Lument Finance Trust, Inc. — Q3 2022 Form 10-Q
Reporting period: Three and nine months ended September 30, 2022. Lument is an externally managed REIT focused primarily on transitional, floating-rate commercial real estate loans, especially multifamily properties. Figures below are in U.S. dollars.
Financial performance and position
| Metric | Q3 2022 | Q3 2021 | Nine months 2022 | Nine months 2021 |
|---|---|---|---|---|
| Net interest income | $5.48 million | $4.73 million | $16.99 million | $14.50 million |
| Net income | $1.50 million | $2.37 million | $7.80 million | $6.86 million |
| Net income attributable to common stockholders | $0.32 million | $1.18 million | $4.24 million | $4.94 million |
| Basic and diluted earnings per common share | $0.01 | $0.05 | $0.09 | $0.20 |
| Common dividends declared per share | $0.06 | $0.09 | $0.18 | $0.27 |
- Revenue, expenses and margin: Loan interest income was $14.74 million in Q3 and $37.39 million for the first nine months. Q3 total expenses were $2.66 million; nine-month expenses were $7.79 million. Net interest income increased year over year, but the filing does not provide a conventional net interest margin percentage.
- Cash flow: Nine-month operating cash flow was $11.74 million, investing cash outflow was $22.26 million and financing cash inflow was $68.95 million. Cash, cash equivalents and restricted cash totaled $76.71 million at September 30, 2022, including $48.49 million unrestricted cash.
- Assets and debt: Total assets were $1.13 billion, including $1.04 billion of commercial mortgage loans net of allowance. Total liabilities were $883.40 million. CLO liabilities were $828.67 million carrying value ($833.75 million principal) and are non-recourse; the secured term loan was $46.91 million carrying value ($47.75 million principal), bearing 7.25% and maturing in 2026. Reported total debt-to-equity was 3.6:1, while recourse debt-to-equity was 0.2:1.
- Capital and liquidity: Stockholders’ equity was $245.17 million; common book value was $3.55 per share, down from $3.60 at June 30. Management said existing equity proceeds, operating cash flow and borrowing capacity should meet anticipated short-term liquidity needs, while longer-term needs depend in part on additional financing or equity.
Material changes versus comparable periods
- Q3 net interest income rose approximately 16% year over year, but common-stockholder income fell to $0.32 million from $1.18 million, principally reflecting a $1.52 million loan-loss provision and higher expenses. The common dividend also declined to $0.06 per share from $0.09.
- For the first nine months, net income increased to $7.80 million from $6.86 million, while common-stockholder income and EPS declined. Higher preferred dividends and a larger weighted-average common share count contributed to the lower common result and EPS.
- The February 2022 rights offering issued 27.28 million common shares for approximately $81.1 million net proceeds, increasing shares outstanding from 24.95 million at year-end 2021 to 52.23 million at September 30.
- Loan principal outstanding increased to approximately $1.046 billion from $1.002 billion at year-end 2021. The weighted-average portfolio coupon increased from 3.9% to 6.0%, alongside higher benchmark rates.
Outlook, risks and unusual items
- Credit: One Chicago office loan, with $10.3 million unpaid principal, was impaired, placed on non-accrual and in maturity default. The borrower remained current on debt-service payments, but management said full repayment or refinancing was unlikely; a forbearance extended maturity to December 2022. The company recorded a $1.87 million allowance for the first nine months. Portfolio average risk rating rose from 2.3 at year-end 2021 to 2.7 at September 30; 97.8% of net carrying value was rated moderate risk or better.
- Rate and market exposure: Almost all investments were floating-rate; 83.5% were LIBOR-indexed and 16.5% SOFR-indexed. Rising rates can increase loan interest income, but may strain borrower cash flows and refinancing capacity. LIBOR transition terms and their eventual economics remain uncertain.
- Macro conditions: Management cited inflation, further rate increases, slowing growth, geopolitical uncertainty and possible recession as risks to borrowers, capital-market liquidity and funding costs. It said COVID-19 had not significantly affected reported 2022 results, but prolonged effects could be adverse.
- Distributions: Q3 common dividends of $0.06 per share exceeded reported EPS of $0.01 and non-GAAP Distributable Earnings of $0.03 per share. Management uses Distributable Earnings in evaluating distributions, but cautions it is not GAAP income, operating cash flow or a measure of liquidity.
- Other exposures: A legacy residential-loan backstop guarantee had estimated underlying loan balances of $317 million; the filing says MAXEX Clearing LLC assumed the obligations and management was not aware of circumstances expected to trigger payment. The CLO trust also had $79.1 million of unfunded loan commitments through an affiliate. No material litigation was reported; debt and CLO covenant compliance was reported at quarter-end.
- Guidance: The filing provides no numerical earnings or distribution guidance. Management’s liquidity outlook is its stated expectation, not a guarantee.
Important facts for investors to verify
- Progress and recovery prospects for the Chicago office loan, including the outcome of the December 2022 forbearance extension and adequacy of the loss allowance.
- Whether Distributable Earnings and operating cash generation can support the common dividend, particularly given Q3 per-share earnings below the declared dividend.
- Portfolio risk-rating migration, borrower performance and exposure to multifamily real estate and concentrated Southern U.S. markets.
- Effects of further rate increases, LIBOR-to-SOFR transition, borrower refinancing conditions and availability and cost of future funding.
- Liquidity available for the CLO’s reinvestment and unfunded commitments, and compliance with financing covenants as market conditions change.
- Potential dilution and per-share effects following the rights offering, as well as related-party loan purchases and manager fees and expense reimbursements.