Lument Finance Trust, Inc. (NYSE:LFT) Q2 2022 Earnings Conference Call August 9, 2022 8:30 AM ET
Company Participants
Charles Duddy – MD
James Flynn – CEO & Chairman
James Briggs – CFO
Michael Larsen – President
Conference Call Participants
Crispin Love – Piper Sandler & Co.
Stephen Laws – Raymond James & Associates
Steven Delaney – JMP Securities
Matthew Erdner – JonesTrading
Operator
Good morning, and thank you for joining Lument Finance Trust Second 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 conference over to Charles Duddy with Investor Relations at Lument Investment Management. Please go ahead, sir.
Charles Duddy
Thank you, and good morning, everyone. Thank you for joining our call to discuss Lument Finance Trust’s second quarter 2022 financial results. With me on the call today are James Flynn, CEO; Michael Larsen, President; and James Briggs, CFO.
On Monday, we filed our 10-Q with the SEC and issued a press release, which provided details on our first quarter results — excuse me, our second 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 may continue to be amplified by the COVID-19 pandemic. It is not possible to predict or identify all such risks. Listeners are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date hereof. The company undertakes no obligation to update any of these forward-looking statements.
Furthermore, certain non-GAAP financial measures will be discussed on this conference call. The 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.
James Flynn
Thank you, Charlie. Good morning, everyone. Welcome and thank you for joining the Lument Finance Trust earnings call for the second quarter of 2022. During Q2, we continue to deploy our capital into commercial real estate debt investments with a focus in multifamily assets. Our manager is one of the nation’s largest capital providers in the multifamily and seniors housing space, executing over $17 billion in transaction volume last year, and servicing over $50 billion — a $50 billion portfolio, employing 600 employees in more than 30 offices nationwide.
We believe the scale and expertise that this broad platform has and will continue to benefit the investors of LFT and provide strong support in the execution of our investment strategy. First, I’d like to begin by addressing the current economic environment. The multifamily market has experienced a period of transition over the last few quarters as lenders and investors react to inflationary pressures, geopolitical risks, capital markets volatility and higher interest rates. Investment activity in the market has declined as asset buyers and sellers work towards reassessing financing costs and finding a new normal for levels of asset valuations and financing structures.
Despite technical recessionary indicators increasing, the strong employment market remains supportive of continued rent growth for multifamily assets, and we believe that the middle market housing asset class remains extremely attractive. Despite rising debt service costs for borrowers, we believe that the supply demand dynamics, demographics and rent growth trends continue to support the asset class, which creates an attractive investment opportunity for shareholders of LFT over the long term.
Our multifamily investment portfolios performed extremely well. And while we did book a $0.01 per share unrealized loss reserve against an office loan this quarter, which we will discuss in more detail later during the call, the remainder of our book continues to demonstrate very strong performance. More specifically, within the bridge lending market, lending standards have tightened and spreads on new loans have increased industry-wide over the last few quarters. We are being more selective with regards to credit and the average assays appraised loan-to-value on new loans being offered by our manager has decreased meaningfully.
Our manager is currently quoting new transactions at spreads above 4%, whereas a few months ago, we were seeing loans priced with spreads in the low to mid-3%s and sometimes lower. We would expect that the average spread on LFT’s investment portfolio will increase from today’s average level as the portfolio grows. With this backdrop, the broader capital markets have remained volatile and dislocated. The CRE CLO market had a relatively strong start to the year, but market conditions have deteriorated considerably since March, and several transactions have been completed with increasing costs with total spread on the investment-grade bonds growing to more than 300 basis points over SOFR.
That compares to a spread of 143 basis points over LIBOR on LFT’s $1 billion CRE CLO, which we financed in June of 2021. While the most recent new issue multifamily CRE CLO in the market priced above total spread above the investment grade bonds, it was a modest decrease to the prior transactions, which we have not seen in many months. In order to continue growing our portfolio on a leveraged basis to fully deploy the capital we raised in Q1 of this year and take advantage of our manager’s significant pipeline of loans, we are actively focused on executing a loan financing transaction to leverage newly acquired loans.
We have historically utilized CRE CLOs to finance our investments and continue to believe that market provides an attractive financing source due to the favorable leverage structure of nonrecourse and non-mark-to-market features. However, due to the dislocated capital markets, we elected to delay our next CRE CLO financing efforts. While we are prepared to execute a CLO quickly to the extent market conditions improve, we are also actively exploring alternative financing options, including note-on-note financings and AB note structures.
In fact, we have received preliminary feedback from rating agencies suggesting the credit quality of our pool will be received well by the market. Overall, it is clear with the cost of liabilities increase and market spreads on assets are also increasing. We believe it is likely that newly originated assets going forward will have wider spreads in existing assets, in line with the increases in the cost of financing. We believe that the increase in short-term rates will also have a benefit to LFT over the short and long-term.
With regards to our dividend, we previously declared a quarterly common dividend of $0.06 per share for the first and second quarter of 2022. This level reflected a resetting of our dividend, taking into account our Q1 capital raise and increased share count. In addition, the dividend reflected the anticipated drag on net income to common shareholders as we work to deploy the newly raised capital on a leverage basis. We would expect our earnings to continue to be pressured during Q3 until such time as the capital market conditions normalize, and we were able to execute a financing transaction.
Overall, however, I would like to emphasize that once our capital is fully deployed on a leverage basis, we expect to support a stable, consistent run rate market yield on a go-forward basis. We are cautiously optimistic of a return to a more stable capital markets environment in the near future. We continue to make progress toward our goals and I’m excited about the continued growth as we focus on executing our business plan.
And with that, I’d like to turn the call over to Jim Briggs, who will provide details on our financial results. Jim?
James Briggs
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 in our earnings summary for the quarter.
For the second quarter of 2022, we reported net income to common stockholders of approximately $2.2 million or $0.04 per share. We also reported distributable earnings of approximately $2.5 million or $0.05 per share. This compares to distributable earnings of $1.7 million or $0.05 per share in the prior quarter. While distributable earnings did increase by approximately $800,000 quarter-over-quarter, our per share distributable EPS was flat due to an increase in share count during Q1.
As Jim noted in his opening remarks, we would expect distributable EPS to continue to be pressured during Q3 until such time as we are able to execute a loan financing transaction. There are a few items I’d like to highlight with regards to our Q2 P&L. First, I will note that our net interest income increased from $5.1 million in Q1 to $6.4 million in Q2. While the average spread on our investments did not change meaningfully relative to the prior quarter, we did benefit from a larger invested capital basis or common equity rights offering closed midway through Q1.
In addition, we have begun to experience a benefit from higher LIBOR and SOFR rates. As Jim briefly referenced in his opening remarks, during the quarter, management identified a bridge loan with a current unpaid principal value of $11.7 million as impaired. Loan, which is collateralized by an office property in Chicago was originated in July of 2018 and is LFT’s only office property investment. The office market in general has been negatively impacted due to COVID and the Chicago office market, in particular, has been challenged.
The office property collateralizing our loan has experienced recent and near-term vacancies, all of which have negatively impacted valuations of the collateral. The loss provision of $352,000 that we’ve taken this quarter reflects all of these factors. As we noted in our 10-Q MD&A, as of yesterday, this loan is in maturity to fall. We are working closely with the borrower and anticipate entering a forbearance agreement and extending the maturity date to December 2022 in order to facilitate an asset sale in the near-term and a repayment of our loan. The borrower remains current on debt service payments.
The loan was purchased by LFT out of the CLO on August 2 and is currently being held on LFT’s balance sheet unlevered. As Jim mentioned in his opening remarks, the remainder of our loan portfolio continues to demonstrate very strong performance. And other than the provision taken this quarter on the office loan, we have not taken any other loss provisions this quarter or historically. Given the unrealized nature of the loss provision taken out of the Chicago office loan, that provision is not reflected in our distributable earnings.
Moving on to expenses. I would note that base management fees increased during the quarter from $925,000 in Q1 to $1.1 million in Q2. This increase was driven by the timing of our Q1 capital raise. As of June 30, the company’s total book equity was approximately $248 million, which represents a meaningful increase in scale relative to total book equity of $169 million as of December 31, 2021. Total common book equity was approximately $188 million or $3.60 per share.
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 of 2023. Until then, we continue to prepare our financial statements on an incurred loss model basis.
I’ll now turn the call over to Mike Larsen, who will provide details on our portfolio composition and investment activity.
Michael Larsen
Thanks, Jim. While broader economic conditions have continued to be volatile, our manager continues to actively originate attractive new investment opportunities. During Q2, LFT acquired 4 new investments from an affiliate of our manager with a total unpaid principal balance of $37 million. All of these acquisitions were secured by multifamily assets. $18 million of these new loans were indexed to 1-month LIBOR and the remaining $19 million were indexed to 30-day terms SOFR. The acquisitions had a weighted average spread to the applicable index of 348 basis points and a weighted average index rate floor of 40 basis points.
I’d highlight that we did see an increase in spreads on loan acquisitions as the quarter progressed. The — 3 of the new loan acquisitions were completed at the beginning of the quarter in April at an average spread of 332 basis points and the final loan was acquired at the very end of the quarter on June 30 at a 375 basis point spread. The acquired loans had a weighted average LTV at origination of just over 71%. We experienced $81 million of loan payoffs during the quarter and at quarter end, our total loan portfolio had an outstanding principal balance of just over $1 billion, $1.03 billion. That represents a 4% decrease in our portfolio size quarter-over-quarter, but still a 69% increase relative to the second quarter of 2021.
The slight decrease in portfolio size relative to Q1 was simply due to the timing of certain loan payoffs occurring at quarter end and is not reflective in any way of our ability to maintain full deployment. The total portfolio consisted of 69 loans with an average loan size of $15 million. Our portfolio at quarter end was 95% multifamily, a slight increase from 92% multifamily as of year-end 2021. Our exposure to retail and office continues to be very low at 3% of total UPB on a combined basis. Due to our — the managers continued strong focus on multifamily, we anticipate majority of our loan activity will be related to multifamily assets.
But as we’ve indicated in the past, we will continue to look to supplement our multifamily investments with strong quality investments and 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 335 basis points and a weighted average index floor of 24 basis points. As Jim mentioned, our manager has seen an increase in loan spreads on new originations recently, driven by economic uncertainty, rate volatility and spread widening, and we anticipate this adjustment of market spreads on our loans and in the capital markets to continue to occur throughout the remainder of 2022.
Our investment return profile has a strong positive correlation with interest rates. We’ve included a rate sensitivity table on Page 11 of our supplemental earnings presentation. And overall, we expect LFT to meaningfully benefit from continued rise in short-term interest rates as the Fed battles inflationary pressures. The current forward curve implies 1 month SOFR increasing to approximately 330 basis points by year-end, which would, holding all else equal, increase our distributable earnings by approximately $0.06 per share on a run rate full year basis.
As of the quarter end, our loan portfolio continues to be financed with 1 series CLO securitization with a weighted average spread of 143 basis points over 1-month LIBOR and an advance rate of over 83%. Now the CLO has a reinvestment period running through December of 2023 that allows principal proceeds from repayments to be reinvested in replacement mortgage assets. We do not currently utilize repo or warehouse facility financing and therefore, are not subject to margin calls on any of our assets from repo or warehouse lenders.
Overall, as we’ve continued to show over the last 3 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 well. And we also continue to see a pipeline of multifamily bridge lending opportunities through our manager, which we expect will continue. With that, I’ll pass the call back to Jim for closing remarks.
James Flynn
Thank you, Mike, and look forward to updating you all on the progress over the coming quarters. And with that, we’ll open it up to questions. Operator?
Question-and-Answer Session
Operator
[Operator Instructions]. And the first question comes from Crispin Love with Piper Sandler.
Crispin Love
First, I’m just curious on what your thoughts are on the potential recession that could be coming, and how Lument would be positioned and if your underwriting has changed at all recently due to the changes in the macro environment. And I’m thinking about any changes in the LTVs, geography, property types or anything else.
James Flynn
So overall, in general, our underwriting has generally tightened a bit. I think that’s relatively true or consistent across the market. So you’ve seen lower LTVs entering or as is LTVs at the time alone is issued, we’ve seen our underwriting to higher debt yields on exit. In general, lets, meaning the increase in rents from the rehab that occurs at the asset have been lower. So — than they have over the last couple of years, frankly, which is generally just kind of consistent with where the market is. We still continue to see rent growth.
We still continue to see attractive investment opportunities, but I do think there’s been a relatively broad acceptance by borrowers that leverage, in particular, lower than what they could have expected to receive 2, 3 quarters ago and certainly a year plus and beyond. So the 80% deals — the higher than 80% deals are fewer and farther between certainly for us, but I think across the market. In terms of asset class and markets, we generally approached that the same today as we always have, which is really focusing on the micro market and the supply dynamic in that market. So there aren’t really particular areas that we’re seeing as a general rule.
But certainly, the dynamics in markets have shifted. The demand and demographics have moved around a bit in certain markets, but there’s still generally been attractive opportunities. We do look at the concentration in our portfolio and whether we feel is from a normal risk standpoint, whether we should — or how significant we should have exposure in certain cities, sponsors, et cetera. But in general, I think across the board, credit quality has probably largely improved across because of the changes, but it was never bad and it’s improvement from, frankly, what I think was already a pretty strong position.
Crispin Love
All right. I appreciate the color there. And then just looking at this quarter’s fundings and payoffs, payoffs weren’t outsized relative to historical levels that were a good amount higher than . Can you just speak to the forward outlook here? From Michael’s comments, I got the sense that funding should roughly match payoffs in coming quarters. Does that make sense to you? Or should it be skewed one way or the other?
James Flynn
Yes. I mean depending on the timing of a leverage transaction, that is true with most of the capital deployed. The payouts this quarter were roughly in line with where we have historically guided, which is about a 1/3 of the portfolio on a run rate basis. So we were right in that low 30% range. That could change with where rates are. I’m not sure that we have sufficient evidence to suggest that it will, meaning it would get lower. We’ve seen assets pay off that we weren’t expecting to pay off or at least at that time, the market continues to be strong.
And the market has changed a bit. I think from a borrower perspective, we’ve seen a bit more or anecdotally, a bit more of a return to longer-term holds in general, which would suggest folks trying to lock in permanent financing perhaps sooner than the strategy of the past couple of years, which for many has been focused on flipping assets by doing some rehab, not all the rehab, selling into a new party who completes the rehab and then they sell to a new party who hold the asset long-term. That certainly can still happen.
But I think the environment is — that opportunity is not quite as lucrative to owners as they may have been over the last couple of years. And so holding assets has become an attractive option, which I think has turned folks to, if they can convert to a longer-term fixed rate loan maybe through the agencies or the banks that we’ve seen a return to that. So I think we’ll see over the rest of this year how that plays certainly the overall economy and where things head on the rest of this year and into next will be telling.
I think we’ve seen some stability over the past couple of weeks, even months plus on where people thought — think we’re headed. Certainly, no one knows for sure. But I think the shock of inflation and rates jumping up has begun, I hope to funds and reading, you’ve seen some, one, acceptance; and two, perhaps leveling off there, which I think will lead to a healthier market both in the capital markets and transaction levels over the coming quarters.
Crispin Love
Great. Just one last quick one for me. Did you disclose what exit fees were in the quarter?
James Flynn
Jim or Charlie, I don’t know if that’s actually identified or not.
James Briggs
That was not separately identified in our filing.
Crispin Love
Are you able to disclose it or not?
James Briggs
Yes, we can…
James Flynn
I don’t have that up the top of my head. But we can get it. The typical fee structure is a 1% exit 50 basis points to — 50 basis points to 100 basis points, I would say, is where the general average is. We can get the exact number for you, though.
James Briggs
Yes, I just — let me just — I found that exit fee number for you, Crispin. So exit fee in Q2, including prepayment and yield maintenance penalties was $1.5 million for Q2 of this year.
Operator
And the next question comes from Stephen Laws with Raymond James.
Stephen Laws
As a follow-up, and Mike, you mentioned the replenishment period in your prepared remarks, and you touched on a lot of these things. But as we’re thinking about incremental returns as the portfolio turns over, it sounds like spreads on new investments are 75 or maybe 100 bps lighter and from the repayment expectations, maybe about 8% of the portfolio turns over per quarter. So should we take that to look at 500 — 5% higher returns on those new investments you’re putting into the CLO as it turns over?
James Flynn
So…
Michael Larsen
Yes. So because we do have a…
James Flynn
Go ahead, Mike.
Michael Larsen
We do have reinvestment in our existing CLO through the end of next year and at attractive levels at 143 basis points despite the dislocation in the capital markets. Today, we benefit from that existing pricing. And so as we reinvest assets with that leverage at higher spreads and higher short-term rates will directly impact and improve our returns.
We are — on the flip side, as we discussed, we are looking to deploy the capital we raised earlier this year with a new financing structure, which we anticipate would be at wider levels in line with the increased levels on our — at the loan level. So I think it’s — there’s the financing that we have in place, and then there’s new financing we’ve put in place at higher levels.
Stephen Laws
And you mentioned evaluating options on other financing possibilities. You mentioned note-on-note or AV structures by name. And can you talk about, given where your spreads are on investments today and kind of how those discussions are, what you think levered returns would be if you pursue those avenues?
Michael Larsen
I think we’re still exploring what the levels would be for those financing. I mean clearly, we’re looking there because we think it could be attractive relative to where the series CLO market is today. But we’re still exploring where we think where levels would be for those types of financing.
Operator
And the next question comes from Steve Delaney with JMP Securities.
Steven Delaney
Curious on the loans transferred from the manager in the second quarter. Obviously, they were closed earlier than the market really moved in terms of spreads. But when they were transferred, were they transferred at par? Or was there any discount applied to those to reflect current market spreads?
James Flynn
So all assets that we transferred really, really have been transferred at or around par. Those assets have been at par, and they were — the timing of getting that done was they were pretty close to par. I mean that if you think about the floating rate market and even in our pricing grid, you probably have 100 basis points to 150 basis points of kind of market depending on the characteristics of the asset and where it is and where it’s located. So those assets were at par. One thing to think about or just to recall from — for LFT, the manager continues to originate assets and put assets on its books and incur the cost of financing those assets, both in terms of setting up warehouse and obviously paying the like for the benefit of LFT.
And one of the reasons we haven’t done that at LFT is frankly the cost, right? We would prefer to avoid that cost and continue to avoid that cost, which is one reason why we haven’t done it. The warehousing market has also become — or has been almost as volatile as, if not more, frankly, than the series CLO market. So that’s not — for the reasons we’ve mentioned on many calls, not certainly in our focus. It’s not that we never do it, but we prefer to continue in the structure and the manner in which we’ve financed our assets historically. And so for that, LFT gets the benefit like if we look at the CRE CLO market, personally, I do see potential for the market to have a bit more of a stable environment towards — in the second half of the year than the first half and hopefully beyond.
And there are assets available to immediately execute the transaction, right? That’s a benefit that LFT has. So it’s something we’ve continued to speak to the board about and continue to have the support of the manager to ensure we have assets to transfer to LFT, but the shifts in the market are something we have to pay attention to both in terms of spread pricing, credit parameters, all of those things. But in general, we feel pretty good and relatively confident that assets can be and will continue to be available at or around par.
Steven Delaney
Right. Well — and to be clear, there’s no question that the manager warehousing loans for LFT is a great benefit to the REIT for sure. And there’s just this volatility that I don’t think any of us really expected the magnitude of that looking forward. So it sounds like — and I appreciate the candor there. The portfolio, it sounds like you guys are saying you’re still not optimal in terms of investing just in terms of payoffs and things.
You were like $1.03 billion on the portfolio at June 30. Is there a target size? I mean, is it $1.1 billion, $1.2 billion that you’re trying to get to in the portfolio given your asset base, say, by the end of this year, what would that round size of the portfolio look like that would make you guys happy?
James Flynn
I think the number is probably somewhere closer to $1.3 billion to $1.5 billion with respect to the — with — because if you think about the rights offering and the capital we raised incremental with the term loan, that’s been deployed on an unlevered basis, right? And the only reason we’ve done that is because — and we continue to evaluate this with the board and regularly when we discussed. But as you mentioned, right, the volatility in the market is what was really most troublesome and difficult to manage.
And we didn’t want to find ourselves executing a CRE CLO transaction, one, that maybe couldn’t execute; or two, that was going to come in at terms that we felt were just not attractive for LFT. I believe we can execute a CLO at a higher cost even at today’s cost and have it be on a long-term basis accretive for the REIT. We’re hopeful we saw a deal recently that was still high. I’d like to think that the spreads will come in a bit, maybe as we get through the summer here and into the fall. But I do think there’s still market demand. We’ve had, in fact, just yesterday, had an investor reach out to me asking whether we were going to issue a CRE CLO.
And you put in an order. That’s one investor, right? That’s not a market, but I didn’t receive that call in May. So I think it’s just that kind of — you look at — again, I think macro people are starting to understand the market environment operating in. I think investors still have significant capital that they’d like to deploy. The multifamily space is — continues to clearly be, I would say, the winner, if not winner in terms of stability and where investors feel comfortable putting capital out, particularly on the debt side.
So I think that if we’re able to — I think we’re going to be able to — or I’d like to say we expect to be able to and have cautiously optimistic that we’re going to be able to execute a transaction, whether it’s a CLO, which I think is ideal, but there are other alternatives that we’re speaking to folks about that would be perhaps as attractive. And as Mike pointed out, if the markets don’t change, it could be more attractive. But I would expect us to push for some leveraged finance transaction of the assets that are unlevered over the coming 2 quarters or before the end of the year.
Steven Delaney
Jim, was that last CLO that you’re referencing, was that the deal from ? And if so did you guys — where did you guys see the weighted average spread on that most recent deal, borrowing spread?
James Flynn
Yes. It was MF 1. That deal came in, I think, around 300 plus or minus for the total investment grade stack, which is a bit inside of the prior deal that had gone out. We saw a lot of — just a dramatic increase from the deals done in 2021 and earlier starting in the second — first quarter and second quarter. We know that a lot of issuers — a few issuers just pull their deals to decide to kind of wait it out. And as we’ve discussed on the asset level, right, even if you have a deal that has assets in the 3%s or high 3%s and that’s where the financing is, you have a 2.5-year reinvestment period where you’d expect to replace those assets with 4%s and 4.5%s, et cetera.
So it’s not — it’s been a little bit more about, from my perspective, just looking at the investor demand, that’s obviously driving spread. I think some of the early trades during volatility, there was an ability to take advantage of the dislocation. And I think bondholders were able to — or bond investors were able to invest at attractive spreads, I think, relative to risk.
Operator
And the next question comes from Matthew Erdner with JonesTrading.
Matthew Erdner
Hello, guys, filling in for Jason. This is Erdner taking the question. Sorry if I missed this, but if you were to execute a CLO today, what would you guys expect the ROE to be?
James Flynn
Well, I think as we just mentioned to Steve, we saw a transaction — I think I’ve seen transactions with total cost of funds in the low 300s for leverage in the, call it, high 70%s to low 80%s. So depending on — obviously, the leverage is a critical component of that ROE, probably even more than the spread. We feel, historically, our assets have received attractive levels from rating agencies based on the multifamily concentration and the quality of the assets.
We’d expect that to continue even in preliminary discussions. That part doesn’t seem to change, it’s a matter of cost. The ROE is going to be a derivative of what the total pool initial funding is, right? So if we — the weighted average spread of the assets at 80% leverage in corporates and coupon would give you the ROE. If it’s a little bit less than that, it’s lower initially and grows, et cetera. So we continue to think that we can achieve a double-digit ROE for a CLO — CRE CLO financing, but the market has been extremely volatile.
And if you ask me that question in 3 months, I’m hopeful that I’m able to answer it with a lot more specificity, both for us for LFT, but just for the broader market. Six months ago, a year ago, we could answer that pretty specifically and be close within probably 10 basis points or 15 basis points. That hasn’t been the case for most of this year, at least the last 6 months.
Matthew Erdner
Yes, okay. Yes, that makes sense. And then is there any migration in the portfolio credit ratings that could possibly lead to further credit provisions? Or is office just a one-off thing?
James Flynn
Look, we — obviously, we can never say never, but we feel very comfortable with the credit quality of the assets as a whole. The office transaction was — it is a one-off. It’s the only — yes, like that that we have. We’re hopeful to minimize the impact that that deal has, but the rent portfolio continues to perform. We have not seen any cracks on the multifamily side, in particular. And from a leverage and coverage standpoint, right now things feel pretty good.
Operator
And this concludes the question-and-answer session. I would like to return the floor to management for any closing comments.
Michael Larsen
We may have lost Jim, but I think we just want to thank everyone for joining here.
James Flynn
No. No, I’m here.
Michael Larsen
All right. You’re here.
James Flynn
Got it. Yes, I don’t know — it’s — my apologies, my phone cut out there for a minute. But yes, if there are no more questions, thank you all for joining. Any other questions, and we’ll get back to you as soon as we can and look forward to speaking again next quarter.
Operator
Thank you. The conference has now concluded. Thank you for attending today’s presentation. You may now disconnect your lines.
Be the first to comment