Lument Finance Trust Inc (LFT) 2020 Q4 法說會逐字稿

Good morning, and thank you for joining the Lument Finance Trust Fourth Quarter 2020 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 call over to Charles Buddy with Investor Relations at Lument Investment Management. Please go ahead.

Thank you, and good morning, everyone. Thank you for joining our call to discuss Lument Finance Trust's Fourth Quarter 2020 Financial Results. With me on the call today are James Flynn, CEO; Michael Larsen, President; James Brigg, CFO; and Precilla Torres, Head of Real Estate Investment 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, which can be found on our site.

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 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, 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.

Additionally, many of these risks and uncertainties are currently amplified by and will continue to be amplified by, or in the future may be amplified, by the COVID-19 pandemic. 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 to the most comparable measures prepared in accordance with GAAP can be accessed through our filings with the SEC at www.sec.gov.

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

Thank you, Charlie. Good morning, everyone. Welcome to Lument Finance Trust earnings call for the fourth quarter of 2020. Appreciate you joining us this morning.

First and foremost, I would like to express my hope that you and your families are all staying well, healthy during the ongoing COVID-19 pandemic. I'd also like to express my optimism that we're all hopeful that we're approaching the beginning of the end of life as we've known it over the past year. So really looking forward to and hopeful that as we enter the spring and summer of this year that we are able to move back to some form of normalcy and then beyond and get through this as safe and healthy as possible. Obviously, COVID-19 has continued to have a significant impact on the economy, our industry and certainly how we all live and work.

Our business and our employees, we continue to seek ways to keep them safe with -- and keep them available to operate with as little disruption as possible. We continue to work from home -- or primarily work from home since March of 2020. So we're now past the 1-year mark, but we do hope our return to the office, at least for some is in the cards for 2021.

Despite those challenges, we've been able to execute on all of our investment management, asset management, servicing, portfolio monitoring and related functions on a daily basis. We continue to -- we in Lument Finance Trust and the manager, along with our parent company leadership, continue to monitor the progress that we've made and continue to be encouraged by the progress and the improving circumstances of vaccine distribution and hopefully, it's not entirely stamping out immediately moving toward, again, that sense of normalcy you've all been waiting for quite some time.

Before turning the call to Mike, I wanted to provide -- to Jim and Mike, I wanted to provide a summary of our achievements for the year. As I just mentioned, we successfully navigated the challenging economic environment resulting from COVID-19 as of December 31, 2020. Our loan portfolio was 100% performing with no impairments, no loan defaults or any loans on nonaccrual status and no loan subject to forbearance.

Furthermore, we have not granted or needed to grant any single forbearance, and we have not experienced any loan default during the entire period, not just at the end of the period. I believe this is a testament to both our rigorous credit standards as well as our proactive asset management efforts. As a reminder, multifamily assets make up the vast majority of our collateral. We do not own any assets backed by hotels, and we have limited exposure to retail and office properties and other asset types.

With regards to shareholder returns, Lument Finance Trust generated an industry-leading 13%, 13% total return inclusive of dividends for the full year 2020. We believe this compares extremely favorably to the competitive set. The number of commercial mortgage REITs in this space had negative returns for 2020, certain competitors have struggled with loan delinquencies and/or margin calls from financing counterparties.

From an earnings perspective, we were able to increase full year distributable earnings by 29% year-over-year from $7.6 million in 2019 to $9.8 million in 2020. During the year or during 2020, our dividend increased meaningfully from $0.075 in Q4 of 2019 to $0.09 in Q4 of 2020, representing a 20% increase. We also declared an incremental $0.04 special dividend in Q4 of 2020.

From a liquidity perspective, we have not experienced any material adverse liquidity events due to COVID or otherwise. We are comfortable with our current liquidity position based on our current business plan and our structure. I would like to note that we do not currently utilized repurchase a warehouse facility financing at LFT, and therefore, we have not been subject to margin calls on any of our assets. Our utilization of non mark-to-market financing has proved valuable during last year's disruption.

Finally, in December of 2020, we announced our rebranding through Lument Finance Trust in conjunction with the rebranding of LFT's manager from OREC Investment Management to Lument Investment Management. It is an overwhelmingly positive feedback from our borrowers and partners on the rebranding and we look forward to leveraging the breadth and expertise of the broader Lument platform in the years to come.

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

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'll be referencing during our remarks. The supplemental investor presentation has been uploaded to the webcast as well for your reference.

On Pages 4, 5 and 6 of the presentation, you will find key updates and an earnings summary for the quarter and for the full year. Before I get into our financial results, I want to briefly discuss our non-GAAP earnings measure. You heard Jim mention distributable earnings in his opening remarks. Historically, we have disclosed core earnings as an important financial metric that we use in addition to GAAP net income to assess the performance of our business and a metric we consider when declaring our dividends.

Beginning this quarter, we have renamed core earnings, distributable earnings. I want to be clear that this change is only a change in terminology and not in how we calculate this metric. We believe this name change better reflects what this non-GAAP financial measure represents, which is a measurement of our results anchored in GAAP net income and adjusted for certain noncash items that gives a better indicator of our performance within the context of a potential dividend.

Others in our industry have similarly moved to change the nomenclature of their non-GAAP measure after discussions between the mortgage REIT industry and the SEC to adopt terminology that is more descriptive of what the metric represents.

For the fourth quarter of 2020, we reported net income to common stockholders of $2.5 million or $0.10 per share, which is in line with the prior quarter. This compares to a net income to common stockholders of $1.2 million or $0.05 per share for the fourth quarter of 2019. The current quarter was primarily impacted by 2 non-distributable items. The first of these was $177,000 decline in the fair value of our legacy and mortgage servicing rights portfolio as we continue to experience elevated prepayment fees associated with lower interest rates.

As of December 31, the carrying value of this asset was below $1 million, due to the limited size of this asset, we generally do not expect any future quarterly reductions in fair value to be significant to our earnings. The other non-distributable item experienced this quarter was a small GAAP income tax benefit of $39,000 pertaining to activity at our taxable REIT subsidiary. After adjusting for these 2 items, our distributable earnings attributable to common stockholders for the quarter was $2.6 million or $0.10 per share. This represents a meaningful increase in distributable earnings per share relative to $0.06 per share in Q4 of 2019, which is driven by higher net interest income, partially attributed to an interest rate environment that has been favorable to our portfolio. We are pleased with the distributable earnings per share yield generated by the company this quarter, which was 9.2% of book equity value on an annualized basis.

Our book value at December 31 was approximately $114 million or $4.56 a share. I would like to highlight that our book value per share has been stable over the last 4 quarters as we began the year at $4.59 per share, which is within 1% of where we stand today.

One additional item, which we discussed last quarter that I would like to remind everyone of is that as a small reporting company as defined by the SEC, we have not yet adopted ASC 2016-13, commonly referred to as CECL or current expected credit losses, which is a comprehensive GAAP amendment of how to recognize credit losses on financial instruments.

As a small reporting company, we are scheduled to implement CECL on January 1, 2023. Until then, we continue to prepare our financial statements on an incurred loss model basis. As of December 31, we do not consider any of our loans to be impaired under the incurred loss model and have not recorded any impairments or allowance for loan losses in the current quarter. While the current performance of our bridge loan portfolio remains healthy, uncertainty about the severity and duration of the economic impact of the COVID-19 pandemic exists, including its impact on our borrowers and on the value of the properties that collateralize our commercial mortgage loan investments.

We will continue to evaluate the loan portfolio for credit losses, and we'll record any impairments or allowance as incurred.

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

Thank you, Jim, and good morning, everyone. With regards to our investment activity, during the quarter, we acquired 1 new loan and made future funding advances on 2 loans with total incremental fundings of $5 million.

All of these fundings were loans secured by multifamily assets. Since January, we have seen a significant increase in investment pipeline activity, driven by a surge in multifamily value-add acquisition activity, newly constructed properties in lease-up, looking for bridge financing and request for bridges to permanent agency and FHA financing.

In general, mark the confidence in the commencement of an economic recovery from the COVID environment has positively impacted borrower demand for bridge loans at the onset of 2020. We did experience $56.6 million of loan payoffs during the quarter and driven by the same uptick in acquisition activity in the market, we expect payoffs to increase over the coming quarters back to a more normalized level. We continue to be thoughtful and patient in our evaluation of new investments. And with the increase in our pipeline, we feel positive about our ability to keep our capital fully deployed.

Our overall loan portfolio at quarter end was 90% multifamily, in line with prior quarters. Even before COVID, we felt that this focus on multifamily is a strength of ours, but in a post-COVID world, we think that is even more true. Multifamily assets have historically reflected the greatest resiliency amongst the different property types during periods of economic uncertainty. And due to our managers' expertise in multifamily, we continue to anticipate the majority of our loan activity will be related to multifamily assets.

Our total portfolio of floating rate loans had an outstanding principal balance of $547 million at quarter end. Portfolio consisted of 40 loans with an average loan size of $13.7 million, which continues to provide for significant asset diversity. Our portfolio has a weighted average spread to LIBOR of 350 basis points. All the loans in our portfolio have a LIBOR floor above current spot LIBOR rate with a weighted average LIBOR floor of 164 basis points.

Should current LIBOR rates persist, and we're able to maintain an average LIBOR floor at or near these levels, we anticipate that our LIBOR floors will continue to have a positive impact on our earnings. As of 12/31, our loan portfolio was financed with 2 CRE, CLO securitizations with an average cost of financing of LIBOR plus 144 basis points. As mentioned before, we believe that the non mark-to-market match term financing that these CLOs provide give us additional protection relative to alternative financing options. The reinvestment period on our first CLO ended in February of 2020, and our second CLO has a reinvestment period that runs through August of this year.

With regards to our first CLO specifically, we experienced $8 million of loan payoffs during Q4. Since the reinvestment period in the securitization has ended, these payoffs have begun to sequentially paint down the CLO bonds. Our total bond pay downs during Q4 were $17 million, which was driven by a combination of that $8 million loan payoff experienced during Q4 and $9 million loan payoff experienced during Q3 of last year, for which proceeds weren't applied to the bonds until the fourth quarter.

I would like to highlight, however, that even after the impact of these pay-downs, our leverage and cost of funds within the first CLO remain attractive at 80.7% and LIBOR plus 145 basis points, respectively. We do continue to actively monitor conditions in the CRE, CLO space, and we are very encouraged by continued positive signs across the commercial real estate capital markets. Over the last 90 days, we have seen liquidity return to the secondary market for CRE, CLO bonds. And more importantly, we have seen an increase in issuance in managed transactions as well as significant compression of spreads for new issue series CLO deals. These developments provide a positive backdrop to our valuation of refinance alternatives and the favorable capital market conditions under which we may potentially refinance our CLO.

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

Thanks again, Mike. We do continue to be excited about the progress we've made, and we remain positive about the company's outlook and growth prospects. We look forward to updating you all on our progress and appreciate your time and interest.

I'd like to reiterate our hope that you and your families are all staying safe and healthy. And with that, we'd like to turn the call over to questions.

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

First off, I'd like to just say congratulations on the progress you made in the dividend. There's no question that, that step up, I think, it was 6.5%, 7.5%, been to 9% clearly, that was the primary driver behind moving your stock up to where we're near 80% of book as we sit today. So nice job on that. And I think from where you sit, it's not in 2021, as I see it, it's not about growing it further. At this time, it's more about being able to cover it with the kind of being maxed out on capital and the CLOs coming up here. So I guess, my first thing, I think the CLOs or the elephant in the room, Mike, if you could comment, the great news is you're not getting killed with paydowns, and you've got some room to run on FL2. The great news is the market is hot, right? I'm sure you saw the Arbor transaction that was reported Monday morning, 5 turns of leverage, 133 weighted average. As you look at your 2 CLOs and your options, I know you can't be specific, do you need to have -- is it better to have 2 separate issues? Or do you get some benefit in the marketplace if you were to combine the 2 transactions and do 1 new larger transaction? Let's start there.

Sure, sure. I'll jump in and others please add. So there is, specifically on that last question, there are some benefits to a larger transaction and the diversity that provides and the levels that can improve the economics of the CLO. So that's something we're looking at. As we've said, in prior quarters, all through last year, we've continued to very actively monitor the market and evaluate when the right time is to refinance our CLOs. As we said, we said in my remarks, the -- despite some of the paydowns we've seen, the pricing and leverage on our existing CLOs remains attractive, but clearly, that's not going to continue to ever forever as those bonds continue to pay down. So we are very actively looking at the market and potential options to refinance one or both CLOs.

And as you noted, the market has improved substantially, particularly even over the last few months, which is great and positive, and we're glad to see that. I think that bodes well for us as we look to refinance our CLOs.

Yes. Okay. Well, we'll stay tuned. Clearly, having that resolved, we'd love to see the company have more capital and grow, I think, accessing capital when there's a big question on the CLO near-term is it makes that more challenging. So it sounds like you've got it all figured out, which I knew you did. Just one quick one for Jim Flynn. You've done the rebranding, okay? And obviously, for what we care about here today, Lument Finance Trust, the REIT, what name, in terms of just operating businesses like RED Capital, how do they refer to themselves in the marketplace now because I know you're climbing the league tables with Freddie and Fannie on small balance?

Yes. So Lument has absorbed all of those names. So what was Hunt Real Estate Capital, which ORIX acquired in January 2020, RED Capital, Lancaster Pollard even kind of what I'll call the ORIX branded balance sheet lending is all going to be incorporated and is incorporated into that Lument brand that is the manager of the finance trust here. So those names is, including RED, are now gone. Obviously, they exist here or there in places on documents that are quite old, but going forward, it will only be the Lument brand.

It's the Lument brand. But if I were to Google it, it's Lument and what? Is it Lument mortgage lending multifamily? How do you refer to it in the marketplace?

So just with -- for the mortgage banking, particularly with Fannie, Freddie, FHA, we've just used Lument. So it doesn't -- it's a single name. So if you go then to lument.com, that's what would show up. And so that -- so we're just trying to -- we're like Madonna, Steve.

Yes, exactly. You don't -- who needs 2 names, right? There you go. Madonna, Gaga, there you go. Okay, well, thanks for clarifying that, and hopefully, it becomes -- it's going to be a really strong brand. Listen, thanks for the time and the comments. The last thing I just want to say, thanks to Jason Stewart at Jones for picking up coverage. It's nice to have somebody else on the story and look forward to moving forward with them as well.

Yes. Thank you, Steve, and thank you for your continued support.

(Operator Instructions) Next question comes from Christopher Nolan with Ladenburg Thalmann.

How much reinvestment capacity is less in the CLO, which is not run off?

CLO 2?

I am sorry, what was that?

You're just referring to the second CLO that has reinvestment capacity, correct?

Exactly. I'm just trying to find out how much?

As of today or -- it wouldn't be today.

Chris, just sort of clarify, is your question on how many months remaining or on dollar amount? Sorry.

No, I was just trying to see whether you have any reinvestment capacity in that second CLO to offset the runoff of the first CLO?

Right...

So capacity.

That's okay. You can get back, it's not a big deal.

No, no, that's all right. As of the end of the year, there was $68 million in capacity within that CLO.

Great. And then turning to the multifamily real estate market. I appreciate the color that you guys provided, what sort of -- the market tends to be a bit competitive. What sort of LTVs and interest coverage ratios are you seeing on deals that you're underwriting?

Precilla, you want to?

Sure. So to answer that question, a good way to answer is to also put it in the backdrop of what was going on pre-COVID. So pre-COVID, I'd say, the LTVs that you have to underwrite to go in at 80%. Nowadays, they were up to, I'd say, mid-70s. It's frankly slowly creeping up with competition, but right now, for the most part going in LTVs or, call it, 75%, with respect to BSCR because LIBOR is already very low. BSCRs are actually less of a challenge right now on a going-in basis. So it's actually also in conjunction with the compression of spreads that we're seeing. There pretty reasonable, except for, obviously, lease-up assets where the coverage is negative. But in those cases, that service reserves are being structured.

Okay. And I guess as a follow-up to that, given that real estate is pretty sensitive to higher interest rates, if interest rates were to go up, obviously, I think your LTV would be going down just because the value of the property would be going down. How would you address that if your LTV -- actually I get to see LTV be going up, excuse me. How would you address that if your LTV started going higher than 80% if we have a material change in interest rates going forward?

Okay. A couple of things. The metrics I discussed were what we call going in LTV and as you can appreciate, because these are transitional assets, ultimately what the transactions typically work towards is an accretion of value as the business plans are executed. As a result, the LTVs that we end up with as term goes -- as the term continues goes down. So in the case, for instance, of an 80% LTV loan, and again, to be clear, that was pre-COVID. Right now, it's more in the mid-70s. Then going out LTV will be closer to low-70s in terms of the market today. And the number of cases actually we've seen it going down to even below 70%, call it, high 60s.

With respect to your question on value and interest rates, I'd say even the past 10 years have shown and certainly the recent periods, there is a stickiness, if you will, to cap rates. And in fact, what's more relevant is what I call the delta, if you will, between cap rates and where charging rates are today. And that delta, I'm reluctant to quote it because I don't have the chart in front of me right now, but it is significantly higher than what the historical average is.

So in other words, very significant -- in our view, and in a number of economists, real estate economists' views, there is significant runway for rates to go up before cap rates even start to go up. So as a result of that, with respect to your question, in fact, I asked a real estate economist a question very recently. What he expressed is, and I shouldn't cite him just because I'm not sure -- there are studies on this though. The concern on cap rates going up relative to where interest rates are, it's still a few years away in terms of concern because of that significant delta right now.

Got it. Final question. Do you guys have any loan exposure in New York City, Los Angeles, San Francisco, Chicago?

So we...

We have...

Go ahead.

Yes, go ahead, Precilla. No, go ahead.

I'd like to just give the context here of, as you all know, the focus of Lument has always been middle market, workforce housing, which tends to be in the, if you will, center of the country and less so in the coastal areas, the East and the West Coast. As a result of that, in terms of New York City and kind of the major markets in California, we have -- if your concern is in terms of the COVID impacted on geographies, it's next to -- it's de minimis, I would say. And the focus actually of the geographies we've had historically are fortuitous with respect to the demographic movements since COVID.

This concludes our question-and-answer session. I would like to turn the conference back over to Mr. Flynn for any closing remarks.

Thank you, operator. I'd just like to variate my thanks for the support from those who joined, and we look forward to speaking to you again next quarter. Thanks all.

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