Business Overview
Lument Finance Trust, Inc. (LFT) is a Maryland-based real estate investment trust (REIT) that focuses on investing in, originating, financing and managing a portfolio of commercial real estate (CRE) debt investments. The company primarily targets floating-rate transitional multifamily loans, but also invests in other CRE-related assets such as mezzanine loans, preferred equity, CMBS, fixed-rate loans, construction loans and other CRE debt instruments.
LFT was incorporated on March 28, 2012, and commenced operations on May 16, 2012. The company became a publicly traded REIT on March 22, 2013, with its shares listed on the New York Stock Exchange following its initial public offering. In January 2020, LFT entered into a series of transactions with subsidiaries of ORIX Corporation USA, a diversified financial company. This included a new management agreement with Lument Investment Management, LLC (Lument IM), an affiliate of ORIX USA, as well as a strategic investment in LFT by an ORIX USA affiliate through a private placement of equity. These transactions enhanced LFT's scale and are expected to generate shareholder value by leveraging Lument's broad origination, asset management and servicing platform.
Throughout its history, LFT has primarily financed its CRE loan portfolio through non-recourse, match-term secured borrowings, including collateralized loan obligations (CLOs) and other securitized financings. This strategy has helped the company mitigate exposure to credit and capital market mark-to-market provisions. Key milestones in LFT's financing history include the completion of the 2021-FL1 CLO in June 2021 and the LMF 2023-1 Financing in July 2023.
LFT has faced various challenges over the years, including navigating market volatility and economic uncertainty. The COVID-19 pandemic in 2020 and early 2021 presented significant hurdles for the company. Additionally, LFT has had to manage the impact of rising interest rates on its borrowers and the broader commercial real estate market. Despite these headwinds, the company has maintained a focus on high-quality multifamily assets and proactive portfolio management, which has contributed to its ability to deliver stable returns to shareholders over time.
Portfolio Composition
At the end of Q3 2024, LFT's portfolio consisted of 75 floating-rate loans with an aggregate unpaid principal balance of approximately $1.2 billion. 100% of the loans were indexed to 1-month SOFR, with a weighted average floating note rate of SOFR + 3.53% and an average remaining term of 28 months. 93% of the portfolio was collateralized by multifamily properties, with the remainder in seniors housing/healthcare and self-storage assets.
The commercial mortgage loan portfolio had an unpaid principal balance of $1.20 billion, with a carrying value of $1.19 billion. The loans in the portfolio are floating-rate transitional loans and other commercial mortgage loans, with a weighted average loan coupon of 8.70% and a weighted average remaining term of 2.30 years, assuming all extension options are exercised by the borrowers.
The portfolio is diversified across various property types, with 93.20% of the loans collateralized by multifamily properties, 6.30% by seniors housing and healthcare properties, and 0.50% by self-storage properties. Geographically, the loans are concentrated in the South (37.20%), Southwest (33.40%), and Mid-Atlantic (15.70%) regions.
Financing Strategy
LFT finances its investments primarily through non-recourse, match-term secured borrowings, including collateralized loan obligations (CLOs) and other securitizations. As of September 30, 2024, the company's financing had an effective leverage of 80% at a weighted average cost of funds of SOFR + 214 basis points. This includes LFT's 2021-FL1 CLO, which provided 79% leverage at a cost of SOFR + 164 basis points, and its 2023 LMF financing, which achieved 82% leverage at SOFR + 314 basis points.
As of September 30, 2024, LFT had $955.09 million in outstanding collateralized loan obligations and secured financings, with a weighted average coupon of 7.23%. Additionally, the company had $47.75 million in outstanding principal under a secured term loan facility, bearing interest at a fixed rate of 7.25%.
Portfolio Performance
LFT's portfolio has continued to perform well, with 60% of loans rated 'moderate risk' (3 out of 5) or better as of Q3 2024. The weighted average risk rating was 3.6, unchanged from the prior quarter. During the quarter, the company had four loans risk-rated at the highest 'default risk' level of 5, representing approximately 7% of the portfolio's carrying value. Subsequent to quarter-end, LFT received full repayment on one of these 'five-rated' loans, which had an outstanding balance of $20.3 million.
The company's conservative leverage, matched-term non-recourse financing, and proactive asset management have helped LFT navigate the volatile market environment over the past year. While the Federal Reserve's interest rate hikes have pressured some borrowers, the company's floating-rate portfolio and SOFR floors have allowed it to benefit from rising rates. LFT's net interest margin expanded to 2.75% in Q3 2024, up from 2.65% in the prior quarter.
Future Outlook
Looking ahead, LFT is actively evaluating its financing options, including the potential to refinance or upsize its existing CLO and securitization vehicles. The company believes there is investor appetite for a new CLO transaction, though it is carefully considering the optimal structure and timing to maximize long-term shareholder value. LFT ended Q3 2024 with $46 million in unrestricted cash, providing ample liquidity to fund new investments as opportunities arise.
Despite the challenging market conditions, LFT's management team remains cautiously optimistic about the long-term fundamentals of the multifamily sector. The company's focus on transitional, floating-rate loans in high-growth Sun Belt markets is well-aligned with current market dynamics. LFT's conservative underwriting, proactive asset management, and diverse financing sources position it to continue delivering stable cash flows and dividends to shareholders.
The management team expressed cautious optimism about the US economic outlook, citing factors like recent interest rate cuts, signs of cooling inflation, and relatively low unemployment. They noted that long-term multifamily market fundamentals remain strong and they are seeing stability in asset cap rates, which is translating into modest increases in property acquisition activity. Management expressed confidence in LFT's ability to continue delivering a stable, sustainable dividend to investors by focusing on the multifamily credit market.
Financials
In Q3 2024, LFT reported GAAP net income of $5.1 million, or $0.10 per share of common stock, and distributable earnings of $5.5 million, or $0.10 per share. The company declared a $0.08 per share common stock dividend for the quarter, in line with the prior period. For the full year 2023, LFT generated GAAP net income of $15.0 million, or $0.29 per share, and distributable earnings of $13.3 million, or $0.26 per share.
While the current market environment remains uncertain, LFT's management team has demonstrated its ability to navigate challenging conditions. The company's diversified portfolio, prudent financing strategy, and experienced leadership team suggest it is well-equipped to continue generating consistent returns for shareholders over the long term.
For the most recent fiscal year, LFT reported revenue of $30.27 million, net income of $19.71 million, operating cash flow of $24.74 million, and free cash flow of $24.74 million. In the most recent quarter, the company reported no revenue, net income of $5.10 million, operating cash flow of $9.48 million, and free cash flow of $9.48 million. The net income increased year-over-year from $5.17 million in Q3 2023 due to higher net interest income, partially offset by higher expenses and provision for credit losses.
LFT's investments are focused in the United States, with 93.2% of the loan portfolio collateralized by multifamily properties. The company does not have significant exposure to international markets.
The commercial real estate lending market has seen higher interest rates and reduced liquidity in recent quarters, but LFT's management believes the multifamily sector fundamentals remain strong, with continued demand and limited new supply in many markets. The company expects to continue delivering a stable, sustainable dividend to investors by focusing on the multifamily credit market.
Liquidity
LFT's balance sheet remains strong, with $46 million in unrestricted cash as of September 30, 2024. The company's conservative leverage, with an effective debt-to-equity ratio of 4.0x, provides financial flexibility to weather market volatility. LFT's financing is predominantly non-recourse, with a weighted average cost of funds of SOFR + 214 basis points.
The company has no recourse debt on its balance sheet, resulting in a debt-to-equity ratio of 0. Cash and cash equivalents were $45.59 million as of September 30, 2024. LFT has a $47.75 million secured term loan facility with a current interest rate of 7.25%. The company also has access to non-recourse collateralized loan obligation (CLO) and secured financing facilities totaling $1.24 billion, of which $1.00 billion was outstanding as of September 30, 2024.
LFT's current ratio and quick ratio were both 5.33 as of September 30, 2024, indicating strong liquidity.
Looking ahead, LFT is focused on proactively managing its portfolio, deploying capital into attractive lending opportunities, and optimizing its financing structure. The company is actively evaluating options to refinance or upsize its existing CLO and securitization vehicles, which could provide additional capacity for new investments. LFT's management remains cautiously optimistic about the long-term fundamentals of the multifamily sector, particularly in the Sun Belt markets that make up the majority of its portfolio.
Mortgage Servicing Rights (MSRs) Segment
In addition to its commercial mortgage loan portfolio, LFT also holds mortgage servicing rights (MSRs) associated with an aggregate principal balance of $63.45 million of residential mortgage loans that the company had previously transferred to securitization trusts. The MSRs are held and managed by LFT's taxable REIT subsidiary, Five Oaks Acquisition Corp. (FOAC), and the company employs two licensed sub-servicers to perform the related servicing activities.
As of September 30, 2024, the carrying value of the MSRs was $640,310, representing 0.20% of LFT's total capital allocation. The MSRs generated $60,280 in servicing income, net, for the three months ended September 30, 2024.
Overall, Lument Finance Trust's diversified CRE lending business, prudent risk management, and experienced leadership team suggest it is well-positioned to navigate the current market environment and continue delivering value to shareholders over the long term. The company's focus on the multifamily sector, conservative leverage, and proactive asset management strategy provide a solid foundation for future growth and stability in the face of ongoing market challenges.