Business context and reporting period
This is the unaudited Form 10-Q for the quarter and six months ended June 30, 2018. The filing identifies the registrant as Hunt Companies Finance Trust, Inc. (formerly Five Oaks Investment Corp.), trading as HCFT after a May 2018 name change; it does not identify the company as Lument Finance Trust.
In January 2018, the company adopted a new strategy focused on transitional, floating-rate multifamily and other commercial real estate loans. During the quarter it largely exited its legacy mortgage-backed securities portfolio and acquired Hunt CMT Equity LLC, an affiliate-related transaction that included a commercial loan portfolio financed through a collateralized loan obligation (CLO).
Financial and operating results
| Metric | Q2 2018 / June 30, 2018 | Comparable period / prior year-end |
|---|---|---|
| Net interest income | $4.6 million for Q2; $7.7 million for the first half | $4.8 million for Q2 2017; $10.6 million for first half 2017 |
| Net income (loss) attributable to common stockholders | Loss of $22.4 million for Q2; loss of $11.9 million for the first half | Loss of $3.2 million for Q2 2017; loss of $1.7 million for first half 2017 |
| Basic and diluted loss per share | $(0.94) for Q2; $(0.51) for the first half | $(0.17) for Q2 2017; $(0.09) for first half 2017 |
| Total assets | $459.5 million | $2.61 billion at December 31, 2017 |
| Stockholders’ equity | $150.0 million, including $37.2 million preferred equity; common book value $4.77 per share | $145.8 million at December 31, 2017 |
| Cash and liquidity | $73.4 million unrestricted cash; $7.9 million restricted cash | $34.3 million unrestricted cash at December 31, 2017 |
| Debt and leverage | No recourse repurchase debt; $287.7 million CLO debt and $19.5 million multifamily securitized debt, both described as non-recourse. Total debt/equity was 1.9x on a GAAP basis; recourse debt/equity was 0.0x. | $1.23 billion of repurchase agreements and 8.5x recourse debt/equity at December 31, 2017 |
| Cash flow, first half | $5.8 million operating cash provided; $1.263 billion investing cash provided; $1.233 billion financing cash used; cash, cash equivalents and restricted cash increased $35.7 million to $81.3 million. | Operating cash used of $0.9 million in first half 2017 |
Q2 total other loss was $23.7 million, primarily reflecting realized investment-sale losses and unrealized derivative and multifamily-loan losses. For the first half, total other loss was $12.3 million. The company reported comprehensive income attributable to common stockholders of $1.1 million in Q2 and $0.7 million for the first half, including gains recorded in other comprehensive income.
Material changes versus prior periods
- Legacy MBS fair value fell from $1.29 billion at year-end 2017 to zero at June 30, 2018; the company reported it had sold all available-for-sale securities and remaining Non-Agency RMBS, and substantially all Multi-Family MBS.
- Commercial mortgage loans held for investment totaled $326.9 million: 22 senior secured loans, all floating-rate, with a 6.9% weighted-average coupon and 3.1-year weighted-average life. The portfolio was newly established in 2018.
- Interest income and net interest income declined year over year, largely due to MBS sales, shrinking balances in consolidated trusts and higher funding costs. The company cautioned that period comparisons are limited by the portfolio transition and trust deconsolidations.
- Common shares outstanding rose to 23.68 million from 22.14 million at year-end, including a 1.54 million-share private placement to a Hunt affiliate for approximately $7.3 million. Common dividends declared were $0.16 per share for the first half, versus $0.30 in first half 2017.
Outlook, risks, contingencies and unusual items
- Management said rising rates generally should increase net interest income because loans and CLO liabilities are floating-rate; its sensitivity estimate indicated a $0.11 million increase in annual net interest income for a 25-basis-point rate increase, assuming parallel and simultaneous resets. Actual results may differ.
- No earnings or dividend guidance was provided. Management stated it believed current cash, operating cash flow and available borrowing capacity would meet anticipated short-term needs, but longer-term growth depends in part on additional CLO issuance, other financing or equity capital.
- On August 3, 2018, the company announced pricing of a proposed $285 million CLO backed by 20 first-lien floating-rate commercial real estate loans to be acquired from a manager affiliate. Closing was expected around August 20, subject to customary conditions.
- Key exposures include commercial property and borrower credit performance, real estate values, geographic and multifamily concentration, refinancing and reinvestment terms, liquidity and access to capital. The company reported no loan impairments or allowance for loan losses at quarter-end; three loans were internally rated high risk, and the average portfolio rating was 3.0 (moderate risk).
- The company had $10.3 million in unfunded loan commitments. MAXEX backstop guarantees had a reported maximum potential exposure of $911.6 million in Note 15, while the MD&A reports $994.9 million; no contingent liability was recorded as probable and estimable. The guarantee arrangement was scheduled to terminate by December 31, 2018, or earlier at MAXEX’s option.
- Disclosure controls were deemed ineffective at June 30, 2018 because of previously identified material weaknesses involving tax review and review of account balances, including consolidated trusts. Management said remediation work was ongoing and targeted completion by December 31, 2018, but the weaknesses were not yet considered remediated.
- The 8.75% Series A preferred stock remained outstanding, with cumulative dividends senior to common distributions. The new manager agreement provides for a 1.50% annual base fee and, beginning after January 18, 2019, a potential incentive fee based on Core Earnings above an 8% annual return threshold.
Most important facts for investors to verify
- Confirm the registrant and ticker applicable to the requested issuer: this filing is for Hunt Companies Finance Trust, Inc. (HCFT), not under the name Lument Finance Trust.
- Reconcile the MAXEX guarantee exposure reported as $911.6 million in the notes versus $994.9 million in MD&A, and understand the remaining obligations and liquidity requirement.
- Review the loan-level credit profile, high-risk loans, collateral values, geographic concentrations and the $10.3 million of unfunded commitments.
- Assess the economics, related-party terms and closing status of the $285 million CLO announced after quarter-end.
- Track remediation and testing of the material weaknesses, and whether disclosure controls are subsequently concluded effective.
- Evaluate whether cash, financing access and future earnings support distributions, particularly given the first-half common loss and the preferred dividend priority.