Business context and reporting period
Annual report for the fiscal year ended December 31, 2019, filed by Hunt Companies Finance Trust, Inc. (NYSE: HCFT), a REIT focused primarily on floating-rate transitional commercial real estate loans, especially multifamily. The filing is not titled in the name “Lument Finance Trust”; investors should verify the issuer identity and any subsequent name change.
At year-end, the portfolio comprised 51 senior secured floating-rate loans with $635.3 million unpaid principal, a 5.4% weighted-average coupon, 3.8-year weighted-average term, and 93.9% multifamily collateral. All loans had LIBOR floors, averaging 1.56%. The company also held $2.7 million of residential mortgage servicing rights.
Financial results and position
| Metric | 2019 | 2018 |
|---|---|---|
| Interest income | $39.1 million | $59.0 million |
| Interest expense | $23.6 million | $41.6 million |
| Net interest income | $15.4 million | $17.4 million |
| Total other loss | $0.4 million | $11.4 million |
| Total expenses | $8.8 million | $10.0 million |
| Net income (loss) | $6.2 million | $(5.5) million |
| Net income (loss) attributable to common stockholders | $2.7 million; $0.11 per share | $(9.0) million; $(0.38) per share |
| Cash provided by operating activities | $7.3 million | $12.3 million |
| Common dividends declared per share | $0.30 | $0.28 |
Net interest margin is not clearly provided in the filing. Results are not directly comparable year over year because of the shift away from legacy mortgage-backed securities, trust deconsolidations, CLO financing, and the 2019 preferred-stock redemption and term-loan draw.
At December 31, 2019, total assets were $657.9 million, total liabilities $549.3 million, and total equity $108.6 million. Unrestricted cash was $10.9 million; restricted cash was $5.1 million. Debt included $505.9 million of CLO liabilities, which are non-recourse to the company, and a $40.25 million secured term loan bearing a fixed 7.25% rate. The company reported total debt-to-equity of 5.0:1 on a GAAP basis and recourse debt-to-equity of 0.4:1. Book value was $4.59 per common share, down from $4.77 at 2018 year-end. No loan impairments, delinquencies, nonaccrual loans, or maturity defaults were reported.
Material changes versus the prior comparable period
- Common-stockholder results improved from a $9.0 million loss to $2.7 million of income, primarily because other losses and total expenses declined; net interest income also declined by $2.0 million.
- The loan portfolio grew from $555.2 million to $635.3 million, with 2019 purchases of $300.3 million, repayments of $213.4 million, and sales of $6.8 million.
- The company redeemed all 1.61 million Series A preferred shares in February 2019 for $40.25 million, funded principally by a six-year secured term loan. The redemption reduced reported year-end equity.
- The company held no available-for-sale securities, repurchase-agreement financing, or derivatives at year-end, having completed its transition from legacy securities toward CRE loans.
- In January 2020, management transferred from Hunt Investment Management to OREC Investment Management, an ORIX USA affiliate. An ORIX USA affiliate invested $5.75 million for 1,246,719 shares at $4.61 per share, approximately 5% of outstanding common shares. The management agreement’s material terms, including fee and expense-cap provisions, were described as substantially aligned with the prior arrangement.
- The company said previously identified material weaknesses in internal controls had been remediated; management and the auditor reported effective internal control over financial reporting at year-end.
Outlook, risks, contingencies, and unusual items
- Management believed existing cash flows and borrowing capacity would meet anticipated short-term liquidity needs. Longer-term needs depend in part on obtaining additional debt or equity financing. The pending IRS resolution concerning the 2018 REIT income-test failure could limit certain financing transactions and equity raises.
- The company failed the REIT 75% gross-income test in 2018 due to gains on terminated hedges. It paid approximately $1.96 million in tax and claimed statutory relief on its 2018 return; an IRS closing agreement remained pending. Management believed REIT status was more likely than not unaffected but gave no assurance.
- The filing discusses the COVID-19 outbreak and related economic disruption as a risk. It noted that, as of early 2020, 99% of loans had LIBOR floors above then-current spot LIBOR; it did not quantify the pandemic’s effects on borrowers, portfolio values, earnings, or liquidity.
- Interest-rate exposure is mixed: management said rising rates generally increase net interest income for its floating-rate portfolio, while falling rates generally reduce it. Borrower stress, credit losses, refinancing availability, property values, prepayments, and LIBOR transition are key risks. The filing cited the planned LIBOR phaseout after 2021.
- Maximum potential payments under legacy mortgage-loan backstop guarantees were estimated at $1.405 billion, but MAXEX Clearing LLC had assumed the obligations and agreed to indemnify FOAC. The company said it knew of no circumstances expected to trigger a payment; the stated maximum is not an estimate of expected loss.
- Year-end unfunded commitments included $50.5 million associated with CLO 2017-FL1 and $41.6 million associated with CLO 2018-FL2; the latter were described as obligations of an affiliate, not commitments of the company.
- The filing reports no pending litigation. It also notes competition, concentration in multifamily and certain regions, leverage and covenant risks, illiquid assets, REIT and Investment Company Act qualification requirements, and potential conflicts with the external manager and its affiliates.
Important facts for investors to verify
- Confirm the registrant’s identity and any relationship to the “Lument Finance Trust” name in the request; the filing itself identifies Hunt Companies Finance Trust, Inc.
- Resolve the portfolio-size discrepancy: the detailed year-end table reports $635.3 million of loans, while a 2019 highlights passage says $653.3 million.
- Track the IRS closing agreement and the possible consequences for REIT status, distributions, and access to financing.
- Review loan concentrations, credit ratings and collateral performance, particularly in multifamily and the Southwest/South regions, and assess exposures to pandemic-related borrower stress.
- Assess debt-service capacity, loan and liability repricing under falling or rising rates, LIBOR replacement terms, CLO reinvestment economics, and available liquidity for commitments and dividends.
- Review the assumptions behind MSR and collateral valuations, the backstop-guarantee indemnification and counterparty protections, and the terms and governance implications of the ORIX-affiliated management and equity transactions.