Lument Finance Trust(LFT) - 2020 Q4 - Annual Report

Cautionary Note Regarding Forward-Looking Statements This section cautions that the report contains forward-looking statements, subject to inherent risks and uncertainties that may cause actual results to differ materially - This section warns that the report contains forward-looking statements, identified by words like 'believe,' 'expect,' or 'anticipate,' which are based on current beliefs and expectations but are subject to risks and uncertainties[10][11] - Factors that may cause actual results to differ materially include risks detailed in Item 1A, the severity and duration of the COVID-19 pandemic, general political and economic conditions, interest rate volatility, adverse changes in real estate markets, financing difficulties, borrower defaults, legislative/regulatory developments, and the company's REIT qualification[12] PART I Item 1. Business LFT is a REIT externally managed by Lument IM, specializing in transitional floating-rate commercial mortgage loans, primarily for middle-market multifamily assets, financed through non-recourse CRE CLOs - LFT is a Maryland corporation, formed in March 2012, that elected REIT status for U.S. federal income tax purposes. Its name changed from 'Hunt Companies Finance Trust, Inc.' to 'Lument Finance Trust, Inc.' on December 28, 2020[14][17] - LFT is externally managed by OREC Investment Management, LLC (Lument IM), a subsidiary of ORIX Real Estate Capital Holdings, LLC (Lument), which is a subsidiary of ORIX Corporation USA[16][20] - In January 2020, a new management agreement with Lument IM was entered, replacing the prior manager. An ORIX USA affiliate purchased 1,246,719 shares of LFT common stock for approximately $5.7 million, representing a 43% premium over the January 2, 2020 share price, giving ORIX USA ~5.0% ownership[18][19] - The primary investment strategy focuses on transitional floating-rate CRE mortgage loans, with an emphasis on middle-market multifamily assets. Other potential investments include mezzanine loans, preferred equity, commercial mortgage-backed securities, fixed-rate loans, and construction loans. Financing is primarily through match-term non-recourse CRE collateralized loan obligations (CLOs)[15][21] Loan Portfolio Statistics as of December 31, 2020 | Metric | Value | | :-------------------------------- | :---------------- | | Number of Senior Secured Loans | 40 | | Aggregate Unpaid Principal Balance (USD) | $547.3 million | | Weighted Average Coupon (%) | 5.1% (LIBOR + 0.14%, incl. 1.64% floor) | | Weighted Average Term to Maturity (Years) | 3.1 years | | Weighted Average LTV (%) | 74.2% | | Portfolio Supported by Multifamily (%) | 89.5% | | Loans acquired in 2020 (USD) | $57.6 million | | Loan repayments in 2020 (USD) | $145.5 million | | Net repayments in 2020 (USD) | $87.9 million | - As of December 31, 2020, the company retained servicing rights for residential mortgage loans with an aggregate unpaid principal balance of approximately $191.8 million, with a carrying value of $0.9 million. No new residential loan activity is anticipated[29] - The company uses leverage, typically between three and six times stockholders' equity, primarily through non-recourse CRE CLOs, aiming to match-fund and match-index investments to minimize duration and index differences[30][31] Item 1A. Risk Factors This section details significant risks that could adversely affect LFT's business, financial condition, results of operations, and ability to make distributions, including investment, financing, management, securities, and tax risks, with a focus on COVID-19 impacts - The ongoing COVID-19 pandemic poses significant risks, including long-term impacts on the broader economy and commercial real estate market, potential deterioration in asset values, increased borrower forbearance requests, limited ability to redeploy investment proceeds, volatility in interest rates and credit spreads, and operational challenges for third-party providers[55][57][58] - Risks related to investment strategy and business include the inability to successfully operate or generate sufficient revenue, potential changes in business policies without shareholder approval, failure to maintain effective internal controls, and various risks associated with floating-rate commercial mortgage loans such as interest rate, prepayment, and credit risks, particularly for transitional loans[59][62][69][74] - Financing and hedging risks involve high leverage amplifying losses, potential increases in borrowing costs, restrictive covenants from lenders, inability to meet financial covenants, and risks associated with non-recourse securitizations. Hedging strategies may be expensive, imperfect, or fail to protect against losses[138][142][146][150] - Risks associated with the relationship with the Manager include broad investment guidelines without individual approval, incentive fees potentially encouraging riskier investments, dependence on the Manager and its key personnel, the costly and difficult termination of the management agreement, limited Manager liability, and conflicts of interest with ORIX affiliates in investment allocation[158][159][161][163][164][166] - Securities-related risks include substantial volatility in market price and trading volume, impact of market factors unrelated to performance, the speculative nature of investments, and potential adverse effects from future offerings of debt or equity securities that rank senior to common stock[168][169][170][175] - Tax risks include the potential failure to maintain REIT qualification, which would result in corporate taxation and substantial tax liability, impact on financing facilities, and distribution requirements that may limit growth. Additionally, REIT dividends do not qualify for reduced tax rates available for some dividends[205][208][209][210] Item 1B. Unresolved Staff Comments The company has no unresolved staff comments from the SEC - There are no unresolved staff comments[231] Item 2. Properties The company does not own any real estate or physical properties, with its corporate headquarters located in office space provided by its Manager - The company does not own any real estate or other physical properties[232] - Corporate headquarters are located at 230 Park Avenue, 23rd Floor, New York, NY 10169, in office space furnished by the Manager, with related expenses reimbursed under the management agreement[232] Item 3. Legal Proceedings As of the filing date, the company is not a party to any litigation or legal proceedings, nor is it aware of any threatened litigation - As of the date of filing, the company is not a party to any litigation or legal proceeding, nor is it aware of any threatened litigation or legal proceeding[233] Item 4. Mine Safety Disclosures This item is not applicable to the company - This item is not applicable[234] PART II Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities LFT's common stock trades on the NYSE under 'LFT,' with 24,943,383 shares outstanding as of March 12, 2021, and the company pays quarterly dividends while having a share repurchase program - LFT's common stock is listed on the NYSE under the symbol 'LFT'. As of March 12, 2021, the last reported sales price was $3.44[237] - As of March 12, 2021, there were 24,943,383 outstanding shares of common stock[6][238] - Dividends on common stock are paid quarterly, authorized by the board based on REIT taxable earnings, financial condition, and REIT status. The company is required to distribute at least 90% of its REIT taxable income[239][240] Common Dividends Declared per Share (2019-2020) | Declaration Date | Amount (USD) | Record Date | Date of Payment | | :--------------- | :----- | :---------- | :----------- | | March 18, 2019 | $0.070 | March 29, 2019 | April 15, 2019 | | June 10, 2019 | $0.075 | June 28, 2019 | July 15, 2019 | | September 17, 2019 | $0.075 | September 30, 2019 | October 15, 2019 | | December 4, 2019 | $0.075 | December 31, 2019 | January 15, 2020 | | March 12, 2020 | $0.075 | March 31, 2020 | April 15, 2020 | | June 17, 2020 | $0.075 | June 30, 2020 | July 15, 2020 | | September 17, 2020 | $0.085 | September 30, 2020 | October 15, 2020 | | December 18, 2020 | $0.090 | December 31, 2020 | January 15, 2021 | | December 21, 2020 | $0.040 | December 31, 2020 | January 15, 2021 | - The company has a share repurchase program, authorized up to $10 million since December 16, 2015. No common shares were purchased under this plan during the twelve months ended December 31, 2020[243][244] Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations This section provides an overview of LFT's business, recent developments, and a detailed analysis of its financial performance for the year ended December 31, 2020, covering key financial measures, investment portfolio activity, critical accounting policies, and liquidity - The ORIX transaction in January 2020, including a new management agreement and a 5.0% ownership stake by an ORIX USA affiliate, is expected to enhance LFT's scale and shareholder value by leveraging ORIX USA's platform[248][249] - The COVID-19 pandemic did not significantly impact LFT's operating results for 2020, except for expensing $624,816 in deferred debt issuance costs. As of December 31, 2020, the loan portfolio was 100% performing with no impairments or forbearance requests, but heightened credit risk persists[256][261][263] 2020 Financial Highlights | Metric | 2020 (USD) | 2019 (USD) | Change (YoY) (USD) | | :------------------------------------------ | :----------- | :----------- | :----------- | | Net income attributable to common stockholders | $8,434,770 | $2,664,098 | +$5.8M | | Basic and Diluted Income per Share | $0.34 | $0.11 | +$0.23 | | Distributable Earnings (non-GAAP) | $9,759,342 | $7,550,628 | +$2.2M | | Distributable Earnings per share (non-GAAP) | $0.39 | $0.32 | +$0.07 | | Book Value per Share | $4.56 | $4.59 | -$0.03 | | Dividends Declared per Share | $0.37 | $0.30 | +$0.07 | Commercial Mortgage Loan Portfolio Activity (Year Ended Dec 31) | Metric | 2020 (USD) | 2019 (USD) | | :-------------------------- | :----------- | :----------- | | Balance at Jan 1 | $635,260,420 | $555,172,891 | | Purchases and advances | $57,601,572 | $300,319,433 | | Proceeds from repayments | ($145,516,658) | ($213,415,654) | | Proceeds from sales | — | ($6,816,250) | | Balance at Dec 31 | $547,345,334 | $635,260,420 | Commercial Mortgage Loan Portfolio Statistics (as of Dec 31) | Metric | 2020 | 2019 | | :-------------------------- | :----- | :----- | | Loan Count | 40 | 51 | | Unpaid Principal Balance (USD) | $547.3M | $635.3M | | Carrying Value (USD) | $547.3M | $635.3M | | Floating Rate Loan (%) | 100.0% | 100.0% | | Weighted Average Coupon (%) | 5.1% | 5.4% | | Weighted Average Term (Years) | 3.1 | 3.8 | | Weighted Average LTV (%) | 74.2% | 73.6% | - The average risk rating of the commercial mortgage loan portfolio increased from 2.8 in 2019 to 3.1 in 2020, primarily due to downgrading non-multifamily loans (retail and office) to reflect higher risk from the COVID-19 pandemic[293][524] Consolidated Statements of Operations Summary (Year Ended Dec 31) | Metric | 2020 (USD) | 2019 (USD) | Change (YoY) (USD) | | :------------------------------------------ | :----------- | :----------- | :----------- | | Net Interest Income | $18,430,514 | $15,413,842 | +$3.0M | | Total Other (Loss) | ($1,070,961) | ($443,647) | -$0.6M | | Total Expenses | $9,386,031 | $8,764,828 | +$0.6M | | Net Income before Income Taxes | $7,973,522 | $6,205,367 | +$1.8M | | Benefit from Income Taxes | $476,248 | $43,523 | +$0.4M | | Net Income | $8,449,770 | $6,248,890 | +$2.2M | | Dividends to Preferred Stockholders | ($15,000) | ($491,764) | +$0.4M | | Deemed Dividend on Preferred Stock Redemption | — | ($3,093,028) | +$3.1M | | Net Income Attributable to Common Stockholders | $8,434,770 | $2,664,098 | +$5.8M | | Basic and Diluted Income per Share | $0.34 | $0.11 | +$0.23 | - As of December 31, 2020, the company had $40.2 million in outstanding principal under its Senior Secured Term Loan (recourse debt) and $465.3 million in non-recourse collateralized loan financing. The recourse debt-to-equity ratio was 0.4:1, and the total debt-to-equity ratio was 4.4:1 on a GAAP basis[330][331] Cash Flows Summary (Year Ended Dec 31) | Activity | 2020 (USD) | 2019 (USD) | | :------------------------------------------ | :----------- | :----------- | | Net cash provided by operating activities | $12,219,209 | $7,282,343 | | Net cash provided by (used in) investing activities | $87,915,086 | ($42,298,246) | | Net cash (used in) financing activities | ($46,770,769) | ($8,186,079) | | Net increase (decrease) in cash, cash equivalents and restricted cash | $53,363,526 | ($43,201,982) | Item 8. Financial Statements and Supplementary Data This item refers to the location of the audited consolidated financial statements and supplementary data within the Form 10-K, starting on page F-2 - The Reports of Independent Registered Public Accounting Firm, the Company's consolidated financial statements, and notes to the consolidated financial statements appear in a separate section of this Form 10-K, beginning on page F-2[342] Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure The company reports no changes in or disagreements with accountants on accounting and financial disclosure - There are no changes in and disagreements with accountants on accounting and financial disclosure[343] Item 9A. Controls and Procedures Management concluded that the company's disclosure controls and procedures and internal control over financial reporting were effective as of December 31, 2020, with no material changes identified - Management concluded that the company's disclosure controls and procedures were effective as of December 31, 2020[345] - Management concluded that the company's internal control over financial reporting was effective as of December 31, 2020, based on the criteria set forth in the COSO Framework[347] - No changes in internal control over financial reporting that materially affected, or are reasonably likely to materially affect, internal control over financial reporting were identified during the most recently completed fiscal quarter[348] Item 9B. Other Information No other information is reported under this item - No other information is reported under this item[349] PART III Item 10. Directors, Executive Officers and Corporate Governance This section provides information on LFT's board of directors and executive officers, including their biographical details, qualifications, roles, and outlines the company's corporate governance practices Board of Directors (as of March 1, 2021) | Name | Age | Position Held with Us | Director Since | | :---------------- | :-- | :---------------------------------- | :------------- | | James P. Flynn | 44 | Chairman of the Board and Chief Executive Officer | 2019 | | Neil A. Cummins | 66 | Independent Director | 2013 | | James C. Hunt | 50 | Director | 2018 | | William A. Houlihan | 65 | Independent Director | 2013 | | Walter C. Keenan | 53 | Independent Director | 2015 | Executive Officers (as of March 1, 2021) | Name | Age | Position Held with Us | Officer Since | | :---------------- | :-- | :---------------------------------- | :------------ | | James P. Flynn | 44 | Chief Executive Officer and Chairman of the Board | 2018 | | Michael P. Larsen | 42 | President | 2018 | | James A. Briggs | 54 | Chief Financial Officer | 2020 | - The board's nominating and corporate governance committee reviews director qualifications annually, considering personal and professional integrity, experience in corporate management and the industry, academic expertise, and business judgment. Diversity is also considered[354][355] - The Audit Committee consists of Messrs. Cummins, Houlihan, and Keenan. Mr. Houlihan serves as the chair and is designated as an 'audit committee financial expert' based on his education and extensive financial experience[384][385] - The company has adopted a Code of Business Conduct and Ethics and Corporate Governance Guidelines, available on its website, to promote high ethical standards and provide a framework for board governance[381][382] Item 11. Executive Compensation This section details the compensation structure for LFT's executive officers and directors, noting that executive officers receive no direct cash compensation from LFT, while independent directors receive cash retainers and restricted stock awards - Executive officers (Messrs. Flynn, Larsen, and Briggs) are employees of an affiliate of the Manager and do not receive direct compensation from LFT[386] - For 2020, the amount of total compensation paid by the Manager's affiliate to Mr. Briggs, allocable to his time spent managing LFT's affairs, was $324,111 (compared to $313,324 in 2019)[387] - Independent directors receive an annual cash retainer of $50,000 and 1,500 restricted shares of common stock. Committee chairs receive additional cash retainers ($15,000 for Audit, $10,000 for Compensation and Nominating & Corporate Governance)[391] Director Compensation for 2020 | Name | Fees Earned or Paid in Cash ($) | Stock Awards ($) | All Other Compensation ($) | Total ($) | | :------------------ | :------------------------------ | :--------------- | :------------------------- | :-------- | | Neil A. Cummins | 60,000 | 3,900 | 4,818 | 68,718 | | William A. Houlihan | 65,000 | 3,900 | 4,818 | 73,718 | | Walter C. Keenan | 60,000 | 3,900 | 3,448 | 67,348 | | James C. Hunt | — | — | — | — | - The company maintains an insider trading policy that prohibits short selling, dealing in publicly traded options, and hedging or monetization transactions in its securities[389] Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters This section details the beneficial ownership of LFT's common stock by significant holders, directors, and executive officers, and provides information on the Manager Equity Plan and Section 16(a) reporting compliance - The Manager Equity Plan allows for grants of restricted common stock and other equity-based awards up to 3.0% of the total issued and outstanding common stock (fully diluted) to the Manager and independent directors[396] Equity Compensation Plan Information (as of December 31, 2020) | Plan Category | Number of securities to be issued upon exercise of outstanding options, warrants and rights | Weighted average exercise price of outstanding options, warrants and rights (USD) | Number of securities remaining available for future issuance under equity compensation plans | | :------------------------------------------ | :------------------------------------------------------------------------ | :------------------------------------------------------------------------ | :----------------------------------------------------------------------- | | Equity compensation plans approved by security holders | — | — | 682,301 | | Equity compensation plans not approved by security holders | — | — | — | | Total | — | — | 682,301 | Beneficial Ownership Table (as of March 1, 2021) | Name of Beneficial Owner | Shares of Common Stock Owned | Percentage of Common Stock Owned (%) | | :-------------------------------- | :--------------------------- | :------------------------------- | | XL Investments Ltd | 3,330,550 | 13.39 % | | XL Global, Inc. | 10,230 | * | | Hunt Companies Equity Holdings LLC | 2,249,901 | 9.02 % | | James P. Flynn | 107,180 | * | | James C. Hunt | 215,054 | * | | Michael Larsen | 41,121 | * | | James A. Briggs | 17,500 | * | | Neil A. Cummins | 38,794 | * | | William A. Houlihan | 68,793 | * | | Walter C. Keenan | 40,411 | * | | All directors and executive officers as a group (seven persons) | 528,853 | 2.04 % | - All Section 16(a) filing requirements for directors, executive officers, and greater than 10% stockholders were complied with on a timely basis for the year ended December 31, 2020, except for a late Form 4 filing for Mr. Flynn related to a common stock purchase on March 26, 2020[403] Item 13. Certain Relationships and Related Transactions, and Director Independence This section details the company's relationships and transactions with related parties, including its Manager, ORIX affiliates, and Hunt Companies, covering management fees, expense reimbursements, investment transactions, and director independence - A new Management Agreement with Lument IM became effective on January 3, 2020. For the year ended December 31, 2020, the company incurred management and incentive fees of $2,505,318 and reimbursed operating expenses of $1,644,886 to the Manager[405][553][556] - XL Investments, an indirect subsidiary of AXA SA, owned 13.39% of LFT's common stock as of March 1, 2021, and has the right to appoint a board observer. The board granted XL Investments an exemption from the 9.8% ownership limitation[407][408][409] - ORIX Real Estate Capital Holdings, LLC (Lument) affiliates, including Lument IM (the Manager), have significant relationships with LFT, including a 5.00% ownership stake by OREC Investment Holdings, LLC. Potential conflicts of interest exist due to ORIX's broader investment activities[410][411] - In 2020, Hunt CRE 2017-FL1 and Hunt CRE 2018-FL2 purchased loans totaling $46.3 million from OREC Structured Finance Co., LLC (LSF), an affiliate of the Manager[412] - On August 5, 2020, future funding participation interests for Hunt CRE 2017-FL1 were transferred to LSF, with LFT agreeing to purchase funded participations from LSF at par when capital is available. The maximum unfunded commitments for FL1 Seller were $28.9 million as of December 31, 2020[327][561] - Hunt Companies Equity Holdings, LLC (an affiliate of Hunt Companies, Inc.) owns 9.02% of LFT's common stock and has the right to designate one director to the board[413][414] - Registration rights agreements are in place with XL Investments, HCEH, and OREC Investment Holdings, LLC, allowing them to register the resale of their common stock[415][416][417] - The company's charter and bylaws provide indemnification for directors and officers to the fullest extent permitted by Maryland law, with limitations for acts of bad faith, willful misconduct, gross negligence, or improper personal benefit[419] - All directors, except James P. Flynn (CEO/Chairman) and James C. Hunt (Director), were determined to be independent for purposes of NYSE listing standards[422] Item 14. Principal Accounting Fees and Services This section details the fees paid to the independent registered public accounting firm, KPMG LLP, for audit and audit-related services in 2020 and 2019, and outlines the audit committee's pre-approval policy for such services Fees Billed by Independent Registered Public Accounting Firm (Year Ended Dec 31) | Category | 2020 (USD) | 2019 (USD) | | :--------------- | :----------- | :----------- | | Audit Fees | $536,000 | $720,390 | | Audit-Related Fees | — | $89,500 | | Tax Fees | — | — | | All Other Fees | — | — | | Total | $536,000 | $622,980 | - The audit committee's charter requires pre-approval of all audit services, audit-related tax services, and other permitted services performed by the independent registered public accounting firm. All services in 2020 were approved in accordance with this policy[428] PART IV Item 15. Exhibits, Financial Statements and Schedules This item lists the financial statements, exhibits, and schedules included as part of the Annual Report on Form 10-K - The report includes consolidated financial statements (Balance Sheets, Statements of Operations, Statements of Stockholders' Equity, Statements of Cash Flows) and related notes, along with the Reports of Independent Registered Public Accounting Firm[432][449] - A detailed Exhibit Index is provided, incorporating various documents by reference, and Schedule IV – Mortgage Loans on Real Estate is included[433][437][438][439][434][591] Item 16. Form 10-K Summary The company states that no Form 10-K Summary is provided - No Form 10-K Summary is provided[442]