Lument Finance Trust, Inc. — Q2 2022 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2022; unaudited. Lument Finance Trust invests primarily in floating-rate commercial real estate debt and is externally managed. It has elected REIT status.
Financial results and position
| Metric | Q2 2022 / June 30, 2022 | Comparison |
|---|---|---|
| Loan interest income | $12.6 million | $8.2 million in Q2 2021 |
| Net interest income | $6.4 million | $5.3 million in Q2 2021 |
| Net income | $3.34 million | $1.68 million in Q2 2021 |
| Net income attributable to common stockholders; diluted EPS | $2.16 million; $0.04 | $0.95 million; $0.04 in Q2 2021 |
| Common dividend declared | $0.06 per share | $0.09 per share in Q2 2021 |
| Distributable Earnings (non-GAAP) | $2.46 million; $0.05 per share | Prior-year comparable value not provided in the cited reconciliation |
| Assets; equity | $1.13 billion; $248.1 million | Assets $1.05 billion; equity $169.4 million at Dec. 31, 2021 |
| Common book value per share | $3.60 | $3.62 at March 31, 2022 |
| Cash and cash equivalents; restricted cash | $39.0 million; $9.7 million | $14.7 million; $3.5 million at Dec. 31, 2021 |
| Debt | $828.0 million CLOs, net; $46.8 million secured term loan, net | Term loan principal $47.75 million; fixed rate 7.25%, maturity February 2026 |
For the six months, net interest income rose to $11.5 million from $9.8 million; net income attributable to common stockholders increased to $3.93 million from $3.76 million, while diluted EPS declined to $0.09 from $0.15. The share count increased substantially following a February rights offering that issued 27.28 million shares for approximately $81.1 million net proceeds. The common dividend for the first half was $0.12 per share, versus $0.18 a year earlier.
At June 30, the loan portfolio comprised 69 senior secured loans with $1.034 billion carrying value; all were floating rate. The weighted average coupon was 4.5%, and 95.4% of collateral value was multifamily. Reported total debt-to-equity was 3.6:1 including non-recourse CLO financing; recourse debt-to-equity was 0.2:1. Management reported compliance with secured-term-loan covenants.
Material changes and operating drivers
- Higher loan balances and floating rates supported net interest income growth, partly offset by higher CLO balances and funding costs, lower loan floors and spreads, fewer exit/extension/prepayment fees, and increased debt-cost amortization.
- Total expenses increased to $2.83 million in Q2 from $1.84 million, including higher management fees, reimbursements and general and administrative costs. No Q2 incentive fee was incurred.
- Q2 2021 included a $1.66 million loss on extinguishment of debt from unwinding prior CLOs; no such loss occurred in Q2 2022.
- The company recorded a $351,914 loan-loss provision for an $11.7 million office-backed loan and placed it on non-accrual, although the borrower was current on debt service at June 30. The filing reports that the loan entered maturity default on August 8, 2022; management anticipated a forbearance extending maturity to December 2022.
Liquidity, outlook, and risks
Management stated that existing cash, operating cash flow and available borrowing capacity should meet anticipated short-term needs, including investment funding, dividends and expenses. Long-term liquidity depends in part on access to additional debt or equity. The filing gives no earnings or dividend guidance. Management intends to continue regular quarterly common distributions; the Q2 common dividend of $0.06 and Series A preferred dividend of $0.49219 per share were paid July 15, 2022.
Management noted that rising rates may increase net interest income when loan rates exceed floors, but can strain borrowers’ debt service and refinancing capacity. At June 30, 91.5% of investment exposure was indexed to one-month LIBOR and 8.5% to Term SOFR; all CLO liabilities were LIBOR-indexed. The company cited uncertainty around LIBOR transition, inflation, geopolitical conditions, capital-market liquidity, COVID-19 effects, property values and borrower credit. The portfolio’s weighted average risk rating was 2.3; 98.9% of loan carrying value was rated moderate risk or better, but one office loan was rated default risk.
Other items include $85.6 million of unfunded commitments on loans held in the CLO and $5.7 million on loans held in LCMT, both associated with the Manager’s affiliate. A $33.8 million receivable from that affiliate for loan transfers was paid in full July 1, 2022. The maximum potential balance associated with legacy MAXEX backstop guarantees was estimated at $317 million, though the filing says this is not indicative of expected losses and MAXEX assumed the obligations. No material litigation was reported. Disclosure controls were deemed effective; no material change to previously disclosed risk factors was reported.
Investor facts to verify
- Reconcile cash-flow disclosure: the consolidated cash flow statement reports $8.3 million of operating cash flow for the first half of 2022, while the MD&A narrative states $25.5 million; the MD&A also gives a different 2021 comparison than the statement.
- Track the office loan’s maturity default, collateral value, expected forbearance and any resulting allowance or recovery.
- Assess dividend coverage: Q2 common dividends of $0.06 per share exceeded reported GAAP EPS of $0.04, while non-GAAP Distributable Earnings was $0.05 per share.
- Monitor the LIBOR-to-SOFR transition and borrower sensitivity to further rate increases, refinancing conditions and property-market deterioration.
- Review CLO tests, non-recourse leverage, unfunded loan commitments, related-party loan transactions and the company’s capacity to raise financing for growth.