Lument Finance Trust, Inc. (NYSE:LFT) Q4 2023 Earnings Call Transcript
Lument Finance Trust, Inc. (NYSE:LFT) Q4 2023 Earnings Call Transcript March 18, 2024
Lument Finance Trust, Inc. isn't one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: Good morning, and thank you for joining the Lument Finance Trust Fourth Quarter 2023 Earnings Call. Today's call is being recorded and will be made available via webcast on the company's website. And I would like to turn the call over to Andrew Tsang with Investor Relations at Lument Investment Management. Please go ahead, sir.
Andrew Tsang: Thank you, and good morning, everyone. Thank you for joining our call to discuss Lument Finance Trust's Fourth Quarter 2023 Financial Results. With me on the call today are Jim Flynn, our CEO; Jim Briggs, our CFO; Jim Henson, our President; and Zachary Halpern, our Managing Director of Portfolio Management. On Friday, March 15th, we filed our 10-K with the SEC and issued a press release to provide details on our fourth quarter results. We also provided a supplemental earnings presentation, which can be found on our website. Before handing the call over to Jim Flynn, I'd 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 of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934.
When used in this conference call, words like 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 Forms 8-K, 10-Q and 10-K, and in particular, the Risk Factors section of our Form 10-K. It is not possible to predict or identify all such risks. Listeners are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date hereof.
The company undertakes no obligation to update any of these forward-looking statements. Furthermore, certain non-GAAP financial measures will be discussed on this conference 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 is the most comparable measures prepared in accordance with GAAP. These can be accessed through our filings with the SEC at www.sec.gov. For the fourth quarter and fiscal year 2023, we reported GAAP net income of $0.07 per share and $0.29 per share of common stock, respectively. For the fourth quarter and fiscal year 2023, we reported distributable earnings of $0.10 and $0.26 per share of common stock, respectively.
This past December, we also declared a dividend of $0.07 per share with respect to the fourth quarter, bringing our cumulative declared dividends for the year to $0.26 per share. I will now turn the call over to Jim Flynn. Please go ahead.
James P. Flynn: Thank you, Andrew. Good morning, everyone. Welcome to the Lument Finance Trust earnings call for the fourth quarter of 2023. We appreciate everyone joining us this morning. I'll start with the macro perspective. We're viewing 2024 with cautious optimism. Consensus expectation is that further hikes are now behind us and most economists believe the soft landing is more probable in 2024 than just six months ago. U.S. economy has remained resilient, unemployment rates remaining below 4%, inflation albeit a bit moving up and down, is moving closer to Fed at the rate of 2% with all the most recently seen available data. That being said, the risk of recession remains elevated as geopolitical uncertainty persists and as seen how the Fed's current policy which operates on a lag, fully plays out across the economic landscape.
Multifamily has its own set of opportunities and challenges. In the short term, the property sales market continues to be primarily driven by for sellers [ph], significantly limiting acquisition financing opportunities. In addition, the multifamily market is expected to experience slowed NOI growth resulting from short -- softening of short-term supply in some markets -- sorry, supply-demand dynamics, I should say, in some markets and higher property operating costs including labor, insurance, and maintenance in addition to the impact of the higher rates we've had across the industry. Despite the challenges, multifamily remains a favored asset class among investors given its strong historical performance and constructive long-term fundamentals.
The lower short-term rate environment in the latter half of 2024, did contribute to improved asset performance in our portfolio and perhaps the narrowing of the current average spread between property buyers and sellers, positively impact the valuation and in turn, debt proceeds. Further, we expect to see significant refinance opportunity on the horizon as the NDA [ph] and others in the industry are projecting well over $300 billion of multifamily loans expected to reach initial maturity by the end of 2025 and over $650 billion of multifamily loans are expected to mature within the next three years. As previously discussed on last quarter's call, the company had a busy and successful year, closing at $386 million secured financing in July and increased our levered investment capacity to approximately $1.4 billion.
During the fourth quarter, we experienced $43 million of loan payoffs and acquired or funded an additional $77 million of loan assets. As of year-end, our capital was effectively fully deployed with approximately 94% of our loan portfolio collateralized by multifamily assets and more than 75% of the portfolio risk rated three, which is moderate risk or better. We had only two assets identified as risk rated 5 and recorded no asset-specific reserves during that period, 5 being the highest risk. The company continued to maintain an attractive long-dated liabilities relying primarily on two secured financing structures to leverage investment portfolio. The reinvestment period of 2021 CRE CLO transaction ended this past December, with an 83% effective advance rate and a weighted average cost of SOFR plus 155 basis points.
Even as the transaction begins to delever, we expect the structure to continue to provide an attractive cost of capital relative to current securitization of warehousing alternatives in the market. We do, however, expect to explore and carefully consider refinance opportunities for that CLO over the coming quarters. With deep experience and expertise in multifamily lending, LFT remains committed to its existing investment strategy. We believe the company provides its shareholders with a unique value proposition among comparable mortgage REITs, given our deliberate focus on middle market multifamily credit, success in active asset management, and strong partnership from the broader ORIX platform. The company has been able to maintain a stable dividend, better-than-average credit performance within its investment portfolio, and this is a superior dividend yield relative to many of its peers.
With that, I'd like to turn the call over to Jim Briggs, who will provide details on our financial results. Jim?
James Briggs: Good morning, everyone. Last Friday 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. Supplemental investor presentation has been uploaded to the webcast as well for your reference. On Pages 4 through 7 of the presentation, you will find key updates and our earnings summary for the quarter. For the fourth quarter of 2023, we reported net income to common stockholders of approximately $3.8 million or $0.07 per share. We also reported distributable earnings of approximately $5.2 million or $0.10 per share. There are a few items I'd like to highlight with regard to the Q4 P&L. Our Q4 net interest income was $9.1 million compared to $9.5 million in Q3.
While Q4 net interest income benefited from a full quarter's worth of levered earnings from the LMF 2023-1 financing transaction that closed in July, a sequential net decline was primarily driven by fewer payoffs during the period, which resulted in lower exit fees. Payoffs and paydowns during Q4 totaled $43 million, as compared to $111 million in the prior quarter. Associated Q4 exit fees of $210,000 were down approximately 57% from the prior quarter. Reduced Q4 payoffs also impacted our total operating expenses as well. As a reminder, when one of our loans are paid off in agency refinancing, provided by an affiliate of our manager, the borrower exit fee is way pursuant to the terms of our management agreement. In that instance, we do, however, receive a credit to expenses reimbursable to our manager of 50% of the waived exit fee.
Total operating expenses were $2.7 million in Q4 versus $2.4 million in Q3. The majority of that expense increase is driven by lower waived exit fees and lower associated credit to expenses driven by overall lower payoffs relative to Q3. Outside of that, operating expenses were largely flat quarter-on-quarter. Primary difference between reported net income and distributable earnings was the approximate $1.4 million net increase in our allowance for credit losses, all with respect to our general reserves. The primary driver of that general reserve increase was a modest uptick in average risk rating from 3.4 to 3.5, changes in the macroeconomic forecast, and relative cautiousness in our estimate modeling as it relates to CRE pricing during this period, where there has been very little transaction activity.
We evaluate our 5-rated loans individually to determine whether asset-specific reserves for credit losses are necessary and determined that none where necessary as of December 31, 2023. In that context, I'd like to note some subsequent events related to the two 5-rated loans we had at year-end. With respect to the 5-rated loan on a multifamily property in Columbus, Ohio, that has been nonaccrual with collections accounted for on a cost recovery basis. We received proceeds related to the loan in both Q4 and Q1. Our carrying value in the loan was reduced to $8.9 million as of year-end from $12.8 million at the end of Q3 and with the $13.5 million in proceeds received in Q1, our carrying value in the asset will be reduced to zero. After taking into consideration certain legal and other costs being recoverable, we expect the net of the Q1 proceeds received to result in a gain of approximately $1.9 million in Q1.
With respect to the $36.8 million, 5-rated loan on a multifamily property in Virginia Beach, Virginia, that was on nonaccrual as of December 31 due to monetary default, we entered into a loan modification with the borrower that among other things resulted in a $3.6 million principal pay down and all past dues being brought current, which will result in interest of approximately $500,000 that was unpaid as of year-end being recognized in Q1. Jim will touch a bit more on this modification in his remarks. As of year-end, the company's total equity was approximately $241 million. Total common book value was approximately $181 million or $3.46 per share, flat versus prior quarter. We ended the fourth quarter with an unrestricted cash balance of $51 million, and our investment capacity through our two secured financings were effectively -- was effectively fully utilized.
I will now turn the call over to Jim Henson to provide details on the company's investment activity during the quarter and portfolio performance. Jim?
James J. Henson: Thank you, Jim Briggs. I will now provide a brief summary of recent activity within our investment portfolio. During the fourth quarter, we experienced a $34 million net increase in our loan portfolio after accounting for $43 million of loan payoffs and pay downs for the period. For the full year, we experienced a $388 million net increase in our loan portfolio after accounting for $271 million of loan payoffs for the period. The growth of the portfolio was driven primarily by our success in executing the LMF transaction in July as well as our managers' diligent efforts to redeploy capital through reinvestment features in our secured financing vehicles. Of the $77 million of loan investments acquired or funded during Q4, approximately 70% were collateralized by multifamily properties.
Of these $660 million of loan investments acquired or funded during the full year, approximately 95% were collateralized by multifamily properties. As of year-end, our portfolio consisted of 88 floating rate loans with an aggregate unpaid principal balance of approximately $1.4 billion with 94% of the portfolio collateralized by multifamily properties. 100% of our floating rate portfolio is indexed to one-month SOFR. Our investment portfolio continued to perform well during the fourth quarter as we ended the period with a little more than 75% of our portfolio risk rated A3 or better and experienced only a modest quarter-over-quarter increase in the weighted average risk rating going from 3.4 to 3.5, primarily driven by a migration of some of our risk-weighted two assets to a risk rating of 3.
On a positive note, our 5-rated aggregate loan exposure decreased from three to two loan assets during the quarter. As previously stated -- as previously -- as we previously rated 5 loans with an unpaid principal balance of $19.6 million was brought current with respect to interest payments and restored to accrual status during the fourth quarter. Jim touched on the two 5-rated loans that remained at December 31, 2023 and were evaluated for specific reserves. As noted, based on proceeds received on the Columbus, Ohio loan, we have no remaining asset on the books coming out of Q1. With respect to the modification on the $36.8 million 5-rated loan collateralized by a multifamily property in Virginia Beach, Virginia, the modification of the loan increased the note rate to SOFR plus 400 basis points from SOFR plus 327 basis points in addition to a principal pay down and are bringing current of all past due interest escrows and reserves.
The stated maturity of that loan has been amended to April 5, 2024, with the ability for the borrower to extend under certain conditions to May 3, 2024. Very positive developments and indicative of success in active asset management that Jim Flynn mentioned in his opening remarks. Despite the potential for further issues with specific loans, we remain confident in our ability to proactively manage repayments and achieve positive asset management outcomes within our portfolio, particularly in light of successful results in recent months. With that, I will pass it back to Jim Flynn for some closing remarks.
James P. Flynn: Thank you, Jim and thanks again to all of our guests on the call. We appreciate your time and your interest. I'd like to open the call up to questions.
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