Good morning and thank you for joining the Hunt Companies Finance Trust Second Quarter 2020 Earnings Call. Today's call is being recorded and will be made available via webcast on the company's website. [Operator Instructions].

I would now like to turn the call over to Brendan Gover with Investor Relations at OREC Investment Management. Please go ahead. .

Thank you and good morning, everyone. Thank you for joining our call to discuss Hunt Companies Finance Trust's Second Quarter 2020 Financial Results. With me on the call today are Jim Flynn, CEO; Mike Larsen, President; Jim Briggs, CFO; and Precilla Torres, Head of Real Estate Investment Strategies..

On Friday, we issued a press release, which provided details of our second quarter earnings results along with the supplemental earnings presentation that can be found on our website. We have also filed our 10-Q with the SEC..

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 Exchange 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. Presentation of this information is not intended to be considered in isolation or 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..

I'll now turn the call over to Jim Flynn. Please go ahead. .

Thank you, Brendan. Good morning, everyone. Welcome to Hunt Companies Finance Trust earnings call for the second quarter of 2020. We appreciate you joining us today in what continues to be a very challenging environment to operate in..

First and foremost, with regards to COVID-19 pandemic, I'd like to express my hope that you and your families are all staying safe and healthy. As we've all experienced, the COVID-19 pandemic continues to have a significant impact on the overall economy, our industry and how we all live and work.

We continue to take measures to protect our employees while ensuring continued business operations with as little disruption as possible..

Our employees have been working remotely since mid-March, and we have been able and will continue to execute on all investment management, asset management, servicing, portfolio monitoring and related functions on a daily basis. Leadership across all segments of the organization is actively monitoring the situation as it continues to unfold..

Clearly, the current environment is unprecedented. We will continue to clearly monitor the impact that the pandemic is having on our assets as well as its impact on the broader economy and financial markets. Notably, the recent months have generally seen improvement in liquidity and the volatility of the credit and capital markets.

However, the economic concerns associated with COVID-19 have continued to impact the breadth of the bridge lending market, transparency around the reset levels of asset values as well as the general availability of financing..

Bridge lending activity has registered positive movement centered around less transition risk and more moderate leverage versus pre-COVID periods. In addition, loan structures and credit evaluations are reflective of local ordinance constraints on lender protection. Our new origination efforts are consistent with these themes.

We will continue to be thoughtful, patient and opportunistic in our evaluation of all CRE debt investments for HCFT..

Given this backdrop, I would like to provide a brief update on our portfolio, our financing sources, our liquidity position and our dividend. With regards to our portfolio, over 99% of our investments consist of senior mortgage loans and participations.

We currently do not own any mezz loans, construction loans, mortgage-backed securities or loans backed by hotels. Furthermore, multifamily assets make up the vast majority of our collateral and we have limited exposure to retail and office properties. We do not currently have any exposure to seniors housing, health care or skilled nursing properties..

Additionally, I would like to highlight that as of June 30, 2020, 100% of the loans in our CRE investment portfolio are current. Furthermore, 100% of the loans in our portfolio made their July payments. We have not executed any forbearances to date.

Overall, we believe that our portfolio is well positioned, and we continue to focus on proactive asset management of all assets potentially impacted by COVID-19 and the broader economic uncertainties..

With regards to our financing sources, we do not currently utilize repurchase or warehouse facility financings at HCFT. And therefore, are not subject to margin calls on any of our assets from repo or warehouse lenders. Our primary sources of financing are 2 matched term, non-mark-to-market CRE CLOs as well as the corporate term loan..

With regards to the corporate term loan, I would like to note that on July 9, we successfully entered into an amendment to this facility.

This amendment was a result of working with our lender to provide the company with additional flexibility to effectively manage any potential borrower distress related to COVID-19 that were not originally contemplated in loan documentation.

While COVID-19 has not had any material adverse impacts on our investment portfolio to date, we believe this amendment is a positive proactive step, which provides additional flexibility going forward, if needed..

From a liquidity perspective, we have not experienced any material adverse liquidity events to date due to COVID-19. While we acknowledge the significant economic uncertainty over the coming months, we believe that our liquidity position is sufficient based on where we stand today.

That being said, significant uncertainty exists today around the depth and length of the economic recession. And to state the obvious, to the extent we experienced delinquencies and/or defaults in the portfolio, our liquidity may be impacted. We remain focused on liquidity management over the coming months..

With respect to our dividend, we paid the Q2 2020 dividend of $0.075 per share on July 15. In accordance with normal course timing and process, we have not yet made a Q3 2020 dividend declaration. We expect to make a determination on our dividend in September after discussing with our Board in the normal course..

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. Good morning, everyone. On Friday evening, we 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, 5 and 6 of the presentation, you will find key updates and an earnings summary for the quarter. We have also filed our 10-Q with the SEC..

For the second quarter of 2020, we reported net income to common stockholders of $1.9 million or $0.08 per share. This compares to a net income to common stockholders of $1.5 million or $0.06 per share for the prior quarter and net income to common stockholders of $1.4 million or $0.06 per share for the second quarter of 2019.

The positive variance relative to prior quarters was primarily driven by an increase in net interest income..

The current quarter was impacted by 2 noncore items. The first of these was a $375,000 decline in the fair value of our legacy mortgage servicing rights portfolio, which was driven primarily by an increase in prepayment speeds associated with lower interest rates during the quarter.

On a UPB basis, 13% of our residential MSR portfolio paid off during Q2. As of quarter end, this legacy MSR asset was valued at $1.4 million or 2.1 multiple of servicing fees..

The other noncore item experienced this quarter was a GAAP income tax benefit of $68,000 pertaining to activity at our taxable REIT subsidiary. After adjusting for these 2 items, our core earnings attributed to common stockholders for the quarter was $2.2 million or $0.09 per share.

This is in line with the prior quarter as well as the second quarter of 2019 in which core earnings was $2.2 million or $0.09 per share in both periods..

I would also like to point out that Q2's income was negatively impacted by $624,000 of previously capitalized CLO issuance costs, which were expensed this quarter based on our determination that we think it is unlikely that we will execute a new CLO financing during 2020 under current market conditions.

We did not add this $624,000 expense back as core earnings adjustment. However, had we added back this nonrecurring item, core earnings per share for Q2 would have been $2.8 million or $0.11 per share on a recurring basis. Mike Larsen will speak in more detail about our CLO financing later on the call..

Our book value at June 30 was $114 million or $4.57 per share. This is in line with our Q1 2020 book value on both the dollars and per share basis. I would like to note that excluding the impact of the noncore and nonrecurring items previously discussed, our book value per share would have increased quarter-over-quarter to $4.61 per share..

One additional item which we discussed last quarter but I would like to remind everyone of is 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 Currently Expected Credit Losses, which is a comprehensive GAAP amendment of how to recognize credit losses on financial instruments.

As a smaller reporting company, we would implement CECL on January 1, 2023. Until then, we continue to prepare our financial statements on an incurred loss model..

As of June 30, 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 will record any impairments or allowance as incurred..

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

Thank you, Jim. As the market uncertainty related to the COVID-19 pandemic continues, we remain focused on managing our existing assets and continue to take a measured approach on new originations.

During the quarter, we made future funding advances on 11 loans with total incremental fundings of $3.4 million, and all of these advances were on loans secured by multifamily assets. We did not acquire any new whole loans during the quarter..

We experienced $32.9 million of loan payoffs during the quarter, and on a net basis, our loan portfolio decreased by $29.6 million. While we continue to be thoughtful on patient in our valuation of new investment opportunities, we are seeing compelling new opportunities in the current market..

We continue to anticipate the majority of our loan activity will be related to multifamily assets. Our overall loan portfolio at quarter end was over 90% multifamily, which is in line with the prior quarter. We believe this is particularly relevant to note in the current environment.

Multifamily assets have historically reflected the greatest resiliency among different property types during the downturn, and despite worsening employment trends, we anticipate the same being true during this period..

Our total portfolio of floating rate loans had an outstanding principal balance of $610 million at the quarter end. The portfolio consisted of 45 loans with an average loan size of $13.5 million, which provides for significant asset diversity. Our portfolio had a weighted average spread to LIBOR of 353 basis points.

And as we have noted on prior calls, we have LIBOR floors on 100% of the loans in our portfolio with a weighted average of 161 basis points across the portfolio..

Therefore, 100% of our portfolio currently has LIBOR floor above the current spot LIBOR rate. And should current LIBOR rates persist where they are and we are able to maintain LIBOR floors above existing levels, we anticipate that our LIBOR floors may have a positive impact on our 2020 earnings..

Final note on our financing. As of 6/30, our loan portfolio was financed with 2 CRE CLO securitizations with weighted average cost of financing of LIBOR plus 141 basis points. With the current market uncertainty, the non-mark-to-market match term financing that these CLOs provide gives us additional stability..

The reinvestment period in our first CLO did end in February of 2020, and our second CLO has a reinvestment period that runs through August of 2021.

We experienced $28 million of loan payoffs in our first CLO during the second quarter, and since the reinvestment period on that securitization has ended, we have begun sequentially paying down the CLO bonds. We paid down $9 million in bonds prior to June 30 and additional $19 million after quarter end.

I would like to note that even after the impact of these payoffs, our leverage and cost of funds within that first CLO remain very attractive at 81.8% advance rate and LIBOR plus 142 basis points..

We have been working towards the refinance of the CLO. However, there is no requirement for us to refinance the CLO, and within the current market volatility, the timing and structure of this is uncertain. We will continue to evaluate our options as the status of the capital markets develop..

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

Thanks, Mike. In summary, we are -- remain excited about the future for the company. We are very actively monitoring our portfolio and the state of the current environment, both in terms of COVID-19 and its impact on the capital markets. We look forward to updating you all on our progress. We appreciate your time and interest..

Again, I'd like to reiterate my hope that you all remain safe and healthy during this challenging environment, challenging time that we're all experiencing..

And with that, I'd also like to open the call up to questions. .

[Operator Instructions] The first question comes from Steve Delaney of JMP Securities. .

First, congratulations on your strong credit profile of the portfolio. Jim, Mike said that -- I hope all you guys are safe and well also. Mike said in his remarks that, I think in the second quarter, you had on FL 1, you had $9 million of distributions.

I assume you're getting like, what, 12% to 15% share of whatever prepayments come in based on your advance rate. But then, Mike, I think you said $19 million so far post June 30..

I guess my question is, you're being pretty cautious on new lending. And obviously, you can't lend, reinvest in that structure at this time.

So what are your plans for that cash as you continue to see paydowns and distributions to you on FL 1?.

So yes, go ahead, Mike.

Why don't you clarify on the distribution?.

Yes. Just to clarify, the -- when the -- now that the reinvestment period has passed in that CLO, repayments are paying the bonds down sequentially. So... .

Got it. All was sequential, yes. I see, so we -- yes... .

Cash there. And the result is a slight reduction in the overall leverage of the company, which we don't see as problematic. And as I mentioned, the advanced rate and pricing is still very compelling on that transaction. .

So Mike until -- so it's sequential right, but at no point then does it go to pro rata. So you're going to fully delever before you -- you're going to be the last dollars out.

Is that what I'm hearing if it were to stay in place and not be called?.

That's right. .

Okay. And it sounds like the market, we're seeing CMBS back open and tightening up pretty well, not at the -- not so much a different piece, but certainly at the upper tranches.

Basically, you're just saying that market conditions, despite the performance of multifamily, you're going to bide your time and looking to call and refinance that structure?.

Yes. We're continually reviewing it. And it's not that we won't and always are looking at the best opportunity to refinance that portfolio to appropriate time. We did make the determination around the capitalized fees, but that's a gap here and it doesn't mean that we're going to stop evaluating opportunities to refinance that portfolio. .

Right. And no impact on core or your dividend capability there. I'm curious, kind of stepping back because there's so much -- the President just signed some orders over the weekend, and there's so much talk out there about forbearance and eviction.

When you look -- kind of on average, when you look at your borrower landlords, can you give us an idea of roughly what percent of rents they need to be pulling in monthly in order to meet their debt service? I know it's different case by case.

I'm just trying to get an understanding of what percentage of forbearance they could incur and still be able to pay down your -- pay your loan?.

Give me a second here. If you want to take a quick look at that, Charlie or Precilla, just based on the coverage. Before -- well, just to follow up on what Mike said there, I think from the refinancing side, well, they get that.

I mean I think the -- with respect to where we are, right, the current CLO and some modest deleveraging off the top, still keeps the financing better than at where we could probably refinance today..

As we've discussed in the past, I think that's not going to continue forever, obviously. But right now, it's not an immediate concern. But as we've discussed in the past, our desire is to grow, is to expand our financing sources and scale up the overall size of the company..

We've resolved any kind of legacy matters that existed from prior to Hunt's and now ORIX' acquisition of the management agreement. And we're basically now in growth mode and looking for ways that we can grow. Of course, that's obviously been significantly impacted by COVID and how it's impacted the economy.

And particularly, as you point out, while multifamily is a very strong asset class, and I believe will continue to be one of -- the strongest or one of the strongest asset classes throughout the period, no matter how long it lasts, there are open questions about how does performance continues with respect to the election, with respect to unemployment benefits, who pays for them and how -- the long-term effects of -- the tax consequences of having to pay for the substantial support that the federal government has appropriately, in my opinion, provided during the pandemic.

All of those things are on the table, along with the more sociopolitical environment around evictions, forbearances, et cetera, and balancing the rights and needs of property owners and their capital partners like ourselves with those of tenants who might be struggling..

And I think there's -- it's a big equation with a lot of variables that I think will long term work out in fine fashion, but it is something that we look at and we think about growing the company today, which we absolutely want to do and what we're working on are -- how do we best provide capital to our partners but are doing so in a way that protects the investors in the company..

And as we wrestle with that strategy, our intentions are to kind of think about, okay, well, we feel pretty good about positioning the company to do X and Y.

So how much can we and should we realistically put out if capital were free and flowing? What would we want to have in our coffers? And that's kind of the analysis that I'd say we're going through now. .

Got it. .

In terms of the rent collection, I don't know, Charlie or Precilla, if you -- I would think it's somewhere around 80, 80-something percent, but can... .

Sure. So with respect to -- I guess if you look to the nature of our transaction speed, they are bridge loans, which means they are in transition. So in a number of cases, you will be -- you will have situations where some units are obviously out up in service.

And as a result of those types of transactions, right, the collection itself is perhaps not as representative of the performance, right, of the asset..

What I will tell you is in a number of cases, we proactively structured either debt service reserves and/or future funding amounts that are held back precisely for the purpose of potential shortfalls. So that should aid in the situations where there may be just issues with respect to potential collections as the pandemic continues to unwind. .

The next question comes from Christopher Nolan of Ladenburg Thalmann. .

Just following up on the last question.

Is it fair to say that you expect your asset volumes, your earning asset volumes to decline in the second half of the year?.

I would say, that is more likely than not, yes. That would be -- just from delevering. .

Got you. No, I totally understand. And given where LIBOR is right now, it looks like funding costs are likely to be stable. So really, the variables in your earnings is more likely to be asset volumes and whatever yields you're getting on those investments, which goes into that would be nonaccruals and all the other stuff.

Is that a fair way to look at it?.

In the short term, meaning in the time period, yes, as you described, I think that's right. .

Okay.

And then I guess in the second half, my question would be, are you seeing -- in New York state, for rent regulations, for rent-stabilized properties, the state has taken a very progressive tact and really locks down the ability for landlords to increase rents year-over-year to the point where a lot of landlords are unable to economically make ends meet.

Are you seeing that in other markets where you're getting these events?.

Yes, I mean, well, I think there's the pressure in some of the Western states, Oregon, for example, Washington, around San Francisco and Northern California, maybe the whole state. There are a number of proposals, in some cases, legislation that have been out there around rent control generally. I do think it's a -- it is an issue.

I actually think New York has not been -- has been reasonably balanced given the size of the city and the affordable crisis that exists there, and we don't do a lot of lending in New York, but there's not a blanket rent control like there have been proposed in other places..

I think it's a worthy topic. I think there is room to provide affordable housing support without deteriorating significantly the entrepreneurial real estate owner and operator.

But there does need -- I do think that without some compromise and working together to come up with solutions in some of these high-cost markets, you run the risk of pendulum swinging going from being very expensive and there's no affordable housing to -- there being no investment or lesser investment because of government regulation..

I think there's got to be some balance. It's definitely a risk. It's definitely something. That we are focused on in states and municipalities where there's been recent legislation. For example, in Oregon, as I mentioned, we are very cautious about looking at deals there until we have a better understanding of what it might mean for the long term.

So it is impacting how we act. It's not -- we're not drawing the line and saying we won't do business in places, but we are looking at things with a different lens to understand how it might impact our business activity there and that of the owner..

So I hope there's more willingness on the part of government regulators, property owners and the constituents who are important to both of those folks and coming together to come up with what is -- what can be a more reasonable or a reasonable compromise into how we deal with what is a very real affordability crisis. .

Yes, there is an affordability crisis. The problem is, and I can tell you, as somebody who used to run multifamily -- over 200 multifamily units in New York City, rents stabilized. Your biggest challenge is actually going to be municipal costs, water costs, property taxes. Those increased double digits in these blue states.

And when they lost the ability to grow -- yes. And when you grow -- and then you lock down the ability to grow your revenues, your only outlet is lower funding costs, refinance to a lower mortgage or as low as it can go. And at the end of the day, the broke starts running out on this business model.

And I guess for you guys, I mean, you're probably looking at it for a similar lens. And if that's the trend, it looks like your investment portfolio should just continue to run off. .

Yes. Look, I probably have -- I'll reserve some core optimism that there's a solution. But I agree with you that to the extent that, particularly in these big, high-cost markets. Now we don't do a lot of New York City lending in general because it's really dominated by bank lenders, in particular.

But that being said, there are many high-cost markets out there. And should the environment come to a point where your costs continue to rise across all of those categories that we just mentioned, but your revenue is not able to grow in line with that.

And the only place that it can impact is -- or that can get resolved, as you point, is financing, which would either require additional subsidy from someone, federal government, state government or lower investment in the properties in the form of the actual value of the properties or the capital dollars that are invested during ownership.

That's obviously not a long-term positive for solving any affordability crisis, right? If anything, it might make it worse down the road. .

[Operator Instructions] The next question comes from Lee Zulch of Overcap. .

Michael mentioned new opportunities in Q3.

Could you expand on that a little bit?.

Sure.

Mike, do you want to go ahead and take that?.

Yes. So we, as you may be aware, as manager, have a very large production platform and are looking every day and talking to borrowers about their financing needs, both stabilized and bridge transitional financing that is the focus of HCFT.

And despite the current COVID-19 market, we are very active lending and doing a lot of transactions across our platform. And while working with our borrowers and discussing new opportunities, particularly in the bridge space, there are still -- we see a lot of properties that are performing..

And in particular, those with limited -- we see more with limited transition, limited construction or lower construction or rehab activity needs that we think are good candidates for bridge.

We still feel very confident in their performance and their ability to convert to a permanent financing likely with the Fannie Mae or Freddie Mac, who are -- continues to be very active and have very strong volumes through the crisis..

So we're still seeing those opportunities. Leverage, as Jim mentioned earlier in his remarks, leverage is a little bit lower and spread's a little bit higher than pre-COVID environment, which is, I think, what you would expect. But we're out there every day and still seeing opportunities. .

So for Q3 -- sorry, go ahead. .

Well, I was going to say, one thing that we have seen is property owners are inherently optimistic creatures, meaning leverage is going to get higher, values go up, rents go up, that kind of mentality as a stereotype or obviously, they wouldn't be investors, right? They're investing, thinking things are going to get better. .

So as we've seen lower leverage in some of the traditional markets, whether it be CMBS, Fannie, Freddie, et cetera, and already low environments with like companies and banks and the like, we do -- to Mike's point, we do see some borrowers turning toward alternative financing like bridge financing or maybe some other structured or mezz pref structure that is at a lower leverage point than what you would consider normal historically but higher than maybe where things would price out or pencil out on a permanent loan today..

And so you have an opportunity to lend at an attractive basis and attractive yield at a level that, what I'll call, in traditional or normal environment, is a bit lower from a leverage standpoint.

So -- and those borrowers are really looking to kind of wait out this economic cycle and really related to the pandemic than the traditional cycle, but kind of waited out the storm and then go get their 7- or 10-year financing or longer down the road a year or 2.

So that is something that I think is an opportunity in the traditional market, and then obviously, the various structured, private structured transactions that could result in accretive investment to earnings. .

Okay.

And just looking at Q3 new loan production, any idea of what that is going to come in at now? Do we have any [ bucks ]?.

Well, what I would say for the -- for HCFT, as Mike pointed out, we are a much larger overall ORIX Real Estate Capital. We did about $10 billion of transactions last year. So we're continuing to see activity. For HCFT, the activity is really a matter of what our capital is.

So as we have investable capital, if loans pay off in CLO 2, or we end up with excess cash beyond the liquidity point that we think is appropriate, then we will fill those investments..

So I expect us to remain relatively full throughout the year. There will be some timing aspects to loan paying off and a loan closing. But the actual origination volume is really going to be dependent upon what happens, absent any capital raise or capital infusion, it would -- it's really dependent on payoffs. .

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

Okay. Thank you. Thank you all for joining us today. We look forward to speaking to you next quarter. We do hope that everyone remains safe. And hopefully, next quarter, we will be on our way across the globe toward a resolution of this health crisis. Be well and safe, and we'll talk next quarter. Thanks. .

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