Lument Finance Trust Inc (LFT) 2019 Q1 法說會逐字稿

Good morning and thank you for joining the Hunt Companies Finance Trust First Quarter 2019 Earnings Call. Today's call is being recorded and will be made available via webcast on the company's website.

I would like to now turn the call over to Evan Abrams with Investor Relations at Hunt. Please go ahead.

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

On Friday, May 10, we filed our 10-Q with the SEC and issued a press release which provided details on our first quarter results. We also provided a supplemental earnings presentation that can be found on our website and that has been uploaded for this webcast under materials for your reference.

Before handing the call over to Jim Flynn, 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 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, 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 statement. 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 on 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 the generally accepted accounting principles can be accessed through our filings with the SEC at www.sec.gov.

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

Thank you, Evan. Good morning, everyone. Welcome to the Hunt Companies Finance Trust earnings call for the first quarter of 2019. Thank you for joining us today. During the first quarter, we continued to execute the transition of our investment strategy while improving our capital structure and reducing our expenses.

As mentioned in our last call, during the quarter, we redeemed all of our 8.75% series A cumulative redeemable preferred stock and simultaneously executed a 6-year $40.25 million credit facility with an initial fixed rate of 7.25%. With the redemption of our preferred stock, the cost of capital on this $40 million portion of HCFT's capital reduced from a floating rate of LIBOR plus 7.15% to a new fixed rate of 7.25%. The annual savings of this cost reduction resulted in an EPS impact of $0.04 per share based on current LIBOR.

We also announced a Q1 2019 increase in the common dividend to $0.07 per share, a 17% increase over the fourth quarter of 2018. In addition, our manager agreed to further reduce the cap on its expense reimbursements for a period of time, which will positively impact our core earnings on a go-forward basis and shows further support from Hunt, our manager.

For the first quarter, HCFT reported a net loss of $2.1 million or $0.09 per share. These results were significantly impacted by a $3.1 million onetime charge to common shareholders, which stemmed from the accounting recognition of transaction costs relating to the redemption of our preferred stock.

Our core earnings for the quarter was $1.7 million or $0.07 per share. Jim Briggs will discuss our results shortly, including this onetime charge to common shareholders in further detail.

We have seen continued stability in our core earnings over the last several quarters now that we have transitioned our investment strategy to floating rate commercial real estate loans. At quarter end, we had $52 million of undeployed cash within our 2 CLOs, which we anticipate deploying over the remainder of the year. We anticipate that this full deployment will further improve our core earnings.

During the quarter, we acquired and funded $65 million of floating rate commercial real estate loans with a weighted average spread above LIBOR of 377 basis points. 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.

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

Thank you, Jim, and good morning, everyone. On Friday 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 Page 5 and 6 of the presentation, you will find key updates and an earnings summary for the first quarter.

As discussed in previous quarters, because the impact of certain gains and losses related to our legacy portfolio are not reflected in GAAP net income, we believe that GAAP comprehensive income better represents -- better presents the full GAAP impact of our operating results for those reporting periods that include our legacy portfolio.

For the first quarter of 2019, we reported a comprehensive loss to common shareholders of $2.1 million or $0.09 per share compared to a comprehensive loss of $431,000 or $0.02 per share for the first quarter of 2018.

As Jim previously mentioned, the current quarter included a onetime charge to common shareholders of $3.1 million or $0.13 per share, which is reflected as a deemed dividend in relation to the redemption of our preferred stock. Our preferred stock was carried on our balance sheet net of $3.1 million in the issuance costs that were incurred by the company in 2013 and '14. Upon the redemption of the preferred stock at its liquidation preference, these issuance costs effectively transferred to our common shareholders in the first quarter.

Excluding this item, comprehensive income in the first quarter of 2019 would have been $1 million or $0.04 per share. As noted in previous calls, with the transition of our strategy, we do not anticipate any material differences between GAAP net income and GAAP comprehensive income going forward.

Our view is that core earnings provide a better indication of our ongoing earnings capacity. Core earnings attributed to common shareholders for the first quarter was $1.7 million or $0.07 per share, which is down $0.01 per share quarter-over-quarter. This quarter-over-quarter decline in core earnings is primarily due to our audit-related fees which are heavily weighted to the first quarter when the previous year's audit is finalized.

There were several items of note that were excluded from our calculation of core earnings and that impacted Q1's book value and/or comprehensive income. First item to note, which impacts comprehensive income only, is the previously mentioned $3.1 million charge to common shareholders relating to the redemption of our preferred stock. Another factor is, as mentioned on our previous call, significant nonrecurring professional fees relating to our failure of the annual 75% gross income retest for 2018. These nonrecurring professional fees in Q1 amounted to $338,000. Lastly, we recorded unrealized losses of $380,000 on our legacy mortgage servicing rights due primarily to higher prepayment expectations.

Together, these items have resulted in book value per share of $4.61 at quarter end compared to an adjusted book value per share of $4.64 at year end. With the redemption of our preferred shares during the first quarter of 2019, we do not anticipate the need for presentation of an adjusted book value in the future.

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

Thank you, Jim. 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, completing the refinancing of our preferred stock and reducing our expenses.

During the first quarter, we acquired 4 loans and made future funding advances on 17 loans with total incremental fundings of $65 million. 44% of these loans were multifamily, with the remaining 56% being retail. This increased percent of non-multifamily investments was driven by 2 larger loans made during the period, and we continue to anticipate that a majority of our loan activity will be related to multifamily assets going forward. Our overall loan portfolio at quarter end remained 84% multifamily.

New loans had a weighted average initial LTV of 71% and a weighted average spread over LIBOR of 377 basis points while competition and spread compression continues to be a trend and we see some signs of stability. We experienced $34 million of loan payoffs during the quarter, which resulted in a net increase to our loan portfolio of $31 million, which is a 6% quarter-over-quarter increase.

Our total portfolio of floating rate loans had an outstanding principal balance of $586 million at quarter end. The portfolio consisted of 45 loans with an average loan size of $13 million, which provides for significant asset and geographic diversity. There are no defaults or delinquencies in the portfolio and we have 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 next year 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 mentioned previously, we completed the redemption of our preferred equity during the quarter, which significantly reduced the cost of capital. In addition to this savings, we have been focused on the management of expenses at HCFT. As noted on prior calls, when Hunt stepped in as manager, Hunt capped its expense reimbursements at 1.5% of adjusted shareholders' equity. In addition, commencing in Q1 of this year, expense reimbursements were further capped at 1.125% of adjusted shareholder equity for a period of time.

We have also been very focused on reducing our G&A expenses by leveraging Hunt's broader relationships and have achieved meaningful reductions in our recurring professional fees, which will benefit us beginning in Q2 of this year.

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

Thank you, Mike. In summary, Hunt continues to be excited and committed to the management of HCFT for the benefit of our shareholders. We remain positive about the company's long-term outlook and growth prospects. And Hunt will continue to take this long view in its relationship to the company and to its shareholders.

With the transition to a portfolio of CRE floating rate investments complete, we believe that the company is well positioned at this stage in the cycle, and we expect continued improvement in earnings as we fully deploy the remainder of our investable cash.

We look forward to updating you all on our progress. We appreciate your time and your interest.

And with that, I will ask the operator to open the call for any questions.

(Operator Instructions) Our first question today comes from Steve Delaney with JMP Securities.

I'd just like to start by congratulating you on the progress that you have made in the past year. It's pretty remarkable given the situation that you inherited. So great job, we're happy here.

The first thing I'd like to ask about, and Mike commented on it, we did obviously notice there were the 2 retail loans I think based in Austin, Texas. Obviously, you're not going to make it 100% multifamily. And I just would be curious if you could share any color about the borrower of those specific properties that caused you to find that opportunity attractive.

Sure. And thank you for your support, Steve. Appreciate the comments. The 2 loans in Austin, which we know well, are actually refinance activity of loans that were already in the portfolio. They were heavy-transition assets, but we did like the sponsor and the location and the story in Austin. Those assets and the sponsor executed extremely well on their business plan and were well ahead of where they anticipated being when they first came in for the loans. And because of our relationship, the borrower came to us and basically said that they were going to refi the loans away from us or just period, but gave us the option to say, "If you guys are willing to negotiate with us and provide basically a lower spread, we'll keep the financing with you."

And while that's not a great story in terms of reducing spread to save some assets, given the progress they had made in the business plan, we were in no doubt that they would find plenty of financing opportunities away from HCFT. So we worked with them to keep both of those loans in our portfolio and continue to help them to complete the execution of their business plan. Frankly, they probably could have got long-term fixed financing and/or a lower spread and higher leverage than we provided. But given the relationship and the seamless execution of a refi, they decided to stay with Hunt.

Sure. And obviously, you've decided either to take a smaller spread or lose the loan. I get that. And I mean, you sound pretty comfortable, Jim, that the risk profile of the refi loan is improved over the more heavily transitional nature when you make the original loan. Is that -- am I clear on that?

Yes, unquestionably. For example, one of the assets was anchored by a grocery store that hadn't -- yet to take possession when we first executed the loan and there was a lot of TI that needed to get done and is now open and operating. It's not -- to call it light transitional would probably be accurate but certainly not overstated.

Okay, great. And then moving on to the broader loan portfolio and activity. You had really solid $31 million net growth in the portfolio. As you look at second quarter and the pipeline and especially kind of what payoffs looks like because they were fairly significant to the first quarter at $34 million. Can you comment on it? Do you have enough visibility at this point to say whether the team -- whether you have an expectation for additional net loan growth in the second quarter?

Yes. I think the expectation is for net growth. Frankly, when we look at the pipeline today, the concern or the issue that we grapple with is less about volume and quality as we are seeing some quality opportunities. It continues to be finding the right sponsor and opportunity around profitability and spread. We've been able to maintain discipline and keep what I would argue as a healthy net spread of our new loans compared to the market, but it's still a slight decline to the average of the portfolio. That's our challenge, and I do expect us to continue to fill the pipeline at/or around where we have been doing it, maybe a slight decline. But as I stated on previous calls, we're in this for the long term. And while it's a competitive environment and we look out and it -- I don't want to say easy, but it might be easier to just reduce spread and win some loans. I think we've taken a much more disciplined approach. And I think in the long run, putting the capital out a little slower as we have to maintain spread discipline is the right path for us.

And I'll add to that, Steve. Looking at any one quarter, obviously driven by prepayments in that quarter and just the timing of loan closing in any [quarter] provides variability. But as we look through the rest of the year, we expect to continue to add to the portfolio and put the rest of that capital to work.

Great. And final thing for me, just on your deck on Page 4, one of your -- when you looked at it from the top, you got a long list of things you've accomplished and you've got a short list of the remaining steps. But one of those is sort of optimizing the sustainable dividend yield that you think you can achieve. And I think the fair way to ask that question now, guys, is with your existing capital base, what do you think sort of the optimal range of a dividend yield on book value can be? And that's it for me.

Yes. What we've continued to say, Steve, is that our -- what we're focused on is providing market-level dividend on book. So looking at 8% to 9%.

Okay. On the current $4.61 book. Yes, and I would agree. That's a pretty much the market. We've had the group at, what, 8.5% or something less on Friday night.

(Operator Instructions) Our next question today comes from Christopher Nolan with Ladenburg Thalmann.

The operating expenses of $338,000 related to the professional fees, is that nonrecurring?

That is nonrecurring.

Okay. So really, that should be -- it should not be added into the core EPS. So the core EPS, rather than $0.07, should be $0.08?

We've adjusted that from -- we've adjusted that in the calculation of core earnings.

If you look, there's a Page 6 of the supplemental. There's a walk provided from our comprehensive income to core earnings. And the adjustment for the onetime $338,000 is in there to get to that core earnings of $0.07.

Got it. Okay. I see it. Thanks for pointing it out. Also, Jim Briggs, did you mention what the spread was -- the investment spread was in the quarter? Or did I miss that?

The new loans that were put on the books during the quarter had an average spread of 377 over LIBOR.

377?

That's right.

(Operator Instructions) As there are no further questions, this concludes our question-and-answer session. I'd like to turn the conference back over to Jim Flynn for any closing remarks.

I just want to thank everyone for their time and continued interest, and look forward to speaking to you in future quarters. Thanks, all.

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