Business context and reporting period
This is the unaudited Form 10-Q for the quarter ended June 30, 2019. The filing’s registrant name is Hunt Companies Finance Trust, Inc. (NYSE: HCFT); the request identifies the company as Lument Finance Trust. The company was shifting from legacy mortgage securities into transitional, floating-rate commercial real estate loans, primarily multifamily. It is externally managed and has elected REIT status.
Key financial results and position
| Metric | Q2 2019 / June 30, 2019 | Comparable period / prior year-end |
|---|---|---|
| Net interest income | $4.05 million | $4.57 million in Q2 2018 |
| Net income (loss) | $1.39 million; $0.06 per common share | Q2 2018: loss of $21.49 million; $(0.94) per share |
| Six-month net income (loss) attributable to common stockholders | Loss of $0.71 million; $(0.03) per share | Six months 2018: loss of $11.93 million; $(0.51) per share |
| Commercial mortgage loans | $599.77 million across 47 loans; 100% floating rate; weighted-average coupon 6.5% | $555.17 million across 44 loans at December 31, 2018 |
| Total assets / equity | $657.35 million / $108.87 million | $679.35 million / $150.20 million at December 31, 2018 |
| Cash and liquidity | $7.16 million unrestricted cash; $42.88 million restricted cash | $7.88 million unrestricted and $51.33 million restricted at December 31, 2018 |
| Debt | $504.95 million CLO liabilities and $39.23 million net secured term loan | $503.98 million CLO liabilities; no term loan at December 31, 2018 |
Six-month operating cash flow was $2.33 million, versus $5.81 million in the first half of 2018. Cash, cash equivalents and restricted cash totaled $50.04 million at June 30, 2019. Management reported recourse debt-to-equity of 0.4:1 and total GAAP debt-to-equity of 5.0:1; most debt is CLO debt that is non-recourse to the company. No profit margin measure is clearly provided.
Material changes versus prior periods
- Q2 2019 returned to common-stockholder profitability, compared with a substantial Q2 2018 loss. The comparison is materially affected by 2018 sales and closeout of the legacy Agency/non-Agency securities and hedges, and by securitization trusts consolidated in 2018 but no longer consolidated in 2019.
- First-half net interest income increased to $8.25 million from $7.69 million, while total other loss narrowed to $0.42 million from $12.26 million. The first-half common-stockholder loss includes a $3.09 million deemed dividend tied to preferred-stock redemption.
- The loan portfolio grew by $44.60 million from year-end: $117.54 million of purchases, offset by $72.94 million of principal repayments. In Q2, management cited $52.9 million of loan purchases and $38.9 million of payoffs.
- In February, the company borrowed $40.25 million under a six-year secured term loan at a stated 7.25% rate and used the proceeds, with working capital, to redeem all 1.61 million Series A preferred shares, carrying an 8.75% dividend rate.
- The common dividend was raised from $0.07 to $0.075 per share for Q2, paid July 15, 2019. First-half declared common dividends were $0.15 per share.
Outlook, risks, contingencies and unusual items
- No specific earnings or investment guidance is provided. Management said available cash flow, prior equity proceeds and borrowing capacity were expected to cover anticipated short-term needs; longer-term needs depend in part on additional debt or equity financing and CLO issuance.
- Management says floating-rate assets and CLO liabilities are largely indexed to 30-day LIBOR and that rising rates generally benefit net interest income. However, higher borrower debt service could stress property cash flows and increase credit risk; declines in rates, refinancing availability, loan prepayments and reinvestment spreads also affect returns.
- The company reported no impaired, nonaccrual or maturity-default loans and no loan-loss allowance at June 30. Its portfolio is concentrated in multifamily collateral (88.4%) and the Southwest (35.5%); 89.4% of loans were rated moderate risk or better, compared with 91.3% at year-end.
- Restricted CLO cash is not freely available for general corporate use. CLO obligations are non-recourse, but are secured by assets held in the CLOs. The company also had $31.6 million of unfunded commitments on loans in one CLO; an affiliate had $51.0 million of commitments on loans in the other.
- Legacy MAXEX backstop guarantees covered loans with an estimated outstanding principal balance of $1.405 billion. MAXEX Clearing LLC assumed the obligations and agreed to indemnify FOAC; the company said it knew of no circumstances expected to trigger a claim. The scale of the underlying exposure and the assumption arrangement remain important contingencies.
- The company failed the REIT 75% gross-income test for 2018 because of hedge-termination gains and paid the associated $1.96 million tax in April 2019. It believed its REIT election would not be affected in current or future periods, but identified REIT qualification as an ongoing risk.
- Disclosure controls were deemed ineffective at June 30 due to material weaknesses involving tax-advisor oversight and review/documentation of account balances. Remediation steps were underway but not all controls were fully operational or considered remediated.
Important facts for investors to verify
- Confirm current loan-level performance, risk-rating migration, collateral values and the concentration of multifamily and Southwest exposures.
- Assess dividend sustainability against recurring earnings, cash available for distribution, REIT distribution requirements and the first-half common-stockholder loss.
- Review term-loan covenants, maturity and borrowing-base requirements, and distinguish unrestricted liquidity from CLO-restricted cash and non-recourse debt.
- Verify MAXEX Clearing LLC’s continuing financial capacity and the remaining duration and terms of assumed backstop guarantees.
- Track remediation and independent testing of the disclosed material weaknesses, and monitor REIT tax compliance following the 2018 income-test failure.