Lument Finance Trust: Loan Book Will Potentially Continue Shrinking, It Is Fairly Valued

Core Viewpoint - Lument Finance Trust's 2Q24 results indicate a shrinking loan book and increasing loan loss provisions, leading to a cautious outlook on future earnings despite an attractive earnings yield of approximately 14% [1][2][10] Financial Performance - Lument's 1H24 results showed an increase in loan book size compared to 1H23, attributed to nearly $320 million in debt issuance and an additional $70 million in equity investment, totaling around $400 million from a base of about $1 billion [3] - Net interest income grew to $22.5 million in 1H24 from $11.75 million, aided by a higher average Secured Overnight Financing Rate (SOFR) [5][6] - The company's net loan assets stood at $1.187 billion, while financial debt was reported at $1.048 billion [4] Loan Quality and Distress - The average credit rating of Lument's loan book deteriorated from 2.3 in 2Q22 to 3.6 in 2Q24, with 3.5% of loans rated below 3 [7] - In 2Q24, five loans were categorized as defaulted, amounting to $84 million in principal, with total loan loss provisions at only $9 million [8] Future Earnings and Financing - The maturity of the 2021 CLO, which has completed its reinvestment period, is expected to lead to a significant decrease in the loan book size, with net repayments anticipated at $80 to $90 million [9] - The company faces challenges in securing new financing, as the CLO market has been inactive, complicating efforts to replace the 2021 CLO [9] - Future earnings will be heavily influenced by the terms of new financing, which are currently uncertain [2][10] Valuation and Market Position - Lument currently offers a 13% earnings yield, but expected developments may lead to a decrease in yield over the next year [10] - The stock trades at a discount to book value, with a market cap of $130 million versus $180 million in equity, reflecting the risks associated with its loan portfolio [10] - Overall, the valuation is considered fair, but the lack of clear upside potential leads to a recommendation to hold the stock [10]