Lument Finance Trust(LFT) - 2022 Q3 - Earnings Call Transcript

Financial Data and Key Metrics Changes - For Q3 2022, the company reported net income to common stockholders of approximately $315,000 or $0.01 per share, with distributable earnings of approximately $1.7 million or $0.03 per share, down from $2.2 million or $0.04 per share in the prior quarter [24][25] - Net interest income decreased to $5.5 million from $6.4 million in Q2 2022, while interest income increased from $11.2 million in Q2 to $14.5 million in Q3 [25][26] - Total expenses were $2.7 million during Q3, consistent with the prior quarter's total of $2.8 million [33] Business Line Data and Key Metrics Changes - The multifamily investment portfolio performed well, although an unrealized loss reserve was booked against a single office loan [12][28] - The company experienced $35 million in loan payoffs during the quarter, generating $291,000 in exit fees, a significant decrease from the previous quarter [27][32] - The total loan portfolio outstanding principal balance was $1.04 billion, representing a 1% increase quarter-over-quarter and a 30% increase year-over-year [42] Market Data and Key Metrics Changes - The multifamily market is experiencing a transition due to inflationary pressures, geopolitical risks, and higher interest rates, leading to a decline in CRE investment activity [9][10] - The average asset appraised LTV on new loans has decreased, and new transactions are being quoted at spreads well above 4%, compared to the low to mid-3% spreads a year ago [13][14] - The one-month term SOFR rate increased from 3.04% to 3.8%, with expectations of it reaching over 5% by spring [45] Company Strategy and Development Direction - The company remains focused on deploying capital into commercial real estate debt investments, particularly in multifamily assets, while exploring alternative financing options [22][18] - The company plans to execute a loan financing transaction to leverage newly originated loans, despite the current challenges in the capital markets [16][17] - The management believes that the credit quality of the middle-market workforce housing asset class remains attractive, supported by favorable supply-demand dynamics [11] Management's Comments on Operating Environment and Future Outlook - Management expects earnings to be pressured until capital markets normalize and attractive loan financing transactions can be executed [21] - The company anticipates continued rent growth for multifamily assets, albeit at a slower pace than in previous years [10] - Management expressed confidence in the performance of the multifamily portfolio despite broader economic uncertainties [58] Other Important Information - The company has not yet adopted the CECL accounting standard and is scheduled to implement it on January 1, 2023 [34] - The company is prepared to execute a CLO quickly if market conditions improve [17] Q&A Session Summary Question: Asset sensitivity and prepay fees - Management noted that the slowdown in loan payoffs has reduced exit fees, impacting earnings negatively [52] Question: Risk ratings and credit quality - Management indicated that the change in risk ratings reflects broader market conditions, with inflationary pressures affecting expenses [59] Question: CLO financing and advance rates - Management confirmed that there are no changes to advance rates in the existing CLO [68] Question: Share buyback possibilities - Management discussed the potential for share buybacks but emphasized the focus on increasing shareholder base and trading value [70] Question: Preferred share buyback - Management has not considered preferred share buybacks due to current cost of capital [73] Question: Lag in pricing of loan source liabilities - Management explained that while liabilities change immediately with rate changes, the asset side adjusts more slowly due to repayment rates [75] Question: Terminal Fed funds rate expectations - Management anticipates the Fed funds rate to reach around 5% in the short term, with potential for slight decreases thereafter [76] Question: Dividend coverage outlook - Management expressed confidence in the ability to cover dividends with higher SOFR rates positively impacting earnings [85] Question: Senior housing asset class - Management sees strong opportunities in the seniors housing space, indicating a solid outlook for that asset class [90]