Lument Finance Trust, Inc. — Q2 2021 Form 10-Q
Business context and reporting period
Quarter ended June 30, 2021; filed August 9, 2021. Lument Finance Trust is an externally managed REIT focused primarily on transitional commercial real estate debt, especially floating-rate senior loans for multifamily properties. It finances much of its portfolio through non-recourse collateralized loan obligations (CLOs).
Key financial metrics
| Metric | Q2 / June 30, 2021 | Comparable period / prior date |
|---|---|---|
| Interest income on commercial mortgage loans | $8.23 million for Q2 | $8.47 million in Q2 2020 |
| Net interest income | $5.25 million for Q2; $9.77 million for first half | $4.78 million for Q2 2020; $8.96 million for first half 2020 |
| Net income attributable to common stockholders | $0.95 million; $0.04 per diluted share for Q2 | $1.87 million; $0.08 per share for Q2 2020 |
| First-half net income attributable to common stockholders | $3.76 million; $0.15 per diluted share | $3.42 million; $0.14 per share in first half 2020 |
| Q2 dividend declared | $0.09 per common share; $0.38 per Series A preferred share | Common dividend was $0.08 per share in Q2 2020 |
| Distributable Earnings (non-GAAP) | $2.79 million; $0.11 per share for Q2 | $0.09 common dividend per share |
| Assets / equity | $1.042 billion / $170.2 million at June 30 | $621.5 million / $113.7 million at December 31, 2020 |
| Loan portfolio | $611.8 million carrying value; 44 loans | $547.3 million; 40 loans at December 31, 2020 |
| Debt | $826.1 million CLO liabilities and $39.6 million secured term loan, carrying values | $463.1 million CLO liabilities and $39.6 million term loan at December 31, 2020 |
| Cash and liquidity | $330.3 million restricted cash; $14.6 million cash and cash equivalents on the balance sheet | $58.0 million restricted cash and $11.4 million cash and cash equivalents at December 31, 2020 |
| Cash flows, first half | $7.1 million operating; $(144.0) million investing; $412.4 million financing | $5.2 million operating; $1.6 million investing; $(6.5) million financing in first half 2020 |
The filing does not provide a clear standard operating margin measure. It reports total liabilities of $871.7 million and a total debt-to-equity ratio of 5.1:1 on a GAAP basis. The CLO obligations are non-recourse to the Company as consolidator; management reports recourse debt-to-equity of 0.2:1. The term loan bears fixed interest at 7.25% and matures in February 2026.
Material changes versus comparable periods
- Q2 common-stockholder income and EPS declined year over year, despite higher net interest income. The principal factors were a $1.66 million loss on extinguishment of debt related to the CLO refinancing and $0.73 million of preferred dividends accrued in Q2 2021.
- For the first half, common-stockholder income and EPS increased modestly year over year, reflecting higher net interest income and lower expenses, partly offset by greater other losses and preferred dividends.
- Net interest income rose year over year in both the quarter and first half. Management cited lower CLO funding costs and increased loan exit/extension fees, offset by lower average loan balances and somewhat lower portfolio floors/spreads.
- Common stock book value per share was $4.41 at June 30, down from $4.58 at March 31. The Company attributed the decline primarily to the debt-extinguishment loss and preferred-stock offering costs.
- The Company issued 2.4 million Series A preferred shares in May, receiving approximately $58.1 million net proceeds before offering expenses. In June it closed a new CRE CLO, issued $833.8 million of investment-grade notes to third parties, retained $70 million of below-investment-grade notes and a $96.25 million equity interest, and unwound prior CLOs with $388.2 million of notes redeemed.
Outlook, management commentary, risks and unusual items
- No formal earnings or return guidance is provided. Management said it expects to deploy capital into target assets, but deployment timing may temporarily reduce net interest income. It also expects an additional $7.5 million term-loan increment to fund in Q3 2021.
- Management believed available resources would meet anticipated short-term liquidity needs; longer-term capital needs may require additional debt or equity. The $330.3 million restricted cash associated with the new CLO was intended for reinvestment, and management warned that this cash could weigh on net interest income until deployed. On July 29, 2021, the CLO used $249.5 million of restricted cash to acquire 12 loans.
- COVID-19, uneven recovery and the Delta variant could affect borrowers, tenants, property cash flows, collateral values, loan performance, liquidity and distributions. Management reported all loans current, no impairments, non-accrual loans, maturity defaults, or loan modifications/forbearance as of June 30, while emphasizing heightened credit risk.
- The portfolio is 100% floating-rate and indexed to one-month U.S. LIBOR; the weighted-average loan floor was 1.32%, and 98.3% of loans had floors above spot LIBOR. LIBOR cessation and transition to SOFR create uncertainty despite contractual fallback provisions.
- Portfolio concentration is material: multifamily represented 84.8% of loan carrying value; South and Southwest represented 36.2% and 31.7%, respectively. The weighted-average internal risk rating improved to 2.6 from 3.1 at year-end, with 97.0% of carrying value rated moderate risk or better.
- The filing discloses related-party loan purchases from Manager affiliates and affiliate roles in servicing and CLO management. It also reports $47.4 million of unfunded commitments on loans in the new CLO and $1.6 million related to LCMT.
- A legacy backstop guarantee had a stated maximum potential payment amount of $465.2 million at June 30, although MAXEX Clearing LLC assumed the obligations and indemnified FOAC; the Company said it knew of no circumstances expected to trigger payment. No material litigation or COVID-related contingency was recorded.
Important facts for investors to verify
- Reconcile the MD&A statement of $11.7 million of unrestricted cash with the balance sheet’s $14.6 million cash and cash-equivalents balance; restricted cash is separately reported at $330.3 million.
- Track deployment of CLO restricted cash, new loan originations and the impact of temporarily uninvested proceeds on net interest income.
- Review CLO asset coverage and collateralization tests, which were reported met at quarter-end, and monitor whether credit deterioration could affect compliance.
- Assess common-dividend sustainability against GAAP earnings, non-GAAP Distributable Earnings, REIT distribution requirements and preferred-stock obligations.
- Evaluate loan performance, portfolio concentrations, the $47.4 million of unfunded loan commitments, LIBOR-to-SOFR transition terms and related-party transactions.
- Note that management reported effective disclosure controls and no material changes in internal control over financial reporting during the quarter.