Lument Finance Trust, Inc. quarterly report, Q3 FY2020

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Business context and reporting period

The supplied filing is Hunt Companies Finance Trust, Inc. (NYSE: HCFT), not a filing identified as Lument Finance Trust, Inc. It is the unaudited Form 10-Q for the quarter and nine months ended September 30, 2020. The company is an externally managed REIT focused primarily on transitional, floating-rate commercial real estate loans, especially multifamily. OREC Investment Management became manager in January 2020; an ORIX USA affiliate acquired approximately 5% of the common stock in a private placement.

Financial performance and position

  • Third-quarter results: Net interest income was $4.83 million, versus $3.80 million a year earlier. Net income attributable to common stockholders was $2.55 million, or $0.10 per diluted share, versus $2.15 million, or $0.09. Total expenses increased to $2.26 million from $1.70 million.
  • Nine-month results: Net interest income was $13.79 million, versus $12.05 million. Net income attributable to common stockholders was $5.97 million, or $0.24 per diluted share, versus $1.45 million, or $0.06. The prior-year comparison includes a $3.09 million deemed preferred-stock redemption dividend and substantially more preferred dividends.
  • Income and costs: Loan interest income was $8.11 million in Q3 and $25.75 million year to date. The filing does not provide a clear operating-margin measure. Nine-month other losses totaled $1.02 million, including $1.60 million of unrealized MSR losses.
  • Portfolio: Commercial mortgage loans were $598.9 million across 44 loans at September 30, down from $635.3 million and 51 loans at year-end 2019. The weighted-average coupon was 5.1%, and all loans were floating-rate. Multifamily represented 90.4% of collateral property types.
  • Liquidity and cash flow: Unrestricted cash was $9.7 million and restricted cash was $14.5 million. For the nine months, operating cash flow was $8.6 million, investing cash flow was $27.2 million, and financing cash flow was negative $27.5 million.
  • Debt and equity: September 30 debt included $479.7 million of CLO liabilities on the balance sheet ($482.4 million principal) and a $40.25 million secured term loan, bearing 7.25% and maturing in January 2025. The CLO obligations are non-recourse to the company as consolidator and term-matched to collateral. Reported total debt-to-equity was 4.6x; recourse debt-to-equity was 0.4x. Total equity was $114.5 million; book value per common share was $4.59.
  • Distributions: The company declared $0.24 per common share for the first nine months. The third-quarter dividend was $0.085 per share, up from $0.075 in Q2, and was paid October 15, 2020.

Material changes versus comparable periods

  • Q3 net interest income rose about 27% year over year, while common-stockholder net income rose about 18%. For the nine-month comparison, the substantial increase in common earnings is affected by the prior-year preferred-stock redemption and related deemed dividend, so it is not a like-for-like operating comparison.
  • Lower LIBOR reduced CLO funding costs, while loan interest income fell year over year as the portfolio contracted and average loan spreads declined. Management cited higher loan balances and LIBOR floors as factors supporting year-to-date net interest income.
  • The weighted-average portfolio risk rating worsened to 3.1 from 2.8 at year-end 2019; 81.0% of loans were rated moderate risk or better, versus 91.9%. Management attributed downgrades mainly to retail- and office-backed loans affected by COVID-19.
  • MSR fair value declined to $1.10 million from $2.70 million at year-end, reflecting lower interest rates, higher prepayments, and lower projected float income.
  • Common shares outstanding increased following the January private placement, which raised approximately $5.7 million net.

Outlook, risks, contingencies and unusual items

  • Management gave no quantified earnings or portfolio guidance. It said current liquidity and borrowing arrangements were expected to meet anticipated short-term requirements, while longer-term needs depend in part on obtaining additional debt or equity financing.
  • COVID-19 creates uncertainty around borrower cash flows, property values, credit losses, reinvestment opportunities, financing access, and dividends. At September 30, all loans were current, none were on non-accrual or impaired, no loan-loss allowance was recorded, and all loans made their October payments. Management nevertheless described portfolio credit risk as elevated and said it could not assure borrowers would remain current.
  • The expired February 2020 reinvestment period for CLO 2017-FL1 means repayments reduce earning assets unless refinanced; management said COVID-related market conditions could make refinancing more difficult. CLO coverage tests and secured-term-loan covenants were in compliance at quarter-end.
  • A contemplated CLO transaction was considered unlikely by year-end; $624,816 of previously deferred transaction costs was expensed in Q2 2020.
  • The company may be required, subject to manager-determined conditions, to purchase funded participations related to FL1 unfunded loan commitments at par. At quarter-end, $29.5 million remained unfunded. FL2 also had $40.9 million of affiliate-held unfunded commitments.
  • FOAC’s legacy backstop guarantees had a stated maximum potential amount of $860.5 million at September 30, 2020; MAXEX Clearing LLC assumed the obligations and agreed to indemnify FOAC. The company said it knew of no circumstances expected to trigger an obligation.
  • An IRS closing agreement in July 2020 resolved the 2018 REIT 75% gross-income-test failure under statutory relief; the company said its REIT election would not be affected.

Important facts for investors to verify

  1. Confirm the issuer identity: this supplied 10-Q is for Hunt Companies Finance Trust, Inc. (HCFT), not Lument Finance Trust, Inc.
  2. Track portfolio risk ratings, borrower payment performance, any forbearances or modifications, and potential loan-loss provisions as COVID-19 effects evolve.
  3. Assess refinancing and reinvestment plans for CLO 2017-FL1, funding needs under the affiliate participation arrangements, and the company’s capacity to sustain distributions.
  4. Review covenant headroom, the distinction between non-recourse CLO debt and recourse term debt, and available unrestricted liquidity.
  5. Examine related-party transactions and the terms governing the manager’s fees, expense reimbursements, and purchases of loan participations from affiliates.