Lument Finance Trust, Inc. Q1 FY2022 Earnings Call

Good morning and thank you for joining the Lument Finance Trust First Quarter 2022 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 Duddy with Investor Relations at Lument Investment Management. Please go ahead.

Thank you and good morning everyone. Thank you for joining our call to discuss Lument Finance Trust’s first quarter 2022 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 Monday, we filed our 10-Q with the SEC and issued a press release, which provided 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 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 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 maybe 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 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 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 Lument Finance Trust's earnings call for the first quarter of 2022. Thank you for joining. During Q1, we continued to observe very strong performance in our investment portfolio. We are continuing to make significant incremental investments to grow the asset base in LFT. First I'd like to begin by recapping our Q1 equity capital rates which we discussed in detail on our year-end earnings call. Every 20 seconds LFT closed on the transferable rights offering which resulted in the company raising approximately $83.5 million in gross common equity proceeds. This is an important transaction that provides LFT with the growth capital required to meet our objectives of achieving appropriate operating scale and expanding our capacity to make investments in target assets. We believe this raise enables the company to improve operating expense efficiencies, and we anticipate that the general and administrative expenses as a percentage of stockholder’s equity will decrease as a result of the offering. We also expect the offering will increase the liquidity and trading volume of our common stock. Finally, I'd note that the transaction demonstrated a strong alignment of interests between LFT and the external manager at Lument. Portfolio of the manager exercises over subscription privilege and made a total investment of $40 million in the transaction. With this recent capital raise in mind I would describe our overall investment performance in Q1 of 2022 as in line with expectations as we began to deploy the new capital. Adjusting with our existing strategy and expertise we acquired 14 multifamily assets from an affiliate of our manager and as a result, we increased the size of the investment portfolio by approximately $76 million or 7.5% during the quarter. In order to continue growing the portfolio on a leveraged basis to fully deploy the recently raised capital and take advantage of the manager’s significant pipeline of loans, we are actively focused on executing the loan financing transaction to leverage the newly acquired assets. Historically we have utilized CRE and CLO to finance our investments and continue to believe that CRE CLOs provide an attractive financing source due to favorable leverage as well as the non-recourse and non-mark to market features. Clearly, we have experienced volatile capital markets over the last few months with elevated concerns around inflation, the speed and size of the Fed rate hikes, supply chain issues, the Russian invasion of Ukraine, and broader U.S. and world economic health. There's been limited CRE CLO activity during the four months of the year and we have seen new issue AAA spreads widen by 40 to 50 basis points or more since the beginning of the year. In recent and coming weeks we expect to see more new activity in this market and we are actively working on a new CRE CLO transaction for LFT seeking to execute in the coming months, assuming market conditions permit. It is clear that the cost of liabilities has increased and the corresponding market values of assets are also increasing. We believe it likely that newly originated assets going forward will have wider spreads than existing assets with similar characteristics. Those increases will be in line with the increases in the cost of financing. We also expect to continue seeing increasing short-term interest rates which over time provide some economic benefit to LFT. With regards to our dividend, we previously declared a quarterly dividend of $0.06 per share for the first quarter of 2022. This level reflected a resetting of our dividend taking into account our recent capital raise and the increased share count. In addition, the dividend reflected the anticipated drag on net income and income to common shareholders in the short-term as we work to deploy the newly raised capital on a leveraged basis. Overall, however, I would like to emphasize that once our capital is fully deployed on that leveraged basis, we expect to support a stable, consistent run rate market yield on a go-forward basis. It's also important to acknowledge that our focus on multifamily bridge lending and the strength of our credit and asset management platform have allowed the portfolio to continue to perform well. As of March 31st our loan portfolio was 100% performing with no impairments, no monetary loan defaults, and no loans subject to forbearance. As stated in the past, we've still not granted a single forbearance nor have we experienced a single monetary default during the COVID era, a testament to both our rigorous credit standards as well as our proactive asset management efforts. We continue to maintain our simple and straightforward strategy of deploying our capital into commercial real estate debt investments with a focus on multifamily in order to provide stable earnings that support a market return to our shareholders. We are making progress towards LFT's long-term goals and remain excited about our continued growth as we focus on executing the business plan. In the coming months, we will continue discussions with investors and educate market participants about LFT and the opportunity we offer. Our manager is one of the nation's largest capital providers in the multifamily and seniors housing space, with over $17 billion in total transaction volume in 2021, servicing a $50 million loan servicing portfolio, and employing over 600 employees in more than 30 offices nationwide. The scale of this platform benefits the investors of LFT and provides strong support in executing our investment strategy. With that, I would like to turn the call over to Jim Briggs who will provide details on our financial results.

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 Pages 4 through 8 of the presentation you will find key updates and an earnings summary for the quarter. For the first quarter of 2022, we reported net income to common stockholders of approximately $1.8 million or $0.05 per share. We also reported distributable earnings of approximately $1.7 million or $0.05 per share. This represents a decline versus Q4 2021’s distributable EPS of $2.6 million or $0.11 per share. There are a few primary drivers of the quarter-over-quarter decline in distributable EPS. The first of these is share count. As mentioned by Jim in his opening remarks on February 22nd, we closed on a transferable rights offering. As a result of this transaction, the company's total equity inclusive of both common and preferred increased by approximately $80 million quarter-over-quarter from approximately $169 million as of year-end to $249 million as of March 31st. The offering caused our total shares issued and outstanding to increase from 24.9 million shares as of December 31st to 52.2 million shares as of March 31st. Our weighted average share count during Q1 based on the February 22nd issuance date was 36.4 million shares. We see the increase in share count contributed $0.02 per share of the EPS decline. Next, I would like to touch on exit fees which we have highlighted on prior calls. LFT's loans are typically structured with exit fees which are recognized as interest income when the loan pays off and the fees are collected in cash; therefore the timing of loan payoffs and associated exit fee income can cause some variability in LFT’s earnings from quarter to quarter. LFT may also be entitled to yield maintenance fees and extension fees on loans from time to time. In Q1 2022, due to the lower level of loan payoff activity, our exit fee income was $528,000 compared to $1.5 million of fees on loan payoffs in Q4 of 2021. Lastly, our gross interest income declined in Q1 due to the weighted average interest of our portfolios decreasing from 3.9% as of year-end to 3.8% as of March 31st. This decline was primarily driven by lower interest rate floors on new acquisitions. As a result of the Q2 rights offering transaction, the company's total book equity increased to approximately $249 million, total common book value increased to approximately $189 million, and book value per share of common stock declined to approximately $3.62 per share. We stated last quarter that we did anticipate a drag on distributable EPS as we deployed the proceeds of this rights offering on a leveraged basis. We would expect distributable EPS to continue to be pressured during Q2 until such time as we are able to execute a CLO or alternate loan financing transaction. As discussed in prior quarters, I would like to remind everyone 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 are scheduled to implement CECL on January 1, 2023. Until then, we continue to prepare our financial statements on an incurred loss model basis. As of March 31st, we do not consider any of our loans to be impaired under the incurred loss model, and we 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 broader economy and COVID-19 recovery continues to exist. 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 and good morning everyone. We continue to experience a robust level of origination activity at the start of this year and the LFT portfolio continues to grow. During the first quarter, as mentioned earlier, we acquired 14 new investments from our manager with a total principal balance of $185 million. All of these acquisitions were secured by multifamily assets. $119 million of these new loans are indexed to one month LIBOR, and the remaining $66 million of loans were indexed to the 30-day term SOFR. The first quarter acquisitions had a weighted average spread to the index of the applicable index of 340 basis points, and a weighted average index rate floor of nine basis points, and the acquired loans had a weighted average loan to value at origination of 75%. We experienced $109 million of loan payoffs during the quarter, and at quarter-end, our total loan portfolio's outstanding principal balance was $1.08 billion, which represents a 7.5% increase in portfolio size quarter-over-quarter, and over a 100% increase relative to the first quarter of last year. The portfolio consisted of 71 loans with an average loan size of $15 million. The portfolio at quarter-end was 94% multifamily despite an increase from 92% multifamily as of the year-end 2021. Our second highest asset type concentration is self-storage, which represents 3% of the portfolio. Our exposure to retail and office continues to remain very low at a 3% total principal balance on a combined basis. We continue to believe the middle market workforce housing multifamily asset class is the best real estate asset class for investment today. Despite rising rates in the current inflationary environment, we believe that the supply-demand dynamics, demographics, and strong rent growth trends in this space continue to support multifamily assets and create an attractive investment opportunity for our shareholders. Due to our mandatory strong focus on multifamily, we continue to anticipate that the majority of our loan activity will be related to multifamily. However, as we've said in the past, we will look to supplement multifamily investments with strong quality investments in other asset types that can offer a strong return profile relative to multifamily. With respect to pricing, our portfolio has a weighted average spread of 336 basis points and a weighted average index floor of 27 basis points. Due to continued market interest in investing in multifamily debt assets, which are our anchor investments, competition in the bridge space continues to be strong. However, we have begun to see an increase in loan spreads on new originations this year, driven by economic uncertainty, rate volatility, and spread widening in the broader capital markets. Whereas a few months ago, we were seeing loans priced with spreads generally in the low to mid-300 basis points, we're now seeing pricing in the high 300s, which we expect over the short-term to continue to trend up. This movement is in line with other increases in the overall market and we anticipate this adjustment of market spreads on our loans to align with the increases seen in the capital markets to continue to occur throughout the remainder of this year. Jim mentioned earlier that our investment return profile has a strong positive correlation with rising interest rates. We have included a rate sensitivity table on Page 11 of our supplemental earnings presentation. Overall, we expect LFT to meaningfully benefit from a continued rise in short-term interest rates as the Fed battles inflationary pressures. The current forward curve implies that one month SOFR will increase to over 2.5% by the end of the year, which holding all else equal, would increase our distributable earnings by approximately $0.08 per share on a run-rate full-year basis. On the financing side as of 3/31, our loan portfolio was financed with one series CLO securitization, with a weighted average spread of 143 basis points over one month LIBOR and an advance rate of 83.375%. The CLO has a reinvestment period running through December of 2023, providing continued attractive financing through this year and next. We do not currently utilize repo or warehouse facility to finance LFT, and therefore, as we've noted before, we are not subject to margin calls in any of our assets from repo or warehouse lenders. Overall, as we have continued to show over the last three years, we're utilizing the strength of our manager to focus on investments in middle market multifamily floating rate bridge loans that have continued to perform extremely well. The pipeline remains strong with lending opportunities through our manager's pipeline, and we expect that will continue. With that, I will pass the call back to Jim for some closing remarks.

Thanks, Mike. As I mentioned, certainly we've seen market volatility and changes. But we still remain confident in the business plan and are excited about LFT's future. We like the asset class that we participate in. We believe we're well positioned to progress in this market. And we look forward to updating you all in future quarters. And with that, we'd like to open the call to questions.

Our first question comes from Crispin Love with Piper Sandler. Please go ahead.

Thank you. Good morning. So you made some comments on the CRE CLOs in your opening remarks and mentioned 40 to 50 bps of widening in the market. And I think on the last call, you mentioned 30 to 40 bps of widening. So that 40 to 50 bps sets was about 10 or so more bps of widening. I just want to make sure I have that right and then relatedly to that, how confident are you that you think you will be able to complete a CRE CLO in the coming months given the market volatility we're facing right now?

The first question you asked about the widening is indeed true; it is an increase from our previous call. There is a deal currently in the market, and we anticipate more deals over the next 60 days. We have observed this widening, which aligns with the rising Fed funds rate and is not unexpected. However, it does create short-term disruptions in the market. Individual asset spreads are less clear to investors during this time. Unlike a CLO that resets at once, assets are originated over several months. If you analyze the recent market deals and our portfolio by month, you would see a generally steady increase over the year, and likely even further back. We are experiencing a simultaneous rise in rates that is healthy for the market's continued operation. Regarding the CRE CLO, our discussions with partners and market bankers reveal there is still significant liquidity and interest in these types of securities. Based on these conversations, I am quite optimistic that the market will stay healthy and open. We will need to keep an eye on pricing and price discovery, but overall, the indications show that the market is likely to remain accessible. Additionally, the short-term and floating rate nature of our assets allows us to benefit from increasing spreads as we introduce new products. As we pay off current assets, I expect that, all else being equal, new assets will carry a higher price. This trend is not unique but is a common challenge among financial firms, especially those dealing with CRE debt. Ultimately, I believe a stable market, which we hope will stabilize over the rest of the year, is beneficial for our ability to finance and advance our assets and provide financing to our borrowers. Did I address your question thoroughly?

Yeah, that was great. Thank you for the color there. And another one for me, so just how would you characterize your earnings power right now with how the portfolio stands, at least right now. I know, the first quarter is a little bit of an anomaly here, given the rights offering and likely the cash drag for a portion of the course, I'm curious how Q2 and then even beyond Q2 looks to earnings power, compared to the current dividend? And I know it can be a tough question because it's okay, it is either absent a precede CLO or kind of post pre-CLO?

I believe you're right; it's a bit challenging. If we assume some level of stability, acknowledging that there will be anticipated increases in short-term rates for the remainder of this year and possibly into the next, we have observed these trends at the asset level of our deals. We're seeing that we are pricing deals at wider spreads. The market seems receptive to both of these developments. If these trends persist in a relatively steady and proportionate way, we are confident in our capacity to achieve core earnings that meet market returns. It's not solely about increasing costs; there’s also a favorable mismatch, where our assets exceed our liabilities regarding short-term rates. As those rates rise over time, it should benefit a financial entity like ours. Overall, we remain cautiously optimistic. Provided there isn't significant disruption in the market, similar to the situation in Ukraine, we believe there will be reasonable stability moving forward. This gives us confidence in our ability to deliver competitive returns comparable to our peers for the rest of the year.

Thank you. I appreciate it. Thanks for taking my questions this morning.

Thank you.

Next question is from Stephen Laws with Raymond James. Please go ahead.

Hi, good morning. You covered a lot in the prepared remarks and the last question, so I appreciate everything you've provided so far. Mike, I guess I had a question on a couple of different loans, looks like two of the loans number two and nine, so through your top 10 look to mature in the next coming months and your only retail exposure is supposed to mature in July. Curious to get your thoughts around that, do you expect those to pay off, do you expect extension, just so you know, will we see any extension fees or other fees tied to those, any thoughts on those three loans?

Sure, I will let Precilla or Charlie you can identify those and give thoughts in a second. But broadly speaking, you mentioned the retail assets, it's a pretty small percentage exposure. Both of those assets are performing assets that we feel very good about. So I don't know, we have an answer on the sponsors' plans there on. I am just pulling up the loans here. Precilla, if you have it in front of you, you can speak.

Yeah, it is in page 13, and a supplement.

Got it, so we expect to see positive results moving forward? What's the next point?

Jimmy, if I may, I'll just say that generally these loans are very well credit protected, based on various data points, whether they be VOV or potential purchase offers, and certainly from a refinance perspective. Again, as Jim said, we cannot comment on specific borrower plans but we have currently no concerns on the credit of those assets. And therefore, if we were to assess prepayment ability, I'd say it would be high.

Right, appreciate the comment.

It does raise an interesting point. If you look at the payoff rates over the last few years, particularly in the floating-rate space, many business plans involved quickly completing work and selling assets. This trend shifted around 2017-2018 as the market was exceptionally strong, values were rising, and there was a real housing shortage. Some sponsors who may have planned to exit their investments might find themselves exactly where they expected to be, with an increase in value and performance. However, they may now be considering holding onto their assets instead of selling, which they might not have anticipated. Some sponsors may choose to stay in the bridge loan market a bit longer and transition to fixed-rate financing while opting to hold rather than sell. We anticipate seeing more of this behavior, but we remain confident in our portfolio. The multifamily market, particularly the assets we manage, continues to show a significant shortage across the country. In the past, we’ve observed this in certain markets, but the housing shortage remains a pressing issue, and rising rates likely affect the residential market more than the multifamily sector due to affordability concerns. The reality is there is a tremendous need for multifamily housing and, despite some concerns, the market appears to be quite healthy. Rents are continuing to rise, and while we might see that growth slow somewhat due to inflation worries, we still expect rent increases to outpace expenses, even considering the outlined concerns.

Right. So, I guess as a follow-up, Jim, I know in your prepared remarks you talked about exit fees, $0.5 million this quarter and $1.5 million before. What do you expect that normalized number to be? Is it $1 million right in the middle or is one of these more indicative of a typical quarter or is it seasonal? 1Q always been like?

It is, it is a little bit seasonal, although I think it'd be unfair to maybe say that that's where it's going to end up. I think, the first quarter sorry, I have that. One of my colleagues, we were just looking at this; I think we said 30% to 40%. I think we saw that elevated probably in the last year plus and it's I think, started to move toward that rate in the first quarter. I think that's probably a more realistic, average long-term 30% to 40% annually.

Great, thanks for the comments this morning.

The next question is from Steve Delaney with JMP Securities. Please go ahead.

Thanks. Good morning, everyone. I would like to start with your FL3 that I believe was reworked the second quarter of last year, is that reinvestment period, is it two years or two and a half years? Just trying to find out when that's going to close?

Two and a half? Okay, great.

That's a nice, nice run rate. Okay. Great, nice runway, I guess, for you there. And just an observation, I think in my model, we've got that with a weighted average spread of about like 143 basis points, something of that ballpark. The Arbor deal last week was weighted average plus 235. So I understand and agree with your comments about plus 40 or 50. But you know, if we look back a year or two.

Arbor was 235 last Friday, which is a good increase. It seems your preference is to consider another CLO while monitoring the market. When conditions tighten a bit, you might not go to repo bank lines or build a small portfolio with non-CLO financing if you were at capacity in FL3. Is that correct? I understand you won't say you'll never do that, but would your goal be to expand the overall portfolio beyond FL3 when an opportunity for additional CLO financing arises? Thank you, Steven. We are closely monitoring the Arbor deal. There are currently a couple of deals in the market, with more on the way. As you've pointed out, we won't completely rule anything out, but our preference definitely leans towards using CLO financing. When you set the pricing, you're accepting the market conditions for at least 24 months before considering refinancing. However, this approach allows you to secure financing. It's worth noting that bond investors have not put significant pressure on us regarding leverage, which remains attractive and stable without being subject to market fluctuations. This aspect alleviates many challenges associated with rebuild warehouse financing. With the current structures that have two and a half or longer reinvestment periods, we can substitute assets as market conditions improve. Regarding the Arbor deal, I was a bit surprised that the pricing wasn't tighter, but it fell within our expected range. I believe Arbor and anyone else in this market will find that if they are adding newly originated assets to this vehicle from now on, it remains an excellent option. Our existing assets are aligning with the financing, yet we still need to finance our current portfolio. Therefore, we aim to utilize the CRE CLO market, believing it's the most suitable way to finance these assets. Bond investors appear to share this sentiment, as there is still strong demand for these bonds. Overall, unless a better alternative emerges that encompasses the benefits of stable financing, non-recourse options, attractive leverage, and fixed spreads with reinvestment rights, this remains the best financing source. If the markets function properly, assets and liabilities should continue to move in a correlated manner, supporting this trend.

Yeah, no question. From our perspective as analysts that we agree with you. We think it's by far the preferred. So getting away from leverage and just one quick follow-up if I may, your thoughts on over a period of time, a small capital allocation given your multifamily expertise to either press equity or mezz loans or multifamily? And I'll leave it at that. Thank you.

Sure. We appreciate your question, Steven, and those of you who have been following our calls. We've discussed this for several quarters now. We are interested in allocating resources towards those assets. While they have some leverage at the asset level, they are essentially unlevered, which helps lower our overall leverage ratio at the corporate level. Historically, the options have not been very appealing in terms of returns for LFT. Yields have been compressed in our view, and liquidity in the market has been high, with many institutions offering significant leverage, making it less necessary for borrowers to rely on these options as they did in the past, particularly in commercial real estate. The current situation is partly a result of the low interest rates; it's challenging to price in senior, mezzanine, or preferred financing when rates are in the low single digits. There isn't much room to work with. However, we have seen consistent demand for mezzanine or preferred fees in the construction sector. With rising rates, we anticipate opportunities to explore more of these assets. We are focused on this area and have team members actively investigating it; we believe the yields are starting to look more attractive. Whether we can capitalize on these opportunities in the next quarter or two will depend on market conditions over time, but it has been on our radar for quite a while.

Thanks for the comments.

The next question is from Jason Stewart with Jones Trading.

Hey, this is Matthew Erdner on for Jason. I had a quick question again about the exit fees, given that rates have gone up and the environment has kind of changed, but there's still a lot of competition. Are you guys still able to get the same exit fees on current loans right now that you would have been a year ago?

On average, yes. We've seen that for our typical loans, we're still aiming for a one-point exit fee. There have been times when we've accepted a lower fee for various reasons, usually due to competition. However, we've generally tried to adhere to that one-point exit fee threshold. There was significant pressure over the past year, but I believe that may ease somewhat as there are fewer competitors in the market. Overall, I'd say we've managed to maintain that standard, with some exceptions.

Got you. Thanks. And then a follow-up would be, do you know the multiple that you guys have on the MSR and is that still a strategy that you guys believe in going forward?

It is. It's not a go-forward strategy for us. That's an old legacy asset from prior to when we took over management. The multiple, Charles, you might know off the top of your head, but it's...

Next question is from Christopher Nolan with Ladenburg Thalmann. Please go ahead.

Hi. In your comments earlier, you mentioned that the capital raise was to achieve scale. Do you believe you have enough equity capital now to achieve the scale that you need to compete?

Yeah, generally speaking, considering the size of some of our competitors, we don't need to be the largest, but I do believe there is significant potential for growth to reach the required operating scale, particularly regarding expenses and asset diversification. Therefore, we have more extensive plans to continue growing in the years ahead.

Okay. And then given that, would you consider another dilutive equity raise?

I mean, what I'd say is it was a very long discussion with our Advisors and our Board to get to the point where we did have the rights offering, which was what we thought was in the best interest of the existing shareholders. Obviously, I don't think I can give you a direct answer that says would we or would we not do something in the future like that. But I think you can assume that we're going to do everything we can to benefit our shareholder base. It would only be a decision that we thought was in the long-term best interest for the shareholders.

And any consideration in giving a management fee waiver to support the dividend?

It's not something we've discussed with the Board, but like I said, any decisions like that that we've made would be made in consultation with our management team here and our Board.

Our next question comes from Matthew Howlett with B. Riley. Please go ahead.

Hey, guys. Thinking in a sense of how large the CLO would be if you do pursue that route and then if you get coupons above, let's just say LIBOR plus 400, are we still talking about a low mid-teen return on the equity given maybe still a 200 basis points spread inside that CLO?

Yeah. So in terms of the return profile at that level, I think right now low teens is what we're pushing for. I'd like to see it move up. I think it can with asset spreads, but that's our goal and our bogey. In terms of the size, depending on whether we utilize all of the capital and also the advance rate. Just kind of looking at where the deals are now and expectations, it would be likely somewhere in the $500 to $600 million range.

Okay, got you. And then when I think about the dividend and I think about the core earnings power of the company, I guess the first question is would you consider refinancing that term loan, that high-cost term loan you have? Second, we talk about ROEs being similar to peers. Put your core EPS run rate in the 8% to 10% sort of range and we're talking about 10% ROE, can we expect over time the dividend to get up to that range if you hit your targets?

I believe that our value relative to book has declined, particularly with the market conditions during 2022. Our goal is to increase the overall yield based on market yield, which is directly linked to the stock price. This creates a balance we need to manage, and we usually measure our performance against book value internally. I appreciate your insights, but I seem to have lost track of the other part of your question.

On the term loan, on that percentage?

The term loan is, I think we said this, it's got some protections that are built in for the lender in terms of lockout and or prepayment fees. So the cost has been fairly high to refinance it at this point. I mentioned, I think on our prior call or another call where we've worked with that lender, they've modified that and worked with us because they like the risk profile. They understand where it was on a relative to market and we're continuing to monitor that and measure the timing. The prepayment penalty is obviously declining over time, but it's something that we evaluate regularly and are hoping to be able to refinance that in some form or another over the next several quarters or a little bit beyond that. But obviously market dependent and negotiations with our current lender and things like that.

Do you think the market is around 5% to 6% today? I'm just curious where you think the term loan market is today for your caliber?

That's probably correct. Given the volatility, we are actively discussing with various parties what the minimum cost needs to be for the prepayment to be viable. If it falls at the very low end or even lower than expected, it might start to seem feasible. However, realistically, it's likely a few quarters away. The market has shifted rapidly, making it challenging to pinpoint the exact situation, but that aligns with recent trends.

Okay, that would involve significant savings to achieve. Do you have any additional insights on the preferred market, or should we concentrate solely on the CLO at this time?

Right now I want to focus on the CLO and I want to get that done. You mentioned the term loan. That's something we want to continue to explore. But certainly as we grow we really want to look at the equity markets, common and preferred. But obviously depending on the cost of what that preferred looks like we're going to need to evaluate.

Thanks a lot.

Thank you.

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

I just want to thank everyone for the lot of good questions. Obviously, please follow-up with me or the team here. Appreciate the support and continued interest and look forward to speaking to you over the coming quarters. Have a good day.

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