Participants

Andrew Tsang; Investor Relations; Lument Finance Trust Inc

James Flynn; Chairman of the Board, Chief Executive Officer; Lument Finance Trust Inc

James Briggs; Chief Financial Officer; Lument Finance Trust Inc

James Henson; President; Lument Finance Trust Inc

Crispin Love; Analyst; Piper Sandler

Jason Stewart; Analyst; JonesTrading

Stephen Laws; Analyst; Raymond James

Christopher Nolen; Analyst; Ladenburg Thalmann

Presentation

Operator

Good morning, and thank you for joining the Lument Finance Trust First Quarter 2024 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 Andrew Chang with Investor Relations, at Lument's Investment Management. Please go ahead.

Andrew Tsang

Good morning, everyone, and thank you for joining our call to discuss Lument Finance Trust's First Quarter 2024 financial results. With me on the call today are James Flynn, our CEO; James Briggs, our CFO; James Henson; our President and Zack Halpern, our Managing Director of Portfolio Management. On Thursday, May 9. We filed the 10Q with the SEC and issued a press release to provide 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 James Flynn, I'd like to remind everyone that certain statements made during the course of the call are not based on historical information that 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.
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 results and uncertainties are discussed in the company's filings and reports with the SEC.
In particular, the Risk Factors section of our Form 10K. It is not possible to predict or identify all such risks and listeners are cautioned not to place undue reliance on these forward-looking statements company undertakes no obligation to update any of these forward-looking statements further or 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 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.
For the first quarter of 2024 company reported GAAP net income of $0.11 in distributable earnings of $0.15 per share of common stock, respectively. In March, we also declared a dividend of $0.07 per common share of stock with respect to the first quarter or second quarter, I will now turn the call over to James Flynn.
Please go ahead.

James Flynn

Thank you, Andrew. Good morning, everyone. Welcome to the lumen Finance Trust earnings call for the first quarter of 2024 We appreciate everyone joining today. So let's start. As we entered 2024 costs and new cautiously optimistic, the lending environment would begin to improve during the first half of the year. We are now in early May. The [Fed] has yet to implement any [rate cuts] and the economic data suggests inflation has remained stubbornly elevated.
The economy and labor market remained broadly resilient despite the historic increases in short-term rates that began over two years ago. And although the fact that the Fed has indicated that it did not expect future hikes during his remarks a couple of weeks ago, the consensus view of higher for longer seems prudent until the -- economic data suggests otherwise.
The multifamily sector continued to be challenged during the first quarter was muted property sales activity leading to limited acquisition financing opportunities. Given the persistence of elevated interest rates, borrowers have also been reluctant to refinance their portfolios and less compelled to do so just this week, the MDA announced first quarter volumes, our lending volume with multi-family down 7% year over year and Q1 and down 29% from Q4 of 2023.
Despite the challenging short-term environment, nearly [$500 billion] of multifamily mortgage tech that is expected to reach initial maturity by the end of 2025 according to MDA estimates. When combined with the perhaps cause of the property sales transaction volume to move toward a new normal level activity, we expect to see a return of attractive lending opportunities in the medium and long term.
Multifamily as an asset class continues to outperform other CRE property types. And we believe this is the reason our company provides its shareholders with a unique value proposition, healthy as a deliberate focus on middle market, multifamily credit success and active asset management and strong sponsorship provided by the broader movement and Rx platforms as a result, the company has been able to maintain stable dividend with better than average credit performance within its investment portfolio.
The superior dividend yield relative to many of our peers having effectively fully deployed our investable capital in the second half of 2023. Our focus this quarter was on proactively managing our portfolio to protect shareholder principal. We successfully resolved the two-five rated assets from our December 31 report and maintained a stable weighted average risk rating of 3.5 for the quarter ended March 31, with no specific reserves recorded during the period. We increased our available unrestricted cash quarter-over-quarter ending Q1 with approximately [$65 million] compared to $51 million in December.
As of December 31 due to the increased liquidity, will allow us to maintain flexibility and achieving positive asset, manage outcomes for our shareholders and provide us with the potential for the Blake capital into attractive investment opportunities outside of our two existing securitization structures. In the meantime, we have our relatively attractive returns on our cash deposits. Given the elevated short-term rates, our portfolio continues to be financed with long-dated secured financing that is not subject to mark-to-market margin calls as of one this year ECLO we closed back in 2021 is now beyond its reinvestment period and has begun to delever with repayment of its collateral.
We continue to explore options to refinance the portfolio as of quarter end, the cost of funds for ECLO was itself for a plus [157] and an effective advance rate of approximately 82% levels, which we believe are still attractive relative to other portfolio financing alternatives available in the market, Seattle and amount of financing throughout the transaction. We executed mid-last year as remaining reinvestment period that extends through July 2025, and we fully intend to reinvest capital as liquidity within that structure becomes available.
With that, I'd like to turn the call over to Jim Briggs, who will provide us details on our financial results.

James Briggs

Thanks, Jim, and good morning, everyone. Last evening, we filed our quarterly report on Form 10Q, 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 seven of the presentation, you will find key updates and earnings summary for the quarter for the first quarter of 24, we reported net income to common stockholders of approximately $5.8 million or $0.11 per share. We also reported distributable earnings of approximately $7.6 million or $0.15 per share.
There are few items I'd like to highlight regarding activity during the period. Our Q1 net interest income was $13 million compared to $9.1 million in Q4 of '23. The sequential increase was primarily driven by higher exit fee income due to greater quarter over quarter payoff activity within the portfolio and $3 million related to the resolution of two defaulted loans, one collateralized by an office property located in columbus, Ohio, in which we reduced our carrying value to zero and the other collateralized by multifamily property located in Virginia Beach, Virginia, which was modified during the quarter with, among other things previously past due interest being brought current.
Payoffs during Q1 totaled $97 million as compared to $43 million in the prior quarter. Associated Q1 exit fees totaled approximately $825,000 as compared to $210,000 recognized in prior quarter. The majority of loan payoffs we experienced were driven by borrowers, either refinancing with another lender, we're selling the underlying properties as a reminder, when one of our loans are refinanced with a permanent agency loan provided by an affiliate of our manager, the borrower exit fees waived pursuant to the terms of our management agreement.
In these instances, we do, however, receive a credit equal to 50% of the weight exit fees against our reimbursable expenses due to our manager, our credit for a waived exit fees was flat quarter on quarter. Our total operating expenses were $4.3 million in Q1 versus $2.7 million in Q4 '23. The majority of the sequential increase in expenses was driven by the accrual of incentive fees due to our manager, which are accrued and payable on a quarterly basis, equal to 20% of the excess of core earnings as defined in our management agreement and over an 8% per annum return threshold.
Distributable earnings can be used synonymously with core earnings in this context outside of DI, operating expenses were largely flat quarter on quarter. The primary difference between reported net income and distributable earnings to common was approximately $1.8 million attributable to the increase in our allowance for credit losses, all with respect to our general CECL reserves, property acquisition volume continues to remain depressed, leading to limited visibility in the market with respect to valuation and cap rates.
The increase in general reserve is reflective of changes in the macroeconomic forecast, including current higher rate for longer sentiment as well as cautiousness in our modeling as it relates to CRE pricing during this period. As of March 31, we had two loans risk rated five for default risks. One is the $17 million loan collateralized by multifamily property in Brooklyn, New York and risk rated five due to imminent maturity to fall.
The other asset is a $20 million loan collateralized by two multi-family properties near Augusta Georgia, but as risk rated five due to monetary default, both of these loans have been placed on nonaccrual status of both of these, although both of these loans have since made their April interest payments, which will be recognized in income on a cash basis.
We evaluated both of these five rated loans individually to determine whether asset specific reserves for credit losses are necessary and after analysis of the underlying collateral determined that none were necessary as of March 31, as of year end, the company's total equity was approximately $243 million. Total book value of common stock was approximately $183 million, or $3.50 per share, up from $3.46 per share as of year end. We ended the first quarter with an unrestricted cash balance of $65 million, and our investment capacity through our two secured financing was effectively fully deployed.
I will now turn the call over to Jim Henson to provide details on the Company's investment activity and portfolio performance during the quarter.
[Jim]?

James Henson

Thank you, Jim. I will now share a brief summary of the recent activity in our investment portfolio. During the first quarter, LFT experienced $97 million of loan payoffs. A portion of these loan payoffs related to the defaulted loans discussed by Jim Briggs earlier, we did not acquire or fund any new loan assets during the first quarter.
As of March 31, our portfolio consisted of 81 floating rate loans with an aggregate unpaid principal balance of approximately $1.3 billion. 100% of the portfolio was indexed to one month. So forth and 94% of the portfolio was collateralized by multifamily properties. An analysis of our net interest income sensitivity to shifts in terms over appears on page 12 of the earnings supplement.
Our investment portfolio continued to perform well during the first quarter, and we ended the period with slightly more than 77% of the loans in portfolio risk rated 83 or better marking a slight improvement versus the fourth quarter of 2023. Weighted risk average rating remained stable at [3.5%] sequentially. Our five rated area loan exposure decreased to approximately $38 million this quarter versus $46 million as of year end.
At the time of our last earnings call, we had two five rated loans that have now been fully resolved. As expected, we received additional insurance proceeds in the amount of [$13.5 million] on a defaulted loan and on the property in Columbus Ohio, reducing the carrying value of this loan to zero and after taking into consideration legal and other costs, resulting in the recognition of one-time income of approximately $2.5 million during the first quarter.
The other five rated asset at the end of 2023 was a defaulted loan on a multifamily property in Virginia Beach, Virginia loan modification with the borrower and received a $3.6 million partial principal paydown during the first quarter last week. The borrower repaid the remaining loan balance in full in accordance with the terms of that loan modification. We are very pleased to have achieved positive asset management outcomes for these loans, thanks to deep, deep experienced and diligent efforts of our team.
With that, I will pass it back to Jam Flynn for closing remarks and questions.

James Flynn

And thank you, Jam and thanks to our attendees and your interest. And operator, please open the call for questions.

Question and Answer Session

Operator

Thank you. (Operator Instructions) Crispin Love, Piper Sandler.

Crispin Love

Thanks. Good morning. So no new investments in the quarter but you did have some payoffs beginning to speak to some of the drivers that kind of expectations going forward in the quarter. Was it lack of opportunity cautiousness in the market or anything else you would call out? And then just how would you expect new investments compared to payoffs in coming quarters? Thanks.

James Briggs

So as noted in the call earlier, FL 1, which is our 2021 securitization is out of the three investment period. Our new investments previously were off and reinvestment of that securitization. So right now, we're basically at capacity given that FL 1 is out of reinvestment period and LMF., the 2023 financing transaction is at capacity and we do have $60 million plus of cash.
And it's just a matter of strategically looking to refinance at all one now and planning with that excess cash accordingly to something to consider over the next couple of quarters as a one continues to deleverage. Over the near term, over the next quarter to two quarters, I don't know that we'll see a FL 1 refinance should be, but that will all be a market condition.

James Flynn

We're effectively fully deployed with obviously the elevated cash. So, you know, in answer to your question, I would expect to be able to fill any reinvestment capacity that we have a reasonably E&O unless it's at the very end of the quarter, you will be able to put despite those that relatively slow market, there are lending opportunities.

Crispin Love

Right. Okay. That makes sense. I appreciate that. And then second question for me. Just can you just give us your views on credit in the portfolio provision increased a bit here credit metrics were stable and the resolutions were good to see. But for the other, some other competitors have been having tougher experiences as of late on. So anything on credit that you're seeing would be helpful? And then why you think you might think performing better than some of the peers in the space here?

James Flynn

Well, you know, the honest answer is I think that we've done a very good job of putting together a quality portfolio. And we've had good sponsors who have worked with us to come up with a resolution to challenging situations on. We feel pretty confident and comfortable that we'll continue to be able to do that in the existing portfolio we've had given the structure of our loan types.
I've always had rig counts. We've had either milestones for drawn of new capital in terms of rental increases and actual business plan milestones that have provided opportunities to work with sponsors out of sometimes sooner in the process than others may have been able to get up in general.
I think we were he did a good job on the front end and have very good asset management and portfolio management group that spend a lot of time at the assets and with the sponsors and making sure that were a timely and top of issues. There's not something more secret on that other than I think we have a really good credit team.

Crispin Love

Great. Thank you, Jim. Appreciate taking my questions.
Thank you.

Operator

Jason Stewart, JonesTrading.

Jason Stewart

Hey, good morning. Thanks for taking my question. First of all, you spoke to this in the last question regarding the wind down of FL 1. I was curious with how much credit spreads have tightened in here quarter to date and over the first quarter, if the opportunity is more immediate to pursue that refinancing and where you're seeing are generalized spreads out there?

James Flynn

So on I mean, on the credit side from at 82% and [157] over that. There's there's no opportunity that's really even close to that on a rather private or public. But as you point out, as time goes by and continue to delever that the cost of those funds will increase as immediate. We're evaluating it like we have been and continue to do so depending on how you define immediate.
But we we think that there's potential this year or early next year to potentially refinance that. But it's really going to be dependent on the capital markets. Obviously we can get it done. I think I should say I shouldn't say always, but I think you can get to refinance them in the public markets. I think there's other structures with some are private or non-capital markets transactions that would provide for refinancing good today.
Frankly, there economically not as attractive to pull the trigger in our opinion, but we're getting closer to that. And we are working with our banking partners who have big opinions of ways. We might refinance that portfolio in a way that doesn't make sense perhaps sooner than later. But yes, the short answer is we feel comfortable with the financing today and want to continue to take advantage of the relative cost of capital.
And frankly, yes, higher leverage than we might otherwise achieve outside of or update a new deal. But it is something we're going to be continuing to do every month. Look at the market, look at what we can get and compare on long term, what we're doing, and I'll also note, I mean, we said this I mentioned the $500 billion of maturities coming up.
I suppose we're already almost halfway through 2024. So that number is probably been pushed into 25 already with extensions. We just don't have that data in the market yet. So the opportunity is coming we're already seeing more for sure, but it's nowhere near where it's been a couple of years ago. So that's also a consideration just in terms of taking advantage of refinancing and creating more more capacity.
We want to make sure that we have attractive investment opportunities at that time as well. So that's part of the equation as well, thus not as not a direct answer, but that's our thought process. And we talked about it internally and with the Board every time.

Jason Stewart

No that's still very helpful. And I was also curious for either with the liquidity build that you've seen to date and taking into your answer into account with what you're likely to see on more repayments, any change in your posture towards how you're thinking about possible share repurchases?

James Flynn

It sounds like it's been on the table with the Board. I mean, this is one of There's obviously a number of initiatives, right? The size of the flow being a big one. It's something we it's certainly something we consider, but it's weighing the benefits of, liquidity, future investment capacity and the immediate kind of benefit to shareholders and how that might impact the long-term value.

Jason Stewart

Okay.
Thank you very much for taking my questions.

Operator

Stephen Laws, Raymond James.

Stephen Laws

Good morning and nice start to the year. A good number out of the gate. I know of as to get the two five rated loans resolved. Can can you touch on the resolution path for the new five rated loans? I know you said both paid April, no specific reserves. So still lots of good updates there. But can you talk about timing or resolution path on those two are as two loans, but three assets?

James Flynn

Yeah. I mean, I think that that is a very real-time conversation. I don't think we're prepared to share the exact resolution path at present. But just like what you've seen from us in the past. This involve them hands-on, active management negotiation with the sponsors a push towards quick resolution.

Stephen Laws

Okay. And then to circle back to the CLOs, I guess or FL 1 specifically, looking at Q4, that spread was [$155 million] and only increased even with [$70 million] odd of repays to [$157 million]. Is it right Can you help me with the math there? How I think about that going forward is in a pro rata pay structure in some way? Or I was a little surprised with that level of prepays that that financing costs didn't increase by more than two basis points sequentially?

James Flynn

Yes. I mean, what I'd say is that the 2021 securitization with the big triple-A and held pretty flat spreads down the stack, meaning that this is not 600 basis points. It will be spread. I don't have exactly offhand where the Triple B is, but I want to say it's in the [300], you're only seeing a marginal increase in spread from that triple-A paying down.
It is just simply paying down. It's not a pro rata of the of the other tranches, just mechanically what the number is, it will shift up as the triple-A continues to pay down, but not excessively, frankly, the same the larger issue there is just the deleveraging, right. The fact that you have less debt on your equity and that will be the primary driver of the need to refinance ultimately.

Stephen Laws

Okay. Appreciate the colour.

James Henson

Yes, and its size, you know is it's a bigger securitization and the other ones that best serves the competitive business while it will have noticed.

Stephen Laws

Triple-B is that tight, it probably stays pretty attractive for some time. I guess to think about incorporating other financing structures you mentioned I mean would you look at bank lines and along those lines where spreads on new investments for what you see as you look at opportunities and how do those spreads compare with what bank lines of banks are charging these days. If you were to go that route and kind of considering the lower advance rate on those facilities, what of a fully levered ROEs look like if you chose a path like that to open up the growth opportunity.

James Flynn

Well, I think there's two there's two I think there's two questions. There are two answers. One is the refinancing of the if we were to refinance ourselves on with a, you know, a term that bank-like just kind of I think how you're asking at that spread and that leverage would be negotiated. And I don't think it would certainly be on it related and correlated to a market, but it wouldn't be the same as a new warehouse saying those spreads.
So new asset spreads are and there's a wide range because of the credit, there's a wide range. You have high-quality new contracts and deals that are coming out of construction into Visa at relatively low leverage on pricing in the mid to high [200], low [300], depending on where you are and what you have extended business plans for bridge loans that have taken longer and are maybe getting recap with a new sponsor, same sponsor for an extra couple of years that are probably more in the [300s], and then you probably have some and then you could go into the higher leverage, different markets above that, which we're not typically see too much.
But of those are -- the asset spreads is we're trying to balance some of the credit risk versus the return. Obviously, as we've done. So we'll have a balance of those opportunities. And I think warehouse and bank spreads when you're thinking about what those look like in the market, which we don't have that LFP, but the sponsor obviously we do of those credit spreads and leverage relates to the assets I just said.
So you have I'd say in the high [100s] to the low [200s] for new deals, newly originated deals and leverage of 70%, 75% is pretty market, I would say it was after Andrew anyway, if you guys have more to add there. (Inaudible).

Stephen Laws

Yeah. Well, that's great color. And I really appreciate you walking through those numbers for me. Appreciate it. Thanks for the comments.

Operator

Christopher Nolan, Ladenburg Thalmann.

Christopher Nolen

As I said, my question's on the Brooklyn non-accrual. Is that a rent-stabilized buildings?

James Flynn

[Jack]. You had the exact answer. I'm sure there's so much that you add back on that for right. It's primarily market rate. To be clear on a yield, there's just I mean our [Unequivocally] that is not an issue (Technical Difficulty) value is not an issue or not, I would say that.

Christopher Nolen

Okay. And then on it for the loan portfolio in general, do you have any interest only loans?

James Flynn

Yeah. I mean for the floating or stuff, it's all interest-only which is the portfolio. I mean, the bridge portfolios, interest-only, there are revaluations requirements that would require principal paydowns in those exist and of funds.

Christopher Nolen

Okay. And then the other question, a recap of of what these underlying bridge loans are there?

James Briggs

A typically there are two or three year terms from floating rate and interest only. They do have interest rate caps, which are purchased by the sponsors, but bridges primarily near whether it's offshore, our competitors in the space, they are interest rate, interest-only loans.

Christopher Nolen

And I guess given that on how does that affect your reserving methodology just because these borrowers sort of have a larger balloon payment at the end than normally?

James Flynn

So when we look at our when we do an asset-by-asset analysis of our portfolio from my perspective and there's actual process, but the key metric we're looking at start is what's our basis our loan to value. And so that's the primary driver. So even whether in some cases, we obviously have assets that maybe started at [70] as is LTV and might be [75 or 80] today and that's not, amendment, the equity has lost value, but our credit position is pretty good. So that's where that's where we're kind of evaluating and metrics.
We're looking at market and the comps. So we're doing it through asset by asset analysis on whether we think there's an impairment or risk of loss on the general reserves on the (Inaudible) side. That is a more macro market driven analysis for Northern less of that and less focus on the specifics of our portfolio and more focused on industry and macro trends. And on another note, we've generally taken, we think are permits.

James Briggs

And so yes, I mean, It's going to be a combination of both -- requires a look-forward, you know, on what the macro environment and the forecast is going to be. We choose a one year period and for that, but to Jim's point on collateral value and LTVs, and that is a big driver as well. And you're seeing that in our in our general reserve rate, I talked about our general cautiousness in this period as we model where there's not a lot of activity getting done and the observability of cap rates and valuation.
And that's sort of speaking to LTVs right now on collateral values. So the same drivers that Jim talks about is going to be a big driver of the reserve and there is going to be this macro economic outlook as well because it's expected losses over the life and we need to be forecasting.
And we saw that macro for us that macro forecast move two more of we're not going to see rate cuts as soon as we thought we were going to and they're going to come later in the year potentially. So it's a combination of both. But I would say that LTV is going to be a driver there and was a driver of reserve.

Christopher Nolen

Okay, thank you.

Operator

[Greg Lum, UBS].

Good morning. Good report and the recoveries on the commercial building, I guess to me sort of looks like an extraordinary gain. If we strip out that gain, what do distributable income per share numbers look like?

James Briggs

Clay, those were those those one-timers work out to be about $0.06 paying for the one-timers on I spoke about the incentive fees. So it sort of going the other way for about $0.03. So the one-timers in particular were about $0.06.

Thank you very much.

Operator

No further question to this, and I will now turn the call over to Andrew Tsang. Please go ahead.

Andrew Tsang

I want to thank everyone for your time and interest and look forward to catching up again next quarter. Thank you.

Operator

Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. You may now disconnect.