Lument Finance Trust(LFT) - 2020 Q3 - Quarterly Report

PART I - FINANCIAL INFORMATION This section provides the company's financial statements, including balance sheets, statements of operations, changes in equity, and cash flows, along with detailed notes on accounting policies and other disclosures Item 1. Financial Statements This section presents the Company's unaudited condensed consolidated financial statements, including balance sheets, statements of operations, changes in equity, and cash flows, along with comprehensive notes detailing accounting policies, investment characteristics, related party transactions, and other financial disclosures for the periods ended September 30, 2020, and December 31, 2019 Condensed Consolidated Balance Sheets The balance sheets show a decrease in total assets and liabilities from December 31, 2019, to September 30, 2020, while total equity increased | Metric | September 30, 2020 | December 31, 2019 | | :------------------------------------------ | :------------------- | :------------------- | | ASSETS | | | | Cash and cash equivalents | $9,720,138 | $10,942,115 | | Restricted cash | $14,548,916 | $5,069,715 | | Commercial mortgage loans held-for-investment | $598,933,122 | $635,260,420 | | Total assets | $637,827,526 | $657,901,998 | | LIABILITIES AND EQUITY | | | | Collateralized loan obligations, net | $479,704,710 | $505,930,065 | | Total liabilities | $523,349,362 | $549,257,286 | | Total equity | $114,478,164 | $108,644,712 | Condensed Consolidated Statements of Operations The statements of operations show an increase in net income attributable to common stockholders for both the three and nine months ended September 30, 2020, compared to the prior year, driven by higher net interest income despite increased total expenses | Metric | 3 Months Ended Sep 30, 2020 | 3 Months Ended Sep 30, 2019 | 9 Months Ended Sep 30, 2020 | 9 Months Ended Sep 30, 2019 | | :------------------------------------------ | :-------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | | Net interest income | $4,831,984 | $3,795,884 | $13,791,320 | $12,049,146 | | Total other (loss) | $(162,138) | $(201,595) | $(1,016,534) | $(622,133) | | Total expenses | $2,261,431 | $1,703,217 | $7,230,789 | $6,527,324 | | Net income attributable to common stockholders | $2,547,218 | $2,153,956 | $5,970,092 | $1,445,601 | | Basic and diluted income per share | $0.10 | $0.09 | $0.24 | $0.06 | | Dividends declared per share of common stock | $0.09 | $0.08 | $0.24 | $0.22 | Condensed Consolidated Statement of Changes in Equity The statement of changes in equity reflects an increase in total equity from December 31, 2019, to September 30, 2020, primarily due to the issuance of common stock and net income, partially offset by common dividends declared | Metric | December 31, 2019 | September 30, 2020 | | :-------------------------------- | :------------------ | :------------------- | | Total Equity | $108,644,712 | $114,478,164 | | Issuance of common stock (9 months) | N/A | $5,747,375 | | Net income (9 months) | N/A | $5,981,384 | | Common dividends declared (9 months) | N/A | $(5,861,358) | Condensed Consolidated Statements of Cash Flows Cash flows from operating activities increased, while investing activities provided less cash and financing activities used significantly more cash for the nine months ended September 30, 2020, compared to the prior year, resulting in a lower net increase in cash, cash equivalents, and restricted cash | Cash Flow Category | 9 Months Ended Sep 30, 2020 | 9 Months Ended Sep 30, 2019 | | :------------------------------------------ | :-------------------------- | :-------------------------- | | Net cash provided by operating activities | $8,624,187 | $5,158,355 | | Net cash provided by investing activities | $27,151,602 | $33,440,622 | | Net cash (used in) financing activities | $(27,518,565) | $(6,474,957) | | Net increase in cash, cash equivalents and restricted cash | $8,257,224 | $32,124,020 | Notes to Unaudited Condensed Consolidated Financial Statements These notes provide detailed explanations and disclosures for the financial statements, covering the Company's organization, significant accounting policies, characteristics of its commercial mortgage loan portfolio, related party transactions, guarantees, commitments, equity, earnings per share, segment reporting, and income taxes NOTE 1 – ORGANIZATION AND BUSINESS OPERATIONS This note outlines the Company's primary investment focus, management structure changes, REIT election, and preferred stock redemption - The Company primarily invests in, finances, and manages a portfolio of commercial real estate debt investments[20] - Effective January 3, 2020, OREC Investment Management, LLC became the external manager, replacing Hunt Investment Management, LLC[20][24] - The Company elected to be taxed as a real estate investment trust (REIT)[21] - On February 14, 2019, the Company redeemed all 1,610,000 shares of its outstanding 8.75% Series A Cumulative Redeemable Preferred Stock using proceeds from a $40.25 million secured term loan[22] NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES This note details the accounting principles used, including GAAP compliance, consolidation of VIEs, COVID-19 impact considerations, and specific asset valuation methods - The unaudited condensed consolidated financial statements are prepared in accordance with GAAP for interim financial reporting[25] - The Company consolidates Variable Interest Entities (VIEs) where it is the primary beneficiary, specifically Hunt CRE 2017-FL1, Ltd. and Hunt CRE 2018-FL2, Ltd[26][28] - The COVID-19 pandemic introduces significant uncertainty to estimates and assumptions, with actual results potentially differing materially[29][30] - Commercial mortgage loans held-for-investment are carried at amortized cost, and interest income is recognized using the effective interest method[39][40] - Mortgage servicing rights (MSRs) are reported at fair value[43] - As a smaller reporting company, the Company has deferred implementation of ASU 2016-13 (Credit Losses) until January 1, 2023[60][65] NOTE 3 – COMMERCIAL MORTGAGE LOANS HELD-FOR-INVESTMENT This note provides details on the commercial mortgage loan portfolio, including its size, characteristics, activity, risk ratings, and collateral types | Metric | September 30, 2020 | December 31, 2019 | | :-------------------------------- | :------------------- | :------------------- | | Unpaid Principal Balance | $598,933,122 | $635,260,420 | | Loan Count | 44 | 51 | | Weighted Average Coupon | 5.1% | 5.4% | | Weighted Average Remaining Term | 3.2 years | 3.8 years | - For the nine months ended September 30, 2020, loan portfolio activity included $52.6 million in purchases and fundings and $(88.9) million in principal payments[68] - The average risk rating of the commercial mortgage loan portfolio increased from 2.8 (Moderate Risk) at December 31, 2019, to 3.1 (Moderate Risk) at September 30, 2020, primarily due to downgrades of non-multi-family loans (retail and office) impacted by the COVID-19 pandemic[68][69][70] - As of September 30, 2020, 90.4% of collateral property types were Multi-Family, a decrease from 93.9% at December 31, 2019[71] - No impaired loans, nonaccrual loans, or loans in maturity default were reported as of September 30, 2020, or December 31, 2019[72] NOTE 4 - THE FREMF TRUSTS This note confirms the Company no longer holds any FREMF Trusts and details the payment in full of a specific trust - As of September 30, 2020, the Company no longer held any FREMF Trusts[73] - The FREMF 2012-KF01 trust was paid-in full on January 25, 2019[74] NOTE 5 - USE OF SPECIAL PURPOSE ENTITIES AND VARIABLE INTEREST ENTITIES This note explains the Company's consolidation of specific Variable Interest Entities (VIEs) and provides their financial metrics and CLO operational results - The Company consolidates Hunt CRE 2017-FL1, Ltd. and Hunt CRE 2018-FL2, Ltd. as Variable Interest Entities (VIEs) because it is the primary beneficiary[78] | VIE Assets/Liabilities | September 30, 2020 | December 31, 2019 | | :-------------------------------- | :------------------- | :------------------- | | Total Assets | $608,690,756 | $636,541,489 | | Total Liabilities | $480,043,366 | $506,662,238 | - All collateralization and coverage tests in the consolidated CLOs were met as of September 30, 2020[79] | CLO Operations | 9 Months Ended Sep 30, 2020 | 9 Months Ended Sep 30, 2019 | | :----------------------- | :-------------------------- | :-------------------------- | | Interest income | $25,225,152 | $29,695,218 | | Interest expense | $(9,649,523) | $(16,147,178) | | Net income | $15,078,541 | $13,010,012 | NOTE 6 - RESTRICTED CASH This note clarifies the restrictions on cash, particularly regarding reinvestment periods for specific CLO entities - The reinvestment period for Hunt CRE 2017-FL1, Ltd. expired on February 20, 2020[85] - Cash received from loan payoffs or maturities in Hunt CRE 2018-FL2, Ltd. is restricted for reinvestment during its 36-month reinvestment period[85] NOTE 7 - SECURED TERM LOAN This note details the Company's secured term loan, including its terms, compliance with covenants, and recent amendments - The Company has a $40.25 million Secured Term Loan with a 6-year maturity, bearing a fixed interest rate of 7.25% for the initial five-year period[86][87] - As of September 30, 2020, the Company was in compliance with all covenants of the Credit Agreement[89] - A Second Amendment to the Credit and Guaranty Agreement was entered into on July 9, 2020, to provide additional flexibility for managing potential borrower distress related to COVID-19[88] NOTE 8 – MSRs This note provides a summary of Mortgage Servicing Rights (MSRs), including their fair value, unrealized losses, and servicing income | Metric | September 30, 2020 | September 30, 2019 | | :-------------------------------- | :------------------- | :------------------- | | Balance at end of period | $1,097,154 | $2,713,809 | | Unrealized (loss) on MSRs (9 months) | $(1,603,052) | $(1,283,977) | | Servicing income, net (9 months) | $586,516 | $676,944 | | MSR values as percent of loans | 0.46% | 0.75% | - Mortgage Servicing Rights (MSRs) are held and managed at the Company's taxable REIT subsidiary (TRS) and are reported at fair value[43][91] NOTE 9 – FAIR VALUE This note details the fair value measurements of financial instruments, classifying them by hierarchy level - Mortgage servicing rights (MSRs) are classified as Level 3 assets, with a balance of $1,097,154 as of September 30, 2020, down from $2,700,207 at December 31, 2019[94][95] | Financial Instrument | Fair Value Hierarchy Level | Carrying Value (Sep 30, 2020) | Fair Value (Sep 30, 2020) | | :------------------------------------ | :-------------------------- | :------------------------------ | :-------------------------- | | Commercial mortgage loans held-for-investment | 3 | $598,933,122 | $594,213,194 | | Collateralized loan obligations | 2 | $479,704,710 | $470,291,430 | | Secured Term Loan | 3 | $39,512,924 | $42,046,142 | NOTE 10 - RELATED PARTY TRANSACTIONS This note outlines transactions with related parties, including management fees, reimbursable expenses, and loan purchases from affiliates | Metric | 9 Months Ended Sep 30, 2020 | 9 Months Ended Sep 30, 2019 | | :-------------------------------- | :-------------------------- | :-------------------------- | | Management and incentive fees | $1,850,139 | $1,677,456 | | Operating expenses reimbursable to Manager | $1,249,123 | $1,232,211 | | Reimbursable expense waived | $73,549 | $345,988 | - Hunt CRE 2017-FL1, Ltd. and Hunt CRE 2018-FL2, Ltd. purchased loans from OREC Structured Finance, LLC, an affiliate of the Manager[108][109] - An amendment to Participation Agreements transferred future funding participation interests from FL1 Seller to OREC SF, with OREC SF making advances on unfunded loan commitments, and the Company may be required to purchase these participations, with a maximum unfunded commitment of $31.3 million as of September 30, 2020[112] NOTE 11 - GUARANTEES This note details the Company's guarantee obligations, including the assumption of backstop guarantees by MAXEX Clearing LLC and the estimated maximum potential future payments - MAXEX Clearing LLC assumed all of FOAC's backstop guarantee obligations as of December 31, 2018, indemnifying FOAC against related losses[116] - The maximum potential amount of future payments under outstanding backstop guarantees was estimated at $860.5 million as of September 30, 2020, a decrease from $1.4 billion at December 31, 2019, though the Company believes this is not indicative of actual potential losses[117] NOTE 12 - COMMITMENTS AND CONTINGENCIES This note addresses the uncertain impact of the COVID-19 pandemic and details unfunded loan commitments for various entities - The full extent of the COVID-19 pandemic's impact remains uncertain, and no contingencies have been recorded on the consolidated balance sheet as of September 30, 2020[119] - Unfunded commitments related to loans held in Hunt CRE 2017-FL1, Ltd. were $29.5 million as of September 30, 2020[120] - Unfunded commitments related to loans held in Hunt CRE 2018-FL2, Ltd. were $40.9 million as of September 30, 2020[122] - Future loan fundings are uncertain and anticipated to be slower due to the COVID-19 pandemic[123] NOTE 13 - EQUITY This note details changes in common stock, preferred stock redemption, and common stock dividends declared - Common stock issued and outstanding increased to 24,943,383 shares at September 30, 2020, from 23,692,164 shares at December 31, 2019[124] - On January 3, 2020, the Company issued 1,246,719 shares of common stock in a private placement, generating $5.7 million in net proceeds[124] - All 8.75% Series A Cumulative Redeemable Preferred Stock was redeemed on February 14, 2019[126] - For the 2020 taxable year to date, the Company declared $5,861,358, or $0.24 per share, in dividends to common stockholders[127] NOTE 14 - EARNINGS PER SHARE This note provides the calculation of basic and diluted earnings per share, including the impact of participating securities | Metric | 9 Months Ended Sep 30, 2020 | 9 Months Ended Sep 30, 2019 | | :------------------------------------------ | :-------------------------- | :-------------------------- | | Net income attributable to common stockholders | $5,970,092 | $1,445,601 | | Basic weighted average shares of common stock | 24,927,122 | 23,683,164 | | Diluted weighted average shares of common stock outstanding | 24,931,524 | 23,687,664 | | Basic and diluted income per share | $0.24 | $0.06 | - Outstanding unvested restricted shares issued under the Manager Equity Plan are considered participating securities and are included in the computation of basic and diluted earnings per share[129] 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 explains the Company's REIT tax status, resolution of a prior income test failure, and the tax treatment of its Taxable REIT Subsidiary - The Company has elected to be treated as a REIT, generally not subject to federal income tax at the corporate level if it distributes 100% of its taxable earnings[133] - The Company resolved the 2018 75% Income Test Failure with the IRS, confirming that its REIT election will not be impacted[136] - Certain activities are conducted through a Taxable REIT Subsidiary (TRS), FOAC, which is subject to tax as a U.S. C-Corporation[133] NOTE 17 - SUBSEQUENT EVENTS This note confirms that management has reviewed subsequent events and found no items requiring additional disclosure - Management has reviewed subsequent events through the issuance date and determined that no events occurred requiring accrual or additional disclosure[137] 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 and results of operations, including an overview of its business, recent developments, factors impacting performance, and detailed analysis of financial results, liquidity, and capital resources, also addressing the ongoing impact of the COVID-19 pandemic Overview This overview describes the Company's investment focus, new management agreement, primary investment strategy, and REIT tax election - The Company focuses on investing in, financing, and managing a portfolio of commercial real estate debt investments[142] - In January 2020, the Company entered into a new management agreement with OREC Investment Management, LLC, and an affiliate of ORIX USA purchased a 5.0% ownership stake through a private placement[143] - The Company primarily invests in transitional floating rate commercial mortgage loans, with an emphasis on middle market multi-family assets, financed through match term collateralized loan obligations[144] - The Company has elected to be taxed as a REIT[146] Third Quarter 2020 Summary This summary highlights the loan portfolio decrease and the announced increase in the third-quarter common stock dividend - The loan portfolio decreased by $10.9 million to $598.9 million, with $10.6 million in loan purchases offset by $21.5 million in loan payoffs[148] - The Company announced a third-quarter dividend of $0.085 per share of common stock, representing a 13.3% increase over the second-quarter dividend[148] The ORIX Transaction This section details the new external management agreement with OREC IM and the private placement of common stock to an ORIX USA affiliate - On January 6, 2020, the Company entered into a new external management agreement with OREC IM, part of ORIX Real Estate Capital's platform[149] - An affiliate of ORIX USA purchased 1,246,719 shares of the Company's common stock in a private placement for $5,747,375, representing a 43% premium over the January 2, 2020, share price[150] Recent Developments This section discusses the adverse impact of the COVID-19 pandemic on economic conditions and the Company's future financial outlook, noting limited impact on current operating results - The COVID-19 pandemic continues to adversely impact economic and market conditions globally, nationally, and locally[151] - The Company faces future uncertainty and risk regarding its financial condition, results of operations, liquidity, and ability to pay distributions due to the pandemic[152] - Operating results for the three and nine months ended September 30, 2020, were not significantly impacted by COVID-19, except for $624,816 in expensed deferred debt issuance costs related to an unlikely collateralized loan obligation transaction[153] Factors Impacting Our Operating Results This section identifies key factors influencing operating results, including net interest income, asset market value, supply/demand, interest rate sensitivity, LIBOR discontinuation, credit risk, and prepayment risk - Operating results are primarily affected by net interest income, market value of assets, and supply/demand for target assets[154] - Rising interest rates generally increase net interest income, while declining rates decrease it, and the Company's loan portfolio benefits from 100% LIBOR floors (weighted average 1.61% as of September 30, 2020)[155] - The discontinuation of LIBOR after 2021 introduces uncertainty regarding alternative base rates and their impact[155] - Heightened credit risk is associated with the commercial mortgage loan portfolio due to COVID-19, although all loans were current as to principal and interest as of September 30, 2020[157] - Prepayment risk is not considered a material risk as all commercial mortgage loans were acquired at par[159] Managing Our Business through COVID-19 This section outlines the Company's strategies for managing its business during the COVID-19 pandemic, including remote work, borrower engagement, and a cautious approach to new investments - The Manager implemented a work-from-home policy for employees, who remain fully operational[162] - The Company is actively engaging with borrowers to monitor property performance and potential cash flow pressures[162] - A more measured approach is being taken for new investment activity, incorporating the impact of COVID-19[163] - The CDC's nationwide moratorium on residential evictions may negatively impact multi-family property cash flow coverage of debt service[163] Investment Portfolio This section provides an overview of the Company's investment portfolio, focusing on commercial mortgage loans, their characteristics, activity, risk ratings, and performance | Metric | September 30, 2020 | December 31, 2019 | | :-------------------------------- | :------------------- | :------------------- | | Commercial Mortgage Loans Held-for-Investment | $598,933,122 | $635,260,420 | | Loan Count | 44 | 51 | | Weighted Average Coupon | 5.1% | 5.4% | | Weighted Average Remaining Term | 3.2 years | 3.8 years | - For the nine months ended September 30, 2020, loan portfolio activity included $52.6 million in purchases and fundings and $(88.9) million in principal repayments[166] - The weighted average risk rating of the loan portfolio increased from 2.8 to 3.1, reflecting higher risk in retail and office properties due to COVID-19[172] - All loans in the portfolio were performing, with no impairments, defaults, or non-accrual loans as of September 30, 2020, and all October payments were made[169] Collateralized Loan Obligations This subsection describes how the Company finances its commercial mortgage loans primarily through collateralized loan obligations (CLOs) - The Company finances its commercial mortgage loans primarily with collateralized loan obligations (CLOs)[173] - As of September 30, 2020, the carrying value of CLOs was $479.7 million, and the outstanding principal balance was $482.4 million[173] FOAC and Our Residential Mortgage Loan Business This section explains FOAC's historical role in residential mortgage loan aggregation, its cessation of prime jumbo loan aggregation, and the assumption of backstop guarantee obligations by MAXEX Clearing LLC - FOAC, a Taxable REIT Subsidiary (TRS), historically aggregated mortgage loans for securitization but has ceased aggregating prime jumbo loans[174][175] - MAXEX Clearing LLC assumed all of FOAC's backstop guarantee obligations as of December 31, 2018, indemnifying FOAC against related losses[176] - The maximum potential future payments under outstanding backstop guarantees decreased from $1.4 billion at December 31, 2019, to $860.5 million at September 30, 2020[117] Equity and Book Value Per Share This section reports the Company's total equity and book value per common share, attributing the increase to net income offsetting dividends - As of September 30, 2020, the Company's total equity was $114.5 million[177] - Book value per common share was $4.59 on a basic and fully diluted basis as of September 30, 2020, an increase from the previous quarter-end amount of $4.57[177] - The increase in book value is attributed to increased net income in the quarter, which more than offset the increase in common dividends[177] Critical Accounting Policies and Estimates This section highlights the significant judgments and estimates required for financial statement preparation, particularly concerning commercial mortgage loans and MSRs, and notes no impairments were recognized - The preparation of financial statements requires significant judgments and estimates, which are inherently less certain due to the COVID-19 pandemic[178] - Commercial mortgage loans held-for-investment are carried at amortized cost, and impairment is assessed quarterly by comparing the estimated fair value of collateral to the loan's book value[179][181][183] - Mortgage Servicing Rights (MSRs) are reported at fair value[185] - No impairments were recognized on loans held-for-investment as of September 30, 2020[184] Capital Allocation This section presents the Company's capital allocation across different categories, highlighting the increasing proportion dedicated to commercial mortgage loans | Capital Allocation Category | September 30, 2020 | December 31, 2019 | | :-------------------------------- | :------------------- | :------------------- | | Commercial Mortgage Loans | $144,948,269 | $136,010,251 | | MSRs | $1,115,474 | $2,700,207 | | Unrestricted Cash | $7,927,345 | $9,318,295 | | Total Capital Allocated | $153,991,088 | $148,028,753 | | % Capital (Commercial Mortgage Loans) | 94.1% | 91.9% | - Commercial mortgage loans represent the largest portion of allocated capital, increasing from 91.9% to 94.1% of total allocated capital[189] Results of Operations This section discusses the comparability of operating results, the limited impact of COVID-19 on current performance, and potential future effects of the pandemic - Results of operations for the periods ended September 30, 2020, and September 30, 2019, are not directly comparable due to significant events in 2019 (FREMF trust repayment, preferred stock redemption, Secured Term Loan draw)[191] - The COVID-19 pandemic did not significantly impact operating results for the period ended September 30, 2020, except for $624,816 in expensed deferred debt issuance costs[192] - The pandemic's prolonged duration could further affect interest income, credit losses, and commercial mortgage loan reinvestment[192] Net Income Summary This summary presents net income attributable to common stockholders and basic/diluted net income per share for the three and nine months ended September 30, 2020, highlighting the drivers of the increase | Metric | 9 Months Ended Sep 30, 2020 | 9 Months Ended Sep 30, 2019 | | :------------------------------------------ | :-------------------------- | :-------------------------- | | Net income attributable to common stockholders | $5,970,092 | $1,445,601 | | Basic and diluted net income per average share | $0.24 | $0.06 | - The increase in net income for the nine months ended September 30, 2020, was primarily driven by an increase in net interest income, a decrease in preferred dividends, and the absence of a deemed dividend on preferred stock redemption[194] | Metric | 3 Months Ended Sep 30, 2020 | 3 Months Ended Sep 30, 2019 | | :------------------------------------------ | :-------------------------- | :-------------------------- | | Net income attributable to common stockholders | $2,547,218 | $2,153,956 | | Basic and diluted net income per average share | $0.10 | $0.09 | Net Interest Income This section details the net interest income for the three and nine months ended September 30, 2020, and explains the factors contributing to its increase | Metric | 9 Months Ended Sep 30, 2020 | 9 Months Ended Sep 30, 2019 | | :----------------- | :-------------------------- | :-------------------------- | | Net interest income | $13,791,320 | $12,049,146 | - The nine-month increase was due to a $40.3 million increase in the weighted-average principal balance of the loan portfolio, a 26bps increase in weighted-average LIBOR floors, and a 167bps decrease in weighted-average LIBOR for CLO liabilities[197] | Metric | 3 Months Ended Sep 30, 2020 | 3 Months Ended Sep 30, 2019 | | :----------------- | :-------------------------- | :-------------------------- | | Net interest income | $4,831,984 | $3,795,884 | Other Income This section summarizes other income (loss) for the three and nine months ended September 30, 2020, primarily attributing the nine-month loss to unrealized losses on mortgage servicing rights | Metric | 9 Months Ended Sep 30, 2020 | 9 Months Ended Sep 30, 2019 | | :----------------- | :-------------------------- | :-------------------------- | | Total other (loss) | $(1,016,534) | $(622,133) | - The nine-month loss was primarily driven by net unrealized losses on mortgage servicing rights of $(1,603,052), partially offset by net mortgage servicing income of $586,516[199] | Metric | 3 Months Ended Sep 30, 2020 | 3 Months Ended Sep 30, 2019 | | :----------------- | :-------------------------- | :-------------------------- | | Total other (loss) | $(162,138) | $(201,595) | Expenses This section details the Company's expenses for the three and nine months ended September 30, 2020, highlighting the increase in operating expenses due to insurance, legal fees, and expensed deferred costs | Metric | 9 Months Ended Sep 30, 2020 | 9 Months Ended Sep 30, 2019 | | :-------------------------------- | :-------------------------- | :-------------------------- | | Management and incentive fees | $1,850,139 | $1,677,456 | | Operating expenses reimbursable to Manager | $1,249,123 | $1,232,211 | | General and administrative expenses | $2,531,385 | $3,266,757 | | Other operating expenses | $1,444,049 | $204,228 | | Compensation expense | $156,093 | $146,672 | | Total expenses | $7,230,789 | $6,527,324 | - The period-over-period increase in operating expenses for the nine months was primarily due to increased insurance and legal fees, as well as deferred costs expensed during the period[206] | Metric | 3 Months Ended Sep 30, 2020 | 3 Months Ended Sep 30, 2019 | | :-------------------------------- | :-------------------------- | :-------------------------- | | Management and incentive fees | $675,107 | $557,833 | | Operating expenses reimbursable to Manager | $441,349 | $175,174 | | General and administrative expenses | $786,651 | $904,413 | | Other operating expenses | $309,125 | $19,212 | | Compensation expense | $49,199 | $46,585 | | Total expenses | $2,261,431 | $1,703,217 | Impairment This section states that the Company has not recognized any impairments on its loans held-for-investment or recorded any allowance for loan losses - The Company has not recognized any impairments on its loans held-for-investment for the three and nine months ended September 30, 2020, and 2019, and has not recorded any allowance for loan losses[209] Income Tax (Benefit) Expense This section presents the income tax benefit for the three and nine months ended September 30, 2020, and 2019 | Metric | 9 Months Ended Sep 30, 2020 | 9 Months Ended Sep 30, 2019 | | :-------------------------- | :-------------------------- | :-------------------------- | | Benefit from income taxes | $437,387 | $126,996 | | Metric | 3 Months Ended Sep 30, 2020 | 3 Months Ended Sep 30, 2019 | | :-------------------------- | :-------------------------- | :-------------------------- | | Benefit from income taxes | $142,595 | $266,676 | Liquidity and Capital Resources This section outlines the Company's primary liquidity sources, outstanding debt, debt-to-equity ratios, and the potential impact of the COVID-19 pandemic on financing - Primary liquidity sources include net proceeds from common/preferred stock issuances, debt offerings, and net cash from operating activities[211] - As of September 30, 2020, the Company had a $40.2 million outstanding principal under its Secured Term Loan (7.25% borrowing rate, matures January 2025) and $482.4 million in collateralized loan financing[211][215] - The recourse debt to equity ratio was 0.4:1, and the total debt to equity ratio (GAAP basis) was 4.6:1 as of September 30, 2020[215][216] - Unrestricted cash and cash equivalents decreased to $9.7 million at September 30, 2020, from $10.9 million at December 31, 2019[214] - The COVID-19 pandemic may make obtaining additional financing more difficult[211] Cash Flows This section summarizes the Company's cash flows from operating, investing, and financing activities for the nine months ended September 30, 2020 | Cash Flow Category | 9 Months Ended Sep 30, 2020 | 9 Months Ended Sep 30, 2019 | | :------------------------------------------ | :-------------------------- | :-------------------------- | | Net cash provided by operating activities | $8,624,187 | $5,158,355 | | Net cash provided by investing activities | $27,151,602 | $33,440,622 | | Net cash (used in) financing activities | $(27,518,565) | $(6,474,957) | | Net increase in cash, cash equivalents and restricted cash | $8,257,224 | $32,124,020 | - Operating activities provided $8.6 million in cash, primarily from interest received from VIEs and senior secured loans[220] - Investing activities provided $27.2 million, mainly from principal repayment of commercial mortgage loans[221] - Financing activities used $27.5 million, primarily due to repayments of collateralized loan obligations and common dividends, partially offset by common stock issuance[222] Forward-Looking Statements Regarding Liquidity This section discusses the Company's expectations for meeting short-term and long-term liquidity requirements, noting the reliance on additional financing and equity capital, and REIT distribution limitations - The Company believes current liquidity sources are sufficient to meet anticipated short-term (one year or less) liquidity requirements[223] - Long-term (greater than one-year) liquidity and capital resource requirements will depend on obtaining additional debt financing and equity capital[224] - REIT distribution requirements limit the Company's ability to retain earnings, necessitating distribution of at least 90% of taxable income annually[225] Off-Balance Sheet Arrangements This section confirms the absence of unconsolidated off-balance sheet arrangements and the elimination of backstop guarantee liabilities due to MAXEX Clearing LLC's assumption - As of September 30, 2020, the Company did not maintain any relationships with unconsolidated financial partnerships or special purpose entities for off-balance sheet arrangements[226] - MAXEX Clearing LLC assumed all of FOAC's backstop guarantee obligations, eliminating the related non-contingent liability from the Company's balance sheet[227] Distributions This section outlines the Company's intention to continue regular quarterly distributions to common stockholders to meet REIT requirements - The Company intends to continue making regular quarterly distributions to common stockholders to meet REIT requirements, which mandate distributing at least 90% of REIT taxable income annually[228] - For the third quarter of 2020, a cash dividend rate of $0.085 per share of common stock was declared[229] Item 3. Quantitative and Qualitative Disclosures about Market Risks This section states that there are no quantitative and qualitative disclosures about market risks to report Item 4. Controls and Procedures Management concluded that the Company's disclosure controls and procedures were effective as of September 30, 2020, and reported no material changes in internal control over financial reporting during the most recently completed fiscal quarter - Management concluded that the Company's disclosure controls and procedures were effective as of September 30, 2020[233] - There have been no material changes in internal control over financial reporting during the most recently completed fiscal quarter[234] PART II - OTHER INFORMATION This section covers legal proceedings, risk factors, equity sales, defaults, mine safety disclosures, other information, and exhibits Item 1. Legal Proceedings The Company is not currently subject to any material legal proceedings - Neither the Company nor its Manager is subject to any legal proceedings considered material as of the filing date[235] Item 1A. Risk Factors This section highlights that there have been no material changes to previously disclosed risk factors, but emphasizes the significant and ongoing adverse impact of the COVID-19 pandemic on the Company's business, financial condition, liquidity, and stock price - No material changes to the Risk Factors previously disclosed in the Annual Report on Form 10-K for the year ended December 31, 2019, other than those related to COVID-19[237] - The spread of COVID-19 could have a material adverse effect on the Company's business, financial condition, liquidity, results of operations, and the market price of its common stock[238][239] - Specific COVID-19 related risks include: negative impact on asset collateral value, potential borrower requests for forbearance, limited ability to redeploy investment proceeds, impacts on interest rates and credit spreads, and challenges for third-party providers[240] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds There are no unregistered sales of equity securities or use of proceeds to report for the period Item 3. Defaults Upon Senior Securities There are no defaults upon senior securities to report for the period Item 4. Mine Safety Disclosures This item is not applicable to the Company Item 5. Other Information There is no other information to report for the period Item 6. Exhibits This section lists all exhibits filed or furnished as part of the report, including corporate governance documents and certifications - The exhibit index includes various corporate documents such as Amended and Restated Articles of Incorporation, Articles Supplementary, Third Amended and Restated Bylaws, and certifications from the Chief Executive Officer and Chief Financial Officer[245] SIGNATURES This section contains the official signatures for the report Signatures The report is duly signed on behalf of Hunt Companies Finance Trust, Inc. by its Chief Executive Officer and Chief Financial Officer - The report was signed by James P. Flynn, Chief Executive Officer, and James A. Briggs, Chief Financial Officer, on November 6, 2020[250]