Business context and reporting period
This is Hunt Companies Finance Trust, Inc.’s Form 10-K for the fiscal year ended December 31, 2018, filed March 18, 2019. The request identifies Lument Finance Trust, but the supplied filing is for Hunt Companies Finance Trust (HCFT); confirm the intended issuer. During 2018, HCFT shifted from agency and non-agency mortgage-backed securities toward transitional multifamily and commercial real estate lending. It became externally managed by Hunt Investment Management in January, changed its name and ticker to HCFT in May, and acquired Hunt CMT Equity in April.
Financial and operating performance
- Profitability: Net loss attributable to common stockholders was $9.0 million, or $0.38 per share, versus net income of $1.2 million, or $0.06 per share, in 2017. Net loss before tax was $3.95 million; income tax provision was $1.52 million.
- Interest and other results: Net interest income was $17.4 million, down from $20.1 million. Total other loss was $11.4 million, compared with $2.6 million in 2017. The 2018 results included $33.4 million of realized investment-sale losses, $26.0 million of realized derivative gains, and $5.35 million of unrealized derivative losses.
- Cash flow: Operating activities provided $12.3 million. Cash, cash equivalents and restricted cash totaled $59.2 million at year-end, including $7.9 million unrestricted cash and $51.3 million restricted CLO reinvestment cash.
- Portfolio: Year-end commercial loans held for investment totaled $555.2 million across 44 senior secured loans; all were floating rate, with a 6.4% weighted-average coupon and 4.1-year weighted-average life. The portfolio’s average internal risk rating was 2.9; five loans totaling $48.3 million were rated high risk. Multifamily collateral represented 87.2% of loan carrying value, and Southwest exposure was 30.2%.
- Debt and liquidity: CLO liabilities had a $504.0 million carrying value and $510.2 million principal balance. Total debt-to-equity was 3.5x, including non-recourse consolidated trust obligations; recourse debt-to-equity was 0.0x. No repurchase agreements remained outstanding, versus $1.235 billion at year-end 2017.
- Equity and distributions: Total equity was $150.2 million; book value was $4.77 per common share, down from $4.91. Common dividends declared were $0.28 per share, versus $0.60 in 2017. The filing reports a 2.9% economic gain on common equity, including dividends.
Material changes versus 2017
- The Company sold its remaining Agency and Non-Agency RMBS and substantially all Multi-Family MBS, and terminated its related hedges. Year-end 2018 MBS investment was $4.8 million on a non-GAAP net-investment basis, compared with $1.317 billion in 2017.
- It acquired a loan portfolio through Hunt CMT Equity and closed a second CLO, Hunt CRE 2018-FL2. Loan purchases totaled $756.6 million and repayments $201.4 million during 2018.
- Net interest income declined, while investment and hedge disposition results drove a swing from common-stockholder profit to loss. Management cautions that reported results are not directly comparable because of portfolio sales, acquisitions and changes in consolidated trusts.
Outlook, risks and unusual items
- Management expects the business to remain focused primarily on floating-rate commercial real estate loans. Rising rates may support net interest income, but borrower debt-service stress, credit losses, lower reinvestment spreads, property-value declines and refinancing risk remain material. No quantitative earnings or return guidance is provided.
- HCFT failed the 2018 REIT 75% gross income test because gains on terminated hedges were treated as nonqualifying income. It accrued a $1.96 million tax liability and sought IRS relief; management believes the REIT election is more likely than not to remain unaffected, but relief is not assured.
- Management and the auditor concluded internal control over financial reporting was ineffective at year-end due to material weaknesses in review of account balances and oversight of third-party tax specialists. Prior-period financial statements for specified 2016 periods were restated. The auditor issued an adverse opinion on internal controls but an unqualified opinion on the financial statements.
- In February 2019, HCFT drew $40.25 million under a six-year facility at a fixed 7.25% initial rate and used the proceeds plus working capital to redeem all Series A preferred shares. A March 2019 manager support agreement reduces the expense-reimbursement cap over time, subject to stated limits.
- Related-party exposure includes loans acquired from Hunt affiliates and servicing by a Hunt affiliate. Other important risks include portfolio concentration, illiquid collateral, leverage, manager conflicts and the requirement to preserve REIT and Investment Company Act status.
Most important facts for investors to verify
- Confirm issuer identity: the supplied 10-K is for Hunt Companies Finance Trust, Inc., not a filing under the name Lument Finance Trust.
- Track the IRS response to the requested REIT relief and the final tax consequences of the failed 75% income test.
- Assess remediation and independent testing of the reported material weaknesses, including the restated 2016 reporting.
- Review loan-level performance, risk ratings, geographic and property-type concentrations, and the status of high-risk loans and unfunded commitments.
- Verify post-year-end facility covenants, borrowing costs, preferred-stock redemption, and the sustainability and funding of common dividends.