Lument Finance Trust, Inc. — FY2021 Form 10-K
Reporting period: Fiscal year ended December 31, 2021; filed March 15, 2022. The filing also reports fourth-quarter results. Lument is an externally managed REIT focused mainly on transitional, floating-rate commercial real estate loans, particularly middle-market multifamily properties.
Financial and operating performance
| Metric | FY2021 | FY2020 |
|---|---|---|
| Commercial mortgage loan interest income | $36.2 million | $33.6 million |
| Net interest income | $20.7 million | $18.4 million |
| Net income attributable to common stockholders | $7.4 million; $0.30 per share | $8.4 million; $0.34 per share |
| Distributable Earnings (non-GAAP) | $9.7 million; $0.39 per share | $9.8 million; $0.39 per share |
| Common dividends declared | $0.36 per share | $0.37 per share |
| Cash from operating activities | $13.8 million | $12.2 million |
For Q4 2021, net income attributable to common stockholders was $2.5 million, or $0.10 per share; Distributable Earnings were $2.6 million, or $0.11 per share; and the common dividend declared was $0.09 per share. The filing describes Distributable Earnings as a supplemental non-GAAP measure, not a substitute for GAAP income or operating cash flow.
Balance sheet and liquidity: At year-end, total assets were $1.049 billion and total liabilities were $879.5 million. The loan portfolio comprised 66 senior secured floating-rate loans with $1.002 billion unpaid principal, a 3.9% weighted-average coupon, 3.7-year weighted-average term and 71.2% weighted-average origination LTV. Multifamily collateral represented 92.0% of the portfolio. Unrestricted cash was $14.7 million; restricted cash was $3.5 million.
Debt included $826.8 million of carrying-value, non-recourse CLO obligations and $46.8 million carrying value on the secured term loan. Reported total debt-to-equity was 5.2x; recourse debt-to-equity was 0.2x. The term loan’s outstanding principal was $47.75 million at a fixed 7.25% rate. Total stockholders’ equity was $169.4 million; common equity was $109.3 million and book value was $4.38 per common share, down from $4.56 a year earlier.
Cash, cash equivalents and restricted cash fell $51.1 million during 2021: operating activities provided $13.8 million, investing activities used $477.3 million, and financing activities provided $412.3 million. The filing states that current resources and borrowing arrangements were expected to cover anticipated short-term needs; longer-term funding needs may require additional debt or equity financing.
Changes versus the prior year
- Net interest income increased by $2.2 million, primarily reflecting a larger average loan portfolio and higher exit and extension fees, partly offset by higher CLO balances and lower loan floors and spreads.
- Common-stockholder net income declined by about $1.0 million despite higher net interest income and lower total expenses. Factors included a $1.7 million loss on extinguishment of debt and $3.1 million in preferred dividends, compared with $15,000 of preferred dividends in 2020.
- The portfolio grew from $547.3 million and 40 loans to $1.002 billion and 66 loans. The weighted-average coupon decreased from 5.1% to 3.9%, while the weighted-average LTV declined from 73.6% to 71.2%. Management’s weighted-average internal risk rating improved from 3.1 to 2.3.
- Common dividends declined from $0.37 to $0.36 per share. Book value per common share fell to $4.38 from $4.56; the filing cites debt-extinguishment loss and preferred-stock offering costs as contributors.
Outlook, risks and unusual items
- Management said COVID-19 did not significantly affect 2021 operating results, but warned that continuing pandemic effects could adversely affect borrowers, collateral values, reinvestment opportunities and 2022 results. All portfolio loans were current at year-end; there were no reported impairments, defaults, non-accrual loans or forbearance agreements.
- The Federal Reserve’s expected rate increases may affect borrower debt service, property values, refinancing and prepayments. Although management generally expects rising rates to benefit net interest income, the effect depends on asset and funding repricing, loan floors, spreads and credit performance.
- At year-end, all commercial loans and CLOs were indexed to one-month LIBOR. The filing discusses transition to SOFR and says the ultimate effects of benchmark replacement are uncertain.
- Key risks include high leverage, concentrated multifamily and geographic exposures, transitional-loan execution and refinancing risk, illiquid collateral, access to financing, and potential covenant constraints. The company is also dependent on its external manager and discloses potential conflicts related to affiliated investment allocations and transactions.
- In June 2021, Lument closed a $1.0 billion CRE CLO, issuing $833.8 million of investment-grade notes to third parties and retaining $70 million of below-investment-grade notes and a $96.25 million equity interest. It unwound two earlier CLOs, recognizing a $1.7 million debt-extinguishment loss.
- In May 2021, the company issued $60 million liquidation-preference of 7.875% Series A preferred stock. Subsequent to year-end, a February 2022 rights offering issued 27.3 million common shares for approximately $83.5 million gross proceeds; the company also amended a credit-facility leverage covenant.
- The audited financial statements received an unqualified opinion from KPMG. Management reported effective disclosure controls and internal control over financial reporting. The filing reported no current legal proceedings.
Important facts for investors to verify
- Whether loan performance, collateral values and borrower payment status remain sound, especially given the portfolio’s multifamily and regional concentrations.
- How the LIBOR-to-SOFR transition affects loan yields, funding costs and contractual fallback terms.
- Current leverage, covenant compliance, liquidity and the company’s capacity to fund loan commitments and distributions.
- Whether GAAP earnings and operating cash flow support common dividends; compare these with non-GAAP Distributable Earnings.
- The effects of the 2022 rights offering on share count, book value per share, leverage and future management fees.
- Related-party loan purchases, servicing and investment-allocation practices, including oversight of conflicts involving the external manager and its affiliates.