Lument Finance Trust, Inc. — Q2 2023 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2023. Lument Finance Trust is an externally managed REIT investing primarily in transitional, floating-rate commercial real estate debt, with an emphasis on multifamily properties.
Financial performance and position
| Metric | Q2 2023 / June 30, 2023 | Comparable period / prior year-end |
|---|---|---|
| Net interest income | $7.5 million | $6.4 million in Q2 2022 |
| Net income attributable to common stockholders | $1.4 million; $0.03 per share | $2.2 million; $0.04 per share in Q2 2022 |
| Six-month net income attributable to common stockholders | $6.0 million; $0.11 per share | $3.9 million; $0.09 per share in H1 2022 |
| Q2 common dividend declared | $0.06 per share | $0.06 per share in Q2 2022 |
| Commercial mortgage loans, net of allowance | $1,017.1 million; 66 loans | $1,071.9 million at December 31, 2022 |
| Cash and cash equivalents | $98.5 million unrestricted; $99.8 million including restricted cash | $43.9 million unrestricted at December 31, 2022 |
| Total assets / total equity | $1,126.0 million / $239.1 million | $1,128.0 million / $243.0 million at December 31, 2022 |
| Debt | $830.6 million CLO liabilities and $47.1 million secured term loan, net | Term-loan principal is $47.75 million; fixed rate 7.25%, maturity February 2026 |
| Book value per common share | $3.43 | $3.46 at March 31, 2023 |
For the six months, operating cash flow was $10.1 million, investing cash flow was positive $51.0 million as loan principal repayments exceeded purchases and advances, and financing cash flow was negative $8.6 million, primarily reflecting dividends. Cash, cash equivalents and restricted cash increased $52.4 million.
The filing reports a GAAP total debt-to-equity ratio of 3.7:1 and recourse debt-to-equity of 0.2:1. CLO obligations are non-recourse to Lument as consolidator; CLO collateral assets are restricted to meeting the trust’s obligations. The company reported compliance with secured-term-loan covenants.
Material changes and operating developments
- Q2 net interest income increased year over year, but common-stockholder income fell. The company attributed the decline to higher other losses and expenses, including $1.7 million of costs expensed after abandoning a contemplated public CRE CLO transaction.
- For H1, common-stockholder income rose year over year as higher net interest income more than offset increased expenses and other losses. Higher floating rates and loan spreads supported interest income, while higher CLO funding costs and a lower average loan balance were offsets.
- The portfolio’s weighted-average risk rating increased to 3.4 from 3.0 at year-end 2022. Management reported that 85.0% of net loan carrying value was rated moderate risk or better, versus 93.8% at year-end.
- At June 30, 98.8% of commercial mortgage loans were current as to principal and interest. One $12.8 million multifamily loan was impaired and on non-accrual due to monetary default; management reported no required reserve based on collateral value. A separate office loan was resolved through a roughly $6.0 million discounted payoff against $10.3 million principal, with a previously established $4.3 million allowance charged off.
- The company adopted CECL on January 1, 2023, recording a $3.6 million reduction to accumulated earnings. At June 30, the loan allowance was $3.9 million, with an additional $55,941 allowance for unfunded commitments.
- All loans were floating-rate; 73.9% of investment exposure was indexed to one-month LIBOR and 26.1% to Term SOFR at quarter-end. The company said it completed conversion of LIBOR-based loans and CLO liabilities to Term SOFR during Q2, for rate settings beginning in July.
Outlook, risks, and contingencies
No formal earnings or dividend guidance is provided. Management stated that prior equity proceeds, operating cash flow and available borrowing arrangements should cover anticipated short-term liquidity needs, while long-term liquidity will depend in part on obtaining additional debt or equity capital. Management intends to continue regular quarterly common-stock distributions. The Q2 common dividend of $0.06 per share and Series A preferred dividend of $0.49219 per share were paid July 17, 2023.
Management noted that higher rates can increase income on floating-rate loans but also raise borrower debt-service costs and refinancing risk, while increasing funding costs. Other cited risks include economic and real estate weakness, credit deterioration, capital-market disruption, reduced liquidity, prepayments and uncertainty around reinvestment spreads. The portfolio is concentrated in multifamily (89.5% of loan carrying value); 45.2% was geographically in the South and 24.8% in the Southwest.
On July 12, 2023, after quarter-end, the company closed LMF 2023-1, a matched-term, non-recourse financing secured by $386.4 million of floating-rate multifamily mortgage assets. It included approximately $270.4 million of senior secured loan financing and $47.3 million of notes sold to an affiliate of the external manager; Lument retained approximately $68.6 million of subordinate interests. The financing is not subject to margin calls or additional collateralization requirements. The filing also reports unfunded loan commitments and a legacy backstop guarantee exposure; management said it was not aware of circumstances expected to trigger the guarantee. No material legal proceedings or material changes to previously reported risk factors were disclosed.
Important facts for investors to verify
- Whether the $12.8 million non-accrual multifamily loan’s performance, collateral value and reserve assessment change.
- How the worsening portfolio risk-rating profile and CECL estimates evolve, including the assumptions used in forward-looking credit-loss forecasts.
- Whether loan yields continue to outpace CLO and term-loan funding costs as rates and borrower credit conditions change.
- The economics, related-party terms, collateral performance and reinvestment outcomes of the July 2023 LMF 2023-1 financing.
- Whether distributable earnings and cash generation support the $0.06 quarterly common dividend; Q2 GAAP earnings per share was $0.03 and management-reported distributable earnings per share was $0.04.
- Related-party loan purchases and financing arrangements, legacy guarantee exposure, unfunded commitments, and compliance with REIT and debt covenants.