Business context and reporting period
Unaudited Form 10-Q for the quarter and six months ended June 30, 2020. The filing identifies the registrant as Hunt Companies Finance Trust, Inc. (NYSE: HCFT), although the request metadata names Lument Finance Trust, Inc. The company is an externally managed REIT focused primarily on transitional commercial real estate loans, particularly multifamily. OREC Investment Management replaced Hunt Investment Management as manager on January 3, 2020; an ORIX USA affiliate also acquired approximately 5% of the company through a private placement.
Key financial metrics
| Metric | Q2 2020 / June 30, 2020 | Comparable period / prior year-end |
|---|---|---|
| Net interest income | $4.78 million for Q2; $8.96 million for six months | $4.05 million for Q2 2019; $8.25 million for six months 2019 |
| Net income attributable to common stockholders | $1.87 million, or $0.08 per share, for Q2; $3.42 million, or $0.14 per share, for six months | $1.39 million, or $0.06 per share, for Q2 2019; six-month 2019 loss of $0.71 million, or $0.03 per share |
| Common dividend | $0.075 per share declared for Q2, paid July 15 | $0.08 per share for Q2 2019; $0.15 per share for each six-month period |
| Assets / equity | Total assets $655.7 million; total equity $114.1 million | Assets $657.9 million and equity $108.6 million at December 31, 2019 |
| Loan portfolio | $609.8 million across 45 senior secured loans; 100% floating-rate; weighted average coupon 5.1% | $635.3 million across 51 loans; weighted average coupon 5.4% at December 31, 2019 |
| Cash and liquidity | $8.9 million unrestricted cash and $7.4 million restricted cash | $10.9 million unrestricted and $5.1 million restricted cash at December 31, 2019 |
| Debt | $498.3 million CLO liabilities (non-recourse) and $39.5 million secured term loan, net; total GAAP debt-to-equity ratio 4.7:1, recourse debt-to-equity 0.4:1 | CLO liabilities $505.9 million and secured term loan $39.4 million, net, at December 31, 2019 |
| Cash flows, six months | Operating +$5.15 million; investing +$1.63 million; financing −$6.52 million; cash and restricted cash increased $0.26 million | Operating +$2.33 million; investing −$6.81 million; financing −$4.70 million; cash and restricted cash decreased $9.17 million |
Material changes versus comparable periods
- Q2 net interest income rose about 18% year over year, while common earnings increased from $1.39 million to $1.87 million. For the first half, common results turned positive versus a 2019 loss; the comparison is affected by the 2019 preferred-stock redemption and its $3.09 million deemed dividend.
- First-half interest income on commercial mortgage loans declined to $17.64 million from $20.19 million, but interest expense on CLOs fell to $7.15 million from $10.90 million, supporting higher net interest income. Management cited larger average loan balances, loan LIBOR floors and lower LIBOR costs on CLO financing; lower loan spreads and a full period of term-loan interest partly offset those benefits.
- Loan balances fell by $25.4 million from year-end as $67.4 million of principal repayments exceeded $42.0 million of purchases and fundings. Portfolio risk rating increased to 3.0 from 2.8; 78.3% of loans were rated moderate risk or better, versus 91.9% at year-end. Eight loans, totaling $132.4 million, were rated high risk, primarily reflecting COVID-19 exposure in retail and office properties.
- MSR fair value fell to $1.45 million from $2.70 million at year-end, with a first-half unrealized loss of $1.25 million. Total expenses rose to $4.97 million from $4.82 million for the first half, including a substantial increase in other operating expenses.
- Shares outstanding increased following a January private placement of 1,246,719 shares to an ORIX USA affiliate, generating $5.75 million of proceeds at $4.61 per share.
Outlook, risks, contingencies and unusual items
- Management said the pandemic had not significantly affected reported results through June 30, apart from expensing $624,816 of previously deferred costs for a contemplated CLO transaction now considered unlikely to close by year-end. No earnings guidance was provided.
- All loans were current at June 30 and made their July payments; the company reported no nonaccrual, maturity-default or impaired loans and no allowance for loan losses. Management nonetheless warned that borrower distress, property-value declines, delayed reinvestment and future credit losses could affect income, liquidity, covenants and dividends. No forbearance agreements or loan modifications had been entered into by the filing date.
- Company loans and CLO liabilities are LIBOR-indexed, and all commercial loans have LIBOR floors (weighted average 1.61%). The filing notes LIBOR’s anticipated discontinuation after 2021 and uncertainty about replacement rates and their economic impact.
- The company reported compliance with secured-term-loan covenants at June 30. On July 9, 2020, it amended that facility to provide additional flexibility for potential COVID-related borrower distress. The term loan bears fixed interest at 7.25% and matures in January 2025; CLO financing is term-matched and matures in 2028 or later.
- At June 30, unfunded loan commitments included $32.6 million for Hunt CRE 2017-FL1 and $41.4 million for Hunt CRE 2018-FL2 (the latter held by a manager affiliate). An August 5 agreement shifted future funding advances for the FL1 commitments to a manager affiliate; the company may later be required to buy funded participations at par, subject to capital and other conditions.
- The filing discloses a maximum potential exposure of approximately $1.41 billion under legacy mortgage backstop guarantees, while stating that MAXEX Clearing LLC assumed the obligations and indemnified the company; management was not aware of circumstances expected to trigger a claim. The filing also reports that an IRS closing agreement on July 13, 2020 confirmed the company’s 2018 REIT income-test failure would not affect its REIT election.
- Management stated it expects available resources to meet short-term liquidity needs, but long-term capital needs may require new debt or equity financing. The REIT’s distribution obligations constrain retained earnings. The Q2 dividend was maintained at $0.075 per share.
Most important facts for investors to verify
- Confirm the issuer identity: the supplied filing is for Hunt Companies Finance Trust, Inc. (HCFT), not a registrant named Lument Finance Trust, Inc.
- Track the eight high-risk loans, especially retail and office exposures, and any subsequent delinquencies, modifications, impairments or loss provisions.
- Assess whether the $624,816 CLO transaction expense, reduced loan balances and funding-market conditions affect future earnings and reinvestment.
- Review liquidity against dividends, debt covenants and unfunded commitments, including the conditional obligation to purchase FL1 participations from a manager affiliate.
- Monitor LIBOR transition terms, MSR valuation assumptions and the continuing coverage of legacy backstop guarantees.