Lument Finance Trust, Inc. (filing registrant: Hunt Companies Finance Trust, Inc.; NYSE: HCFT) — Q1 2019 Form 10-Q
Reporting period: Three months ended March 31, 2019; balance-sheet comparisons are to December 31, 2018. The filing is unaudited. The registrant name in the filing differs from the company name in the request.
Business context
The company is an externally managed REIT focused primarily on transitional, floating-rate commercial real estate loans, especially multifamily loans. It had completed its exit from legacy mortgage-backed securities and shifted toward commercial mortgage lending, financed mainly through collateralized loan obligations (CLOs).
Financial results and position
| Metric | Q1 2019 / March 31, 2019 | Comparable period / prior date |
|---|---|---|
| Interest income | $10.0 million | $21.5 million in Q1 2018 |
| Interest expense | $5.8 million | $18.4 million in Q1 2018 |
| Net interest income | $4.2 million | $3.1 million in Q1 2018 |
| Other income (loss) | $(0.1) million | $11.4 million in Q1 2018 |
| Expenses | $2.6 million | $3.2 million in Q1 2018 |
| Net income | $1.5 million | $11.3 million in Q1 2018 |
| Net income (loss) attributable to common stockholders | $(2.1) million; $(0.09) per share | $10.4 million; $0.45 per share |
| Operating cash flow | $2.5 million | $1.9 million in Q1 2018 |
| Total assets | $659.4 million | $679.4 million |
| Cash and cash equivalents | $13.6 million | $7.9 million |
| Restricted cash | $52.3 million | $51.3 million |
| Commercial mortgage loans | $585.8 million | $555.2 million |
| CLO debt, net carrying value | $504.5 million | $504.0 million |
| Secured term loan, net carrying value | $39.3 million | None reported |
| Total equity | $109.3 million | $150.2 million |
The common-stock loss included a $3.1 million deemed dividend related to redeeming preferred shares; the company also recorded $0.5 million of preferred dividends. It declared a common dividend of $0.07 per share for the quarter, down from $0.10 in Q1 2018. The loan portfolio comprised 45 senior secured loans, all floating rate, with a weighted-average coupon of 6.5% and weighted-average life of 4.0 years. Management reported no loan impairments or non-accrual loans.
Cash, cash equivalents and restricted cash totaled $66.0 million. The filing reports recourse debt-to-equity of 0.4:1 and total debt-to-equity of 5.0:1; the latter includes largely non-recourse CLO obligations. Cash flow from investing was $7.2 million and financing cash flow was $(2.9) million.
Material changes versus Q1 2018 and year-end 2018
- Net interest income increased to $4.2 million from $3.1 million, although total interest income fell substantially as the company exited legacy securities and deconsolidated securitization trusts.
- Other income fell from $11.4 million to a loss of $0.1 million. Q1 2018 included substantial realized and unrealized derivative gains; no derivatives were held at March 31, 2019.
- Commercial mortgage loans increased $30.6 million, reflecting $64.6 million of purchases and $34.0 million of principal repayments.
- The company drew $40.25 million under a new six-year secured term facility at a fixed 7.25% initial rate and used the proceeds, plus working capital, to redeem all 1.61 million Series A preferred shares for $40.25 million plus accrued dividends.
- Total equity declined $40.9 million from year-end, largely reflecting the preferred-stock redemption. Management reported book value per common share of $4.61, down from $4.77; adjusted for the liquidation preference of the redeemed preferred shares, it reported a 0.6% decline from $4.64.
- The FREMF 2012-KF01 trust paid off in January 2019, and the company ceased consolidating it. The company continued consolidating its two commercial real estate CLO entities.
Outlook, risks and unusual items
- No quantified earnings or portfolio guidance is provided. Management expects current liquidity, operating cash flow and available borrowing capacity to meet anticipated short-term needs, but says longer-term requirements depend in part on additional financing or capital.
- Management says rising rates generally support net interest income because assets and CLOs are primarily indexed to 30-day LIBOR. However, higher borrower debt-service costs can increase credit risk. Other identified risks include property values and operating performance, refinancing and reinvestment spreads, prepayments, and access to financing and liquidity.
- The manager agreed to reduce the expense-reimbursement cap by 25% annually, subject to a maximum annual reduction of $568,000, until support reaches approximately $1.96 million.
- The company failed the REIT 75% gross-income test for 2018 because of gains associated with hedge terminations. It accrued and paid a $1.96 million tax liability on April 12, 2019, and said it believed its REIT election would not be affected in current or future periods.
- Disclosure controls and procedures were deemed ineffective at March 31, 2019 because of material weaknesses involving REIT tax compliance oversight and review/documentation of account balances. Remediation steps were underway, but management said the weaknesses were not yet considered remediated.
- Unfunded commitments were $36.9 million for loans held in Hunt CRE 2017-FL1; an affiliate of the manager had a further $54.3 million of commitments related to loans in Hunt CRE 2018-FL2. These were not recorded on the balance sheet.
- Potential payments under legacy MAXEX backstop guarantees were estimated at $1.405 billion based on the underlying loan balances. MAXEX Clearing LLC assumed the obligations and agreed to indemnify FOAC; management reported no known circumstances expected to trigger a payment. The size of the underlying exposure and the assumption’s protections merit attention.
Important facts for investors to verify
- Confirm the registrant’s identity and ticker: this filing is headed Hunt Companies Finance Trust, Inc. (HCFT), not Lument Finance Trust, Inc.
- Review the secured term loan’s collateral, covenants, borrowing-base requirements and stepped-up interest rate after year five, and distinguish this recourse debt from the non-recourse CLO debt.
- Assess credit quality and concentration in the loan portfolio, including the 4 high-risk-rated loans totaling $38.4 million, property and geographic exposures, and the significant unfunded commitments.
- Track whether the manager support agreement delivers the stated expense reductions and whether the company sustains distributions while meeting REIT requirements.
- Monitor remediation and testing of the disclosed material weaknesses, as well as future REIT tax compliance and any impact from the 2018 income-test failure.
- Evaluate the continuing MAXEX guarantee exposure and the financial capacity and ongoing compliance of the party that assumed the obligations.