Lument Finance Trust, Inc. annual report, FY2022

Lument Finance Trust, Inc. — 2022 Form 10-K

Reporting period: Fiscal year ended December 31, 2022. The filing was signed March 23, 2023. Lument Finance Trust is an externally managed REIT focused primarily on transitional floating-rate commercial real estate loans, especially middle-market multifamily lending. Figures below are U.S. dollars unless otherwise noted.

Financial performance and position

Metric	2022	2021
Interest income on commercial mortgage loans	$56.6 million	$36.2 million
Net interest income	$23.9 million	$20.7 million
Net income	$9.9 million	$10.5 million
Net income attributable to common stockholders	$5.1 million; $0.11 per share	$7.4 million; $0.30 per share
Distributable Earnings, non-GAAP	$9.2 million; $0.19 per share	$9.7 million; $0.39 per share
Common dividends declared	$0.24 per share	$0.36 per share
Net cash provided by operating activities	$16.3 million	$13.8 million

For Q4 2022, common-stockholder net income was $0.9 million ($0.02 per share), Distributable Earnings were $3.3 million ($0.06 per share), and the declared common dividend was $0.06 per share. The filing does not provide a clear Q4 cash-flow figure or a comparable Q4 table for the prior year.

• Portfolio: 71 senior secured floating-rate loans with $1.077 billion unpaid principal and $1.072 billion net carrying value at year-end. Weighted-average coupon was 7.6%, term to maturity 3.5 years, and origination LTV 71.5%. Approximately 89.6% of collateral was multifamily.
• Credit: A $4.3 million provision for loan losses was recorded against the Chicago office loan. One multifamily loan with $12.8 million principal was also identified as impaired due to monetary default, with no reserve recorded after collateral review. Two loans were on non-accrual at year-end. The office loan’s $10.3 million balance was subsequently resolved through a discounted payoff of approximately $6.0 million in February 2023.
• Liquidity and debt: Unrestricted cash was $43.9 million, versus $14.7 million a year earlier. CLO liabilities were $829.3 million carrying value ($833.8 million principal), non-recourse to the Company; the secured term loan was $47.0 million carrying value ($47.75 million principal), bearing a fixed 7.25% rate and maturing in February 2026. Total debt-to-equity was 3.6:1 on a GAAP basis; recourse debt-to-equity was 0.2:1.
• Equity and book value: Common stockholders’ equity was $182.9 million and book value was $3.50 per share, compared with $109.3 million and $4.38 per share at year-end 2021. The 2022 rights offering raised approximately $81.1 million net and materially increased shares outstanding.
• Margins: Net interest income increased, but the filing does not provide a clear net interest margin percentage. Total expenses were $10.3 million, up from $8.4 million.

Material changes versus 2021

• Net interest income rose $3.2 million, primarily reflecting a larger average loan portfolio and higher floating rates; increased CLO balances and funding costs, reduced exit and prepayment fees, and lower loan floors partially offset the gains.
• Net income attributable to common stockholders fell $2.3 million, while EPS declined from $0.30 to $0.11. Higher preferred dividends, operating expenses, and the office-loan loss provision more than offset higher net interest income.
• Common dividends declined from $0.36 to $0.24 per share. The company issued 27.3 million common shares in its February 2022 rights offering, with gross proceeds of approximately $83.5 million.
• The portfolio grew to $1.077 billion principal from $1.002 billion. The manager-assigned average risk rating worsened from 2.3 (Low Risk) to 3.0 (Moderate Risk); the share of loans rated 3 or better fell from 97.5% to 93.8%.
• Cash, cash equivalents, and restricted cash increased by $29.1 million in 2022; investing activities used $51.8 million and financing activities provided $64.6 million.

Outlook, risks, and unusual items

• Management stated that available cash, operating cash flow, prior equity proceeds, and borrowing arrangements were expected to meet anticipated short-term liquidity needs. Longer-term liquidity depends, among other things, on future debt financing and equity capital. No earnings or return guidance was provided.
• The company expects to convert its LIBOR-linked loans and CLO liabilities to Term SOFR in Q2 2023, ahead of the planned June 30, 2023 cessation of one-month USD LIBOR. At year-end, 77.4% of loans by principal were LIBOR-linked, and all CLO liabilities were LIBOR-linked; timing or basis mismatches could affect earnings and cash flows.
• Management described inflation, higher interest rates, slowing growth, geopolitical uncertainty, and reduced capital-market liquidity as headwinds. Rising rates may increase loan yields but can also raise borrower debt-service burdens, defaults, and refinancing risk, and pressure property values.
• The portfolio is concentrated in multifamily real estate and floating-rate credit. Other notable risks include leverage, funding availability and cost, loan extensions and prepayments, illiquid collateral, manager and related-party conflicts, and maintaining REIT and Investment Company Act status.
• CECL accounting became effective for the company on January 1, 2023. Management estimated an initial general allowance of $3.0 million to approximately $4.0 million for loans and future funding commitments; the existing $4.3 million specific reserve was separate. The office-loan payoff was expected to use that specific reserve with de minimis additional provision impact.
• The board declared a Q1 2023 common dividend of $0.06 per share. Dividends are discretionary and may be reduced; REIT distribution requirements do not establish a minimum common dividend.
• The filing reports an unqualified audit opinion. Management concluded disclosure controls and internal control over financial reporting were effective as of December 31, 2022. The auditor identified the $4.3 million individually evaluated loan-loss allowance as a critical audit matter due to valuation uncertainty and judgment.

Most important facts for investors to verify

• Subsequent reporting on the $6.0 million office-loan discounted payoff, reserve charge-off, and recovery relative to the $10.3 million principal balance.
• Q1 2023 CECL adoption: actual opening allowance, effects on retained earnings and equity, and subsequent credit-loss provisions.
• Portfolio credit migration, the $12.8 million multifamily monetary default, non-accrual status, and any borrower modifications or delinquencies.
• LIBOR-to-SOFR conversion progress across both loans and CLO liabilities, including any basis or timing differences.
• Cash available for dividends and investment funding, covenant compliance, refinancing capacity, and the economics of any new CLO or equity financing.
• Whether distributable earnings, GAAP earnings, and cash generation support the common dividend; Distributable Earnings is a non-GAAP measure and is not cash flow or a measure of liquidity.