Lument Finance Trust, Inc. (filing registrant: Hunt Companies Finance Trust, Inc.) — Q1 2020 Form 10-Q
Reporting period: Three months ended March 31, 2020; filed May 11, 2020. The filing identifies the registrant as Hunt Companies Finance Trust, Inc. (NYSE: HCFT), not Lument Finance Trust, Inc.; verify the entity and ticker before relying on this summary.
Business context and financial results
The company is an externally managed commercial real estate debt investor, focused primarily on floating-rate transitional loans, especially multifamily. It consolidates two CLO entities. Results are unaudited and the company cautions that interim results are not necessarily indicative of full-year performance.
| Metric | Q1 2020 | Q1 2019 / comparison |
|---|---|---|
| Commercial mortgage loan interest income | $9.17 million | $9.90 million |
| Net interest income | $4.18 million | $4.21 million |
| Other loss | $0.68 million | $0.15 million |
| Total expenses | $2.17 million | $2.65 million |
| Net income | $1.55 million | $1.47 million |
| Net income (loss) attributable to common stockholders | $1.55 million; $0.06 per share | $(2.10) million; $(0.09) per share |
| Common dividend declared | $0.075 per share | $0.07 per share |
| Operating cash flow | $2.37 million | $2.50 million |
Revenue is chiefly interest income; the filing does not present a conventional revenue or operating-margin measure. Net interest income was nearly flat year over year. The swing to positive common-stockholder earnings mainly reflects lower expenses, much lower preferred dividends, and the absence of the prior-year $3.09 million deemed preferred-stock redemption dividend; increased other losses partly offset these benefits. Q1 2019 also included activity from a multifamily securitization trust that had since been repaid.
Balance sheet, portfolio and liquidity
- At March 31, 2020, total assets were $664.0 million, total equity $114.1 million, and commercial mortgage loans held for investment $639.4 million across 51 loans. Loans were 100% floating-rate; weighted-average coupon was 5.3% and weighted-average remaining term 3.7 years.
- Debt comprised $506.4 million of CLO liabilities (about $510.2 million principal) and a $40.25 million secured term loan (reported net carrying value $39.4 million). CLO debt is non-recourse to the company as consolidator and is supported by restricted trust assets. The term loan bears 7.25%, matures in January 2025, and is secured by substantially all assets of the credit parties.
- Management reported total debt-to-equity of 4.8:1 on a GAAP basis and recourse debt-to-equity of 0.4:1. CLOs are term-matched to assets and not subject to margin calls or market-value collateral requirements. The company reported compliance with term-loan covenants and CLO coverage tests at quarter-end.
- Unrestricted cash was $11.3 million; restricted cash was $6.9 million, for combined cash, cash equivalents and restricted cash of $18.2 million. Operating cash flow was $2.37 million; investing used $4.11 million and financing provided $3.97 million. The company raised $5.75 million through a private common-stock placement.
- Equity increased from $108.6 million at year-end 2019; reported book value was $4.57 per common share versus $4.59 at year-end. An ORIX USA affiliate purchased 1,246,719 shares at $4.61 each, approximately 5% of outstanding shares.
- There were no nonaccrual, impaired, or maturity-default loans at quarter-end, and no loan-loss allowance was recorded. The weighted-average loan risk rating worsened to 2.9 from 2.8; 78.7% of loans were rated moderate risk or better, versus 91.9% at year-end. Nine loans totaling $136.3 million were rated high risk.
Material changes, outlook and risks
- Management transition: On January 3, 2020, OREC Investment Management (an ORIX USA affiliate) replaced Hunt Investment Management. The new management agreement is materially similar, including a 1.5% annual base fee and a 20% incentive fee above an 8% annualized Core Earnings threshold. No termination fee was paid to the former manager.
- COVID-19: Management said the pandemic had not significantly affected Q1 results but expected effects on future interest income, credit losses, reinvestment, financial condition and cash flows. Retail and office exposures were downgraded; these property types together were 8.3% of loan collateral. As of May 11, 95% of the portfolio by principal balance had made May payments; the two remaining borrowers had grace periods through May 13, and management expected payment. These were post-quarter developments, not quarter-end results.
- The company had not entered forbearance agreements or loan modifications as of the filing, but warned that borrower distress, property-value declines, weaker credit markets and reduced ability to reinvest at comparable spreads could affect earnings, covenants, liquidity and dividends. New investment activity was being approached more cautiously. No quantified earnings or dividend guidance was provided.
- Management stated it believed available resources and operating cash flow would cover anticipated short-term needs. Long-term liquidity depends partly on future debt or equity financing. The filing notes that unresolved discussions with the IRS concerning the company’s 2018 REIT income-test issue may limit some financing or equity transactions; management said it believed other financing remained available, though COVID-19 could make it harder to obtain.
- Unfunded commitments for loans held in Hunt CRE 2017-FL1 were $47.7 million. Separately, the Manager’s affiliate had $41.5 million of unfunded commitments for loans held in Hunt CRE 2018-FL2. A legacy backstop-guarantee disclosure states maximum potential payments of $1.405 billion, but MAXEX Clearing LLC assumed the obligations and agreed to indemnify FOAC; the company reported no known circumstance expected to trigger a payment.
- The $0.075-per-share Q1 common dividend was paid April 15, 2020. The company intends regular quarterly distributions but cautions that future distributions depend on liquidity, operating needs, debt service and taxable income.
Important facts for investors to verify
- Confirm the filing entity and security: the source is for Hunt Companies Finance Trust, Inc. (HCFT), despite the request naming Lument Finance Trust, Inc.
- Track borrower payment performance, requests for relief, future risk-rating changes and any loan-loss provisions as pandemic effects develop.
- Review unrestricted versus restricted cash, the $47.7 million company loan-funding commitment, debt covenants and financing availability.
- Monitor the IRS closing-agreement matter and the implications for REIT qualification, distributions and capital raising.
- Assess whether the reported dividend remains supportable and whether the legacy MAXEX backstop indemnity remains effective and collectible.