Lument Finance Trust Inc (LFT) 2022 Q1 法說會逐字稿

Good morning, and thank you for joining the Lument Finance Trust First Quarter 2022 Earnings Call. Today's call is being recorded and will be available via webcast on the company's website.

I would now like to turn the call over to Charles Duddy 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 first quarter 2020 financial results. With me on the call today are James Flynn, CEO; Michael Larsen, President; James Briggs, CFO; and Precilla Torres, Head of Real Estate Investment Strategies.

On Monday, 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, which 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 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. The 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 the Lument Finance Trust Earnings Call for the first quarter of 2022. Thank you for joining. During Q1, we continue to observe very strong performance in our investment portfolio and continue to make significant incremental investments to grow the asset base in LFT.

First, I'd like to begin by recapping our Q1 equity capital raise, which we discussed in detail on our year-end earnings call. February 22, LFT closed on a transferable rights offering, which resulted in the company raising approximately $83.5 million of gross common equity proceeds. This was an important transaction that provides LFT with growth capital required to meet our objectives of achieving appropriate operating scale and expanding our capacity to make investments on target assets. We believe this raise enables the company to improve operating expense efficiencies, and we anticipate that the general and administrative expenses as a percentage of stockholders' equity will decrease as a result of the offering. We also expect that the offering will increase the liquidity in trading volume of our common stock.

Finally, I'd note that the transaction demonstrated a strong alignment of interest between LFT and its external manager, Lument. The affiliate of the manager exercised its oversubscription privilege and made a total investment of $40 million in the transaction. With this recent capital raise in mind, I would describe our overall investment performance in Q1 of 2022 as in line with expectations as we began to deploy the new capital. Consistent with our existing strategy and expertise, we acquired 14 multifamily assets from an affiliate of our manager, and as a result, we increased the size of the investment portfolio by approximately $76 million or 7.5% during the quarter.

In order to continue growing the portfolio on a leverage basis to fully deploy the recently raised capital and take advantage of the manager's significant pipeline of loans, we are actively focused on executing the loan financing transaction to leverage the newly acquired assets. Historically, we've utilized CRE CLOs to finance our investments and continue to believe that CRE CLOs provide an attractive financing source due to favorable leverage as well as the nonrecourse and non-mark-to-market features.

Clearly, we have experienced volatile capital markets over the last few months with elevated concerns around inflation, the speed and size of the Fed rate hikes, supply chain issues, the Russian invasion of Ukraine, and broader U.S. and world economic health. There's been limited CRE CLO activity during the 4 months of the year, but we have seen new issued AAA spreads widen by 40 to 50 basis points or more since the beginning of the year. In recent and coming weeks, we expect to see more new activity in this market, and we are actively working on the new CRE CLO transaction for LFT seeking to execute in the coming months, assuming market conditions permit.

It is clear that the cost of liabilities has increased and the corresponding market spreads on assets are also increasing. We believe it likely that newly originated assets going forward will have wider spreads in existing assets with similar characteristics. Those increases will be in line with the increases in the cost of financing. We also expect to continue to see increasing short-term interest rates, which, over time, provide some economic benefit to LFP.

With regards to our dividend, we previously declared a quarterly dividend of $0.06 per share for the first quarter of 2022. This level reflected a resetting of our dividend, taking into account our recent capital raise and the increased share count. In addition, the dividend reflected the anticipated drag on net income and income to common shareholders in the short term as we work to deploy the newly raised capital on a leverage basis. Overall, however, I would like to emphasize that once our capital is fully deployed on that leverage basis, we expect to support a stable, consistent run rate market yield on a go-forward basis.

It's also important to acknowledge that our folks in multifamily bridge lending and the strength of our credit and asset management platform have allowed the portfolio to continue to perform well. As of March 31, our loan portfolio was 100% performing with no impairments, no monetary loan defaults, and no loans subject to forbearance. As stated in the past, we have still not granted a single forbearance nor we experienced a single monetary default during the COVID era, a testament to both the rigorous credit standards as well as our proactive asset management efforts.

We continue to maintain our simple and straightforward strategy of deploying our capital into commercial real estate debt investments with a focus on multifamily in order to provide stable earnings that support a market return to our shareholders. We're making progress towards LFT's long-term goals and remain excited about our continued growth as we focus on executing the business plan. In the coming months, we will continue discussions with investors and educate market participants about LFP and the opportunity we offer investors.

Our manager is one of the nation's largest capital providers in the multifamily and seniors housing space, executing over $17 billion in total transaction volume in 2021, servicing a $50 billion servicing -- loan servicing portfolio, and employing over 600 employees in more than 30 offices nationwide. The scale of this platform benefits the investors of LFT and provide strong support in the execution of our investment strategy.

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

Thank you, Jim, and good morning, everyone. On Monday 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 Pages 4 through 8 of the presentation, you will find key updates and an earnings summary for the quarter. For the first quarter of 2022, we reported net income to common stockholders of approximately $1.8 million or $0.05 per share. We also reported distributable earnings of approximately $1.7 million or $0.05 per share. This represents a decline versus Q4 '21, distributable EPS of $2.6 million or $0.11 per share.

There are a few primary drivers of the quarter-over-quarter decline in distributable EPS. The first of these is share count. As mentioned by Jim in his opening remarks, on February 22, we closed on a transferable rights offering. As a result of this transaction, the company's total equity, inclusive of both common and preferred, increased by approximately $80 million quarter-over-quarter from approximately $169 million as of year-end to $249 million as of March 31. The offering caused our total shares issued and outstanding to increase from 24.9 million shares as of December 31 to 52.2 million shares as of March 31. Our weighted average share count during Q1 based on the February 22 issuance state was 36.4 million shares. This increase in share count contributed $0.02 per share of EPS decline.

Next, I would like to touch on exit fees, which we have highlighted on prior calls. LFT's loans are typically structured with exit fees, which are recognized as interest income when a loan pays off and the fee is collected in cash, therefore, the timing of loan payoffs and the associated exit fee income can cause some variability in LFT's earnings from quarter to quarter. LFT may also be entitled to yield maintenance penalties and extension fees on loans from time to time. In Q1 2022, due to lower level of loan payoff activity, our exit fee income was $528,000 compared to $1.5 million of fees on loan payoffs in Q4 of '21.

Lastly, our gross interest income declined in Q1 due to the weighted average coupon of our portfolio decreasing from 3.9% as of year-end to 3.8% as of March 31. This decline was primarily driven by lower interest rate floors on new acquisitions. As a result of the Q2 rights offering transaction, the company's total book equity increased to approximately $249 million. Total common book value increased to approximately $189 million, and book value per share of common stock declined to approximately $3.62. per share. We stated last quarter that we did anticipate a drag on distributable EPS as we deployed the proceeds of this rights offering on a leverage basis. We would expect distributable EPS to continue to be pressured during Q2 until such time as we were able to execute a CLO or alternative on the financing transaction.

As discussed in prior quarters, I would like to remind everyone that as a smaller 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 smaller 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 March 31, we do not consider any of our loans to be impaired under the incurred loss model, and we 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 broader economy and COVID-19 recovery continues to exist. We will continue to evaluate the loan portfolio for credit losses and will record adding 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. We continue to experience a robust level of origination activity in the start of this year, and the LFT portfolio continues to grow. During the first quarter, as mentioned earlier, we acquired 14 new investments from our manager with a total principal balance of $185 million. All of these acquisitions were secured by multifamily assets. $119 million of these new loans are indexed to 1-month LIBOR and the remaining $66 million of loans were indexed to 30-day terms SOFR. The first quarter acquisitions had a weighted average spread to the index of the applicable index of 340 basis points and a weighted average index rate floor of 9 basis points. And the acquired loans had a weighted average loan to value at origination of 75%.

We experienced $109 million of loan payoffs during the quarter. And at quarter-end, our total loan portfolio outstanding principal balance was $1.08 billion. That represents a 7.5% increase in portfolio size quarter-over-quarter and over a 100% increase relative to the first quarter of last year. The portfolio consisted of 71 loans with an average loan size of $15 million. Portfolio at quarter-end was 94% multifamily with a slight increase from 92% multifamily as of the year-end '21.

Our second highest asset type concentration in self-storage, which represents 3% of the portfolio, and our exposure to retail and office continues to remain very low at 3% total principal balance on a combined basis. We continue to believe the middle market workforce housing, multifamily asset class is the best real estate asset class for investment today. Despite rising rates in the current inflationary environment, we believe that the supply/demand dynamics, demographics, and strong rent growth trends in this space continue to support multifamily assets and create an attractive investment opportunity for our shareholders.

Due to our manager's strong focus on multifamily, we continue to anticipate that the majority of our loan activity will be related to multifamily. However, as we've said in the past, we will look to supplement multifamily investments with strong quality investments and other asset types that can offer a strong return profile relative to multifamily.

With respect to pricing, our portfolio has a weighted average spread of 336 basis points and a weighted average index for 27 basis points. Due to continued market interest in investing in multifamily debt assets, which are our anchor investments, competition in the bridge space continues to be strong. However, we have begun to see an increase in loan spreads on new originations this year, driven by economic uncertainty, great volatility, and spread widening in the broader capital markets. Whereas a few months ago, we were seeing loans priced with spreads generally in the low to mid 300 basis points, we are now seeing pricing in the high 300s, which we expect over the short term to continue to trend up. This movement is in line with other increases in the overall market, and we anticipate this adjustment of market spreads on our loans to align with increases seen in the capital markets to continue to occur throughout the remainder of this year.

Jim mentioned earlier that our investment return profile has a strong positive correlation with rising interest rates. We have included a rate sensitivity table on Page 11 of our supplemental earnings presentation. And overall, we expect LFT to meaningfully benefit from a continued rise in short-term interest rates as the Fed battles inflationary pressures. Current forward curve implies 1 month so far increasing to over 2.5% by the end of the year, which holding all else equal, would increase our distributable earnings by approximately $0.08 per share on a run rate full-year basis.

On the financing side, as of 3/31, our loan portfolio was financed with 1 CRE CLO securitization, a weighted average spread of 143 basis points over 1-month LIBOR, an advance rate of 83.3%. The CLO has a reinvestment period running through December of 2023, providing continued attractive financing through this year and next. We do not currently utilize repo or warehouse facility financing at [LP], and therefore, as we've noted before, we are not subject to margin calls on any of our assets from repo or warehouse lenders.

Overall, as we have continued to show over the last 3 years, we're utilizing the strength of our manager to focus our investments in middle-market multifamily floating rate bridge loans that have continued to perform extremely well. Our pipeline remains strong really with lending opportunities through our manager's pipeline, and we expect that will continue. With that, I will pass the call back to Jim for some closing remarks.

Thanks, Mike. As I mentioned, certainly, we've seen market volatility and changes, but we still remain confident in the business plan and are excited about LFT's future. We like the asset class that we participate in. We believe we're well positioned to progress in this market, and we look forward to updating you all in the future and future quarters. And with that, I would like to open the call to questions.

We will now begin the question-and-answer session. (Operator Instructions) First question comes from Crispin Love with Piper Sandler.

So you made some comments on the CRE CLOs in your opening remarks, and mentioned the 40 to 50 bps of widening in the market. And I think on the last call, you mentioned 30 to 40 bps of widening. So that 40 to 50 bps that was about 10 or so more bps of widening. I just want to make sure I have that right. And then relatedly to that, how confident are you that you think you will be able to complete a CRE CLO in the coming months given the market volatility we're facing right now?

So the answer to the first one is -- as you described it in terms of the widening is, yes, it's incremental to our prior call or the statements on our prior call. And in fact, there's deal in the market, and we know there are several others that are expected to come to market over the next, call it, 60 days or so. So we have seen that widening. And when you look at the Fed funds rate rises or increases, it's not terribly surprising, but obviously, it is disruptive to the market, at least in the short term. What is less transparent to the market and investors are individual spreads on assets as that's going on.

And obviously, that doesn't get reset -- those don't get reset at one time like a CLO that's issued, right? Assets originated over a period of months. And if you look at the deals that have hit the market, you look at our portfolio and you bifurcate deals by a month without even dissecting the credit characteristics or risk parameters, you'd see generally a steady increase on a monthly basis, probably going back certainly for the year and probably going back maybe a little bit further. And so there is a dual process here of rates going up on both sides, which is obviously healthy and critical for the market to continue to function.

In terms of the CRE CLO, our conversations with our partners and bankers, those in the markets, there's still a ton of liquidity and cash interested in this type of security and rated securities. So at this moment, based on those conversations, I feel fairly confident that the market will remain healthy and open. As we said, pricing and price discovery will continue to be something that we'll have to monitor. But I certainly -- all signs point towards the market being open.

And again, the nature of our assets, the short-term nature of the assets and those liabilities in the floating rate nature allow us to take advantage of the increasing spread as we originate new products, by example, assets that we -- that pay off that are in our current book, I mentioned earlier, but I do expect that all things being relatively equal, meaning credit, that spreads will be higher on new assets. And this is a phenomenal -- not a phenomenal but a characteristic that I think all financial firms and particularly those that are on the CRE debt side, we're all kind of facing the same challenges in terms of the speed at which this is happening. I think on the other side, having kind of a stable market that will hopefully level off over the rest of this year is long-run healthy for our ability to move forward finance assets to enhance our assets and offer financing to our borrower clients. Did I answer that fully? I think...

Another one for me. So how would you characterize your core earnings power right now with how the portfolio stands at least right now? I know the first quarter is a little bit of an anomaly here given the rights offering and likely the cash drag for a portion of the quarter. So I'm curious how 2Q and then even beyond 2Q looks for earnings power compared to the current dividend. And I know it can be a tough question because it's okay, either absent a CRE CLO or kind of post presale of [consider]?

Yes. I think -- so look, I think you said it, right? It's a little difficult. But if you assume some relative stability, and I don't mean no increases, right? We know that they're priced in and anticipated increases in short-term rates for the rest of this year, maybe beyond. We've seen it on the asset level of deals coming in that we see that we're pricing deals wider on the asset side, and there seems to be a general receptiveness in the market to both of those trends. And obviously, if those are -- if those trends continue in a relatively proportionate and stable manner, the earnings are -- we feel pretty confident in our ability to deliver core earnings that deliver that market return. It's not all costs go up, right? We also have a mismatch in a positive way, meaning our assets are greater than our liabilities in terms of short-term rates. So short-term rates go up, that overtime should be a benefit to a financial entity like LFT.

So in terms of how we feel about it, I think we're certainly cautiously optimistic, but we feel that without significant incremental disruption in the market, a Ukraine type of event that we have some reasonable stability moving forward with how people are looking towards the rest of the year on a consensus basis that we'll be able to deliver that market and competitive return similar to our peers.

The next question is from Stephen Laws with Raymond James.

You covered a lot in the prepared remarks and the last question. So I appreciate everything you've provided so far. Mike, I guess I had a question on a couple of different loans. It looks like 2 of the loans, #2 and #9, so 2-year top 10 look to mature in the next coming months and your only retail exposure is supposed to mature in July. Curious to get your thoughts around that. Do you expect those to pay off? Do you expect extension to so? Will we see any extension fees or other fees tied to those? Any thoughts on those 3 loans?

Sure. I'll let -- Precilla, Charlie, you can identify those and give thoughts in a second. But broadly speaking, you mentioned the retail assets. It's pretty relative small percentage exposure. Both of those assets are performing assets that we feel very good about as an asset. So I don't know we have an answer on the sponsor's plans there on -- I'm just pulling up the loans here. Precilla, if you have it in front of you then you can speak to that.

Yes, it's on Page 13 of the supplement.

Got it. So number...

[25]

9, we expect to pay off for sure. They're moving forward. #2 each...

Jim, if I may, I'll just say that generally, these loans are very well credit-protected based on various data points, whether they be BOVs or potential purchase offers, and certainly from a refi perspective. Again, as Jim said, we cannot comment on specific borrower plans, but we have currently no concerns on the credit of those assets. And therefore, if we were to assess prepayment ability, I'd say it would be high.

Yes, it does raise the -- just anecdotally, I guess, a little bit. If you look at the -- and this is reflected in payoff rates, but if you look at the last couple of years, probably a few years, business plans, particularly in the floating rate space where to do some work as quickly as you can and sell the asset. That was the majority -- that was a shift from the middle of the last decade towards '17, '18 because the market was extraordinarily hot, values are going up because housing shortage was real. And you saw people taking advantage of value.

So I think part -- to Precilla's point, for some of our sponsors who may have planned to exit, they may have executed their plan. They may be doing exactly where they thought they were going to be. There's been some increase in value performance as well, but they may be considering a hold versus a sell more than maybe they thought they were going to when they went into the asset. And I'll say I'm somewhat speculating, but that's kind of my view because they have to put that money to work again. And so some sponsors may be looking at moving to -- staying in the bridge loan maybe a bit longer, moving to a fixed-rate financing and holding the asset rather than selling it.

So there is some -- I'll call it, price discovery or kind of modification to business plans that I do think is happening in the market. I don't think it's a -- I don't think it's a negative. I think it's a function of people executing and thinking, "Well, I might as well keep the current asset I have rather than buy another one with -- at a price I don't like or in a market I don't like." So I do think we're going to see a bit more of that, but we feel very good in our portfolio. I mean the one characteristic that just isn't changing is the multifamily market and in particular, the assets we play in, there's still just a real shortage across the country.

Again, we've said this in the past or specific markets or submarkets that might have -- might not be there, but the housing shortage is real. And rising rates probably impact the residential market arguably more than the multifamily market and on affordability basis. So the reality is that there's just an enormous need there. And I think even with some of the concerns I mentioned earlier that the market is still pretty healthy. And rents are continuing to increase. While I may expect them to increase at a lower rate even with inflation concerns because of those storages, I do expect there to see a balance and likely rents, [inpace] or outpace expenses even with some of the concerns outlined.

So I guess as a follow-up, Jim, I know in your prepared remarks, you talked about exit fees, $0.5 million this quarter, $1.5 million Q4. What do you expect that normalized number to be? Is it $1 million right in the middle? Or is one of these more indicative of the typical quarter? Or is it seasonal with 1Q always being like...

It is a little bit seasonal, although I think it would be unfair to maybe say that that's where it's going to end up. I think the first quarter -- sorry, I have that. One of my colleagues, we were just looking at this. Historically, I think we've said 30% to 40%. I think we saw that elevated probably in the last year-plus, and it's, I think, started to move toward that rate in the first quarter, and I think that's probably a more realistic average long term, 30% to 40% annually.

Next question is from Steve DeLaney with JMP Securities.

I'd like to start with your FL3. That, I believe, was reworked second quarter of last year. Is that reinvestment period -- is it 2 years or 2.5 years? Just trying to find out when that's going to close.

2.5.

2.5. Okay. Great.

December of '23, I believe.

Yes, that's right, Jim.

That's a nice run rate. Okay. Great. Nice runway, I guess, for you there. And just observation, I think in my model, we've got that with a weighted average spread of about like 143 basis points, something in that ballpark. The Arbor deal last week was weighted average plus 235. So I understand and agree with your comments about plus 40 or 50, but if we look back a year to when you did your asset.

(inaudible)

No. Arbor was 235 all in, last Friday -- last week still. But any event, that's good that you've got that ramp. And it sounds like your preference is to consider another CLO as watching the market and when things maybe tighten up a little bit. I'm not hearing that you're -- if you were at capacity in FL3 that you necessarily would go out to repo, bank lines, whatever and build an additional small portfolio with non-CLO financing. Am I correct in that? That, that would be -- I know you're not going to say you would never do something like that, but it would be your -- would it be your objective to grow the portfolio overall beyond FL3 when you could see the potential for an additional CLO financing?

Thanks, Steven. And obviously, we're watching the Arbor deal very closely. There's a couple in the market now, and I know there's a couple more coming. Look, I think -- so as you said, I'm not ever going to say -- we're not going to say, "Oh, we would never do that." But certainly, our preference is to use CLO financing, right? When you price it, you're accepting the market pricing at that time for a period of at least 24 months before you would really consider refining. But you're locking in financing, you still have -- and one thing we haven't seen much pressure on from bond investors is the leverage is very attractive. It's stable. It's non-mark-to-market so that completely eliminates some of the largest challenges with rebind warehouse financing. And you're able to -- in the current structures with the 2.5 or longer reinvestment periods, you're able to replace assets as we see the market go up.

So I look at the pricing on the Arbor deal, little surprising that it was not a little tighter, but it was kind of within a reasonable range of where we were expecting. I do think that Arbor, us, anyone that's in this space if they were putting newly originated assets in that vehicle from today forward, it's still a great vehicle. And so the assets are -- the current assets are catching up in line with the financing, but you still have to finance your existing book. So yes, we want and expect to use the CRE CLO market. We still think it's the best way to finance these types of assets. We think the bond investors seem to agree because there's still a strong appetite for the bonds here and we like the overall risk.

So overall, until somebody tells -- shows me a better alternative that has all of the characteristics non-mark-to-market, non-recourse, good leverage, and kind of fixed spread for a term with reinvestment rates, I think it's the best source of financing. And if markets are working, your assets and liabilities should move in a correlated direction that we continue that trend.

Yes, no question from our perspective as analysts, we agree. We think it's by far the preferred. So getting away from leverage and just one quick follow-up, if I may. Your thoughts on over a period of time, a small capital allocation given your multifamily expertise to either pref equity or mezz loans or multifamily. And I'll leave it at that.

Sure. And look, we've talked that -- I appreciate that question, Steve, and all of them. We've talked about that -- for those of you that have been on these calls, we've talked about that for quite a few quarters now. We would like to have an allocation toward those assets. They're at the asset level, have obviously some leverage in them, but they're unleveraged. So it serves a purpose for the corporate entity to have somewhat of a lower overall leverage ratio.

And historically, or at least since we've been talking about, I mean, the -- those options have not been terribly attractive from a return standpoint for LFT. Yields have been really compressed in our opinion. And liquidity was great in the market. High leverage was available from a lot of institutions, some peers, a lot of debt funds and private vehicles, et cetera. So borrowers didn't really need to turn to that as much as they maybe had historically and just commercial real estate more broadly.

I think with the raising -- and that's -- it is a function of how low interest rates have been, right? It's hard to price in a senior, a mezz, and a pref without even tranche-ing those out when your rates are in the low single digits, right? There's just not a lot of room to have that. Construction was probably the one area where there continues to be demand for that mezz or pref piece at a high level. With rates rising, I expect that to provide opportunity to see more of those assets. So -- and I think we have a focus on it. We've got some folks really looking at it. We think the yields are starting to make more sense. So whether that happens in the next quarter or 2 is going to be a function of the market or over time, but it is something that we've had on our radar for quite some time.

The next question is from Jason Stewart with JonesTrading.

This is [Matthew] on for Jason. I had a quick question again about the exit fees. Given that rates have gone up and the environment has kind of changed but there's still a lot of competition, are you guys still able to get the same exit fees on current loans right now than you would have been a year ago?

On average, yes. I mean we've seen -- so our typical loans, we're still trying to get a point exit. There have been instances where we've taken a lower fee for a variety of reasons, usually competitive. But in general, we've really tried to stick to that 1 point exit fee threshold. There was a lot of pressure put on over the last year. I think maybe it will wait a little bit because -- just in general, there's a little bit less or fewer competitors out there. But in general, I'd say we've been able to maintain that with some exceptions.

And then a follow-up would be; do you know the multiple that you guys have on the MSR, and is that still a strategy that you guys believe in going forward?

It's not a go-forward strategy for us. That's an old legacy asset from prior to when we took over management. The multiple, Charlie, you might know off the top of your head, but it's...

It's 3...

[Slide down] payoff.

Next question is from Christopher Nolan with Ladenburg Thalmann.

In your comments early, you mentioned that the capital raise was to achieve scale. Do you believe you have enough equity capital now to achieve the scale that you need to compete?

Yes. Broadly speaking, though, I think we still -- if you look at the size of some of our peers, and we have to get -- we don't have to be the biggest, but I do think there's reasonable room for growth in order to fully achieve that operating scale, both in terms of expenses and asset diversification, size, et cetera. So we have bigger and broader plans to continue to grow over the coming years.

And then given that, would you consider another dilutive equity raise?

What I would say is it was a very long discussion with our advisers and our board to get to the point where we did it the rights offering, which was what we thought was in the best interest of the existing shareholders. Obviously, I don't think I can give you a direct answer as would we or would we not do something in the future like that, but I think you can assume that we're going to do everything we can to benefit our shareholder base and would only make a decision that we thought was in the long-term best interest of shareholders.

And any consideration of giving a management fee waiver to support the dividend?

It's not something we've discussed with the board, but I guess any decisions like that, that we've made would be made in consultation with our management team here and our board.

(Operator Instructions) Our next question comes from Matthew Howlett with B. Riley.

Can you give a sense of how large the CLO would be if you do pursue that route? And then if you get coupons above, let's just say, LIBOR, SOFR plus 400, I mean, are we still talking about a mid -- low mid-teens return on the equity given maybe still 200 basis points spread inside that CLO?

Yes. So in terms of the return profile at that level, I think right now, low-teens is what we're pushing for. I'd like to see it move up. I think it can with asset spreads, but that's our goal and our bogey. In terms of the size, depending on whether we utilize all of the capital and also the advance rate, but just kind of looking at where the deals are now in expectations, it'd be likely somewhere in the 500 to 600 range.

And then when I think about the dividend and I think about the core earnings power of the company, I guess the first question is, would you consider refinancing the term loan, that high-cost term loan you have? Second, when you talk about ROEs being similar to peers, it would put your core EPS run rate in the 8% to 10% total range, and we're talking about 10% -- 9%, 10% ROE. Can we expect over time the dividends to get up to that range if you hit your targets?

Yes. Look, I think [that are] certainly creating value relative to book has declined, obviously, with the market and with -- during 2022. So our hope is, yes, to grow the overall yield. On a market yield basis, that's obviously reflective of the stock price. So there's a push-pull there, and we typically are measuring against book internally in terms of what we're able to deliver. But as you've described it, I think that, that makes sense. I'm sorry, I lost my train of thought. The other piece of -- part of your question.

On the term loan? On that [8] percentage...

Oh, the term loan. Right. Yes. The term loan is -- and I think we said this, it's got some protections that are built-in for the lender in terms of lockout and/or prepayment fees. So the cost has been and is fairly high to refinance it at this point. I mentioned, I think, on our prior call or another call where we've worked with that lender, they've modified that and worked with us because they like the risk profile. They understand where it was on a -- relative to market, and we're continuing to monitor that and measure the timing. The prepayment penalty is obviously declining over time, but it's something that we evaluate regularly and are hoping to be able to refinance that in some form or another over the next several quarters or a little bit beyond that. But obviously, market dependent and negotiations with our current lender and things like that, but over time...

I think the market is around 5%, 6% today. I was just curious on where you think the term loan market is today for your caliber of quality?

That's probably right. It's a little bit -- with the volatility, it might be a little bit -- we are actively talking to folks or regularly talking to folks about how low the cost that we need in order to make the prepayment makes sense. If it's at the very low end or lower from where you're talking, you start to say maybe that does work. But I think realistically, it's got to be a few quarters out. But I think you're -- I think that's about where the market is. It's hard to -- things have moved so quickly in the capital markets. It's hard to put your thumb on it, I guess, right now, but that is the number about where it's been in the recent past.

Okay. Well, that will be substantial. Obviously, if you get it done up, that could be substantial savings. And any more thoughts on the preferred market? Or it's just at this point in time, you just want to focus on the CLO?

Well, right now, I want to focus on the CLO, and I want to get that done. You mentioned the term loan, that's something we want to continue to explore. But certainly, as we grow, we really want to look at the equity markets; common and preferred. But obviously, depending on the cost of what [you looked at] preferred looks like, we're going to need to evaluate.

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. A lot of good questions. Obviously, please follow up with me or the team here. Appreciate the support and continued interest and look forward to speaking to you over the coming quarters. Have a good day.

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