Business Context and Reporting Period
This Form 8-K was filed by Five Oaks Investment Corp. (not Lument Finance Trust, Inc.) on January 18, 2018. The filing reports a material change in corporate governance and management structure. The Company entered into a new Management Agreement with Hunt Investment Management, LLC, replacing its previous manager, Oak Circle Capital Partners LLC. Concurrently, the Company executed a private placement of equity, terminated outstanding warrants, and restructured its Board of Directors and executive leadership.
Key Financial Metrics and Transactions
The filing details specific transactional financials rather than operational performance metrics for a reporting period.
- Private Placement Proceeds: The Company sold 1,539,406 shares of common stock to Hunt Companies Equity Holdings, LLC (HCEH) at $4.77 per share, generating gross proceeds of $7,342,966.62.
- Management Fee Structure:
- Base Management Fee: 1.5% of Stockholders' Equity annually (0.375% quarterly).
- Incentive Fee: 20% of Core Earnings exceeding an 8% annualized return on Stockholders' Equity, payable quarterly starting after the first anniversary of closing.
- Expense Reimbursement Cap: Reimbursement for non-investment personnel and specific executive costs is capped at 1.5% of average Stockholders' Equity.
- Termination Fee: If terminated without cause, the fee equals three times the sum of the average annual Base Management Fee and Incentive Fee earned over the preceding 24 months.
- Warrant Cancellation: The Company cancelled warrants held by XL Investments Ltd representing the right to purchase 3,753,492 shares of common stock.
Material Changes Versus Prior Period
The filing represents a complete overhaul of the Company's management and capital structure compared to the prior period:
- Management Change: The management agreement with Oak Circle Capital Partners LLC (dated May 16, 2012) was mutually terminated without a termination fee. Hunt Investment Management, LLC is now the external manager.
- Leadership Transition: David Carroll resigned as President, CEO, Chairman, and Director. James C. Hunt was elected Chairman; James P. Flynn was appointed CEO; and Michael Larsen was appointed President.
- Capital Structure: The Company issued new equity to an affiliate of the new manager and cancelled a significant block of outstanding warrants.
- Board Composition: HCEH received the right to designate one director to the Board, contingent on maintaining at least 5% beneficial ownership.
Guidance, Outlook, and Risks
The filing does not provide specific financial guidance, revenue outlook, or liquidity projections. However, it outlines the following structural terms and risks:
- Agreement Term: The new Management Agreement has an initial term ending January 18, 2021, with automatic one-year renewals unless terminated by a two-thirds vote of independent directors or shareholders.
- Termination Rights: The Company may terminate the agreement "for cause" without a fee with 30 days' notice. Termination without cause triggers a significant fee based on prior earnings.
- Core Earnings Definition: The incentive fee relies on "Core Earnings," a non-GAAP measure that excludes unrealized gains/losses, depreciation, and certain one-time items, which may differ from reported net income.
- Registration Rights: HCEH was granted demand and piggyback registration rights for the shares acquired.
Investor Verification Checklist
- Verify the exact terms of the "Core Earnings" calculation in the Management Agreement to understand the threshold for incentive fees.
- Confirm the impact of the warrant cancellation on the Company's potential future dilution.
- Review the background and track record of the new management team (Hunt, Flynn, Larsen) in the mortgage REIT sector.
- Assess the financial implications of the 1.5% expense reimbursement cap relative to the Company's projected equity base.
- Monitor the Company's ability to maintain the 5% ownership threshold required for HCEH to retain its board seat.