Lument Finance Trust, Inc. quarterly report, Q3 FY2021

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Lument Finance Trust, Inc. — Q3 2021 Form 10-Q

Reporting period: Three and nine months ended September 30, 2021. Lument is an externally managed commercial real estate debt investor, focused primarily on transitional, floating-rate loans, especially multifamily. The interim financial statements are unaudited.

Financial and operating highlights

  • Q3 results: Net interest income was $4.73 million, down 2.0% from $4.83 million a year earlier. Net income was $2.37 million versus $2.55 million; net income attributable to common stockholders was $1.18 million, or $0.05 per share, compared with $2.55 million, or $0.10 per share.
  • Nine-month results: Net interest income rose to $14.50 million from $13.79 million. Net income increased to $6.86 million from $5.98 million, but common-stockholder income declined to $4.94 million from $5.97 million, or $0.20 versus $0.24 per share.
  • Drivers and unusual items: Nine-month 2021 results included a $1.66 million loss on extinguishment of debt from unwinding older CLOs. Preferred dividends of $1.93 million reduced income attributable to common stockholders; none were outstanding at the prior-year period-end. The company also recorded $0.30 million of nine-month unrealized MSR losses. Total expenses fell to $6.03 million for the nine months from $7.23 million.
  • Portfolio: Commercial mortgage loans held for investment were $803.1 million across 53 senior secured loans, up from $547.3 million and 40 loans at December 31, 2020. All loans were floating-rate; the weighted-average coupon was 4.3%, remaining term 3.7 years, and internal weighted-average risk rating 2.3 versus 3.1 at year-end. Management reported all loans current, with no nonaccrual, maturity-default, or impaired loans and no loan-loss allowance.
  • Profitability and distributions: Q3 GAAP EPS was $0.05, compared with the $0.09 common dividend per share; management reported non-GAAP Distributable Earnings of $0.06 per share. Nine-month common dividends declared were $0.27 per share. Distributable Earnings is management’s non-GAAP measure, not a measure of liquidity or cash available for distributions. No profit margin measure is clearly reported.
  • Balance sheet and liquidity: Total assets were $1.05 billion and total liabilities $880.9 million at September 30, 2021, versus $621.5 million and $507.8 million, respectively, at December 31, 2020. Cash and cash equivalents were $44.1 million; restricted cash was $148.1 million and is held in the CLO for reinvestment, so it is not generally available for corporate use. Common book value was $4.37 per share, down from $4.41 at June 30, 2021.
  • Debt and capital: CLO liabilities had a carrying value of $826.1 million and $833.8 million face value; these are nonrecourse obligations of the consolidated CLO. The secured term loan had $47.75 million principal outstanding at a 7.25% fixed rate and matures in February 2026. Management reported recourse debt-to-equity of 0.2:1 and total GAAP debt-to-equity of 5.2:1. The company issued 2.4 million Series A preferred shares in May, raising approximately $58.1 million net before offering expenses; the preferred carries a 7.875% rate and $60 million liquidation preference.
  • Cash flow: For the first nine months, operating cash flow was $11.9 million, investing cash outflow $305.0 million, and financing cash inflow $415.8 million. Cash, cash equivalents and restricted cash increased $122.8 million to $192.1 million. Investing outflows primarily reflected loan purchases and fundings; financing inflows primarily reflected CLO and preferred-stock issuance.

Changes versus comparable periods

  • Q3 common-stockholder income and EPS were lower year over year, mainly reflecting preferred dividends, slightly lower net interest income, and higher expenses. Other income improved from a loss to a small gain, largely because MSR valuation losses were smaller.
  • Nine-month net interest income improved, while common-stockholder income and EPS declined. Higher net interest income and lower expenses were more than offset by the debt-extinguishment loss, MSR valuation losses, and preferred dividends.
  • The June 2021 CLO refinancing replaced two older CLOs, issued $833.8 million of investment-grade notes to third parties and retained $70 million of below-investment-grade notes. The company also retained a $96.25 million equity interest and reported a $166.2 million residual interest exposure.

Outlook, risks and contingencies

  • Management gave no quantified earnings or dividend guidance. It said available liquidity and borrowing arrangements should meet anticipated short-term needs, while longer-term requirements may depend on additional debt financing or equity capital. It expects loan deployment to take time, potentially weighing on net interest income while proceeds remain uninvested.
  • COVID-19 and its economic effects could weaken property cash flows, occupancy, rents, collateral values, borrower performance and the company’s ability to pay distributions or meet obligations. Management reported heightened credit risk despite current loan payments and no impairments.
  • All commercial loans and CLOs were indexed to one-month U.S. LIBOR. LIBOR cessation and transition to alternative rates, including SOFR, could affect asset and funding economics; management said contractual fallback provisions exist but outcomes remain uncertain.
  • Interest-rate and prepayment changes may affect loan income, CLO reinvestment returns and MSR valuations. The company also depends on continued access to CLO markets, financing and equity capital to grow investments.
  • The company reported $66.7 million of unfunded commitments related to loans held in the CLO, associated with an affiliate of the Manager. The potential MAXEX backstop guarantee exposure was estimated at $465.2 million of underlying loan balances; MAXEX Clearing LLC assumed the obligations and indemnified FOAC, and management reported no known circumstances expected to trigger a guarantee.
  • The company reported no material legal proceedings, no recorded COVID-related contingencies, and compliance with secured-term-loan covenants and CLO coverage tests. It stated disclosure controls were effective and reported no material change in internal control over financial reporting.

Important facts for investors to verify

  • How quickly the $148.1 million of restricted CLO cash and other capital can be deployed, and the effect of any deployment lag on net interest income.
  • Whether the portfolio’s loan performance and internal risk ratings remain stable as COVID-related uncertainty and property-level pressures evolve.
  • The economics and fallback terms for the LIBOR-to-SOFR transition across both loans and CLO funding.
  • The sustainability of the $0.09 quarterly common dividend relative to GAAP EPS, Distributable Earnings, preferred dividends and REIT distribution requirements.
  • The actual liquidity implications of the $66.7 million unfunded commitments, CLO restrictions, recourse term debt and MAXEX backstop arrangement.