Release Date: August 13, 2024
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
Positive Points
- Lument Finance Trust Inc (LFT, Financial) reported a GAAP net income of $0.07 and distributable earnings of $0.09 per share for the second quarter of 2024.
- The company declared a dividend of $0.08 per share, representing a 14% increase over the first quarter dividend.
- LFT maintains a strong liquidity position with approximately $65 million of unrestricted cash on its balance sheet.
- The company's focus on middle market multifamily credit has enabled it to deliver a stable dividend and preserve shareholder capital.
- LFT's secured financing provides effective leverage with attractive terms, with a weighted average cost of funds of SOFR plus 212 basis points.
Negative Points
- LFT experienced a slight decline in its weighted average risk rating from 3.5 to 3.6, indicating some deterioration in credit quality.
- The company reported an increase in its allowance for credit losses, with four loans risk-rated at 5 due to defaults.
- Net interest income decreased from $13 million in Q1 to $9.5 million in Q2, partly due to prior quarter one-time income recognition.
- LFT did not acquire or fund any new loan assets during the second quarter, indicating a lack of new investment activity.
- The company's portfolio saw a decrease in loans risk-rated three or better, dropping from 77% to 63%.
Q & A Highlights
Q: Can you discuss the credit outlook, given the recent degradation in credit quality and non-performing loans? Do you believe we've reached peak stress in multifamily credit during this cycle?
A: James Henson, President: It's challenging to predict, but there seems to be an expectation that we're near peak stress. Rate reductions are on the horizon, which should benefit credit quality. Multifamily has historically performed well, and the supply-demand dynamic remains favorable. We are actively managing stressed assets and feel confident in our portfolio's quality, though we acknowledge the need to work through some challenging assets.
Q: Why was there no new investment activity in the second quarter despite significant loan payoffs?
A: James Henson, President: The larger CLO is through its reinvestment period, leading to deleveraging. We maintain a high cash position to manage the portfolio proactively. While the market is competitive, we are seeing more high-quality opportunities. We expect transaction opportunities to increase as rates decline and market conditions improve.
Q: Could you explain the timing of loan payoffs and the decline in commercial loan income this quarter?
A: James Briggs, CFO: The payoffs occurred steadily throughout the quarter, leading to a sequential decline in loan balances and income. The decrease in net interest income was also due to one-time past due income recognized in the prior quarter.
Q: How are you managing loans in default, particularly in secondary and tertiary markets?
A: James Flynn, CEO: We take a proactive approach with sponsors, considering options like cash contributions, business plan reviews, and refinancing. We aim to avoid foreclosure but are prepared to take necessary actions to protect our investments.
Q: What are your expectations for loan repayments in the coming months, and how might this impact your financing strategy?
A: James Flynn, CEO: We expect repayments to continue at a similar pace, around $90 million per quarter. We are exploring options for new securitizations or warehouse financing as our current CLO de-leverages, depending on market conditions.
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
