Business context and reporting period
This is the unaudited Form 10-Q for the quarter and nine months ended September 30, 2019. The filing identifies the registrant as Hunt Companies Finance Trust, Inc. (NYSE: HCFT); it does not identify the company as Lument Finance Trust. The company is an externally managed mortgage REIT focused mainly on transitional, floating-rate commercial real estate loans, predominantly multifamily loans.
Key financial results and position
| Metric | Q3 2019 / September 30, 2019 | Comparable period / prior year-end |
|---|---|---|
| Interest income | $9.83 million | $9.72 million in Q3 2018 |
| Net interest income | $3.80 million | $5.11 million in Q3 2018 |
| Net income | $2.16 million; $2.15 million attributable to common stockholders, or $0.09 per share | $4.35 million; $3.47 million attributable to common stockholders, or $0.15 per share, in Q3 2018 |
| Nine-month common-stockholder result | $1.45 million income, or $0.06 per share | $8.45 million loss, or $0.36 loss per share, in 2018 |
| Total assets | $657.4 million | $679.4 million at December 31, 2018 |
| Total equity | $109.2 million; book value $4.61 per common share | $150.2 million at December 31, 2018 |
| Cash and restricted cash | $91.3 million combined, including $10.3 million unrestricted cash and $81.0 million restricted | $59.2 million combined at December 31, 2018 |
| Debt | $505.4 million CLO obligations and $39.3 million net secured term loan | $504.0 million CLO obligations and no term loan at December 31, 2018 |
| Cash flow, nine months | Operations: +$5.1 million; investing: +$33.4 million; financing: -$6.5 million | Operations: +$11.1 million; investing: +$1.05 billion; financing: -$1.02 billion in 2018 |
The filing does not provide a conventional operating-margin measure. It reports net interest income of $12.05 million for the first nine months, down from $12.80 million in 2018. Common dividends declared were $0.075 per share for Q3 and $0.22 per share year to date.
Portfolio and material changes
- The September 30 loan portfolio was $559.5 million across 45 senior secured loans, all floating-rate; average coupon was 5.8% and weighted average life was 3.8 years. Multifamily collateral represented 92.0% of the portfolio, and the Southwest represented 39.3%.
- Portfolio risk rating averaged 2.9; 91.0% of loans were rated moderate risk or better. The company reported no impaired, nonaccrual, or maturity-default loans and no loan-loss allowance.
- Management reported Q3 loan purchases of $61.6 million and payoffs of $101.8 million. The nine-month portfolio activity table shows purchases of $179.1 million and principal repayments of $174.7 million.
- In February 2019, the company drew $40.25 million under a six-year secured term loan bearing a fixed 7.25% rate and used the proceeds, together with working capital, to redeem all $40.25 million of its Series A preferred stock. The preferred redemption generated a $3.09 million deemed dividend for year-to-date common-stockholder earnings.
- The company completed its shift away from legacy mortgage-backed securities: it held no available-for-sale securities or derivatives at September 30, 2019, and no longer consolidated the former multifamily securitization trusts. Comparisons with 2018 are therefore affected by portfolio sales, trust deconsolidations, CLO financing, and the new term loan.
Outlook, risks, and unusual items
- No numerical earnings or investment guidance is provided. Management says available cash, operating cash flow, and borrowing capacity should meet anticipated short-term needs; longer-term funding depends partly on additional debt or equity financing.
- Management states rising rates generally may increase net interest income, but higher borrower debt-service costs could weaken property cash flows and increase default risk. The loans and CLOs are substantially indexed to 30-day LIBOR. Credit, property-value, prepayment, liquidity, and financing availability are additional stated risks.
- CLO debt is non-recourse to the company as consolidator and is not subject to margin calls, but is a substantial part of reported leverage. Management reported total debt-to-equity of 5.0:1 on a GAAP basis and recourse debt-to-equity of 0.4:1; term-loan covenants were reported in compliance.
- Unfunded commitments were $46.5 million for loans held in Hunt CRE 2017-FL1. A further $46.3 million related to Hunt CRE 2018-FL2 was attributed to HFC, an affiliate of the manager, not directly to the company.
- The filing estimates maximum potential payments under legacy seller-backstop guarantees at $1.405 billion. MAXEX Clearing LLC assumed the obligations and agreed to indemnify FOAC, but the stated maximum remains a contingent exposure to review; the company reported no known circumstances expected to trigger a payment.
- The company failed the REIT 75% gross-income test for 2018 due to hedge-termination gains and paid the resulting $1.96 million tax in April 2019. It said it believed the failure would not affect its REIT election.
- Management concluded disclosure controls were ineffective as of September 30, 2019 because of continuing material weaknesses involving tax-specialist oversight and documentation of management review controls, as well as account-balance review. Remediation steps were underway but not yet fully tested and concluded effective.
Important facts for investors to verify
- Confirm the issuer and security identity: this filing is for Hunt Companies Finance Trust, Inc. (HCFT), despite the request metadata naming Lument Finance Trust.
- Review loan-level credit performance, collateral valuations, concentrations, and the effect of rate changes on borrowers and floating-rate loan spreads.
- Assess the company’s dependence on CLO structures and its ability to refinance or raise capital, including the term loan’s covenants and six-year maturity.
- Track the MAXEX backstop assumption, indemnity, and ongoing counterparty financial-condition requirements, alongside the reported guarantee amount.
- Monitor remediation of the material weaknesses and ongoing REIT compliance; the filing says controls were not effective and the 2018 income test was failed.
- Compare cash available for distributions with taxable income, required REIT distributions, and future unfunded loan commitments.