Lument Finance Trust, Inc. (NYSE:LFT) Q3 2023 Earnings Call Transcript

Lument Finance Trust, Inc. (NYSE:LFT) Q3 2023 Earnings Call Transcript November 14, 2023

Lument Finance Trust, Inc. beats earnings expectations. Reported EPS is $0.11, expectations were $0.1.

Operator: Good morning and thank you for joining the Lument Finance Trust Third 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 floor over to Andrew Tsang with Investor Relations at Lument Investment Management. Please go ahead.

Andrew Tsang: Thank you, and good morning, everyone. Thank you for joining our call to discuss Lument Finance Trust’s third quarter 2023 financial results. With me on the call today are James Flynn, CEO; James Briggs, CFO; and James Henson, President; and Zachary Halpern, Senior Director of Portfolio Management. Yesterday on Monday, November 13, we filed our 10-Q with the SEC and issued a press release to provide details on our third 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, The Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934.

When used in this conference call, words outlook, value 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 for financial information presented in accordance with GAAP. Reconciliations of these non-GAAP financial measures is the most comparable measures compared to in accordance with GAAP can be accessed through our filings with the SEC at www.sec.gov. For the third quarter, we reported GAAP net income of $0.10 per share, while distributable earnings were $0.11 per share. In October, we paid a dividend of $0.07 per share with respect to the third quarter which represented approximately a 17% quarter-over-quarter increase.

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

James Flynn: Thank you, Andrew. Good morning, everyone. Welcome to the Lument Finance Trust earnings call for the third quarter of 2023. We appreciate everyone joining today. The macroeconomic environment continues to be a challenging one. A mild recession beginning in the first half of 2024 remains a possible outcome as higher for longer rate environment seems to be the consensus economic forecast. Given the surprising resiliency of the labor market, consumption continues to outpace incomes and government spending and interest cost concerns. As we await the impact of the recent and dramatic monetary policy tightening to fully work its way through the system, we are also faced with heightened geopolitical uncertainty, further modeling the near-term outlook.

Given the interest rate volatility, multifamily and other commercial real estate property types continue to trade thinly. Overall, U.S. commercial real estate investment sales volume was down greater than 50% year-over-year in Q3. Despite deceleration of rent growth and widening of year-over-year cap rates, multifamily continues to be the preferred sector and is supported by strong fundamentals. While deliveries are elevated in certain markets this year and next, muted new construction starts suggest limited supply in the medium term, which is supportive of higher asset values as we move forward. Demand for multifamily continues to be driven by historic homeownership affordability gap with prices of single-family homes remaining high and residential mortgage rates currently north of 7%.

Given these positive signs in the long-term, LFT remains committed to its investment roots in seeking middle-market multifamily investment opportunities that are accretive to the earnings and long-term shareholder value. The CRE CLO market continues to see significant dysfunction with only two managed CRE CLO transactions priced during the third quarter and year-to-date. Issuance volumes through October are down 66% year-over-year from an already depressed prior year. Given the uncertainty in the capital markets, we are proud to have successfully executed on July 12, a $386 million floating rate mortgage portfolio financing transaction that we will subsequently reference as LMF 2023-1. In connection with LMF 2023-1 transaction, $270 million of an investment-grade rated senior secured floating rate loan was placed with a private lender and approximately $47 million of investment grade notes were issued and sold to an affiliate of our external manager.

LFT retained $67 million of subordinate notes in that transaction. The outstanding liabilities of this financing transaction have an initial weighted average spread of 314 basis points over 30-day term SOFR, excluding fees and transaction costs. The initial collateral pool consisted of 25 first lien floating rate mortgage loans secured by 32 multifamily properties located across the United States. The majority of the collateral was acquired from an affiliate of the manager at an aggregate discount to par of approximately 1.5%. The weighted average spread of the initial collateral was approximately 365 basis points over 30-day term SOFR, which we estimate works out to an effective spread on the initial collateral pool north of 425 basis points.

LMF 2023-1 provides for a 24-month reinvestment period that allows principal proceeds from repayments of the mortgage assets to be reinvested and qualified replacement mortgage assets subject to certain conditions. Consummation of this financing allowed the company to increase its investment capacity to approximately $1.4 billion at a relatively attractive incremental cost of capital. With the closing of LMF 2023-1, coupled with our CRE CLO debt previously issued in 2021 and outstanding corporate term loan, which matures in 2026, the company currently maintains an attractively priced and long-dated liabilities profile that positions us well as we enter an uncertain part of the market cycle. LFT’s investment strategy of acquiring floating rate mortgage asset positions it well for a higher for longer rate environment.

We believe the company consistently differentiates itself from its peer group. There is continued focus on middle-market multifamily credit opportunities, its culture of active asset management and its strong sponsorship from the broader ORIX platform. With that, I’d like to turn the call over to Jim Briggs, who will provide us details on our financial results Jim?

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James Briggs: Thank you, Jim and good morning everyone. Last 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. 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 an earnings summary for the quarter. For the third quarter of ‘23, we reported net income to common stockholders of approximately $5.2 million or $0.10 per share. There are a few items I’d like to highlight with regard to third quarter P&L. Our Q3 net interest income was $9.5 million compared to $7.5 million in Q2 and primarily as a result of the growth of our loan portfolio facilitated through the execution of the LMF 2023-1 financing transaction in July.

SOFR increased 23 basis points during the quarter from 5 spot, 9% to 5.32%, driving an increase in the interest income on our portfolio in excess of the increase in the cost of our floating rate liabilities. Exit fees and other prepayment-related income were relatively flat sequentially despite payoffs being higher than prior quarter due to a larger portion of the multifamily payoffs this quarter being refinanced with agency debt provided by an affiliate of the manager. Note that in such situations, a portion of the manager’s expense reimbursements are waived pursuant to the terms of the management agreement. Our total operating expenses were $2.4 million during Q3 versus $4.4 million in Q2. This quarter-over-quarter decrease was driven primarily by the $1.7 million or $0.03 per share of deal costs we expensed in Q2 and which have been incurred in pursuit of executing a broadly marketed CRE CLO securitization transaction which we ultimately abandoned in Q2 in lieu of the more attractive LMF 2023-1 private financing transaction.

For Q3, we reported distributable earnings of approximately $6 million or $0.11 per share. The primary difference between reported net income and distributable earnings was the approximate $800,000 net increase to CECL general reserves in the quarter, primarily due to the increase in the overall size of the floating rate loan portfolio as well as changes in the macroeconomic forecast in the period. As a non-cash unrealized item, these charges are adjusted out for purposes of calculating distributable earnings. We did not take any asset-specific provisions in Q3. As of September 30, the company’s total equity was approximately $241 million. Total common book value was approximately $180 million or $3.46 per share, up $0.03 per share from Q2.

We ended the third quarter with an unrestricted cash balance of $43 million. We also had an additional $30 million of aggregate reinvestment capacity through our two secured financings. 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?

Operator: Pardon me, this is the conference operator. Mr. Henson, is it possible your microphone is on mute?

James Henson: Yes, thank you. Thank you, Jim Briggs and thank you. I will now provide a brief summary of our recent activity within our investment portfolio. During the third quarter, we experienced a net $341 million increase in our loan portfolio after accounting for $111 million of loan payoffs. The $111 million of loan payoffs experienced during the quarter represent approximately 33% – a 33% annualized payoff rate, which is relatively in-line with the long-term historical averages and our short-term expectations. Of the $452 million of loan investments acquired or funded during the quarter, 99% were collateralized by multifamily properties. Loans acquired during the quarter from an affiliate of the manager were acquired at an aggregate discount to par of $7.1 million.

As of September 30, our portfolio consisted of 87 floating rate loans with an aggregate unpaid principal balance of approximately $1.4 billion of which 93% was collateralized by multifamily properties. 100% of our portfolio rate – floating rate portfolio is indexed to 1-month safer. Our investment portfolio performed well. We ended the third quarter with 75% of the portfolio risk rated a 3 or better, and we have maintained a weighted average risk rating of 3.4% quarter-over-quarter. Several offsetting factors impacted the average risk rating for the quarter. On one hand, the average risk rating would have shifted toward improvement during the quarter due to the company acquiring four new 2-rated loan investments with an aggregate unpaid principal balance of $64 million and two existing loan investments totaling $31 million of unpaid principal balance moving to a two rating during the quarter due to improved property performance metrics.

In addition, several assets migrated from a 3 to a 4 rating and two loan assets migrated from a 4 to 5 rating. We had three loan investments each collateralized by multifamily property, which were rated a 5 for the third quarter. These loans with an aggregate unpaid principal balance of $69 million are currently considered collateral dependent due to the actual or expected monetary default. One of these three loans we have discussed in prior quarters, and we continue to pursue all available revenues with regard to that loan. After conducting our analysis of the underlying collateral, we have concluded – we have not recorded any specific reserves with respect to these investments. We continue to proactively monitor the health of our portfolio, and we rely on the depth and breadth of our manager capabilities to drive positive asset management outcomes while protecting shareholder value.

With that, I will pass it back to Jim Flynn for some closing remarks.

James Flynn: Thank you, Jim Henson. Appreciate everyone’s time and interest. I want to open the call up for questions. I know there’s a few already in the queue.

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