Lument Finance Trust, Inc. (LFT) is a Maryland-based real estate investment trust (REIT) that has carved out a niche in the commercial real estate (CRE) debt investment market. With a focus on transitional floating-rate CRE mortgage loans, primarily in the multifamily sector, LFT has established itself as a reliable player in an industry that has seen its fair share of ups and downs.
Business Overview and History
Lument Finance Trust was incorporated on March 28, 2012, and commenced operations on May 16, 2012. The company went public on March 22, 2013, trading as a publicly traded company. LFT’s primary investment strategy has been to focus on transitional floating-rate CRE mortgage loans, with a particular emphasis on middle-market multifamily assets. The company has financed these investments primarily through matched-term non-recourse secured borrowings, including collateralized loan obligations (CLOs).
In 2016, LFT’s subsidiary, Five Oaks Acquisition Corp. (FOAC), ceased aggregating and securitizing residential mortgage loans, which it had previously done to increase the range of LFT’s mortgage-related asset investments. FOAC continued to manage the mortgage servicing rights (MSRs) associated with residential mortgage loans it had previously transferred to securitization trusts.
Throughout its history, LFT has faced challenges common to commercial real estate lenders, such as managing credit risk, interest rate risk, and liquidity risk. The company has worked to mitigate these risks through conservative underwriting, matched-term non-recourse financing, and proactive asset management. Despite these challenges, LFT has maintained its focus on transitional multifamily CRE lending and has sought to deliver stable, sustainable dividends to its investors.
In January 2020, LFT entered into a series of transactions with subsidiaries of ORIX Corporation USA, a diversified financial company. This partnership has enhanced the scale of LFT and is expected to generate shareholder value through leveraging ORIX USA’s expansive originations, asset management, and servicing platform. Lument Investment Management, an affiliate of Lument, a nationally recognized leader in multifamily and seniors housing and healthcare finance, serves as the external manager for LFT.
Financials
Financial Performance and Ratios
As of September 30, 2024, LFT reported total assets of $1.26 billion and total equity of $243.14 million. The company’s debt-to-equity ratio stood at 4.00, indicating a moderate level of leverage. LFT’s net interest margin, a key metric in the CRE lending business, was 2.76% for the twelve months ended September 30, 2024.
For the nine months ended September 30, 2024, LFT reported net income of $17.86 million, or $0.27 per diluted share. The company’s annualized return on equity for the period was 9.45%. LFT’s operating cash flow for the nine-month period was $20.80 million, while free cash flow amounted to $201.59 million.
For the most recent quarter, LFT reported net income of $6,280,725, operating cash flow of $2,517,967, and free cash flow of $2,517,967. The company’s cash position stood at $45.59 million as of the end of the quarter.
In the third quarter of 2024, LFT-PA reported GAAP net income of $0.10 per share of common stock and distributable earnings of $0.10 per share of common stock. In September 2024, LFT-PA declared a dividend of $0.08 per common share with respect to the third quarter, which was in line with the prior quarter’s dividend.
Liquidity
LFT finances its commercial mortgage loan portfolio primarily through non-recourse, match-term secured borrowings, including collateralized loan obligations (CLOs) and other secured financings. As of September 30, 2024, the company’s secured financing had a weighted average cost of funds of SOFR plus 214 basis points, providing attractive leverage to the portfolio.
In June 2021, LFT completed the 2021-FL1 CLO, issuing $903.80 million in notes, of which $833.80 million were investment-grade notes sold to third-party investors. In July 2023, the company entered into the LMF 2023-1 Financing, which provided $270.40 million of an investment-grade rated senior secured floating-rate loan and $47.30 million of investment-grade rated notes.
The management team is currently evaluating alternatives, including potentially refinancing their existing CLO securitization, to ensure the best alignment with their overall financing strategy and long-term shareholder value creation.
Portfolio Composition and Performance
As of September 30, 2024, LFT’s commercial mortgage loan portfolio had an aggregate unpaid principal balance of $1.20 billion, with 100% of the loans bearing a floating interest rate indexed to one-month SOFR. The portfolio was predominantly focused on multifamily properties, which accounted for 93.20% of the total investment exposure.
The weighted average risk rating of LFT’s loan portfolio was 3.60 on a scale of 1 to 5 (with 1 being the lowest risk), indicating a moderate risk profile. During the third quarter of 2024, the company experienced $51 million in loan payoffs and acquired two new loans with an initial principal balance of $45 million and a weighted average coupon of SOFR plus 323 basis points.
The portfolio consists of 75 loans with a weighted average floating-rate coupon of 30-day SOFR plus 3.58% and a weighted average remaining term of 2.3 years, assuming all extension options are exercised. The weighted average loan-to-value (LTV) ratio of the portfolio was 70.6% at origination. In addition to multifamily properties, the remaining 6.8% of the portfolio consists of seniors housing, healthcare, and self-storage assets.
Geographically, the portfolio is diversified across the South (37.2%), Southwest (33.4%), Mid-Atlantic (15.7%), Midwest (8.8%), and West (4.9%) regions.
During the nine months ended September 30, 2024, LFT experienced $247.01 million in principal repayments, $45.42 million in new loan purchases and fundings, and recorded a $3.46 million provision for credit losses, net.
Mortgage Servicing Rights Segment
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 it had previously transferred to securitization trusts. The company employs two licensed sub-servicers to perform the related servicing activities. As of September 30, 2024, the fair value of the company’s mortgage servicing rights (MSRs) was $640,310, representing 0.2% of its total capital.
During the nine months ended September 30, 2024, the company recorded $117,060 in net servicing income from its MSR portfolio, which experienced a $51,660 unrealized loss in fair value due to reductions in the underlying loan principal balances.
Financing and Leverage
LFT finances its commercial mortgage loan portfolio primarily through non-recourse, match-term secured borrowings, including collateralized loan obligations (CLOs) and other secured financings. As of September 30, 2024, the company’s secured financing had a weighted average cost of funds of SOFR plus 214 basis points, providing attractive leverage to the portfolio.
In June 2021, LFT completed the 2021-FL1 CLO, issuing $903.80 million in notes, of which $833.80 million were investment-grade notes sold to third-party investors. In July 2023, the company entered into the LMF 2023-1 Financing, which provided $270.40 million of an investment-grade rated senior secured floating-rate loan and $47.30 million of investment-grade rated notes.
Risks and Challenges
Like any CRE lender, LFT is exposed to various risks, including interest rate fluctuations, credit risk, and liquidity challenges. The company’s portfolio is heavily weighted towards the multifamily sector, which could be susceptible to changes in market conditions and rental demand. Additionally, the company’s reliance on secured financing, while providing attractive leverage, also exposes it to potential refinancing risks.
Furthermore, the CRE market has faced headwinds in recent years, with the COVID-19 pandemic and economic uncertainty contributing to volatility. LFT’s ability to navigate these challenges and maintain its portfolio quality will be crucial to its long-term success.
Outlook and Conclusion
Despite the challenges faced by the CRE industry, LFT has demonstrated its resilience and ability to deliver consistent financial performance. The company’s focus on transitional floating-rate multifamily loans, coupled with its prudent leverage and risk management strategies, have positioned it well to navigate the current market environment.
Looking ahead, LFT’s partnership with ORIX USA and the expertise of its external manager, Lument Investment Management, are expected to continue supporting the company’s growth and value creation for shareholders. The management team has expressed continued confidence in the future of the multifamily market and their ability to deliver a stable, sustainable dividend to investors by focusing on multifamily credit.
While LFT-PA did not provide explicit forward guidance for future quarters or the full year 2025, the company remains committed to actively managing its investment portfolio and working closely with borrowers to monitor the financial performance of the collateral assets. As LFT navigates the evolving CRE landscape, its steady performance and disciplined approach make it a compelling investment opportunity for those seeking exposure to the commercial real estate debt market.
Disclaimer: This article is for informational purposes only. It does not constitute financial, legal, or other types of advice. While every effort has been made to ensure the accuracy of the information presented here, the author and the publisher do not make any guarantees about the completeness, reliability, and accuracy of this information.