Lument Finance Trust, Inc. — FY2020 Form 10-K
Reporting period: Fiscal year ended December 31, 2020. This is an annual report, not a standalone fourth-quarter filing; selected Q4 results are identified below. The company is an externally managed REIT focused primarily on transitional, floating-rate commercial real estate loans, especially middle-market multifamily. In January 2020, management transferred to Lument Investment Management, an ORIX affiliate; the company changed its name and ticker to Lument Finance Trust and LFT in December.
Financial results and portfolio
| Metric | FY2020 | FY2019 |
|---|---|---|
| Interest income | $33.6 million | $39.1 million |
| Net interest income | $18.4 million | $15.4 million |
| Net income attributable to common stockholders | $8.4 million; $0.34 per share | $2.7 million; $0.11 per share |
| Distributable Earnings, non-GAAP | $9.8 million; $0.39 per share | $7.6 million; $0.32 per share |
| Common dividends declared | $0.37 per share | $0.30 per share |
| Operating cash flow | $12.2 million | $7.3 million |
Q4 2020: Net income attributable to common stockholders was $2.5 million, or $0.10 per share; net interest income was $4.6 million. The company declared a regular dividend of $0.09 per share and a special dividend of $0.04 per share.
At year-end, the portfolio comprised 40 senior secured loans with $547.3 million unpaid principal, down from $635.3 million and 51 loans a year earlier. All loans were floating-rate; the weighted-average coupon was 5.1%, loan term 3.1 years, and origination LTV 74.2%. Multifamily collateral represented 89.5% of the portfolio. All loans were current, with no defaults, non-accruals, impairments, or recognized loan-loss allowance. The weighted-average internal risk rating worsened to 3.1 from 2.8, largely due to downgrades of retail- and office-backed loans.
Book value was $4.56 per share, compared with $4.59 at December 2019. Total equity was $113.7 million. Unrestricted cash was $11.4 million; restricted cash was $58.0 million and held within CLO structures. Cash, cash equivalents and restricted cash together increased by $53.4 million during the year, primarily reflecting net loan repayments and cash retained in securitization structures.
Debt at year-end included $40.25 million principal on the secured term loan, at a fixed 7.25% rate and maturing in 2025, plus $465.3 million principal of non-recourse CLO financing, with stated maturities in 2028 or later. The company reported recourse debt-to-equity of 0.4:1 and total GAAP debt-to-equity of 4.4:1. The CLOs are match-term financing and are not subject to margin calls; the company reported compliance with debt covenants and CLO collateral and coverage tests.
Changes and notable items
- Net income and Distributable Earnings increased year over year. Higher net interest income, lower preferred dividends and the absence of a $3.1 million deemed preferred-stock redemption dividend recorded in 2019 were key factors. Comparisons are also affected by 2019 changes including repayment of a securitization trust and redemption of preferred shares.
- Net interest income rose despite lower interest income, as CLO interest expense declined and loan portfolio LIBOR floors supported income in the low-rate environment. The company attributed the increase to higher average loan balances, higher average loan floors and lower average LIBOR on CLO liabilities, partly offset by lower loan spreads and a full year of term-loan interest expense.
- Mortgage servicing rights fell to $0.9 million from $2.7 million, with a $1.8 million unrealized loss, attributed to lower rates, faster prepayments and reduced projected float income.
- The company expensed $624,816 of deferred costs for a contemplated CLO transaction after concluding it was unlikely to proceed before year-end in the market environment.
- An ORIX affiliate invested approximately $5.7 million in a private placement at $4.61 per share, reported as a 43% premium to the January 2, 2020 share price. The company also redeemed all its Series A preferred stock in 2019; no preferred shares were outstanding at year-end 2020.
Outlook, risks and contingencies
Management said the pandemic did not significantly affect FY2020 operating results, apart from the deferred transaction costs, but emphasized uncertainty over its duration and effects on borrowers, property cash flows, collateral values, financing and distributions. The company reported no forbearance agreements or loan modifications granted by year-end, while noting heightened portfolio credit risk and active borrower monitoring. It gave no earnings or dividend guidance. Management expected available cash flow and borrowing capacity to meet anticipated short-term needs, while longer-term funding depends on debt or equity financing, including potential CLO issuance.
- COVID-19-related deterioration in occupancy, rents or property values could weaken borrowers’ ability to pay, increase credit losses, affect covenant compliance and constrain dividends. Multifamily eviction restrictions and slower property improvements and leasing were identified as concerns.
- All commercial loans and CLO liabilities were LIBOR-linked. The company said contracts contain alternative-rate procedures, but the impact and relative favorability of replacement rates remained uncertain.
- Loan balances declined by $87.9 million net during 2020. The expired reinvestment period for Hunt CRE 2017-FL1 limits reinvestment of repayments; management noted refinancing that CLO could be more difficult in the pandemic market.
- Future funding commitments are not recorded on the balance sheet and depend on asset performance. The filing gives differing figures for the FL1 participation arrangement: MD&A describes $28.9 million maximum, with $7.7 million funded and $21.2 million unfunded; the notes describe $30.2 million maximum, with $5.6 million funded and $24.6 million unfunded. It separately reports $25.8 million unfunded for FL2.
- The company relies on REIT qualification and its Investment Company Act exclusion. It disclosed a 2018 REIT gross-income test failure resolved through an IRS closing agreement in July 2020; it reported compliance with REIT requirements for 2019 and 2020.
- Other principal risks include leverage, real estate concentration, illiquid assets, refinancing and funding access, manager dependence and conflicts of interest, and the risk that distributions may be reduced. The company said it had no pending legal proceedings and no subsequent events requiring disclosure.
Important facts for investors to verify
- Reconcile the conflicting FL1 future-funding commitment and funded/unfunded amounts disclosed in MD&A and the notes.
- Confirm the precise number of shares issued in the ORIX-affiliate placement: the narrative reports 1,246,719 shares, while the equity statement reports 1,251,219 shares.
- Review loan-level exposure, especially the six loans rated high risk and the retail and office collateral, as pandemic effects and borrower payment performance evolve.
- Assess cash available for distributions separately from restricted CLO cash, and monitor future funding obligations, CLO refinancing/reinvestment capacity, and debt covenant headroom.
- Compare Distributable Earnings with GAAP earnings and cash flows; it is a non-GAAP measure and is not a measure of liquidity or cash available for distributions.