Earnings Call Transcript - LFT Q1 2023

Operator, Operator

Good morning and thank you for joining the Lument Finance Trust First Quarter 2023 Earnings Call. Today's call is being recorded and will be available on the company's website. I would now like to turn the call over to Charles Duddy with Lument's Investment Management. Please go ahead.

Charles Duddy, Investment Management

Thank you and good morning, everyone. Thank you for joining our call to discuss Lument Finance Trust's first quarter 2023 financial results. With me on the call today are James Flynn, CEO; and James Briggs, CFO. On Thursday, we filed our 10-Q with the SEC and issued a press release, providing details on our fourth 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. 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 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 sec.gov. I will now turn the call over to James Flynn. Please go ahead.

James Flynn, CEO

Thank you, Charlie. Good morning, everyone. Thank you for joining the Lument Finance Trust earnings call for the first quarter of 2023. We would like to begin by discussing the current economic environment. While there have been signs of stability, the multifamily investment market continues to undergo transition as lenders and investors adjust to higher interest rates, economic uncertainties, and capital markets volatility. Year-over-year, commercial real estate investment activity has decreased as buyers and sellers reassess financing costs and seek new norms for asset valuations and structures. Despite rising recessionary indicators and potential negative impacts from the recent banking crisis, the robust employment market supports ongoing growth in the multifamily sector, albeit at a slower pace than in previous years. We anticipate rents will outpace expenses and believe that the credit quality of middle-market workforce housing, our focus area, remains an attractive opportunity. In the first quarter, we observed an annual growth rate of 4.5% for multifamily assets in the US. While this is a notable drop from the 15% increase in Q1 of 2022, it still exceeds the pre-COVID average of 2.7%. The overall multifamily vacancy rate rose by 30 basis points quarter-over-quarter in Q1 to 4.9%. However, this is less than the 70 basis point increase observed in Q4 of 2022 and the 90 basis point increase seen in Q2 of 2022, suggesting that supply and demand dynamics may start to stabilize. New construction deliveries reached 58,600 units in Q1, contributing to a four-quarter total of 332,200 units, slightly below the 2022 annual total of 343,000 units. If this trend continues, the slowdown in construction could enhance market fundamentals. However, property sales volumes, which drive acquisition financing opportunities, have significantly declined, showing a 64% decrease in Q1 compared to the same period last year. This marks the lowest Q1 transaction volume since 2014 and is 25% lower than the average between 2013 and 2019. In the long run, we believe that the credit profile of middle-market housing will continue to support favorable supply and demand dynamics, demographic trends, and long-term rent growth, presenting an appealing investment opportunity for our shareholders. Our multifamily investment portfolio is performing well. Although we recorded a realized loss on our only office loan this quarter and adjusted the risk rating on some multifamily assets due to the elevated interest rate environment, the rest of our portfolio remains strong. In the bridge lending market, we are seeing tighter lending standards and increased pricing on new loans, although there has been some stabilization recently. Opportunities have decreased alongside the decline in acquisition transaction volume, but we expect the average spread in our investment portfolio to rise as we reinvest as loans mature. Regarding the ongoing volatility in the banking sector, particularly among smaller regional banks, we have noticed a reduction in credit availability and a less aggressive approach from banks competing for financing opportunities. This pullback could create significant openings for non-bank platforms like Lument to access attractive opportunities and grow market share as investment sales volumes recover. The broader capital markets remain volatile, with the CRE/CLO market showing some positive trends compared to Q4 of 2022. However, uncertainty has increased due to recent developments in the banking industry. According to Wells research, AAAs managed CRE/CLO bond spreads averaged 260 basis points as of May 5, consistent with previous levels. Meanwhile, BBB minus bond spreads rose from 660 basis points to 850 basis points, reflecting the ongoing market volatility. We have historically utilized CRE/CLOs to finance our investments, which we believe remain an attractive source of financing due to favorable leverage and non-recourse market features. To fully deploy our capital on a leveraged basis and leverage our origination capabilities, we are focused on executing loan financing transactions. While we are ready to quickly pursue a CLO in public markets if conditions improve, we are also exploring other financing options, including note-on-note financing, A-note structures, warehouse facilities, and private transactions to replicate CLO market conditions. As for our dividend, on March 16, we declared a quarterly common dividend of $0.06 per share for Q1 2023, consistent with our dividend levels over the past four quarters. Our GAAP EPS for Q1 was $0.09, providing a strong coverage ratio for this dividend. We anticipate the potential to increase our dividend when we can execute a long-term loan financing transaction. We will continue to focus our capital deployment on commercial real estate debt investments, particularly in multifamily. Our manager is one of the largest capital providers in the multifamily and seniors housing sector, having executed over $10 billion in transactions in 2022 and servicing nearly $50 billion of assets with approximately 600 employees across more than 30 offices. We believe that our platform's scale and expertise will continue to benefit LFT's investors. Now, I would like to turn the call over to Jim Briggs for further details on our financial results. Jim?

James Briggs, CFO

Thank you, Jim, and good morning, everyone. On Thursday evening, we filed our quarterly report on Form 10-Q and provided a supplemental investor presentation on our website, which we'll be referencing during our remarks. The supplemental investor presentation has been uploaded to the webcast as well for your reference. On pages four through eight of the presentation, you will find key updates and our earnings summary for the quarter. The first quarter of 2023, we reported net income to common stockholders of approximately $4.6 million or $0.09 per share. We also reported distributable earnings of approximately $173,000 or $0.00 per share. There are a few items I would like to highlight regarding our Q1 P&L. Beginning with net interest income, our Q1 net interest income was $8.2 million compared to $6.9 million in Q4 of 2022, which represents an approximate 20% increase quarter-over-quarter. Short-term interest rates continue to remain elevated, which we expect will continue to benefit LFT's earnings profile over the coming quarters. The primary contributor to the increase over Q4 was approximately $1 million in exit fees and prepayment penalty interest on loan payoffs in Q1, where we saw approximately $200,000 in Q4 in the form of credits for waived exit fees that reduced expenses reimbursed to our manager. Speaking of payoffs, during Q4, we experienced $52 million of loan payoffs, which represents a slight increase relative to $45 million of loan payoffs during Q4. The $52 million of payoffs experienced during the quarter represents a 19% annualized payoff rate. While this payoff rate is below our long-term historical averages, we expect to continue experiencing similar payoff speeds over the coming quarters due to persistent interest rate volatility and economic uncertainty. The primary difference between our distributable and reported net income during Q1 was a $4.3 million or $0.08 per share realized loss on the Chicago office property loan, which was fully reserved for at year-end and which we discussed during the year-end call. As discussed on our year-end call on February 27, 2023, the property was ultimately sold via auction for $6 million, and we've accepted a discounted payoff from the borrower in that amount. We no longer have any exposure to the office sector. Moving on to expenses. Our total expenses were $2.7 million for Q1 versus $2.5 million in Q4. This quarter-over-quarter increase was primarily driven by some seasonality in professional fees. I'd like to also point out that as we've launched signal on these calls, we adopted CECL on January 1 of 2023. As noted in our filing, we use the probability of default loss given default model combined with a subset of historical loan loss data licensed from Trepp that most closely represents our focus on transitional bridge loans. We recorded an approximately $3.6 million or $0.07 per share implementation adjustment on January 1, which was recorded as a reduction to stockholders' equity. Changes in our allowance subsequent to the January 1 implementation will be reflected through earnings. In the current quarter, we recognized an approximately $200,000 benefit from the change in allowance, which was a function of some loan payoffs, partially offset by an uptick in reserve for the remaining portfolio that is a function of changes in the macroeconomic forecast and changes in the portfolio risk profile. As of March 31, the company's total book equity was approximately $241 million. Total common book value was approximately $181 million or $3.46 per share. Excluding the impact of CECL in the quarter, both the January 1 implementation and change in the quarter, book value per share would have increased sequentially over Q4 by approximately $0.02 per share. I will now turn the call over to Charles Duddy, who will provide details on our portfolio composition and investment activity.

Charles Duddy, Investment Management

Thank you, Jim. Jim Flynn at the top touched on the broader economic conditions, which have continued to be volatile. Due to these conditions, new acquisition activity in the market has remained relatively slow and the number of bridge opportunities has declined. However, we are continuing to evaluate new opportunities on a selective basis, with a heightened focus on new construction lease-up transactions, as well as timing bridges to HUD, and less of an explicit focus on value-add deals while we are still reviewing attractive value-add opportunities. At the same time, we have seen and expect payoffs speeds to temper in the near-term as well, reducing our capacity for new investments relative to prior quarters. We anticipate this trend continuing for the remainder of 2023 while interest rate increases moderate and the general real estate market resets to the new interest rate environment. During Q1, LFT did not originate or acquire any new loan investments. We experienced $52 million of loan payoffs during the quarter and at quarter end, our total loan portfolio outstanding principal balance was $1 billion. The portfolio consisted of 67 loans with an average loan size of $15 million, which provides for significant asset diversity. Our portfolio at quarter end was 90% multifamily and we have no exposure to office. With regards to retail, as of 3/31, we owned one $17 million loan backed by a retail property. Subsequent to quarter end, this retail asset ultimately paid off via successful refinance. Therefore, as of today, other than one self-storage asset, the LFT portfolio is backed 100% by multifamily and seniors housing assets. Due to our manager's strong focus in multifamily and seniors housing, we continue to anticipate that the majority of our loan activity will be related to these asset classes. I'll also touch on risk ratings. As of 3/31, we classified one $12.7 million multifamily loan as risk rated 5. This loan was also rated risk-rated five as of 12/31, and while we have not reserved for any specific loss on this loan and do not currently expect any loss, we have filed a foreclosure of receivership and guarantee enforcement case and will continue to monitor and keep our shareholders informed. Our investment return profile has a strong positive correlation with rising interest rates and we have included a rate sensitivity table on page 11 of our supplemental earnings presentation and overall, we expect LFT to benefit from elevated short-term rates. Since quarter end, the one-month term SOFR rate has increased from 4.8% to over 5% today. We anticipate a continued positive impact over the coming quarters. On the financing side, as of 3/31, our loan portfolio was financed with one series CLO securitization with an average weighted spread of 143 basis points over one-month LIBOR and an advance rate of over 83%. This CLO has a reinvestment period running through December of 2023 that allows principal proceeds from repayments of the mortgage assets to be reinvested in qualifying replacement assets subject to certain conditions. With that, I'll pass the call back to Jim Flynn for some closing remarks.

James Flynn, CEO

Thank you, Charlie. We look forward to continuing to update you on our progress in this volatile market and continue to keep you informed. Now, I'd like to open the call to questions. Operator?

Operator, Operator

Thank you. We will now begin the question-and-answer session. The first question comes from Crispin Love with Piper Sandler. Please go ahead.

Crispin Love, Analyst

Thanks, and good morning, everyone. First on fundings and acquisitions, I think this is the first quarter that I can recall where you didn't have any funding. So just going forward on fundings, would you expect fundings to remain depressed over the near term just given multifamily dynamics? Are there other sectors, maybe seniors, that you would expect to grow over the next few quarters? And then just looking at the second quarter, would you expect fundings to match payoffs in the second quarter, or do you think they'll fall short?

James Flynn, CEO

Yeah. So thanks for the question. With respect to fundings, in terms of the quarter, it's really timing. So I think answering the second question is informative of that, which is yes, we would expect our fundings to match our payoffs. As I mentioned earlier in the call, we continue to evaluate potential opportunities and private transactions to replicate or find a potential leverage solution that looks or is as attractive as a CLO. If we're able to execute on a transaction such as that, then obviously our fundings would increase above payoffs because we would have more capital to deploy. And we do have assets that we hold on the manager's balance sheet that meet the investment criteria for LFT. So from that standpoint, we're not concerned about fundings. In terms of the overall market, I mean the biggest driver of this market or the bridge market in particular is clearly acquisitions. You heard my comment earlier about acquisitions being down nearly 70% quarter-over-quarter just in the market. Anecdotally, I can tell you in other areas of our business, including agency where we've seen significant levels of refinance activity relative to acquisition activity, it has been relatively consistent in terms of the overall market. And I will also say that at recent conferences and discussions with peers across the industry, I think most people have suggested that they've seen an increase in business activity that they're evaluating. That hasn't fully translated into increased activity in terms of transactions getting completed, but we've seen a lot more transactions being evaluated. I think that suggests that buyers and sellers are moving closer together in terms of the bid-ask spread on valuations. I think owners are more accepting and familiar with understanding the financing options that are available today, not the ones that were available a year ago. And despite the challenges in the market with the banking industry as the most recent example, we have seen some relative stability in terms of spread and pricing. Some of that is lower transactions. But I think there's some reason to have some cautious optimism that we're moving towards something that becomes a more stable environment, and that's a much better one for all of us to operate in.

Crispin Love, Analyst

All right. Thanks. That's all helpful. And then just on credit quality, I heard your comments on the portfolio and the shift in risk ratings due to the rates and uncertainty out there. But as it relates to your CLO, are you able to share any underlying credit stats on the CRE CLO and how it's performing?

James Flynn, CEO

In terms of the individual assets, nearly all of the assets held on the balance sheet are in the CLO. If you refer to the supplemental information we've provided, you'll see that those assets are almost entirely within the CLO. As Charlie mentioned, we've experienced a retail deal payoff, which was our most recent one, as well as the office deal we've discussed in previous quarters. The primary challenges facing most transactions are the rising inflationary costs and the question of whether their rental increases in their business plans can sufficiently outpace expenses compared to the original plan. We believe that our portfolio is performing well in this environment. It's important to note that overall interest rates, not just the spread, have roughly doubled for many of these entities since they initiated their business plans, and this doesn’t account for inflationary pressures on other expenses. Despite these challenges, they are still achieving rental increases and progressing with their plans. Recently, we’ve observed that larger, well-capitalized sponsors are looking for opportunities to refinance due to the current costs of short-term financing. Charlie, if you have anything to add regarding the overall portfolio, please feel free.

Charles Duddy, Investment Management

Sure. To address the question, we have not reported the credit criteria of the CLO separately from LFT as a whole because over 90% of LFT's assets are within the CLO. Everything is current as we mentioned earlier. I want to highlight that all deals in the portfolio have interest rate caps, which is beneficial for the debt service coverage ratio in the current environment with the rapid increase in SOFR. Additionally, regarding the loans rated for risk this quarter, only one is expected to mature within the next six months, giving us some time before the maturity wall increases. This deal, a $13 million multifamily property, is performing well, and we have received a payoff request from the borrower for a refinance. Therefore, we do not anticipate any maturity default or issues with this deal.

Crispin Love, Analyst

I appreciate all the color. I appreciate taking my question. Thanks.

Operator, Operator

The next question comes from Steve DeLaney with JMP Securities. Please go ahead.

Steve DeLaney, Analyst

Good morning, everyone. It's a pleasure to be on the call today. Regarding the risk-weighting question, you reported a weighted average risk rating of 3.2 times. Could you provide details on how many, specifically, four and five-rated loans there are as of March 31? Thank you.

Charles Duddy, Investment Management

Thank you for joining, Steve. I can address that. Our total portfolio consists of 67 loans. Among those, one is rated a risk level of five, and that rating remained unchanged since December 31. Additionally, there are 12 loans rated at a risk level of four, which represents 18% of the portfolio. As Jim noted, none of these risk ratings indicate performance issues. We are simply taking a more cautious approach in our assessments based on our analysis of business plans, debt service coverage ratios, and current market conditions. This is reminiscent of the adjustments made during COVID, where many in the industry slightly increased their risk ratings, and we are experiencing a similar scenario this time without any specific concerns regarding individual assets.

Steve DeLaney, Analyst

Thank you for the comment on the retail loan. That was actually my first question, to get an update and profile on that. However, since it has been paid off, we won't need to discuss it further. I noticed that you have a $12 million multifamily loan rated at a five, but you mentioned that you do not expect a loss at this time. Could you elaborate on that? We've been influenced by commercial mortgage REITs that have indicated it's typical to rate a loan at five when a principal loss is anticipated, which might be an oversimplification. Hearing that you're rating it at five while not expecting a loss seems a bit contradictory. Can you provide some insight on why it holds a five rating and what positive characteristics lead you to believe you will be fully repaid? Thank you.

James Briggs, CFO

Hey Steve, thanks for the question. It's Jim Briggs here. Regarding CECL, you’re correct that the risk ratings, particularly the fives, are typically based on evaluations pulled from the pool. More often than not, those loans do have some level of associated loss. This particular loan is in monetary default, which is why we assigned it a five. However, based on our current analysis, we believe we will recover our full investment there.

Steve DeLaney, Analyst

Got it. So stop, there is no interest reserve. They're not paying out of pocket. And I guess you probably have it on non-accrual. Would that be accurate?

James Briggs, CFO

Yes, that's right. It's correct on all of those.

Steve DeLaney, Analyst

Okay. Excellent. And Jim, just one final thing. I believe we are still feeling the effects of the Fed's aggressive rate hikes. Many believe that the recent 25 basis point increase was the last one. This has caused significant pain and uncertainty in the market over the past year. However, the futures market suggests that by Thanksgiving, the Fed may start reversing course and that in 2024, we could see a notable drop of over 100 basis points in short-term rates. Since higher rates have contributed to these issues, do you think the prospect of lower rates next year could alleviate most of the problems in the real estate markets? Thanks.

James Flynn, CEO

Thanks, Steve. Fear probably is a strong word.

Steve DeLaney, Analyst

Okay. Relieve, relieve.

James Flynn, CEO

No. The most crucial factor in transactions is the need for stability in pricing and financing expectations to enable buyers and sellers to exchange assets. This has been the primary driver. The rapid increase in rates has created a significant slowdown. Recently, there has been some stability, which contrasts with the earlier uncertainty about whether the Fed would raise or lower rates at each meeting. While there may have been some doubts about the latest rate decision, the overall consensus has eased concerns. I believe lower interest rates will help address various portfolio issues for sponsors regarding their costs. However, it's important to note that lower rates could coincide with worsening economic conditions, depending on inflation control. If rates maintain their current levels or decline modestly, I expect more transactions to occur. There's still a substantial supply-demand shortage in housing, particularly in the middle-market sector. Current construction deliveries are limited, and few new starts indicate that this issue won't resolve soon. Thus, there will be ongoing demand for transactions in the housing sector. Lower rates could facilitate this, provided any economic downturn isn't too severe. Overall, I anticipate a significant increase in transaction volumes in the latter half of the year, especially toward the end, compared to the slower first quarter, indicating a healthier transaction environment.

Steve DeLaney, Analyst

James, thank you so much. I really appreciate that perspective. You’ve got a front-row seat, and thank you for that detailed response. Stay well.

James Flynn, CEO

Thanks, Steve. You too.

Operator, Operator

The next question comes from Stephen Laws with Raymond James. Please go ahead.

Stephen Laws, Analyst

Hi. Good morning. I have a follow-up question that combines topics about credit and CECL. It seems there were several loan payoffs along with some downgrades. I was surprised to see that despite the average rating increasing from 3.0 to 3.2, the CECL reserve actually released a couple of hundred thousand in the first quarter and did not build up in relation to the general reserve. Can you explain the difference between the rating downgrades and the CECL reserve release?

James Flynn, CEO

The loans that paid off had slightly higher reserves compared to the rest of the portfolio, which led to the release. While the risk ratings have gone up, the fundamentals from the collateral standpoint remain strong. Therefore, the potential loss hasn't increased significantly.

Stephen Laws, Analyst

Thank you. As a follow-up, I wanted to discuss options and possibilities related to non-CLO financing. When are you considering implementing something like that? Are you waiting until closer to the replenishment period, which you have until the end of the year? Are there any leasing options available? What do the return on equities look like, and what pricing or options do you have? Can you explain how we might expect this to develop over the remainder of the year?

James Flynn, CEO

Sure. For those closely monitoring the market, the early part of this year indicated a promising opportunity for securities, financing, and especially series CLOs. Several of our peers and we were actively considering similar public transactions, but then we witnessed the second and third largest bank failures in US history, which disrupted that stability. If you had asked me in February, I would have anticipated numerous public financings by now, but that perspective has shifted. We are still in talks with some banking partners and private investors regarding the potential for private transactions. I believe there is interest from private investors to pursue deals that would typically be done in the public market if those markets remain stalled. I can't predict when we might accomplish that, but discussions show heightened interest in exploring private deals if public options are not available. We will keep evaluating these possibilities and monitor the public markets. We've also sought traditional financing from our banking partners, aiming for reasonable adjustments in terms and conditions. While our approach hasn't fundamentally changed over the past quarters, the interest from counterparties seems to be stronger now than it has been during most of that time.

Stephen Laws, Analyst

Yes. No, certainly that window was very short and the bank issues closed that quickly. To your earlier point hopefully, some stabilization in rates can help things on ball. I do have one last follow-up. As you have discussions around extensions, any pushback or hesitancy of borrowers to buy new caps? Are you looking for other structural protections and loans around extensions?

James Flynn, CEO

I believe that every borrower has considered the cost of new caps and hasn't been particularly enthusiastic about it. While it's not exactly resistance, there are definitely alternative ways we could collaborate with them. So far, we haven't had to engage in too many discussions about this. Generally speaking, we’ve been clear that this will be part of any modifications or extensions we pursue. Most of our borrowers have accepted this reasonably well and are trying to explore other ways to improve conditions. What borrowers are contemplating is that the cost of financing has risen, as have cash costs. Consequently, there seems to be an increased interest in making payments to reduce principal, which we have discussed more recently compared to when conditions were more favorable. The rising costs of financing, caps, and short-term rates have led some borrowers to consider that if they can reduce their leverage, we might assist them in other areas. From our viewpoint, we are often ready to agree because deleveraging helps lower the risk profile. Additionally, as Steve noted, when we analyze the interest rate curve, many borrowers anticipate a decline in their interest costs once they get through this year. They are highly motivated to work with us to ensure we are comfortable with their loans. In the few instances where we've actively negotiated, I've been quite pleased with the fairness both sides have demonstrated. Some recent payoffs were for assets we had concerns about regarding their leverage rather than their quality or condition, and they decided to pay off. Sometimes, it’s just hard to pinpoint the exact reasons.

Stephen Laws, Analyst

Yes. Well, no, it's been a great discussion in the Q&A, and I certainly enjoyed it. Appreciate it.

Operator, Operator

The next question comes from Matthew Erdner with JonesTrading. Please go ahead.

Matthew Erdner, Analyst

Hey, guys. It's Matthew on for Jason this morning. Thanks for taking the question. You mentioned long-term rent growth on multifamily. Could you describe, I guess, what the business plans were that were underwritten two years ago, say, compared to now, and the expectation for rent growth? And then can I get your guys' view on rent growth going forward as well?

James Flynn, CEO

Yes. When it comes to rent growth, it's important to analyze it on a case-by-case basis. On a broader scale, we believe rent growth will continue in the range of about 2%, possibly approaching 3%, but not exceeding that. This figure represents a national average, and it's crucial to consider specific markets to get a clearer picture. Regarding our business plans, we don’t usually make detailed public statements, but the rent growth we’ve seen has mostly aligned with our expectations for the markets in which buyers are operating. While it's not universal, in many cases, rental growth is occurring, though it's being offset by higher expenses related to debt and inflation. This has posed a significant challenge for sponsors. There are certainly submarkets where we have properties that have not met rent growth expectations. After renovating some units, the anticipated increase in rent has not materialized, which has led us to work more closely with certain borrowers, one of whom we recently had a payoff from. Looking ahead, there may be opportunities in adjusting prior bridge loans to more suitable debt levels. Competitors and alternative deals could provide chances to benefit from potential lower rates and cost-saving measures already in place, even if they come with reduced rent growth. Nevertheless, we are still observing areas where rental growth can reach between 5% and 10% in select markets, compared to previous years where we saw increases of over 20%, especially for rehab projects. There are numerous markets across the country that fit this description. However, I don’t expect this trend to continue in the next few years. Nonetheless, the demand for rental housing remains strong, and I believe there will still be opportunities available, though the dollar volume of these opportunities may not reach the levels seen in late 2019, 2020, and 2021. Overall, I think rental growth in our portfolio, as well as in others, hasn’t been the main contributor to performance challenges; rather, it's been driven by rising leverage costs and inflationary pressures.

Matthew Erdner, Analyst

Okay. That's helpful. Thanks for your answer.

Operator, Operator

The next question comes from Howard Blum with UBS Financial Services. Please go ahead.

Howard Blum, Analyst

Hi. Just looking out into the future, if you see these continued problems with regional banks in the real estate area, is it reasonable to expect spreads to widen and giving us better returns in terms of new loans?

James Flynn, CEO

I think the short answer is yes, that's a logical conclusion. Over the past five or six years, we have observed that when opportunities arise, certain pockets of capital enter the market relatively quickly, particularly debt funds, which help keep those levels somewhat muted. Overall, the spread in our portfolio is narrower than the spreads on a new portfolio due to its vintage. Therefore, I anticipate spreads in the fours. A few years ago, spreads in the fours, perhaps more than a few years ago, indicated a decline; we are still seeing some transactions occurring even below that. Your point is valid. If there’s a significant pullback in lending, life companies are not really active in this space; they have been the most engaged lenders. Fannie, Freddie, and FHA are also not participants in this market. Thus, we have mortgage REITs, debt funds, and banks. Banks are certainly going to pull back, creating many opportunities in the form of REITs and both public and private debt funds. Consequently, there should be a chance for some spread expansion, which, in my view, would need to be accompanied by an increase in transaction volume. If there are numerous parties competing for the same deal without other opportunities, that tends to keep things depressed.

Howard Blum, Analyst

Thank you.

Operator, Operator

The next question comes from Greg Vineet, a Private Investor. Please go ahead.

Unidentified Analyst, Analyst

Good morning. Can you clarify whether the $50 million you entered the second quarter with has been reinvested, and what your current cash position is?

Charles Duddy, Investment Management

Greg, this is Charlie. I can start.

James Flynn, CEO

Charlie, go ahead.

Charles Duddy, Investment Management

We are currently working on transferring some assets, so we expect there to be acquisitions by LFT during the quarter. We don't have a final number yet, and we haven't historically reported mid-quarter asset balances. However, there are assets on the manager's balance sheet that we are in the process of transferring. Therefore, we expect the cash balance to decline from 331 to 630.

Unidentified Analyst, Analyst

Okay. Second question from a retail investor's perspective. Looking at the table or page number 10 for the weighted average risk rating, when you purchase a loan from your parent company, are you acquiring a loan rated one or two for the portfolio, or what criteria do you use?

James Flynn, CEO

I mean, yes, they are all performing.

Charles Duddy, Investment Management

I think that's correct. The criteria for acquiring assets from the parent are as follows: first, all loans are transferred at fair market value; second, the assets need to be performing; and third, they must be eligible for financing facilities. It's possible that whether it's a one or two or three, they all fall within the performing category. As long as our asset management group has no concerns about performance and the pricing aligns with the market, we wouldn't expect to transfer anything deemed higher risk.

Unidentified Analyst, Analyst

I guess I would say visually when you look at the start and if you are a retail investor and you're looking at it, what is the difference in pricing if you're looking at buying a one, or acquiring a one from your parent versus a three? Is there a huge difference in pricing for the trust?

James Briggs, CFO

I think one thing to note is that the factors influencing pricing are loan-to-value ratio, debt service, and occupancy, which also determine risk rating. There isn't a significant difference between them. For example, if a one rating corresponds to a 60% LTV loan and a three rating corresponds to a 75% LTV loan, there would be some theoretical change in the mark based on the loan's leverage and risk profile, but it varies from asset to asset. Go ahead, Jim.

James Flynn, CEO

We've experienced significant changes in spreads and rates recently. If you were to originate a new loan today that you initially deemed to have a lower risk than it actually does, we don't simply account for that at the start; it’s part of the underwriting process. Typically, this is reflected in the spread. So when comparing two deals originated at the same time, if one is assessed as slightly riskier, we anticipate a premium for that risk. This doesn’t mean that the asset is undervalued in the market; it indicates that it might trade at a higher spread.

Unidentified Analyst, Analyst

All the loans come from the parent company, which aligns with your past business model. These loans are all underwritten by the parent. You handle your own lending, meaning you're not purchasing loans from regional banks. Is that correct?

James Flynn, CEO

You do. That's correct.

Unidentified Analyst, Analyst

And that's what you plan to keep doing? Or might your parent look into purchasing a loan if regional banks need to offload loans for liquidity reasons? Is that something you would consider after completing your own underwriting?

James Flynn, CEO

I don't want to suggest that there aren't many considerations we discuss regarding capital at the parent level. So I wouldn't rule out the possibility entirely, but that's not really the business plan for our parent, Lument, or LFT. We expect to continue originating loans through our own production team and underwrite them ourselves from the start. If a significant opportunity arises due to the turmoil and disruption in the banking market, we might consider it, but that doesn't mean LFT would need or want to get involved. It's a topic we would need to discuss with the Board. Generally, this isn't something we're focused on.

Unidentified Analyst, Analyst

From a shareholder's perspective, I would prefer to have a lower spread and focus on more first and second positions. I think this might improve your stock price. I recognize that loans issued a year ago were underwritten, but moving forward, if you communicated to your investors that you would start with more firsts and seconds while accepting a smaller spread, it could be beneficial. Your stock currently yields 14%, and as shareholders, we are looking for a return off our capital rather than just a return on it. Personally, I would opt for a lower return on capital in exchange for a first or second position in the current environment. This approach might lead to a higher stock price from the investment community.

James Flynn, CEO

Well, I hope that that's true. And to be clear, we don't underwrite deals that are starting out at a higher risk rating, right? I mean, I'm not suggesting you said that, but I just want to clarify. But yes, point well taken.

Operator, Operator

The next question comes from Christopher Nolan with Ladenburg Thalmann. Please go ahead.

Christopher Nolan, Analyst

Hi. Given where your stock price is, are you giving any consideration to share repurchases?

James Flynn, CEO

So it's something we've talked about always with the Board. The challenge that this platform has, as we've discussed, is we're trying to raise more capital and not less. And the challenge with share repurchases is it just takes even more flow out of the market. So it's not a no, but that is a big part of the consideration that we've talked to the Board about. We do believe certainly that the yield that the stock is trading at is far in excess of where the risk is. So it's something we'll continue to look at. It's not at the forefront of what we're thinking admittedly, but it is something that we continue to evaluate and discuss.

Christopher Nolan, Analyst

How low does the stock price have to go relative to book for it to be in the forefront of capital planning discussions?

James Flynn, CEO

I don't think that there's a direct answer to that that we've stated publicly, but it is something that we've talked about with the Board.

Operator, Operator

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

James Flynn, CEO

I want to thank Charles. I want to thank the group. That was a good call. I'm glad for all of the questions. Please feel free to reach out to me or the team here with any follow-ups. We'd be happy to keep everyone informed and look forward to speaking to you again next quarter. Thanks all.

Operator, Operator

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