburg Thalmann & Co. Inc., Research Division - EVP of Equity Research [9]

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Mike, could you mention that there were no defaults delinquencies for the fourth quarter? Or was that in the first quarter '20?

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Michael P. Larsen, Hunt Companies Finance Trust, Inc. - President [10]

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There are no delinquencies or defaults currently, so it's both. Both in the fourth quarter and currently, we don't have any delinquencies or defaults.

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Christopher Whitbread Patrick Nolan, Ladenburg Thalmann & Co. Inc., Research Division - EVP of Equity Research [11]

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And how are you guys sort of thinking about how the default or delinquency trajectory will go given the coronavirus trajectory?

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James Peter Flynn, Hunt Companies Finance Trust, Inc. - CEO & Director [12]

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Certainly, Chris, that's a great -- or at the top of everyone's mind not just ours, but all lenders and really across the industry.

As I pointed out, in new financing, I think there's been a general cooperative discussion among all of the various parties.

I think that certainly, the timing of and the depth and significance of the coronavirus outbreak will dictate the ultimate results here.

But I would suspect that we will be in a position to work with borrowers on expansions and as they apply for -- their tenants applying for federal help with respect to wages getting covered, all of the outstanding underlying support issues, I mean, that's where it starts, right? It's a matter of whether the tenants can pay rent, whether that's a retail tenant, a multifamily tenant, which is where is our -- the overwhelming majority of our assets are caucus or otherwise.

So some of this depends on what kind of support the underlying tenant receives given the lack of rhetoric in Washington for the first time. And really, I shouldn't say the lack of, but the decrease in partisan rhetoric in Washington, I do expect there to be significant levels of support at the tenant level, which should flow through to our borrowers and hopefully mute those needs.

But we'll certainly be prepared to work with folks. We don't want to see delinquencies and defaults caused by the coronavirus, which I think we all hope is rather short but in temporary blip in the performance of the assets.

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Christopher Whitbread Patrick Nolan, Ladenburg Thalmann & Co. Inc., Research Division - EVP of Equity Research [13]

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And then a final question on leverage. Given that one of your CLOs is no longer in its reinvestment period, where are you thinking about balance sheet leverage going forward, stay the same, go down? What are your thoughts?

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James Peter Flynn, Hunt Companies Finance Trust, Inc. - CEO & Director [14]

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I mean, I think as we've said in the past, I think that the leverage ratio today is okay. And given the type of leverage we have and our size, over time, we've suggested that we'd like to see that come down a little bit as we grow.

Depending on -- certainly, with the CLO out of the reinvestment period, there will be a natural deleveraging occurring in that vehicle should we choose not to refinance it.

But I would expect it to maintain relatively in line with where it is, but certainly don't expect it to increase. If anything, it will come down.

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Operator [15]

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Our next question comes from Lee Zulch from Overcap.

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Lee Zulch, [16]

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Could you comment on first quarter book value, how that's shaping up?

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James Peter Flynn, Hunt Companies Finance Trust, Inc. - CEO & Director [17]

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Sure. Jim, Briggs, do you want to take that one?

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James A. Briggs, Hunt Companies Finance Trust, Inc. - CFO [18]

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Yes, sure. With our MSRs, we'll need to see where value is coming in there, clearly, with the decrease in rates. We're expecting some unrealized there, which could contribute to a lower book value in Q1. Otherwise, as we've spoken, we've been relatively stable from a book value perspective.

But the MSRs, which is fair value through P&L, we do expect to see some unrealized there -- unrealized losses there in Q1.

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Lee Zulch, [19]

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And how significant would that be? What sort of...

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James A. Briggs, Hunt Companies Finance Trust, Inc. - CFO [20]

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It's only a $2.7 million asset. So we're talking in the hundreds of thousand there, probably.

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Operator [21]

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(Operator Instructions) Our next question comes from [Rich Silverstein].

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Unidentified Analyst, [22]

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I have a question. What is the average duration of your guys loans?

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

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I believe -- I don't know if one of you have the answer to that offhand, I believe it's around 18 to 20 months, but I want to make sure I'm more precise. I don't know, Percilla or Mike, if you have...

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Michael P. Larsen, Hunt Companies Finance Trust, Inc. - President [24]

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I don't have the exact number in front of me but that is right. Our loans typically are 2 to 3-year terms with the extension opportunities. And so they -- as we model and think about them, they're generally in that range, that 18-month range.

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James A. Briggs, Hunt Companies Finance Trust, Inc. - CFO [25]

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Yes. On Page 14 of our supplemental, which has been posted as of 12/31, it was 21 months if all extensions are exercised by the borrowers.

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Operator [26]

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And ladies and gentlemen, with that, we will conclude today's question-and-answer session. I'd like to turn the conference call back over to management for any closing remarks.

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

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All right. Just want to thank everyone for joining. Obviously, we wish everyone well, good health, be well, be safe, and look forward to speaking to you next quarter.

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Operator [28]

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Ladies and gentlemen, that does conclude today's conference call. We do thank you for joining today's presentation. You may now disconnect your lines.