Lument Finance Trust(LFT) - 2020 Q2 - Quarterly Report

FORM 10-Q Cover Page This section provides the cover page details for the Quarterly Report (Form 10-Q) of HUNT COMPANIES FINANCE TRUST, INC., including company classification and outstanding common stock information - The report is a Quarterly Report (Form 10-Q) for HUNT COMPANIES FINANCE TRUST, INC., covering the period ended June 30, 2020[2] | Title of Each Class | Trading Symbol(s) | Name of Exchange on Which Registered | | :------------------ | :---------------- | :----------------------------------- | | Common Stock, par value $0.01 per share | HCFT | New York Stock Exchange | - The registrant is classified as an Accelerated Filer and a Smaller Reporting Company[4] | Class | Outstanding at August 7, 2020 | | :---------------------- | :---------------------------- | | Common stock, $0.01 par value | 24,943,383 | INDEX This section provides a comprehensive table of contents for the entire Form 10-Q report PART I - FINANCIAL INFORMATION This part contains the unaudited condensed consolidated financial statements and management's discussion and analysis of financial condition and results of operations Item 1. Financial Statements This section presents the unaudited condensed consolidated financial statements of Hunt Companies Finance Trust, Inc. and its subsidiaries for the period ended June 30, 2020, including balance sheets, statements of operations, changes in equity, and cash flows, along with detailed notes explaining the company's organization, significant accounting policies, and specific financial instrument characteristics Condensed Consolidated Balance Sheets This section provides a snapshot of the Company's financial position, detailing assets, liabilities, and equity at specific reporting dates | ASSETS | June 30, 2020 | December 31, 2019 | | :------------------------------------------------- | :------------ | :---------------- | | Cash and cash equivalents | $8,856,854 | $10,942,115 | | Restricted cash | 7,414,097 | 5,069,715 | | Commercial mortgage loans held-for-investment, at amortized cost | 609,847,568 | 635,260,420 | | Mortgage servicing rights, at fair value | 1,447,282 | 2,700,207 | | Investment related receivable | 23,781,668 | — | | Total assets | $655,651,908 | $657,901,998 | | LIABILITIES: | | | | Collateralized loan obligations, net | 498,311,273 | 505,930,065 | | Secured term loan, net | 39,469,649 | 39,384,041 | | Total liabilities | 541,590,389 | 549,257,286 | | EQUITY: | | | | Total stockholders' equity | 113,962,019 | 108,545,212 | | Total equity | $114,061,519 | $108,644,712 | | Total liabilities and equity | $655,651,908 | $657,901,998 | - Total assets decreased slightly from $657.90 million at December 31, 2019, to $655.65 million at June 30, 2020[10] - Total equity increased from $108.64 million at December 31, 2019, to $114.06 million at June 30, 2020[13] Condensed Consolidated Statements of Operations This section outlines the Company's financial performance over specific periods, presenting revenues, expenses, and net income | | Three Months Ended June 30, 2020 | Three Months Ended June 30, 2019 | Six Months Ended June 30, 2020 | Six Months Ended June 30, 2019 | | :------------------------------------------------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Revenues: | | | | | | Interest income: Commercial mortgage loans held-for-investment | $8,472,153 | $10,289,117 | $17,637,958 | $20,193,305 | | Interest expense: Collateralized loan obligations | (2,915,638) | (5,456,288) | (7,153,527) | (10,903,177) | | Net interest income | 4,783,694 | 4,046,715 | 8,959,336 | 8,253,262 | | Total other (loss) | (170,796) | (273,654) | (854,396) | (420,538) | | Total expenses | 2,802,466 | 2,176,146 | 4,969,358 | 4,824,107 | | Net income | 1,878,703 | 1,394,170 | 3,430,374 | 2,868,937 | | Net income (loss) attributable to common stockholders | $1,874,953 | $1,390,378 | $3,422,874 | $(708,355) | | Basic and diluted income (loss) per share | $0.08 | $0.06 | $0.14 | $(0.03) | | Dividends declared per share of common stock | $0.08 | $0.08 | $0.15 | $0.15 | - Net income attributable to common stockholders increased significantly for the six months ended June 30, 2020, to $3.42 million ($0.14 EPS) from a net loss of $0.71 million ($-0.03 EPS) in the prior year[16] - Net interest income increased for both the three-month ($4.78 million vs $4.05 million) and six-month ($8.96 million vs $8.25 million) periods ended June 30, 2020, compared to 2019[16] Condensed Consolidated Statement of Changes in Equity This section details the changes in the Company's equity over time, reflecting impacts from net income, stock issuances, and dividends | Item | Amount | | :-------------------------------- | :------------- | | Balance at December 31, 2019 | $108,644,712 | | Issuance of common stock | 5,747,375 | | Cost of issuing common stock | (13,333) | | Restricted stock compensation expense | 7,882 | | Net income (loss) | 1,551,671 | | Common dividends declared | (1,870,416) | | Preferred dividends declared | (3,750) | | Balance at March 31, 2020 | $113,964,641 | | Issuance of common stock | 14,985 | | Cost of issuing common stock | (13,333) | | Restricted stock compensation expense | (8,473) | | Net income (loss) | 1,878,703 | | Common dividends declared | (1,870,754) | | Preferred dividends declared | (3,750) | | Balance at June 30, 2020 | $114,061,519 | - Total equity increased from $108.64 million at December 31, 2019, to $114.06 million at June 30, 2020, primarily driven by net income and common stock issuance, partially offset by dividends[18] - Common stock shares outstanding increased from 23,692,164 at December 31, 2019, to 24,943,383 at June 30, 2020[18] Condensed Consolidated Statements of Cash Flows This section reports the cash inflows and outflows from operating, investing, and financing activities, illustrating changes in liquidity | Cash Flows From | Six Months Ended June 30, 2020 | Six Months Ended June 30, 2019 | | :------------------------------------------------- | :----------------------------- | :----------------------------- | | Operating Activities | $5,150,748 | $2,334,539 | | Investing Activities | 1,631,184 | (6,808,188) | | Financing Activities | (6,522,811) | (4,698,382) | | Net Increase (Decrease) in Cash, Cash Equivalents and Restricted Cash | $259,121 | $(9,172,031) | | Cash, cash equivalents and restricted cash, end of period | $16,270,951 | $50,041,781 | - Net cash provided by operating activities increased significantly to $5.15 million for the six months ended June 30, 2020, from $2.33 million in the prior year[22] - Investing activities shifted from a net cash outflow of $6.81 million in 2019 to a net cash inflow of $1.63 million in 2020[22] - Net cash used in financing activities increased to $6.52 million in 2020 from $4.70 million in 2019[22] Notes to Unaudited Condensed Consolidated Financial Statements This section provides detailed explanations and additional information supporting the condensed consolidated financial statements NOTE 1 – ORGANIZATION AND BUSINESS OPERATIONS This note describes the Company's primary investment focus, its external management structure, and its election to be taxed as a Real Estate Investment Trust - Hunt Companies Finance Trust, Inc. (HCFT) primarily invests in, finances, and manages commercial real estate debt investments[24] - Effective January 3, 2020, OREC Investment Management, LLC (OREC IM) replaced Hunt Investment Management, LLC (HIM) as the external manager[24][28] - The Company has elected to be taxed as a Real Estate Investment Trust (REIT)[25] - On February 14, 2019, the Company redeemed all 1,610,000 shares of its outstanding 8.75% Series A Cumulative Redeemable Preferred Stock for $40.25 million[26] NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES This note outlines the key accounting principles and methods used in preparing the financial statements, including consolidation, revenue recognition, and fair value measurements - Financial statements are prepared in accordance with GAAP for interim reporting, with certain information condensed or omitted[29] - The Company consolidates Variable Interest Entities (VIEs) where it is the primary beneficiary, such as Hunt CRE 2017-FL1, Ltd. and Hunt CRE 2018-FL2, Ltd[30][32] - The COVID-19 pandemic introduces significant uncertainty to estimates and assumptions, potentially impacting future financial results[33][34] - Commercial mortgage loans held-for-investment are carried at unpaid principal balances, adjusted for fees, premiums, discounts, and impairment; interest income is recognized using the effective interest method[43][44] - Loans are risk-rated on a 5-point scale (1=Very Low Risk, 5=Default Risk); impairment is assessed quarterly for High Risk loans or above[45][50] - Mortgage Servicing Rights (MSRs) are reported at fair value, determined by a third-party pricing service using discounted cash flow models[42][47] - Collateralized Loan Obligations (CLOs) are carried at outstanding unpaid principal balances, net of unamortized discounts or deferred financing costs[49] - The Company has deferred implementation of ASU 2016-13 (Credit Losses) until January 1, 2023, as a smaller reporting company[64][68] NOTE 3 – COMMERCIAL MORTGAGE LOANS HELD-FOR-INVESTMENT This note provides details on the Company's commercial mortgage loan portfolio, including its size, composition, risk ratings, and collateral types | Metric | June 30, 2020 | December 31, 2019 | | :-------------------------------- | :------------ | :---------------- | | Unpaid Principal Balance | $609,847,568 | $635,260,420 | | Loan Count | 45 | 51 | | Weighted Average Floating Rate Loan % | 100.0% | 100.0% | | Weighted Average Coupon (1mL LIBOR + floors) | 5.1% | 5.4% | | Weighted Average Remaining Term (Years) | 3.5 | 3.8 | - The loan portfolio decreased by $25.41 million for the six months ended June 30, 2020, due to $41.99 million in purchases/fundings and $67.40 million in principal payments[72] | Risk Rating | Number of Loans (Jun 30, 2020) | Unpaid Principal Balance (Jun 30, 2020) | Number of Loans (Dec 31, 2019) | Unpaid Principal Balance (Dec 31, 2019) | | :---------- | :----------------------------- | :------------------------------------ | :----------------------------- | :------------------------------------ | | 1 (Very Low Risk) | — | $— | 1 | $9,000,000 | | 2 (Low Risk) | 7 | $64,922,724 | 9 | $87,176,088 | | 3 (Moderate Risk) | 30 | $412,508,744 | 37 | $487,513,256 | | 4 (High Risk) | 8 | $132,416,100 | 4 | $51,571,076 | | 5 (Default Risk) | — | $— | — | $— | | Total | 45 | $609,847,568 | 51 | $635,260,420 | - The average risk rating increased from 2.8 to 3.0, primarily due to downgrades of non-multi-family loans (retail and office properties) impacted by COVID-19[73][74] | Collateral Property Type | June 30, 2020 | December 31, 2019 | | :----------------------- | :------------ | :---------------- | | Multi-Family | 90.6% | 93.9% | | Retail | 5.8% | 2.7% | | Office | 2.9% | 2.0% | NOTE 4 - THE FREMF TRUSTS This note clarifies the Company's historical involvement with FREMF Trusts and their deconsolidation upon repayment - As of June 30, 2020, the Company no longer held any FREMF Trusts[77] - The FREMF 2012-KF01 trust was paid-in full on January 25, 2019, leading to its deconsolidation[78][80] NOTE 5 - USE OF SPECIAL PURPOSE ENTITIES AND VARIABLE INTEREST ENTITIES This note explains the Company's consolidation of Variable Interest Entities (VIEs) and the associated assets and liabilities - The Company consolidates Hunt CRE 2017-FL1, Ltd. and Hunt CRE 2018-FL2, Ltd. as VIEs, being their primary beneficiary due to obligations to absorb losses from preferred shares[81][82] - Assets of consolidated VIEs totaled $627.98 million at June 30, 2020, and liabilities totaled $498.67 million[84] - All collateralization and coverage tests in the consolidated CLOs were met as of June 30, 2020, but prolonged COVID-19 impact could affect these tests[83] | ASSETS | June 30, 2020 | December 31, 2019 | | :-------------------------------- | :------------ | :---------------- | | Cash, cash equivalents and restricted cash | $7,414,097 | $5,069,715 | | Loans held for investment | 594,668,851 | 629,157,956 | | Total Assets | $627,983,822 | $636,541,489 | | LIABILITIES | | | | Collateralized loan obligations | $498,311,273 | $505,930,065 | | Total Liabilities | $498,666,940 | $506,662,238 | NOTE 6 - RESTRICTED CASH This note details the nature and purpose of restricted cash, primarily for reinvestment in qualifying commercial mortgage loans - Restricted cash is held for reinvestment in qualifying commercial mortgage loans within Hunt CRE 2018-FL2, Ltd[88] - The reinvestment period for Hunt CRE 2017-FL1 expired on February 20, 2020[88] NOTE 7 - SECURED TERM LOAN This note describes the Company's secured term loan, including its terms, collateral, and compliance with covenants - The Company has a $40.25 million Secured Term Loan, drawn on February 14, 2019, with a 6-year maturity and a fixed interest rate of 7.25%[89][90] - The loan is secured by substantially all assets of the Credit Parties and is subject to customary covenants, which were in compliance as of June 30, 2020[90][92] - An amendment on July 9, 2020, provides additional flexibility to manage potential borrower distress related to COVID-19[91] NOTE 8 – MSRs This note provides information on Mortgage Servicing Rights (MSRs), including their fair value changes and associated loan balances - As of June 30, 2020, the Company retained servicing rights for $274.57 million in residential mortgage loans, managed by its TRS (FOAC) and two sub-servicers[94] | Metric | June 30, 2020 | June 30, 2019 | | :-------------------------------- | :------------ | :------------ | | Balance at beginning of period | $2,700,207 | $3,997,786 | | Changes in fair value due to valuation inputs/assumptions | (777,330) | (589,660) | | Other changes to fair value (realization of expected cash flows) | (475,595) | (249,457) | | Balance at end of period | $1,447,282 | $3,158,669 | | Loans associated with MSRs | $274,570,339 | $381,847,136 | | MSR values as percent of loans | 0.53% | 0.83% | - MSR fair value decreased significantly from $2.70 million at the beginning of the period to $1.45 million at June 30, 2020, primarily due to changes in valuation inputs and realization of expected cash flows[95] | Period | June 30, 2020 | June 30, 2019 | | :----------------------- | :------------ | :------------ | | Three Months Ended | $204,380 | $185,465 | | Six Months Ended | $398,527 | $433,679 | NOTE 9 - FAIR VALUE This note categorizes assets and liabilities by fair value hierarchy levels and details key valuation inputs for Level 3 instruments | Asset/Liability | Level 1 | Level 2 | Level 3 | Balance as of June 30, 2020 | | :-------------------------------- | :------ | :------ | :-------- | :-------------------------- | | Mortgage servicing rights (Assets) | $— | $— | $1,447,282 | $1,447,282 | | Cash and cash equivalents (Assets) | $8,856,854 | | | $8,856,854 | | Restricted cash (Assets) | $7,414,097 | | | $7,414,097 | | Commercial mortgage loans held-for-investment (Assets) | | | $609,847,568 | $609,847,568 | | Collateralized loan obligations (Liabilities) | | $498,311,273 | | $498,311,273 | | Secured Term Loan (Liabilities) | | | $39,469,649 | $39,469,649 | - MSRs are classified as Level 3 assets, with significant unobservable inputs including a weighted average constant prepayment rate of 20.1% (up from 13.3% at Dec 31, 2019) and a discount rate of 12.0%[98][99] - Commercial mortgage loans held-for-investment are Level 3 assets, while collateralized loan obligations are Level 2 liabilities[99] NOTE 10 - RELATED PARTY TRANSACTIONS This note discloses transactions with related parties, including management fees, expense reimbursements, and loan purchases from affiliates - The Company pays its Manager an annual base management fee of 1.50% of Stockholders' Equity and a quarterly incentive fee of 20% of Core Earnings exceeding an 8% per annum threshold[100] | Period | June 30, 2020 | June 30, 2019 | | :----------------------- | :------------ | :------------ | | Three Months Ended | $590,211 | $566,164 | | Six Months Ended | $1,175,032 | $1,119,623 | - The Company incurred $807,774 in reimbursable operating expenses to the Manager for the six months ended June 30, 2020, with $73,549 waived due to permanent financing by an affiliate[107] - Hunt CRE 2017-FL1, Ltd. purchased two loans totaling $31.94 million from OREC Structured Finance, LLC (an affiliate of the Manager) in Q1 2020[110] - An amendment on August 5, 2020, transferred future funding participation interests from FL1 Seller to OREC SF, with OREC SF making advances on unfunded loan commitments (estimated $31.6 million)[113] NOTE 11 - GUARANTEES This note describes the Company's loan repurchase obligations and the assumption of backstop guarantee obligations by MAXEX Clearing LLC - The Company has customary loan repurchase obligations for residential mortgage loans sold into securitizations, but has not been required to repurchase any to date[115] - MAXEX Clearing LLC assumed all of FOAC's backstop guarantee obligations as of December 31, 2018, indemnifying FOAC against related losses[116][117] - The maximum potential amount under outstanding backstop guarantees was estimated at $1.41 billion as of June 30, 2020, though the Company believes actual potential losses are not indicative of this amount[118] NOTE 12 - COMMITMENTS AND CONTINGENCIES This note addresses the potential impact of COVID-19, unfunded loan commitments, and the uncertainty surrounding future loan fundings - The full impact of COVID-19 on the Company's financial condition, results of operations, and cash flows remains uncertain, with no contingencies recorded as of June 30, 2020[120] - Unfunded commitments related to loans in Hunt CRE 2017-FL1, Ltd. totaled $32.6 million as of June 30, 2020[121] - OREC SF, an affiliate of the Manager, had $41.4 million in unfunded commitments for loans in Hunt CRE 2018-FL2, Ltd[122] - Future loan fundings are uncertain in timing and amount, and the pace of funding for capital improvements and leasing is anticipated to be slower due to COVID-19[123] NOTE 13 - EQUITY This note details changes in common stock outstanding, private placements, stock repurchase programs, and dividend declarations - Common stock shares outstanding increased to 24,943,383 at June 30, 2020, from 23,692,164 at December 31, 2019[124] - On January 3, 2020, the Company issued 1,246,719 common shares in a private placement for $5.7 million net proceeds[124] - The Company has a $10 million stock repurchase program, with $9.4 million remaining authorized as of June 30, 2020; no repurchases have occurred since January 2016[125][126] - All 1,610,000 shares of 8.75% Series A Cumulative Redeemable Preferred Stock were redeemed on February 14, 2019[127] | Declaration Date | Record Date | Payment Date | Dividend Amount | Cash Dividend Per Weighted Average Share | | :--------------- | :---------- | :----------- | :-------------- | :--------------------------------------- | | March 12, 2020 | March 31, 2020 | April 15, 2020 | $1,870,416 | $0.07504 | | June 17, 2020 | June 30, 2020 | July 15, 2020 | $1,870,754 | $0.07505 | NOTE 14 - EARNINGS PER SHARE This note explains the calculation of basic and diluted earnings per share, including the treatment of participating securities - Unvested restricted shares issued under the Manager Equity Plan are considered participating securities and included in EPS computation[130] | Metric | Three Months Ended June 30, 2020 | Three Months Ended June 30, 2019 | Six Months Ended June 30, 2020 | Six Months Ended June 30, 2019 | | :------------------------------------------------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Net income (loss) attributable to common stockholders | $1,874,953 | $1,390,378 | $3,422,874 | $(708,355) | | Basic and diluted income (loss) per share | $0.08 | $0.06 | $0.14 | $(0.03) | | Weighted average number of shares of common stock outstanding | 24,939,575 | 23,687,664 | 24,925,529 | 23,687,664 | NOTE 15 - SEGMENT REPORTING This note clarifies that the Company operates as a single reporting segment focused on commercial mortgage loans and related investments - The Company operates as a single reporting segment, investing in a portfolio of commercial mortgage loans and other mortgage-related investments[132] NOTE 16 - INCOME TAXES This note discusses the Company's REIT election, the tax treatment of its Taxable REIT Subsidiary, and the resolution of a prior income test failure - The Company maintains its REIT election, generally avoiding federal income tax at the corporate level by distributing 100% of taxable earnings[133] - A Taxable REIT Subsidiary (TRS), FOAC, conducts certain activities and is subject to U.S. C-Corporation tax[133] - The 2018 75% Income Test Failure was resolved via a closing agreement with the IRS on July 13, 2020, confirming it was due to reasonable cause and will not impact REIT election[134][135] NOTE 17 - SUBSEQUENT EVENTS This note confirms that no subsequent events requiring additional disclosure were identified through the financial statement issuance date - No subsequent events requiring accrual or additional disclosure were identified through the financial statement issuance date, beyond those already disclosed[136] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations This section provides management's perspective on the Company's financial condition, results of operations, and liquidity, highlighting key events such as the ORIX transaction, the impact of the COVID-19 pandemic, and performance drivers Overview This section introduces the Company's investment strategy, its new management agreement, and its financing approach as a REIT - The Company focuses on investing in, financing, and managing a portfolio of commercial real estate debt investments, primarily transitional floating rate commercial mortgage loans with an emphasis on middle market multi-family assets[141][143] - In January 2020, the Company entered a new management agreement with OREC IM and an affiliate of ORIX USA purchased a 5.0% ownership stake, aiming to enhance scale and shareholder value[142] - The Company finances investments primarily through match-term collateralized loan obligations and has elected to be taxed as a REIT[143][145] Second Quarter 2020 Summary This section summarizes key financial activities and declarations for the second quarter of 2020, including loan fundings and dividends - Funded $3.4 million in future funding obligations for existing loans with a weighted average interest rate of LIBOR plus 3.15%[147] - Declared a second-quarter dividend of $0.075 per share of common stock, consistent with the previous quarter[147] The ORIX Transaction This section details the strategic partnership with ORIX, including the new management agreement, equity investment, and leadership changes - On January 6, 2020, the Company entered a new external management agreement with OREC IM, an affiliate of ORIX Corporation USA, and terminated the prior agreement with HIM without a termination fee[148] - An ORIX USA affiliate purchased 1,246,719 common shares in a private placement for $5.75 million, representing a 43% premium over the January 2, 2020 share price, resulting in approximately 5% ownership[149] - James Flynn became Chairman of the Board and CEO, and James A. Briggs was appointed CFO[149] Recent Developments (COVID-19 Impact) This section discusses the ongoing adverse effects of the COVID-19 pandemic on global markets and the Company's operations, liquidity, and financial condition - The COVID-19 pandemic continues to adversely impact global economic and market conditions, leading to widespread disruptions[150] - The full magnitude and duration of COVID-19's impact on the Company's financial condition, operations, liquidity, and distributions remain uncertain[151] - Operating results for Q2 2020 were not significantly impacted, except for $624,816 in previously deferred debt issuance costs expensed due to an unlikely CLO transaction[152] Factors Impacting Our Operating Results This section identifies key drivers of operating results, including net interest income, asset market values, credit risk, liquidity, and prepayment risk - Operating results are affected by net interest income, asset market values, and supply/demand for target assets, all influenced by market interest rates and prepayment speeds[153] - Rising interest rates generally increase net interest income, while declining rates decrease it; the portfolio benefits from 100% LIBOR-indexed investments and LIBOR floors (weighted average 1.61% as of June 30, 2020)[154] - Commercial mortgage loans are subject to credit risk, monitored by the Manager's asset management team; 100% of loans were current as of June 30, 2020, but heightened credit risk exists due to COVID-19[155][157] - Liquidity is sourced from equity issuances, corporate debt, operating activities, and financing arrangements; CLOs are match-term and not subject to margin calls[158] - Prepayment risk is mitigated as all commercial mortgage loans were acquired at par; however, reinvestment in new assets at lower spreads could reduce future interest income[159] - Changes in market value of assets directly impact earnings only if a loan is impaired, leading to an allowance for loan losses[160] Managing Our Business through COVID-19 This section outlines the Manager's operational adjustments and cautious approach to new investments in response to the COVID-19 pandemic - The Manager implemented a work-from-home policy, with the team fully operational and maintaining active dialogue with borrowers to monitor property performance[162] - The Company is taking a measured approach to new investment activity, incorporating COVID-19 impacts into evaluations, and monitoring fiscal stimulus and local ordinance constraints[163] Investment Portfolio This section provides an overview of the Company's investment portfolio, including loan activity, key metrics, and risk rating changes - The Company consolidates Hunt CRE 2017-FL1, Ltd. and Hunt CRE 2018-FL2, Ltd. as primary beneficiaries[164] | Item | Amount | | :-------------------------------- | :------------- | | Balance at December 31, 2019 | $635,260,420 | | Purchases and fundings | 41,990,011 | | Proceeds from principal repayments | (67,402,863) | | Balance at June 30, 2020 | $609,847,568 | | Metric | June 30, 2020 | December 31, 2019 | | :-------------------------------- | :------------ | :---------------- | | Unpaid Principal Balance | $609,847,568 | $635,260,420 | | Loan Count | 45 | 51 | | Weighted Average Coupon | 5.1% | 5.4% | | Weighted Average Remaining Term (Years) | 3.5 | 3.8 | - The loan portfolio is 100% performing with no impairments, defaults, or non-accrual loans as of June 30, 2020, and all July payments were made[173] - The weighted average risk rating increased from 2.8 to 3.0, reflecting higher risk in retail and office properties due to COVID-19[176] FOAC and Our Residential Mortgage Loan Business This section describes FOAC's role as a Taxable REIT Subsidiary, its historical residential mortgage loan activities, and the transfer of backstop guarantee obligations - FOAC, a Taxable REIT Subsidiary (TRS), historically aggregated mortgage loans for securitization and continues to own MSRs serviced by sub-servicers[178] - FOAC ceased aggregating prime jumbo loans and no longer maintains warehouse financing for them[179] - MAXEX Clearing LLC assumed all of FOAC's backstop guarantee obligations as of December 31, 2018, indemnifying FOAC against related losses[180][181] Equity and Book Value Per Share This section presents the Company's total equity and book value per common share, highlighting their stability | Metric | Value | | :---------------------- | :------------ | | Total Equity | $114.1 million | | Book Value Per Common Share (basic and fully diluted) | $4.57 | - Book value per common share remained constant at $4.57 from the previous quarter-end[182] Critical Accounting Policies and Estimates This section details the significant accounting policies and estimates, particularly those affected by the COVID-19 pandemic, including loan valuation and MSR reporting - Financial statements rely on estimates and assumptions, particularly impacted by the heightened uncertainty of the COVID-19 pandemic[183] - Commercial mortgage loans held-for-investment are carried at amortized cost; interest income is recognized using the effective interest method[184][185] - Loans are risk-rated quarterly (1-5 scale); impairment is recognized when collection is not probable, measured by comparing collateral fair value to book value[186][187] - Mortgage Servicing Rights (MSRs) are reported at fair value, with income recognized net of sub-servicer costs[188][189] Capital Allocation This section illustrates how the Company allocates its capital across different investment types, emphasizing commercial mortgage loans | Investment Type | June 30, 2020 Capital Allocated | June 30, 2020 % Capital | December 31, 2019 Capital Allocated | December 31, 2019 % Capital | | :-------------------------------- | :------------------------------ | :-------------------- | :-------------------------------- | :-------------------- | | Commercial Mortgage Loans | $144,549,005 | 94.2% | $136,010,251 | 91.9% | | MSRs | $1,447,282 | 0.9% | $2,700,207 | 1.8% | | Unrestricted Cash | $7,534,881 | 4.9% | $9,318,295 | 6.3% | | Total Capital Allocated | $153,531,168 | 100.0% | $148,028,753 | 100.0% | - Commercial Mortgage Loans represent the largest allocation of capital, increasing from 91.9% to 94.2% of total allocated capital[192] - MSRs and Unrestricted Cash as a percentage of total capital decreased from December 31, 2019, to June 30, 2020[192] Results of Operations This section provides a comparative analysis of the Company's financial performance, considering prior year events and the impact of COVID-19 - Results are not directly comparable due to the repayment of FREMF 2012-KF01, preferred stock redemption, and Secured Term Loan draw in 2019[194] - COVID-19 did not significantly impact Q2 2020 operating results, except for expensing $624,816 in deferred debt issuance costs[194] | | Three Months Ended June 30, 2020 | Three Months Ended June 30, 2019 | Six Months Ended June 30, 2020 | Six Months Ended June 30, 2019 | | :------------------------------------------------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Net interest income | $4,783,694 | $4,046,715 | $8,959,336 | $8,253,262 | | Total other (loss) | (170,796) | (273,654) | (854,396) | (420,538) | | Total expenses | 2,802,466 | 2,176,146 | 4,969,358 | 4,824,107 | | Net income attributable to common stockholders | $1,874,953 | $1,390,378 | $3,422,874 | $(708,355) | | Basic and diluted income (loss) per share | $0.08 | $0.06 | $0.14 | $(0.03) | Net Income Summary This section summarizes the Company's net income attributable to common stockholders, highlighting significant improvements and contributing factors - Net income attributable to common stockholders for the six months ended June 30, 2020, was $3.42 million ($0.14 EPS), a significant improvement from a $0.71 million net loss ($-0.03 EPS) in the prior year[197] - This improvement was driven by increased net interest income and decreased preferred dividends, offsetting higher total other loss and expenses[197] - For the three months ended June 30, 2020, net income attributable to common shareholders increased to $1.87 million ($0.08 EPS) from $1.39 million ($0.06 EPS) in the prior year[198] Net Interest Income This section analyzes the changes in net interest income, attributing them to loan portfolio balance, LIBOR floors, and CLO liabilities - Net interest income increased to $8.96 million for the six months ended June 30, 2020 (vs. $8.25 million in 2019), primarily due to a $50.9 million increase in loan portfolio balance, higher LIBOR floors, and lower CLO liabilities' LIBOR[199] - For the three months ended June 30, 2020, net interest income rose to $4.78 million (vs. $4.05 million in 2019), driven by a $35.6 million increase in loan portfolio balance, higher LIBOR floors, and lower CLO liabilities' LIBOR[200] - These increases were partially offset by a decrease in weighted-average spread on the loan portfolio for both periods[199][200] Other Income This section explains the components of other income, primarily focusing on unrealized losses on mortgage servicing rights due to market changes - For the six months ended June 30, 2020, the Company incurred an $854,396 loss, primarily due to $1.25 million in net unrealized losses on mortgage servicing rights (MSRs) from decreased interest rates and increased prepayments[201] - For the six months ended June 30, 2019, the Company incurred a $420,538 loss, driven by realized losses on investments and unrealized MSR losses, partially offset by unrealized gains on multi-family loans[202] - The period-over-period increase in other loss was mainly due to changes in unrealized gain/loss on MSRs[203] Expenses This section details the Company's total expenses, including management fees and operating expenses, and explains period-over-period changes - Total expenses for the six months ended June 30, 2020, were $4.97 million, including $1.18 million in management fees and $3.79 million in operating expenses[206] - The period-over-period increase in operating expenses reflects higher insurance and legal fees, and expensed deferred costs, partially offset by decreased expense reimbursement[208] - For the three months ended June 30, 2020, total expenses were $2.80 million, including $0.59 million in management fees and $2.21 million in operating expenses[209] Impairment This section confirms that no impairments or allowances for loan losses were recognized during the reported periods - The Company recognized no impairments on its loans held-for-investment and recorded no allowance for loan losses for the three and six months ended June 30, 2020 and 2019[212] Income Tax (Benefit) Expense This section reports the Company's income tax benefit or provision for the three and six months ended June 30, 2020 and 2019 - For the six months ended June 30, 2020, the Company recognized an income tax benefit of $294,792, compared to a provision of $139,680 in 2019[213] - For the three months ended June 30, 2020, the Company recognized an income tax benefit of $68,271, compared to a provision of $202,745 in 2019[213] Liquidity and Capital Resources This section discusses the Company's sources of liquidity, debt structure, and key financial ratios, considering the impact of COVID-19 - Primary liquidity sources include equity issuances, debt offerings, and operating cash flow; commercial mortgage loans are financed with match-term CLOs not subject to margin calls[214] - As of June 30, 2020, the Company had a $40.2 million secured term loan (maturing Jan 2025) and $498.3 million in collateralized loan financing (maturing 2028 or later)[214] - The IRS closing agreement on July 13, 2020, facilitates future financing and equity capital raises, though COVID-19 may make obtaining financing more difficult[214] - Unfunded loan commitments in Hunt CRE 2017-FL1, Ltd. totaled $32.6 million as of June 30, 2020, with OREC SF now responsible for advances[216] - Unrestricted cash and cash equivalents were $8.9 million at June 30, 2020, down from $10.9 million at December 31, 2019[217] - Recourse debt to equity ratio was 0.4:1, and total debt to equity ratio (GAAP basis) was 4.7:1 as of June 30, 2020[218][219] Cash Flows This section analyzes the Company's cash flows from operating, investing, and financing activities for the reported periods | Cash Flows From | Six Months Ended June 30, 2020 | Six Months Ended June 30, 2019 | | :-------------------------------- | :----------------------------- | :----------------------------- | | Operating Activities | $5,150,748 | $2,334,539 | | Investing Activities | 1,631,184 | (6,808,188) | | Financing Activities | (6,522,811) | (4,698,382) | | Net Increase (Decrease) in Cash, Cash Equivalents and Restricted Cash | $259,121 | $(9,172,031) | - Net cash provided by operating activities increased to $5.2 million in 2020, driven by interest received from consolidated VIEs and senior secured loans[221] - Investing activities generated $1.6 million in cash in 2020, a reversal from a $6.8 million outflow in 2019[223] - Net cash used in financing activities increased to $6.5 million in 2020, primarily due to common stock dividends and CLO repayments, partially offset by common stock issuance proceeds[224] Forward-Looking Statements Regarding Liquidity This section outlines the Company's expectations for meeting short-term and long-term liquidity needs, including reliance on future financing and equity capital - The Company believes current liquidity, combined with cash flow and borrowing capacity, will meet short-term liquidity needs[225] - Long-term liquidity depends on obtaining additional debt financing and equity capital, potentially through credit facilities, CLOs, or public/private offerings[226] - REIT distribution requirements (at least 90% of taxable income) limit retained earnings for capital[227] Off-Balance Sheet Arrangements This section confirms the absence of unconsolidated off-balance sheet arrangements and the transfer of backstop guarantee obligations - As of June 30, 2020, the Company had no relationships with unconsolidated financial partnerships or special purpose entities for off-balance sheet arrangements[228] - MAXEX Clearing LLC assumed all of FOAC's backstop guarantee obligations, eliminating the related non-contingent liability from the Company's balance sheet[229] Distributions This section details the Company's dividend policy, its intention to maintain REIT qualification, and recent dividend declarations - The Company intends to continue regular quarterly distributions to common stockholders, aiming to distribute substantially all REIT taxable income to maintain REIT qualification[230] - Cash available for distribution may be less than taxable income, potentially requiring asset sales, borrowings, or taxable stock distributions[230] - A cash dividend of $0.075 per common share was declared for Q2 2020, paid on July 15, 2020[231] Item 3. Quantitative and Qualitative Disclosures about Market Risks This section states that there are no applicable quantitative and qualitative disclosures about market risks for the Company in this report - Not applicable for this report[233] Item 4. Controls and Procedures Management, including the principal executive and financial officers, concluded that the Company's disclosure controls and procedures were effective as of June 30, 2020. No material changes in internal control over financial reporting occurred during the quarter - Disclosure controls and procedures were evaluated and deemed effective as of June 30, 2020, by management, including the principal executive and financial officers[235] - No material changes in internal control over financial reporting occurred during the most recently completed fiscal quarter[236] PART II - OTHER INFORMATION This part includes disclosures on legal proceedings, risk factors, equity sales, defaults, mine safety, other information, and exhibits Item 1. Legal Proceedings The Company and its Manager are not currently subject to any material legal proceedings - Neither the Company nor its Manager are subject to any material legal proceedings as of the report date[237] Item 1A. Risk Factors This section highlights material changes to risk factors, primarily focusing on the potential adverse effects of the COVID-19 pandemic on the Company's business, financial condition, liquidity, and stock price - No material changes to Risk Factors were disclosed other than those related to the COVID-19 pandemic[239] - The COVID-19 pandemic could have a material adverse effect on the Company's business, including asset values, borrower payment ability, ability to redeploy proceeds, interest rates, and new investment challenges[240][241] - Potential impacts include deterioration in collateral value, requests for forbearance/loan modifications, reduced future interest income from lower reinvestment spreads, and challenges for third-party providers[241] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds There were no unregistered sales of equity securities or use of proceeds to report in this period - None to report[238] Item 3. Defaults Upon Senior Securities There were no defaults upon senior securities to report - None to report[241] Item 4. Mine Safety Disclosures This item is not applicable to the Company - Not applicable[243] Item 5. Other Information No other information is required to be disclosed under this item - None to report[244] Item 6. Exhibits This section lists all exhibits filed or furnished as part of this report, including amendments to agreements, certifications, and XBRL documents - The report includes various exhibits such as amendments to the Credit and Guaranty Agreement, Purchase and Sale Agreement, Participation Agreements, and certifications[245][247] SIGNATURES This section provides the official signatures of the Company's principal executive and financial officers, certifying the report's contents - The report was signed by James P. Flynn, Chief Executive Officer, and James A. Briggs, Chief Financial Officer, on August 7, 2020[251]