Lument Finance Trust, Inc. — Q1 2023 Form 10-Q
Reporting period: Three months ended March 31, 2023. The company is an externally managed REIT investing primarily in transitional commercial real estate debt, with an emphasis on floating-rate multifamily loans.
Financial performance and position
- Earnings: Net income was $5.77 million; income attributable to common stockholders was $4.58 million, or $0.09 per diluted share, versus $1.77 million and $0.05 per share in Q1 2022.
- Interest results: Net interest income rose to $8.25 million from $5.09 million. Loan interest income was $21.94 million; CLO interest expense increased to $13.03 million from $4.00 million. Total expenses increased to $2.67 million from $2.30 million.
- Distributions and non-GAAP earnings: The common dividend was $0.06 per share, unchanged year over year. Distributable Earnings, a non-GAAP measure, were $172,618, or $0.00 per share, compared with $3.32 million, or $0.06 per share, in the preceding quarter.
- Portfolio and assets: Commercial mortgage loans, net of allowance, were $1.016 billion, down from $1.072 billion at year-end. The portfolio comprised 67 senior secured loans with an 8.1% weighted-average coupon and 3.2-year weighted-average remaining term. Multifamily represented 89.7% of collateral value.
- Liquidity and cash flow: Unrestricted cash was $98.6 million, up from $43.9 million at year-end; restricted cash was $1.9 million. Q1 operating cash flow was $5.84 million and investing cash flow was $51.63 million, primarily reflecting loan principal repayments. Financing cash flow was negative $4.32 million, mainly dividends paid.
- Debt and equity: CLO liabilities were $829.9 million carrying value ($833.8 million principal) and are non-recourse to the company. The secured term loan was $47.75 million principal, at 7.25%, with a February 2026 maturity. Management reported total debt-to-equity of 3.7:1 on a GAAP basis and recourse debt-to-equity of 0.2:1. Common book value was $3.46 per share, versus $3.50 at year-end.
Material changes and credit developments
- Net interest income increased year over year, primarily due to higher average loan balances and floating rates, partly offset by higher CLO funding costs. Common EPS improved, while operating expenses also rose.
- The company adopted CECL on January 1, recording a $3.59 million reduction to accumulated earnings. The quarter-end loan allowance was $3.36 million; a $4.27 million charge-off followed the discounted payoff of an impaired office loan.
- Portfolio credit indicators weakened: the weighted-average internal risk rating moved to 3.2 from 3.0, and 83.3% of net loan carrying value was rated moderate risk or better, compared with 93.8% at year-end.
- In February, the company accepted approximately $6.0 million on an office loan with $10.3 million unpaid principal; the related allowance had been recorded in 2022, so the charge-off had de minimis Q1 income impact. A separate $12.8 million multifamily loan was impaired and on non-accrual after monetary default; management reported no reserve was required based on collateral analysis. The filing reports 98.8% of loans current as to principal and interest.
Outlook, risks, and contingencies
- No specific earnings or dividend guidance was provided. Management said available cash, operating cash flow, and borrowing capacity should meet anticipated short-term liquidity needs; longer-term needs may require additional debt or equity financing.
- Management expects to convert LIBOR-based loans and CLO liabilities to Term SOFR during Q2 2023 ahead of the LIBOR phase-out. At quarter-end, 76.3% of loan exposure was indexed to LIBOR and 23.7% to Term SOFR; the CLO liabilities were LIBOR-indexed.
- Management cautioned that inflation, rising rates, slower growth, geopolitical uncertainty, and banking-sector instability could constrain capital-market liquidity and increase borrowing costs. Higher rates can support net interest income but may pressure borrower cash flows and refinancing capacity.
- Unfunded commitments included $6.7 million related to loans held in the consolidated CLO and commitments from Manager affiliate LSF of $65.0 million for CLO-held loans and $0.4 million for loans held in LCMT; these amounts were not reflected as company balance-sheet liabilities.
- The maximum potential balance under legacy mortgage backstop guarantees was estimated at $167 million, but MAXEX Clearing LLC assumed the obligations and agreed to indemnify FOAC. The company reported no known circumstances expected to trigger a guarantee payment. No material litigation or subsequent events requiring disclosure were reported.
- The company stated it was in compliance with secured-term-loan covenants and REIT requirements. Disclosure controls were assessed as effective, with no material change in internal control reported.
Key facts for investors to verify
- Whether the non-accrual multifamily loan remains adequately collateralized and whether additional loans migrate to higher-risk grades.
- CECL reserve assumptions and the effects of further charge-offs or changes in expected credit losses.
- Progress and terms of the LIBOR-to-SOFR transition, including treatment of the CLO liabilities.
- Ability to sustain the $0.06 common dividend given Q1 Distributable Earnings of $0.00 per share and ongoing REIT distribution requirements.
- Liquidity and funding needs as the CLO reinvestment period approaches its stated December 2023 end, and whether new financing or equity is needed for growth.