Good morning and thank you for joining the Hunt Companies Finance Trust First 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 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 first 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 Debt Strategies.

On Monday, we filed our 10-K with the SEC and issued a press release, which provided details on our first quarter results. We also provided a supplemental earnings presentation that 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 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, anticipate, 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 and will continue to be amplified or in the future may be amplified by the COVID-19 outbreak. It's 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 in this conference call.

A 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 will now turn the call over to Jim Flynn. Please go ahead..

Thank you, Brendan. Good morning, everyone. Welcome to the Hunt Companies Finance Trust earnings call for the first quarter of 2020. We appreciate you all joining us today under what are very challenging circumstances for us all.

First and foremost, with regards to COVID-19, I'd like to express my hope that you and all of your families are staying safe and healthy. As we have all seen, the COVID-19 pandemic is having 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.

We've been able and we'll 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 OREC organization are actively monitoring the situation as it continues to unfold.

Clearly, the current environment is unprecedented, and we are closely monitoring the impact that the pandemic is having on our assets as well as its impact on the broader economy and financial markets.

The extreme volatility and economic concerns associated with COVID-19 have impacted the bridge lending market, created uncertainties around credit and asset values, loan pricing and the availability of financing and, thus, reducing overall lending activity.

In addition, stay-at-home orders and other travel restrictions have, in some cases, limited the ability of lenders to obtain appraisals and other third-party reports.

With that in mind, we have significantly curtailed new loan originations at HCFT's manager since mid-March, and we will continue to be thoughtful, patient and opportunistic in our evaluation of CRE debt investment opportunities for HCFT.

In light of the current environment, I'd like to briefly address our portfolio, our financing sources and 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 mezzanine loans, construction loans, mortgage-backed securities or any loans backed by hotels. Furthermore, multifamily assets make up the vast majority of our collateral, and we have limited exposure to retail properties. We do not currently have any exposure to seniors housing, health care or skilled nursing properties.

I'd like to highlight that as of March 31, 2020, 100% of the loans in our CRE investment portfolio were current. Furthermore, 100% of the loans in the CRE investment portfolio made their April payment. With regards to May payment activity, as of May 11, we have received payments on 95% of the portfolio or 49 out of 51 loans.

Borrowers on the remaining three loans for which we have not yet received payment were granted a seven-day grace period to May 13, 2020. We currently expect to receive payment from these borrowers on May 13. We have not executed any forbearances to date.

We believe that our portfolio is well positioned, and we'll continue to focus on proactive asset management of all assets potentially impacted by COVID-19. With respect to our financing sources, we do not currently utilize repurchase a warehouse facility financing at HCFT.

And therefore, we are not subject to margin calls on any of our assets from repo warehouse lenders. Our primary sources of financing are two matched term, non mark-to-market CRE CLOs as well as a corporate term loan. From a liquidity perspective, we have not experienced any material adverse liquidity events to date due to COVID-19.

We ended the quarter with $11.3 million of unrestricted cash and have $9 million of unrestricted cash on hand today. Historically, we have operated with between $7 million and $13 million of unrestricted cash on a daily basis. And therefore, we continue to operate within this range.

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. Significant uncertainty does exist today around the depth and length of the economic recession.

And to state the obvious, to the extent we experience delinquencies or defaults in the portfolio, our liquidity could be impacted in the future. With that in mind, we are focused on liquidity management over the coming months. With respect to our dividend, we paid the Q1 2020 dividend of $0.075 per share on April 15.

In accordance with normal course timing and process, we have not yet made a Q2 2020 dividend declaration. We expect to make a determination on the dividend in June after discussing with our Board in normal course. Now, I'll touch briefly on our first quarter results.

Net income for the first quarter was $1.5 million or $0.06 per share, and core earnings for the first quarter was $2.2 million or $0.09 per share. Jim Briggs will discuss our financial results in more detail shortly.

During the quarter, we acquired and funded $38.6 million of floating rate CRE loans at a weighted average spread of 305 basis points over LIBOR. As announced in March, we successfully invested a substantial majority of HCFT's undeployed restricted cash in Q4 2019. We remain substantially fully deployed as of today.

With that, I'd like to turn the call over to Jim Briggs, who will provide further detail on the financial results.

Jim?.

Thank you, Jim, and good morning, everyone. On Monday 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 Page 5 and 6 of the presentation, you will find key updates and an earnings summary for the first quarter. For the first quarter of 2020, we reported net income to common stockholders of $1.5 million or $0.06 per share.

This compares to net income to common stockholders of $1.2 million or $0.05 per share for the prior quarter and a net loss of $2.1 million or negative $0.09 per share for the first quarter of 2019. The current quarter was impacted by two non-core items.

The first of these was an $878,000 decline in the fair value of our legacy mortgage servicing right portfolio, which was driven primarily by declining interest rates and a corresponding increase in expected prepayment rates.

As of March 31, 2020, the MSR was valued at $1.8 million or a 2.2 times multiple of servicing fees compared to $2.7 million or 3.2 times multiple of servicing fees as of December 31, 2019.

While the value of our MSR will continue to amortize these loans pay off, we do not anticipate that the significant decline in valuation experienced this quarter will be a recurring item.

The other non-core item experienced this quarter was a $227,000 income tax benefit related to activity at our taxable REIT subsidiary where our MSR asset has helped. After adjusting for these two items, our core earnings attributed to common stockholders for the quarter was $2.2 million or $0.09 per share.

This compares to core earnings of $1.3 million or $0.06 per share for the prior quarter and $1.7 million or $0.07 per share for the first quarter of 2019. The main driver of the quarter-over-quarter improvement in our core earnings was an increase in net interest income from $3.4 million in Q4 of 2019 to $4.2 million in Q1 of 2020.

This increase can be primarily attributed to our improved capital deployment throughout the quarter, the benefit of our LIBOR floors and, to a lesser extent, an increase in exit fees earned during Q1.

Our book value at March 31 was $114.1 million, an increase of $5.4 million from year-end and reflects a January investment of $5.7 million by an affiliate of our manager of $4.61 a share. Our Q1 2020 book value per share was $4.57 compared to a Q4 2019 book value per share of $4.59.

I'd like to note that excluding the impact of the non-recurring non-core items previously discussed, our book value per share would have increased quarter-over-quarter to $4.60.

An additional item I would like to note 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 March 31, 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 commercial loan portfolio remains healthy, uncertainty about the severity and duration of the economic impact of COVID-19 pandemic exists, including its impact on our borrowers and on the value of the properties that collateralize the commercial mortgage loan investments.

We will continue to evaluate the loan portfolio for credit losses, and we'll 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, and good morning, everyone. Just expanding on the earlier comments, while we had significantly curtailed new loan originations at HCFT's manager since mid-March, the first quarter of 2020 was primarily a pre-COVID quarter.

During the quarter, we did acquire two loans, made future funding advances on 2019 loans with total incremental fundings of $38.6 million. We experienced $34.5 million of loan payoffs during the quarter. And on a net basis, our loan portfolio increased by $4.1 million, and we continue to be fully deployed.

New loans for the quarter had a weighted average initial LTV of 79% and a weighted average spread over LIBOR of 305 basis points. 99% of these new loan investments were in multifamily. We continue to anticipate that a majority of our loan activity will be related to multifamily assets.

Our overall portfolio at quarter-end was over 90% multifamily, which is in line with year-end. We believe this is particularly relevant to note in the current environment. Multifamily assets have historically reflected the greatest resiliency among the different property types during the downturn.

And despite the worrisome employment trends we're seeing, we anticipate the same being true this period. I would also like to note that due to the heavy middle market emphasis of the loans in our portfolio, we have limited exposure to certain central business districts, such as New York City, which have been significantly impacted by COVID-19.

Our total portfolio of floating rate loans had an outstanding principal balance of $639 million at quarter end. The portfolio consisted of 51 loans with an average loan size of $12.8 million with significant asset diversity. The portfolio had a weighted average rental life of 355 basis points.

And as we have noted on prior calls, we have LIBOR floors on 100% of the loans in the portfolio with a weighted average floor of 160 basis points. Due to the recent decline in LIBOR, 100% of our portfolio currently has a LIBOR floor above current LIBOR rate.

Should current LIBOR rates persist and we are able to maintain LIBOR floors, we anticipate that these floors would have a positive impact on our 2020 earnings. Final note on our financing. As was mentioned, our loan portfolio is financed with two CRE CLO securitizations with an average cost financing of LIBOR plus 141 basis points.

With the current market uncertainty, the non mark-to-market match term financing that these CLOs provide give us additional production and stability. The reinvestment period on our first CLO ended in February of 2020 and our second has a reinvestment period that runs through August of 2021. We have been exploring a refinance of the first CLO.

However, there's no requirement for us to refinance the CLO. And with the current market volatility, the timing and/or structure of the refinancing is uncertain. We'll continue to evaluate our options for refinancing as the status of the capital markets develops. With that, I'll pass the call back to Jim..

Thank you, Mike. In summary, despite the current economic environment, we do continue to feel optimistic about the future of the company and remain positive on its outlook and growth prospects long-term. We look forward to updating you all on our progress, and we appreciate your time and interest.

Finally, I'd like to reiterate my sincere hope that you and your families are all well and remain safe and healthy during the remainder of this crisis. With that, I'll ask the operator to open the call for any questions..

We will now begin the question-and-answer session. [Operator Instructions] And our first question will come from Christopher Nolan with Ladenburg Thalmann..

Hi, guys. Hope, everyone is well..

Hi, Chris.

How are you?.

Good.

I guess for Jim Briggs, when do you anticipate CECL implementation?.

We would be implementing as a smaller reporting company January 1 of 2023..

Got it. And then, I guess in terms of – I think it was a good quarter all around, a surprisingly good, but it looks like asset quality is the big topic going forward.

And can you give us any sort of granular insight in terms of, how your borrowers are being impacted by everything that’s going on with COVID and so forth and what you’re doing to try to work with them?.

Sure. This is Jim. I’ll start and may Precilla can offer some other thoughts as well.

But in general, as you know the manager has a much larger footprint than just HCFT with over $40 billion in our servicing portfolio across different products outside of HCFT, I would say that within the REIT, we’ve seen that the multifamily concentration is obviously helped, all asset classes are obviously experiencing some distress.

Frankly, the multifamily market has actually performed, I think better than even I expected and that’s including in the Fannie, Freddie, FHA space. There’s certainly concern from a long-term standpoint, obviously, we’ve seen the country start to reopen over the past days and week or so and more to come going forward including here in New York.

And that’s obviously, the big question. Most borrowers that we’ve had – have all been very proactive with us and with their tenants and vice versa, right.

So many have sought to grant discounts and other specials to try to get people to pay their rent early and just pay, they’ve come to us, we haven’t had any forbearance agreements, but we have been in active dialogue with a handful of our borrowers about the challenges that they’re facing.

But they continue to be long-term good actors, I think that as you point out the quality of our assets, there’s significant equity behind our assets, I think that’s an important key for maintaining stability, maintaining owner incentive to make sure the properties remain in good standing.

People from the tenants all the way through borrowers, I think, there is a strong sense of reputation, reputationally doing the right thing almost anecdotally, I would say. It seems – it does seem a little different than a normal economic downturn. So, I think we have a high-quality portfolio.

We do have some assets that are more challenged than others, but we continue to work with those borrowers and we expect to be able to work through the issues with them as they come up.

Precilla Torres, who’s the PM here? Do you want to add any color there?.

Sure. So the only other thing that’s pretty critical is that, the substantial majority of our assets have – have historically been acquisition assets.

So as a matter, of course, majority of our borrowers have significant cash equity invested in their transactions, hence it improves the probability or heightens the probability of support of the assets through this difficult and challenging period for all of us and we have seen that behavior manifested in our collections to-date..

All right. Thank you. It sounds like the asset quality at least for now seems to be fairly steady, I mean. And then also given that you have assets sense, excuse me, your interest rate sensitivity seems to be benefiting from the changes in the interest rates.

I mean, overall it sounds like the earnings momentum seems to be relatively steady and so would the dividend, is that a fair characterization?.

Yes. Look, I think on a current basis and relatively short-term basis we’re pretty well position with interest rates, primarily due to the floors that we have in our loan documents.

But just in the abundance of cartage and thinking about management that may be true, but we’re also keeping a very keen eye on the liquidity, because if I think we’re all pleased to see that the things are getting, seem to be getting better, but there’s still a lot of people that are dying and there’s a lot of questions that remain with this pandemic that are going to last or could last for a very long time, but certainly for quite some time.

And we’re definitely going to be prudent with our liquidity and how we manage the portfolio. But certainly, in the short-term, we feel that we’re as well positioned as any of the other firms out there in terms of our asset quality and the structure of our loans..

Okay. I’ll get back in queue. Thank you for taking my questions..

Our next question comes from Lee Zulch with Overcap..

Good morning. Thank you, everyone and a quick question.

Are there any LIBOR floors on the CLOs?.

There are none..

On the notes, on the liability?.

Yes..

No..

Okay. Thank you. And just one other one.

Excluding events caused by COVID-19, looking ahead, what do you see as the biggest competitive challenges for your business model?.

For us, I think as we’ve certainly we’re – certainly we’re in a different environment, a challenging environment now. Overall our desire is to grow in size, right, and our scale definitely is a limiting factor with our competition in terms of efficiencies and spreading of costs.

So that’s the big challenge, but the underlying challenge of growth independent from just normal market conditions and what needs to be available to continue – to raise capital.

There was a very significant amount of pressure put on the market by competition, by a lot of new funds, a lot of new money that had entered this space over the last several years it was a very concentrated view on investment towards the short end of the curve, which led to a lot of that money coming in.

We’ve certainly seen – we’ve certainly seen a lot of maybe most of that money stop being in the market currently, whether that will continue or not is certainly relevant to the challenges for us.

We think that, while – while we’re well positioned today, I think we’d like a little more diversity in our assets, in the CRE debt space not beyond that but just, broadening the pool a bit. So, the biggest challenge is frankly, competition and whether people are in firms are getting paid for the risk.

My personal opinion is that as an industry in the commercial mortgage REITs that we probably haven’t been being paid for the risk over the past 18 months or so in general, not overall, but that frankly has really been a function of competition..

Great. Thank you very much..

[Operator Instructions] Seeing no further questions, I’d like to hand the call back over to Jim Flynn for any closing remarks..

I just like to thank everyone for joining us today. We look forward to speaking to you next quarter. Optimistically, hopefully, we’ll be in a better environment for the whole country. Wish everyone good health and safety during the coming months and look forward to speaking to you soon. Thank you..

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