Lument Finance Trust, Inc. — Q3 2023 Form 10-Q
Reporting period: Three and nine months ended September 30, 2023; comparisons are to the corresponding 2022 periods unless stated otherwise. Lument Finance Trust is an externally managed REIT focused primarily on originating, financing and managing commercial real estate debt, especially transitional multifamily loans.
Financial performance and position
| Metric | Q3 2023 / Sept. 30, 2023 | Comparable period / prior year-end |
|---|---|---|
| Net interest income | $9.5 million for Q3; $25.3 million for nine months | $5.5 million for Q3 2022; $17.0 million for nine months 2022 |
| Net income attributable to common stockholders | $5.2 million for Q3; $11.1 million for nine months | $0.3 million for Q3 2022; $4.2 million for nine months 2022 |
| Basic and diluted EPS | $0.10 for Q3; $0.21 for nine months | $0.01 for Q3 2022; $0.09 for nine months 2022 |
| Common dividends declared | $0.07 per share for Q3; $0.19 year-to-date | $0.06 per share for Q3 2022; $0.18 for nine months 2022 |
| Distributable Earnings (non-GAAP) | $0.11 per share for Q3 | $0.04 per share for Q2 2023 |
| Common book value per share | $3.46 | $3.43 at June 30, 2023 |
| Commercial mortgage loans, net of allowance | $1.351 billion | $1.072 billion at Dec. 31, 2022 |
| Unrestricted cash | $43.4 million | $43.9 million at Dec. 31, 2022 |
| Collateralized obligations and secured financings, net | $1.145 billion | $829.3 million at Dec. 31, 2022 |
| Secured term loan | $47.75 million principal; 7.25% rate | $47.75 million principal at Dec. 31, 2022 |
The filing does not provide a clear net interest margin figure. Nine-month operating cash flow was $15.5 million, investing cash outflow was $314.2 million, and financing cash inflow was $300.9 million. Cash, cash equivalents and restricted cash totaled $49.6 million at quarter-end. GAAP total debt-to-equity was 5.0:1; recourse debt-to-equity was 0.2:1. CLO and secured-financing debt is non-recourse to the Company, subject to the stated securitization arrangements.
Material changes and notable developments
- Q3 net interest income rose to $9.5 million from $5.5 million, driven mainly by portfolio growth and higher floating rates and spreads; higher secured borrowing balances, rates and spreads partly offset the increase.
- Nine-month common earnings increased to $11.1 million from $4.2 million. The larger loan portfolio and higher net interest income were the principal drivers.
- The loan portfolio grew to 87 loans with $1.363 billion unpaid principal, from 71 loans and $1.077 billion at year-end 2022. The weighted-average coupon increased to 8.8% from 7.6%; loans were floating-rate and indexed to 30-day Term SOFR at September 30.
- The weighted-average internal loan risk rating worsened to 3.4 from 3.0. Management reported $68.6 million of loans across three multifamily properties as impaired and on non-accrual, due to actual or expected monetary default; no specific asset reserves were required after collateral analysis. The filing also states 96.4% of loans were current as to principal and interest.
- In July, the Company closed LMF 2023-1, a matched-term, non-recourse financing secured by $386.4 million of first-lien floating-rate multifamily loans. It raised approximately $317.7 million in senior financing and retained subordinate interests of approximately $68.6 million. The financing is not subject to margin calls or additional collateralization requirements.
- In Q2, the Company expensed $1.7 million of costs after abandoning a contemplated public CRE CLO because of capital-market conditions. This contributed to nine-month other operating expenses of $2.0 million, up from $0.2 million in the prior-year period.
- Adoption of CECL on January 1, 2023 reduced accumulated earnings by $3.6 million. The quarter-end allowance for loan credit losses was $4.7 million.
Outlook, risks and contingencies
- Management believes prior equity proceeds and operating cash flow, together with current borrowing arrangements, are sufficient for anticipated short-term liquidity needs (one year or less). Long-term funding needs may require additional debt, CLO issuance or equity capital; no quantified earnings or revenue guidance is provided.
- Management cited inflation, higher interest rates, slower growth, geopolitical uncertainty and capital-market volatility as risks. Floating rates may support interest income, but higher borrower debt service can weaken property cash flows and borrowers’ ability to refinance or repay.
- The Company reported that 99.9% of investments by total exposure earned floating rates and all secured financing was indexed to 30-day Term SOFR. Reinvestment periods expire in December 2023 for the 2021-FL1 CLO and July 2025 for LMF 2023-1.
- The Company reported that CLO coverage and collateralization tests were met and that it complied with secured term-loan covenants. The $47.75 million secured term loan matures in February 2026.
- Unfunded commitments included $6.7 million for LCMT, $52.7 million for LSF-related loans in the 2021-FL1 CLO and $25.1 million for LSF-related loans in LMF 2023-1. These amounts are not reflected on the consolidated balance sheet.
- Legacy MAXEX backstop guarantees had a stated maximum potential amount of $145 million, based on underlying loan balances. MAXEX Clearing LLC assumed the obligations and indemnified FOAC; the Company said it was not aware of circumstances expected to trigger a guarantee. No material litigation was reported.
- The common dividend rose to $0.07 per share for Q3 from $0.06 in Q2. The filing states the Company intends to continue regular quarterly distributions, subject to operating, debt-service and REIT requirements.
Important facts for investors to verify
- Credit performance and resolution prospects for the three impaired, non-accrual multifamily loans totaling $68.6 million, and the basis for the reported 96.4% current-payment figure.
- Whether portfolio and borrower performance support the $4.7 million CECL allowance as forecasts, interest rates and property fundamentals change.
- Funding costs, refinancing capacity and reinvestment economics as the 2021-FL1 reinvestment period ends and market liquidity remains uncertain.
- Liquidity available for future loan fundings, dividends and other obligations, including the timing and amount of unfunded commitments.
- Related-party aspects of LMF 2023-1, including notes sold to an affiliate of the external manager and loans purchased from manager affiliates; also review the management agreement’s renewal terms.
- Distributable Earnings is non-GAAP and is not cash flow or a measure of liquidity; review its reconciliation to GAAP earnings when assessing dividend coverage.