Good morning and thank you for joining the Hunt Companies Finance Trust Third Quarter 2020 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 [ Charles Study ] 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 third 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 Friday, we filed our 10-Q with the SEC and issued a press release, which provided details on our third 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 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 report 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. A presentation of this information is not intended to be considered in isolation nor as a substitute to financial information presented in accordance with GAAP.

Reconciliations of these non-GAAP financial measures to the most comparable measures are 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 Hunt Companies Finance Trust Earnings Call for the third quarter of 2020. Thank you for joining us today under what continues to be challenging circumstances for many of us, given what's going on in the country today.

Despite all that, I will say that we are very pleased with the financial results and stability for Hunt Companies Finance Trust and look forward to telling you more about it here today..

With regards to the COVID-19 pandemic, first, let me express my hope that you and your families are continuing to stay safe and healthy. As we've all experienced, the COVID-19 pandemic continues to have a significant impact on our economy, our industry, our political environment 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 they will continue to do so. However, we've been able to execute on all investment management, asset management servicing, portfolio monitoring and related functions on a daily basis.

Leadership across all segments of the ORIX organization, our parent, is actively monitoring the situation as it continues to progress. Clearly, the current environment is unprecedented, and we are closely monitoring the impact on -- of the pandemic on our assets as well as its impact on the broader economy and financial markets..

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. Notably, real estate acquisition volume driving the bridge lending market has picked up, but has not returned to robust COVID levels.

We are actively screening and underwriting new transactions, but continue to be mindful of local ordinance constraints on lender protection and the impact of eviction moratoriums as well as the potential for interim cash flow disruptions while the rental market contends with the economic realities of today's COVID environment, including increased concessions and potential delinquencies -- tenant delinquencies..

As a result, our originations of late have had a heightened focus on sponsor qualifications and markets with more resilient demand drivers. We will continue to be thoughtful, patient and opportunistic in our evaluation of CRE debt investment opportunities 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 facilities..

Additionally, I'd like to highlight that as of September 30, 2020, 100% of the loans in our CRE investment portfolio were current. Furthermore, 100% of those loans in our portfolio made their October payments. We have not executed any forbearances nor have we experienced any loan defaults or write-downs during the COVID era.

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

With regards to our financing sources, we do not currently utilize repurchase or warehouse facility financings at HCFT. And therefore, we 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 a corporate term loan..

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

With that being said, significant uncertainty exists and the depth and length of the economic recession -- potential recession and, to state the obvious, to the extent we experienced delinquencies and/or defaults in the portfolio, our liquidity may be impacted.

With that in mind, we remain focused on liquidity management and we'll continue to do so over the coming months and quarters..

With respect to our dividend, on September 17, we announced a 13% increase in our quarterly dividend from $0.075 per share to $0.085 per share. I'm pleased to announce that for the third quarter, we comfortably covered the dividend with the GAAP EPS dividend ratio -- coverage ratio of 118% and a core EPS dividend coverage ratio of 129%..

In accordance with the normal course timing and process, we have not yet made the Q4 2020 dividend declaration. We expect to make that determination on our dividend in early December after discussing with our Board in the normal course. We do expect to distribute 100% of our taxable income and may declare a special dividend in Q4 if necessary..

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

Jim?.

Thank you, Jim, and good morning, everyone..

On Friday 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, 5 and 6 of the presentation, you will find key updates and an earnings summary for the quarter. .

For the third quarter of 2020, we reported net income to common stockholders of $2.5 million or $0.10 per share. This compares to a net income to common stockholders of $1.9 million or $0.08 per share for the prior quarter and net income to common stockholders of $2.2 million or $0.09 per share for the third quarter of 2019..

Relative to the prior quarter, the positive variance in earnings was driven primarily by lower expenses, which declined from $2.8 million in Q2 to $2.3 million in Q3. This improvement was primarily the result of the company incurring approximately $600,000 of nonrecurring expenses in the prior quarter related to a postponed CLO issuance..

I would also like to highlight that in both the current and prior quarter, we experienced a meaningful benefit to interest income from the LIBOR floors that exist on 100% of the loans in our portfolio. The current quarter was impacted by 2 noncore items.

The first of these was a $350,000 decline in the fair value of our legacy mortgage servicing rights portfolio as we continue to experience elevated prepayment speeds associated with lower interest rates. As of 9/30, the carrying value of this asset was $1.1 million.

Due to the limited size of the remaining asset, we would generally expect the magnitude of any future quarterly reductions in fair value to be less meaningful to the bottom line. The other noncore item experienced this quarter was a GAAP income tax benefit of $143,000 pertaining to activity of our taxable REIT subsidiary..

After adjusting for these 2 items, our core earnings attributed to common stockholders for the quarter was $2.8 million or $0.11 per share. We are pleased with the core EPS yield generated by the company this quarter, which was 9.6% of book equity value on an annualized basis. Our book value at September 30 was $114.5 million or $4.59 per share.

This represents a $0.02 increase from our Q2 2020 book value per share of $4.57. We'd like to highlight that our book value per share has been extremely stable over the last 4 quarters as we began the year at $4.59 per share, which is in line with where we stand today..

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

As of September 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 continues to exist, 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 Mike Larsen, who will provide details on our portfolio composition and investment activity. .

Thank you, Jim..

As Jim Flynn discussed earlier on the call, we continue to take a measured approach to new originations. During the quarter, we acquired 1 new loan and did future funding advances on 6 loans with total incremental fundings of $10.6 million. All of these fundings were on loans secured by multifamily assets..

We experienced $21.5 million of loan payoffs during the corner -- quarter. And on a net basis, our loan portfolio decreased by $10.9 million or 1.8% of total UPB. While we continue to be thoughtful and patient in our evaluation of new investments, we are seeing compelling investment opportunities in the current market..

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

Multifamily assets have historically reflected the greatest resiliency amongst the different property types during a downturn, and we anticipate the same being true during this period..

Our total portfolio of floating-rate loans had an outstanding principal balance of $599 million at quarter end. The portfolio consisted of 44 loans with an average loan size of $13.6 million, which provides for significant asset diversity..

Our portfolio has a weighted average spread to LIBOR of 354 basis points. And as Jim noted, we have LIBOR floors on 100% of the loans in our portfolio, with a weighted average of 161 basis points.

Should current LIBOR rates persist and we are able to maintain LIBOR floors above existing levels, we anticipate that our LIBOR floor is going to continue to have meaningful positive impact on our earnings..

Final note on our financing. As of 9/30, our loan portfolio was financed with 2 CRE CLO securitizations with an average cost of financing of LIBOR plus 143 basis points. With the continued market uncertainty, the non-mark-to-market matched term financing that these CLOs provide give us additional protection.

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

With regards to our first CLO specifically, we experienced $28 million of loan payoffs during Q2 and an additional $9 million of loan payoffs during Q3. Since the reinvestment period on this securitization has ended, these payoffs have begun sequentially paying down the CLO bonds.

I'd like to highlight that even after the impact of these bond paydowns, of which over $9 million occurred after quarter end, our leverage and cost of funds within the first CLO remain attractive at 81% and LIBOR plus 143 basis points, respectively..

We continue to actively monitor conditions in the CRE CLO space and evaluate our options for refinancing as conditions develop. We are encouraged by the positive signs across commercial real estate capital markets, including the recent issuance of the first managed CRE, CLO during the COVID era.

Furthermore, several new CRE CLO issuances are expected to come to market over the coming quarter, and we have seen liquidity return to the secondary market for CRE and CLO bonds. These developments provide a positive backdrop to our evaluation of refinance alternatives..

In terms of warehouse and repo facilities, warehouse line providers are reviewing more financing requests from lenders. While certain warehouse lenders are eager to put capital out, others remain on the sidelines due to the continued economic uncertainty.

We are seeing some improvement in the terms offered as well, albeit they have not returned to pre-COVID levels..

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

Thank you, Mike..

In summary, we are excited about the quarter and the progress that we continue to make. We remain positive about the company's outlook and its growth prospects. We look forward to updating you on our progress, and we appreciate your interest in our firm..

Before we take Q&A, I'd like to reiterate my hope that you and your families remain healthy and safe and hopefully continued good news with respect to vaccines and treatments. I know Pfizer had a big announcement today, so hopefully that will bode well for the future..

With that, I will ask the operator to open the call for questions. .

[Operator Instructions] The first question today comes from Christopher Nolan of Ladenburg Thalmann. .

Mike, on your comments on the CLO refinancing, any idea of possible timing? Could this be a first half 2021 type of event?.

There's a lot of factors that go into that. And we have, throughout the year, continually evaluated the market and looking at the timing to do that. And things definitely have improved, which would put us in a position to revisit that in the coming months and into next year, but as you all know, the market can continue to change..

And what I will say is that we have no obligation to refinance the first CLO that we have. And as you mentioned, the terms remain very attractive because they -- compared to the current market. So we'll continue to evaluate, but it's going to depend on how the market develops. .

Great.

And I guess for James Flynn, for your portfolio companies or your investments, what is the average interest rate coverage of your debt by the borrowers?.

Over debt by the borrowers? It's a tricky question because some of the borrowers are -- these are the bridge loans. So they're going in and doing work. So in some cases, the coverage is quite low while they're doing work. I can tell you that we underwrite stabilize covered typically to a minimum of 125..

Precilla, I don't know if you want to add more to that topic, something more specific, but yes. .

Sure. As of the end of the quarter, it was 1.06x. But keep in mind, we have fairly high floors when that number was calculated. .

Okay.

So 1.06 was the most recent, but normally, it's a little bit higher than that?.

The floors are there. What I'm suggesting is that the floors of our loans are high. So as a result of that, if you were to normalize it for where LIBOR is today, it would be higher. .

Yes.

Actually, my question really is about the economics of the underlying properties and whether or not they're -- how much their pre-interest rate earnings cover your debt, your debt interest?.

So the blended rate is a 1.06, but if there is a wide range there because of what I described as those that are continuing to do work on units, whether it's multifamily or the retail or other assets where they're not receiving rent versus those that are better -- is already occupied and are receiving rent.

So I think anything over 1 we think is good as a blended portfolio because of the expectation that certain assets are going to be at or below 1 during periods of rehabilitation of asset. .

Okay.

And then, I guess, what percentage of your loans, if any, are at their floors?.

They all are. .

I think I would suggest they all are, yes. .

They're all at the floors? Okay. .

Just to add to that. So the average -- the weighted average -- our floors on our loans have a weighted average of 161 basis points. So if you look at LIBOR today, it's well below that. So all of our loans have a LIBOR floor above current LIBOR. .

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

Congratulations on the quarter and the credit performance of the portfolio. I note that the average remaining term of the portfolio is fairly short, 14 months.

So given that, can you comment on your outlook for repayments over the next 2 to 3 quarters? And do you expect to have access to additional slightly seasoned loans with floors over current LIBOR as you did in the third quarter?.

I'll let Precilla go through the -- provide a little more detail. But in general, most of our loans have extension options at the borrowers, with some requirements on extension, but most of them are achievable or will be met. So first, I would say that the -- that it's possible that those terms are extended under the current loan terms.

And then the more important second part of your question, I think the short answer is, yes, we would expect to have access to some seasoned loans that the manager and our parent have on our balance sheet or we'll have on our balance sheet that we can place into HCFT as liquidity elevates..

So from that -- and as we stated earlier, since Labor Day, the portfolio -- I mean, the activity has picked up. We've seen some good transaction flow come through really a lot over the last month or so that we think is high quality, and we feel pretty good about having to -- or hopefully being able to win a fair amount of that business..

And then in terms of the floors, we will continue to put floors in our loans. The levels will be dictated by where LIBOR is and by what the market is tolerable of, but we've always used floors and will continue to do so..

Precilla, I don't know if you want to add anything on the current portfolio and duration?.

Sure. No, Steve is right. The seasoning is about 14 -- I'm sorry, the remaining term is about 14 months. But I will say that we have seen also, as Jim mentioned, an acceleration of volume in terms of screenings, given that the acquisition activity in the market has picked up post Labor Day.

We expect, especially with the positive news today, that, that will only accelerate. As a result, being able to refill payments that come through. .

That's helpful from both of you. And one final thing, Jim. Now that ORIX is the manager, I'm curious if there are any plans to rebrand the company.

And down the road, could you add other loan products or business lines to the HCFT platform?.

Sure. So we have had preliminary discussions around branding and the long-term positioning of the REIT with our Board and with our managers. So we'll continue to have those discussions and come back to the investor community with the conclusions on those..

In terms of your second question, I mean, again, I think, sticking with short answers, the answer is, yes, there is that potential.

We, in fact, have been evaluating using some of the limited liquidity that we do have and any future potential liquidity that the REIT is able to generate or raise that we would use some of that to think about diversifying away from just the bridge loan category but related types of assets and investments that we typically already see, whether it be mezz financing or some other structured finance around the same asset classes and things of that nature.

So I do see there being potential for that to happen down the road..

Of course, all of those things are subject to where we see opportunities in the market, both available and -- that are available and the credit profile that we find attractive. I think there are some. So it's fair to say we would consider that down the road. .

I appreciate the comments. And everyone, stay safe. Have a good close to 2020. I think we'll all be glad when it's over. .

Yes, sir. Thanks, Steve. .

[Operator Instructions].

Showing no further questions, this concludes our question-and-answer session. I would like to turn the conference back over to James Flynn for any closing remarks. .

Thank you. I just want to say thank you to the group. Thank you for joining again today. We look forward to speaking to everyone again soon. Stay well. Be healthy. And hopefully, we'll continue to have some good news here in the fourth quarter. We'll speak to you again soon. Thank you. .

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