Business Overview and History
Lument Finance Trust, Inc. (LFT) is a Maryland-based real estate investment trust (REIT) that has established itself as a reliable player in the commercial real estate debt investment market. With a focus on transitional floating-rate commercial mortgage loans, predominantly in the multifamily sector, LFT has navigated the challenges of the past few years with a steady hand, delivering consistent performance and shareholder value.
Lument Finance Trust was incorporated on March 28, 2012, and commenced operations on May 16, 2012. The company began trading as a publicly traded company on March 22, 2013. LFT elected to be taxed as a REIT, commencing with its short taxable period ended December 31, 2012. The company primarily invests in, originates, finances, and manages a portfolio of commercial real estate debt investments, with a particular emphasis on middle-market multifamily assets.
In June 2013, LFT established FOAC as a Taxable REIT Subsidiary (TRS) to increase the range of its investments in mortgage-related assets. Until August 1, 2016, FOAC aggregated mortgage loans primarily for sale into securitization transactions, with the expectation that LFT would purchase the subordinated tranches issued by the related securitization trusts.
In July 2016, the company announced that it would no longer aggregate and securitize residential mortgage loans. Instead, it sought to capitalize on its infrastructure and knowledge to become the provider of seller eligibility review and backstop services to MAXEX. This arrangement with MAXEX terminated on November 28, 2018.
In January 2020, LFT entered into a series of transactions with subsidiaries of ORIX Corporation USA, a diversified financial company. This partnership enhanced the scale of LFT and is expected to generate shareholder value through leveraging ORIX USA's expansive originations, asset management, and servicing platform. As part of these transactions, LFT entered into a new management agreement with Lument Investment Management, LLC (Lument IM), an affiliate of ORIX USA, while another ORIX USA affiliate purchased an ownership stake of approximately 5% through a privately-placed stock issuance.
During the COVID-19 pandemic in 2020, LFT took measures to provide its borrowers with additional flexibility to manage potential distress related to the pandemic.
As of September 30, 2024, LFT's investment portfolio consisted of 75 floating-rate commercial mortgage loans with an aggregate unpaid principal balance of approximately $1.2 billion. 100% of the portfolio was indexed to one-month SOFR, and 93% of the portfolio was collateralized by multifamily properties. The weighted average floating note rate was SOFR plus 353 basis points, and the portfolio had an unamortized aggregate purchase discount of $4.3 million.
Financials
LFT's financial performance has shown resilience in recent years. For the fiscal year 2023, the company reported revenue of $30.27 million, net income of $19.71 million, and operating cash flow of $24.74 million. In the most recent quarter (Q3 2024), LFT generated revenue of $9.31 million and net income of $6.28 million, representing a 10% increase in revenue and a 2% decrease in net income compared to Q3 2023.
The company's financial ratios paint a picture of a well-capitalized and efficiently managed REIT. As of September 30, 2024, the company's debt-to-equity ratio stood at 4.00, indicating a moderate level of leverage. The interest coverage ratio was 0.67, suggesting a need for improvement in the company's ability to cover its interest obligations. The current ratio and quick ratio both stood at 5.33, indicating strong short-term liquidity.
Liquidity
The company's liquidity position remains solid, with an unrestricted cash balance of $45.59 million as of September 30, 2024. LFT's investment capacity through its secured financings was fully deployed, providing ample resources to pursue growth opportunities. The company had $955.09 million in outstanding collateralized loan obligations and secured financings, with a weighted average coupon of 30-day term SOFR plus 2.13%. Additionally, LFT had $47.41 million in outstanding principal on its secured term loan, bearing interest at a fixed rate of 7.25%.
Portfolio and Geographic Diversification
As of September 30, 2024, LFT's commercial mortgage loans held-for-investment portfolio had a total unpaid principal balance of $1.20 billion across 75 loans. The portfolio is composed entirely of senior secured loans, with 93.20% of the loans collateralized by multifamily properties. The weighted average floating rate loan coupon was 30-day term SOFR plus 3.58%, with a weighted average remaining term of 2.30 years.
Geographically, LFT's portfolio is diversified across the United States, with 37.2% in the South, 33.4% in the Southwest, 15.7% in the Mid-Atlantic, 8.8% in the Midwest, and 4.9% in the West. This diversification helps mitigate regional economic risks and provides exposure to various real estate markets.
Quarterly Performance and Guidance
For the third quarter of 2024, LFT reported GAAP net income attributable to common shareholders of $5.1 million, or $0.10 per share. Distributable earnings, a non-GAAP metric, were $5.5 million, or $0.10 per share. The company's net interest income remained relatively flat at $9.5 million, as the weighted average coupon and declining outstanding portfolio balance were offset by increased accelerated purchase discount recognition.
Total operating expenses for the quarter were $2.9 million, down from $3.5 million in the previous quarter, primarily due to a lower accrual of incentive fees payable to the manager. The company's total equity at the end of the quarter stood at approximately $243 million, with a book value per share of common stock of $3.50.
LFT's management remains cautiously optimistic about the US economic outlook, noting signs of a potential soft landing, with continued low unemployment and relative stability in multifamily asset cap rates. The company expects to continue delivering a stable, sustainable dividend to investors by focusing on the multifamily credit market. LFT's manager and its affiliates are seeing a steady ramp-up in the origination pipeline, a trend expected to continue into the coming year.
The company's portfolio continued to perform well, with the weighted average risk rating holding steady at 3.6 and no new loans added to the highest risk category during the quarter. LFT is actively evaluating alternatives for its 2021 CLO securitization transaction, which had a reinvestment period that ended in December 2023. The CLO currently has a weighted average cost of funds of SOFR plus 164 basis points with an effective advance rate of approximately 79%. The company is considering various financing options, including potential securitization through a new CLO, to ensure their ultimate choice aligns with their overall financing strategy and creates long-term value for shareholders.
Risks and Challenges
While LFT has navigated the recent market volatility and economic uncertainty relatively well, the company faces several risks and challenges that warrant close monitoring. These include:
1. Interest Rate Risk: As a lender focused on floating-rate commercial mortgage loans, LFT is exposed to interest rate fluctuations, which can impact the company's net interest income and the ability of its borrowers to service their debt.
2. Credit Risk: The performance and value of LFT's loans are subject to the creditworthiness of its borrowers and the underlying collateral. Deterioration in the credit quality of the company's portfolio could lead to increased loan impairments and losses.
3. Competitive Landscape: LFT operates in a highly competitive commercial real estate lending market, which may pressure margins and make it challenging to originate new loans at attractive risk-adjusted returns.
4. Regulatory Environment: As a REIT, LFT must comply with various regulatory requirements, which could change over time and impact the company's operations and profitability.
Despite these risks, LFT's management team has demonstrated its ability to navigate challenging market conditions and deliver solid financial results for its shareholders. The company's focus on the multifamily sector, its conservative underwriting approach, and its prudent use of leverage have all contributed to its resilience in the face of turbulent times.
Industry Trends
The commercial real estate debt market has experienced a compound annual growth rate (CAGR) of 5% over the past five years, driven primarily by growth in the multifamily and senior housing sectors. However, the market has faced increased volatility and higher borrowing costs in the current inflationary environment. LFT's focus on the multifamily sector and its ability to adapt to changing market conditions have positioned the company well to navigate these industry trends.
Additional Business Activities
In addition to its core commercial mortgage loan portfolio, LFT, through its taxable REIT subsidiary Five Oaks Acquisition Corp. (FOAC), retains the servicing rights associated with an aggregate principal balance of $63.45 million of residential mortgage loans that the company had previously transferred to residential mortgage loan securitization trusts. As of September 30, 2024, the company's mortgage servicing rights had a fair value of $640,310. While this represents a smaller component of LFT's operations, it provides an additional source of non-interest income.
Conclusion
Lument Finance Trust has established itself as a reliable player in the commercial real estate debt investment market, focusing on transitional floating-rate loans, primarily in the multifamily sector. The company's partnership with ORIX USA, its experienced management team, and its conservative financial approach have enabled LFT to navigate the recent market volatility and economic uncertainty with a steady hand.
LFT's diversified portfolio, strong liquidity position, and focus on the resilient multifamily sector provide a solid foundation for future growth. The company's ability to maintain a stable dividend and its ongoing evaluation of financing options demonstrate a commitment to creating long-term value for shareholders.
While the company faces various risks, including interest rate fluctuations and credit quality concerns, LFT's track record of consistent performance and shareholder value creation suggests that it is well-positioned to continue delivering solid results for its investors in the years to come. As the commercial real estate market continues to evolve, LFT's adaptive strategy and strong market position should allow it to capitalize on new opportunities and maintain its standing as a steady hand in turbulent times.