Lument Finance Trust, Inc. — Q1 2021 Form 10-Q
Reporting period: Three months ended March 31, 2021; comparisons are with Q1 2020 unless otherwise stated. Lument is an externally managed REIT focused primarily on transitional commercial real estate debt, particularly floating-rate loans. Financial statements consolidate two CRE CLO variable-interest entities; their assets are restricted to their obligations and their debt is nonrecourse to Lument.
Financial performance and position
| Metric | Q1 2021 / March 31, 2021 | Comparable |
|---|---|---|
| Commercial mortgage interest income | $7.47 million | $9.17 million in Q1 2020 |
| Net interest income | $4.52 million | $4.18 million in Q1 2020 |
| Net income attributable to common stockholders | $2.80 million; $0.11 per share | $1.55 million; $0.06 per share |
| Distributable Earnings, non-GAAP | $2.84 million; $0.11 per share | $2.21 million; $0.09 per share |
| Common dividend declared | $0.09 per share | $0.08 per share |
| Operating cash flow | $3.17 million | $2.37 million in Q1 2020 |
| Cash, cash equivalents and restricted cash | $43.87 million, including $11.72 million unrestricted | $69.38 million at December 31, 2020 |
| Total assets / liabilities / equity | $567.41 million / $453.14 million / $114.27 million | Assets $621.49 million and equity $113.70 million at December 31, 2020 |
| Book value per share | $4.58 | $4.56 at December 31, 2020 |
Net interest income improved despite lower commercial mortgage interest income, principally because CLO interest expense declined. The filing reports no single operating-margin measure. Total expenses fell to $1.80 million from $2.17 million; other income moved to a $0.10 million gain from a $0.68 million loss, largely reflecting a smaller unrealized MSR loss. The tax line shifted from a $0.23 million benefit to a $0.01 million provision.
Investing activities provided $28.64 million, as $98.07 million of loan principal repayments exceeded $34.89 million of purchases and fundings. Financing activities used $57.32 million, including $54.07 million of CLO repayments and $3.24 million of common dividends. Cash and restricted cash consequently declined by $25.50 million during the quarter.
At quarter-end, the loan portfolio was $484.17 million across 34 senior-secured loans, down from $547.35 million across 40 loans at year-end. All loans were floating rate; the weighted-average coupon was 5.1% and remaining term 2.9 years. CLO liabilities were $409.4 million carrying value ($411.2 million principal); the secured term loan was $40.25 million principal, bearing 7.25%. Management reported total debt to equity of 3.9x on a GAAP basis and recourse debt to equity of 0.4x.
Material changes and portfolio condition
- Common-stockholder net income rose to $2.80 million from $1.55 million. Management attributed the improvement to higher net interest income, better MSR-related results, and lower expenses.
- The weighted-average internal loan risk rating improved to 2.7 from 3.1 at year-end; 91.6% of loans were rated moderate risk or better. The filing attributes the improvement to payoffs, new lower-risk loans, and loans migrating from risk rating 4 to 3.
- Management reported that all portfolio loans were current on principal and interest, with no nonaccrual, maturity-default, or impaired loans and no allowance for loan losses. It had not entered forbearance agreements or loan modifications.
- The portfolio remained concentrated: 88.2% was secured by multifamily properties and 39.0% by Southwest properties. The corresponding year-end concentrations were 89.5% and 38.7%.
Outlook, risks and contingencies
Management said COVID-19 had not significantly affected Q1 operating results, but warned that prolonged effects could harm borrowers, property cash flows, portfolio credit quality, results, liquidity, and distributions. It cited possible delays to borrower business plans, tenant rent-payment and eviction constraints, and uncertainty in the economic recovery. Management stated that it believed available resources could meet anticipated short-term liquidity needs, while longer-term needs may require additional debt or equity. It was pursuing a CRE CLO refinance, but gave no assurance that refinancing would be available.
All commercial loans and CLOs were indexed to one-month U.S. LIBOR. Loans had a weighted-average LIBOR floor of 1.54%, and management said all loans were above the then-current LIBOR rate because of those floors. LIBOR’s planned phaseout creates uncertainty around replacement rates and contract impacts. Management also noted prepayment and reinvestment risk, particularly because the FL1 CLO reinvestment period had expired; it reported $98.9 million of post-expiration loan prepayments in FL1.
Unfunded commitments included $10.2 million potentially purchasable from a Manager affiliate for FL1 participations and $23.8 million associated with FL2 loans. A separate residential-loan backstop guarantee had an estimated maximum potential payment amount of $724.1 million, but MAXEX Clearing LLC had assumed the obligations and agreed to indemnify FOAC; the company said it knew of no circumstances expected to trigger a payment. No material legal proceedings or COVID-related balance-sheet contingencies were reported. The company said it remained in compliance with secured-term-loan covenants and CRE CLO coverage tests at quarter-end.
Subsequent events: On May 5, 2021, Lument issued 2.4 million shares of 7.875% Series A cumulative redeemable preferred stock, receiving $58.1 million net of underwriting discounts and commissions but before offering expenses. The offering enabled an April credit-agreement amendment providing a $7.5 million incremental secured term loan, extending the secured loan maturity to February 2026, and revising certain limits and covenants. Management expected the incremental loan to fund in Q2 and cautioned that deploying the new capital could take time and temporarily reduce net interest income. The preferred issuance also increases the equity base used to calculate management fees.
Important facts for investors to verify
- Whether loan collections, borrower performance, and risk ratings remain sound, given COVID-19-related uncertainty and the multifamily and regional concentrations.
- Progress, terms, and availability of a replacement CRE CLO, including the effect of FL1’s expired reinvestment period and continued loan payoffs.
- Use of the preferred-stock proceeds and incremental term borrowing, and resulting effects on leverage, funding costs, management fees, and earnings per share.
- Whether distributions remain supported by taxable income and recurring cash generation; Distributable Earnings is non-GAAP and is not a measure of liquidity or cash available for dividends.
- Potential cash needs from unfunded loan commitments, the status of the MAXEX backstop and indemnification, and compliance with debt covenants and CLO coverage tests.
- LIBOR transition arrangements and whether replacement benchmark rates change asset yields, funding costs, or loan terms.