The following discussion should be read in conjunction with our consolidated financial statements and the accompanying notes included in this Annual Report on Form 10-K. The following discussion contains forward-looking statements that reflect our current expectations, estimates, forecasts and projections.
Overview
We are a
InJanuary 2020 , we entered into a series of transactions with subsidiaries ofORIX Corporation USA ("ORIX USA "), a diversified financial company with the ability to provide investment capital and asset management services to clients in the corporate, real estate and municipal finance sectors. We entered into a new management agreement withOREC Investment Management, LLC doing business asLument Investment Management (the "Manager" or "Lument IM"), while another affiliate ofORIX USA purchased an ownership stake of approximately 5.0% through a privately-placed stock issuance. The transactions are expected to enhance the scale of LFT and generate shareholder value through leveragingORIX USA's expansive originations, asset management and servicing platform.
Lument IM is a subsidiary of Lument, a nationally recognized leader in financing multifamily and senior housing. The firm relies on Lument’s extensive platform and considerable expertise when originating and underwriting investments.
We invest primarily in transitional floating rate CRE mortgage loans with an
emphasis on middle market multifamily assets. We may also invest in other
CRE-related investments including mezzanine loans, preferred equity, commercial
mortgage-backed securities, fixed rate loans, construction loans and other CRE
debt instruments. We finance our current investments in transitional multifamily
and other CRE loans primarily through match term non-recourse CRE collateralized
loan obligations ("CLOs"). We may utilize warehouse repurchase agreements or
other forms of financing in the future. Our primary sources of income are net
interest from our investment portfolio and non-interest income from our mortgage
loan-related activities. Net interest income represents the interest income we
earn on investments less the expense of funding these investments.
Our investments generally have the following characteristics:
•Sponsors with experience in particular real estate sectors and geographic markets; •Located inU.S. markets with multiple demand drivers, such as growth in employment and household formation; •Fully funded principal balance greater than$5 million and generally less than$75 million ; •Loan to Value ratio up to 85% of as-is value and up to 75% of as stabilized value; •Floating rate loans historically tied to one-monthU.S. denominated LIBOR, more recently to one-month term SOFR, and/or in the future potentially other index replacement; •Three-year term with two one-year extension options. We believe that our current investment strategy provides significant opportunities to achieve attractive risk-adjusted returns for our stockholders over time. However, to capitalize on the investment opportunities at different points in the economic and real estate investment cycle, we may modify or expand our investment strategy. We believe that the flexibility of our strategy, which is supported by significant CRE experience of Lument's investment team, and the extensive resources ofORIX USA , will allow us to take advantage of changing market conditions to maximize risk-adjusted returns to our stockholders. We have elected to be taxed as a REIT and comply with the provisions of the Internal Revenue Code with respect thereto. Accordingly, we are generally not subject to federal income tax on our REIT taxable income that we currently distribute to our stockholders so long as we maintain our qualification as a REIT. Our continued qualification as a REIT depends on our ability to meet, on a continuing basis, various complex requirements under the Internal Revenue Code relating to, among other things, the source of our gross income, the composition and values of our assets, our distribution levels and the concentration of ownership of our capital stock. Even if we maintain our qualification as a REIT, we may become subject to some federal, state and local taxes on our income generated in our wholly owned taxable REIT subsidiary ("TRS"),Five Oaks Acquisition Corp. ("FOAC").
RECENT DEVELOPMENTS
As the COVID-19 pandemic has evolved from its emergence in early 2020, so has its global impact. Many countries have re-instituted, or strongly encouraged, varying levels of quarantines and restrictions on travel and in some cases have at times limited operations of certain businesses and taken other restrictive measures designed to help slow the spread of COVID-19 and its variants. Governments and businesses have also instituted vaccine mandates and testing requirements for employees. While vaccine availability and uptake has increased, the longer-term macro-economic effects on global supply chains, inflation, labor shortages and wage increases continue to impact many industries. Moreover, with the potential for new strains of COVID-19 to emerge, governments and businesses may re-impose aggressive measures to help slow its spread in the future. For this reason, among others, as the COVID-19 pandemic continues, the potential global impacts are uncertain and difficult to assess. The effects of the COVID-19 pandemic did not significantly impact our operating results for the year endedDecember 31, 2021 . However, the prolonged duration and impact of the COVID-19 pandemic could materially disrupt our business operations and negatively impact our business, financial performance and operating results for the year endingDecember 31, 2022 and potentially longer.
At
OnFebruary 22, 2022 , the Company, together with its Credit Parties, entered into an amendment (the "Fourth Amendment") to the Credit and Guaranty Agreement. This amendment amends the maximum total net leverage financial covenant.
2021 Highlights
•Net income attributable to common stockholders of$7.4 million , or$0.30 per share of common stock, and Distributable Earnings of$9.7 million , or$0.39 per share of common stock, with common dividends declared of$9.0 million , or$0.36 per share of common stock. Distributable Earnings is a non-GAAP 32 --------------------------------------------------------------------------------
financial measure. For a definition of distributable income and a reconciliation of our distributable income to our net income attributable to common shareholders, see “Key Financial Measures and Indicators”.
• Book value per common share was
•Acquired sixty-four loans and acquired eighteen loan advances with an initial unpaid principal balance of$983.3 million with a weighted average interest rate of one monthU.S. LIBOR plus 3.46% and a weighted average LIBOR floor of 0.46%. •OnApril 21, 2021 , the Company, together with its FOAC and Lument CMT Equity subsidiaries (together with the Company, the "Credit Parties"), entered into an amendment (the "Third Amendment") to the Credit and Guaranty Agreement datedJanuary 15, 2019 , as amended onFebruary 13, 2019 andJuly 9, 2020 withCortland Capital Market Services, LLC as the administrative agent and collateral agent (the "Administrative Agent") and the lenders party thereto. The Third Amendment amended the Credit and Guaranty Agreement to, among other things (i) provide the Company with an incremental secured term loan in the aggregate principal amount of$7.5 million ("Incremental Secured Term Loan"); (ii) extend the maturity of the Secured Term Loan fromFebruary 14, 2025 toFebruary 14, 2026 ; (iii) amend certain asset concentration limits and (iv) amend certain financial covenants. Pursuant to the terms of the Amended Credit and Guaranty Agreement, borrowings under the Secured Term Loan bear interest at a fixed rate of 7.25% per annum, which is subject to step up by 0.25% per annum for the first four months afterFebruary 14, 2025 , then by 0.375% per annum for the following four months and then by 0.50% for the last four months until maturity date. OnMay 5, 2021 the Third Amendment became effective. OnAugust 23, 2021 , we drew$7.5 million in incremental secured term loans as provided by the Third Amendment. •OnMay 5, 2021 , LFT issued 2,400,000 shared of 7.875% Series A Cumulative Redeemable Preferred Stock (the "Series A Preferred Stock") and received net proceeds, after underwriting discounts and commissions but before offering expenses payable by the Company, of$58.1 million . The Series A Preferred Stock is redeemable, at LFT's option, at a liquidation preference price of$25.00 per share plus accrued dividends commencing inMay 2026 . Dividends on the Series A Preferred Stock are payable quarterly in arrears. •OnJune 14, 2021 , the Company closed LFT CRE 2021-FL1, a collateralized loan obligation, totaling$1.0 billion of real estate related assets and cash, of which$833.75 million of investment-grade notes were issued to third party investors and$70 million of below investment-grade notes and$96.25 million equity interest in the portfolio were retained by us. •In relation to the closing of LFT CRE 2021-FL1, onJune 14, 2021 , the Company unwound Hunt CRE 2017-FL1 and Hunt CRE 2018-FL2, redeeming$388.2 million of outstanding notes which were repaid primarily from refinancing the assets within Hunt CRE 2017-FL1 and Hunt CRE 2018-FL2.
The ORIX transaction
OnJanuary 6, 2020 , we announced the entry into a new external management agreement with Lument IM and the concurrent mutual termination of our management agreement with HIM. Lument IM is part of Lument, a nationally recognized leader in multifamily and seniors housing and healthcare finance. The terms of the new management agreement align with the terms of our prior management agreement with HIM in all material respects, including a cap on reimbursable expenses. Pursuant to the terms of the termination agreement between the Company and HIM, the termination of the management agreement did not trigger, and HIM was not paid, a termination fee by the Company.
Factors Affecting Our Results of Operations
Market conditions. The results of our operations are and will continue to be affected by a number of factors and primarily depend on, among other things, the level of our net interest income, the market value of our assets and the supply of, and demand for, our target assets in the marketplace. Our net interest income, will vary primarily as a result of changes in market interest rates and prepayment speeds, and by the ability of the borrowers underlying our commercial mortgage loans to continue making payments in accordance with the contractual terms of their loans, which may be impacted by unanticipated credit events experienced by such borrowers, such as the ongoing COVID-19 pandemic. Interest rates vary according to the type of investment, conditions in the financial markets, competition and other factors, none of which can be predicted with any certainty, and have most recently been impacted by the ongoing COVID-19 pandemic. Our operating results will also be affected by generalU.S. real estate fundamentals and the overallU.S. economic environment, including the pace and degree of recovery from the ongoing COVID-19 pandemic. In particular, our strategy is influenced by the specific characteristics of the underlying real estate markets, including prepayment rates, credit market conditions and interest rate levels. Changes in market interest rates. Generally, our business model is such that rising interest rates will generally increase our net interest income, while declining interest rates will decrease our net interest income. Substantially all of our investments and all of our collateralized loan obligations are indexed to 30-day LIBOR, and as a result we are less sensitive to variability in our net interest income resulting from interest rate changes. Our net interest income currently benefits from in-the-money LIBOR floors in our commercial loan portfolio, with a weighted average LIBOR floor of 0.49% as ofDecember 31, 2021 . As ofDecember 31, 2021 , 99.0% of the loans in our commercial loan portfolio benefitted from LIBOR floors, 66.2% of which had a LIBOR floor greater than the current spot LIBOR rate. When interest rates are below our average LIBOR floor, an increase in interest rates will decrease our net interest until such time as interest rates rise above our average LIBOR floor. While we expect low LIBOR rates to persist as the economy continues to recover from the current COVID-19 pandemic, no assurance can be made that our current portfolio profile will be maintained. Additionally, there can be no assurance that will continue to obtain LIBOR floors as current market conditions reflect transactions with lower or no floors. Similarly, net interest income is also impacted by the spread in our commercial loan portfolio. As ofDecember 31, 2021 , the weighted average spread of our commercial loan portfolio was 3.41%, but there is no assurance that these spreads will be maintained as market environments fluctuate. Current market conditions have reflected a tightening trend in commercial mortgage loan credit spreads. A decrease to the weighted average LIBOR floor and/or spread would result in a decrease to net interest income. Additionally, a simultaneous decrease in both weighted average LIBOR floor and portfolio spread would exacerbate the impact to net interest income. In addition to the risk related to fluctuations in cash flows associated with movement in interest rates, there is also the risk of non-performance on floating rate assets. In the case of significant increase in interest rates, the additional debt service payments due from our borrowers may strain the operating cash flows of the real estate assets underlying our mortgages and/or impact their ability to be refinanced at such higher interest rates, potentially, contribute to non-performance or, in severe cases, default. OnNovember 30, 2020 , theICE Benchmark Administration ("IBA"), with the support of the United States Federal Reserve andUnited Kingdom's Financial Conduct Authority ("FCA"), announced plans to consult on ceasing publication of LIBOR onDecember 31, 2021 for only one week and two month LIBOR tenors, and onJune 30, 2023 for all other LIBOR tenors. While this announcement extends the transition period toJune 2023 ,the United States 33 --------------------------------------------------------------------------------Federal Reserve concurrently issued a statements advising banks to stop new LIBOR issuance by the end of 2021. OnMarch 5, 2021 , theFCA confirmed that all LIBOR settings will either cease to be provided by any administrator or no longer be representative" (a) immediately afterDecember 31, 2021 , in the case of the one week and two monthU.S , dollar settings; and (b) immediately afterJune 30, 2023 , in the case of the remainingU.S. dollar settings. The ARRC, a committee convened by theFederal Reserve that includes major market participants, has proposed an alternative rate to replaceU.S. Dollar LIBOR: the Secured Overnight Financing Rate ("SOFR"). OnJuly 29, 2021 the RRC ratified term rates for the one-, three- and six-month tenors based on SOFR futures traded. This announcement is expected to expedite the transition from LIBOR to SOFR. The outcome of these reforms is uncertain and any changes on the methods by which LIBOR is determined or regulatory activity related to LIBOR's phase-out could cause LIBOR to preform differently than in the past. As ofDecember 31, 2021 , 100% of our commercial loans by principal balance and 100% of our collateralized loan obligations bear interest related to one-monthU.S. LIBOR. All of these arrangements provide procedures for determining an alternative base rate in the event that LIBOR is discontinued. Regardless, there can be no assurances as to what alternative base rates may be and whether such base rate will be more or less favorable than LIBOR and any other unforeseen impacts of the discontinuation of LIBOR. We are monitoring the developments with respect to the phasing out of LIBOR and are working with our lenders and borrowers to minimize the impact of any LIBOR transitions on our financial condition and results of operations, but can provide no assurances regarding the impact of the discontinuation of LIBOR. Credit risk. Our commercial mortgage loans and other investments are also subject to credit risk. The performance and value of our loans and other investments depend upon the sponsor's ability to operate properties that serve as our collateral so that they produce cash flows adequate to pay interest and principal due to us. To monitor this risk, the Manager's asset management team reviews our portfolio and maintains regular contact with borrowers, co-lenders and local market experts to monitor the performance of the underlying collateral, anticipate borrower, property and market issues and, to the extent necessary or appropriate, enforce our rights as lender. The market values of commercial mortgage assets are subject to volatility and may be adversely affected by a number of factors, including, but not limited to, national, regional and local economic conditions (which may be adversely affected by industry slowdowns and other factors); local real estate conditions; changes or continued weakness in specific industry segments; construction quality, age and design; demographic factors; and retroactive changes to building or similar codes. In addition, decreases in property values reduce the value of the collateral and potential proceeds available to a borrower to repay the underlying loans, which could also cause us to suffer losses. As ofDecember 31, 2021 , 100% of the commercial mortgage loans in our portfolio were current as to principal and interest. Additionally, we have reviewed the loans designated as High Risk for impairment. Impairment of these loans, which are collateral dependent, is measured by comparing the estimated fair value of the underlying collateral, less costs to sell, to the book value of the respective loan. As ofDecember 31, 2021 , the Company has not recognized any impairments on its loan portfolio. However, due to the continued widespread impact of the COVID-19 pandemic we consider there to be heightened credit risk associated with our commercial mortgage loan portfolio. Uncertainty about the severity and duration of the economic impact of the COVID-19 pandemic, as exacerbated by events related to virus strains, persist and potential exists for the credit risk of our portfolio to heighten further. We can provide no assurances that our borrowers will remain current as to principal and interest, or that we will not enter into forbearance agreements or loan modifications in order to protect the value of our commercial mortgage loan assets. Should that occur, it could have a material negative impact on our results of operations. Liquidity and financing markets. Liquidity is a measurement of our ability to meet potential cash requirements, including ongoing commitments to pay dividends, fund investments and repay borrowings and other general business needs. Our primary sources of liquidity have been proceeds of common or preferred stock issuance, net proceeds from corporate debt obligations, net cash provided by operating activities and other financing arrangements. We finance our commercial mortgage loans primarily with collateralized loan obligations, the maturities of which are matched to the maturities of the loans, and which are not subject to margin calls or additional collateralization requirements. However, to the extent that we seek to invest in additional commercial mortgage loans, outside of our CLO, we will in part be dependent on our ability to issue additional collateralized loan obligations, to secure alternative financing facilities or to raise additional common or preferred equity. Prepayment speeds. Prepayment risk is the risk that principal will be repaid at a different rate than anticipated, causing the return on certain investments to be less than expected. As we receive prepayments of principal on our assets, any premiums paid on such assets are amortized against interest income. In general, an increase in prepayment rates accelerates the amortization of purchase premiums, thereby reducing the interest income earned on the assets. Conversely, discounts on such assets are accreted into interest income. In general, an increase in prepayment rates accelerates the accretion of purchase discounts, thereby increasing the interest earned on the assets. With the exception of nine loans acquired with an initial aggregate unpaid principal balance of$117.0 million with an aggregate purchase premium of$538,146 and aggregate purchase discount of$171,186 , all of our commercial mortgage loans were acquired at par. As ofDecember 31, 2021 , our aggregate unamortized purchase premium was$80,397 and our aggregate unamortized purchase discount was$125,098 , and accordingly we do not believe this to be a material risk for us at present. Additionally, we are subject to prepayment risk associated with the terms of our collateralized loan obligations. Due to the generally short-term nature of transitional floating-rate commercial mortgage loans, our CLOs include a reinvestment period during which principal repayments and prepayments on our commercial mortgage loans may be reinvested in similar assets, subject to meeting certain eligibility criteria. The reinvestment period for LFT 2021-FL1 remains in place throughDecember 2023 . While the interest rate spreads of our collateralized loan obligations are fixed until they are repaid, the terms, including spreads, of newly originated loans are subject to uncertainty based on a variety of factors, including market and competitive conditions, which remain uncertain and volatile in light of the COVID-19 pandemic. To the extent that such conditions result in lower spreads on the assets in which we reinvest, we may be subject to a reduction in interest income in the future. However, our loan agreements provide for prepayment penalties which are intended to offset any potential reduction in future interest income. Changes in market value of our assets. We account for our commercial mortgage loans at amortized cost. As such, our earnings will generally not be directly impacted by changes in the market values of these loans. However, if a loan is considered to be impaired as the result of adverse credit performance, an allowance is recorded to reduce the carrying value through a charge to the provision for loan losses. Impairment is measured by comparing the estimated fair value of the underlying collateral, less costs to sell, to the book value of the respective loan. Provisions for loan losses will directly impact our earnings. Given the widespread impact of COVID-19 pandemic, we consider there to be a heightened credit risk associated with our commercial mortgage loan portfolio. Governmental actions. Since 2008, when both Fannie Mae and Freddie Mac were placed under the conservatorship of theU.S. government, there have been a number of proposals to reform theU.S. housing finance system in general, and Fannie Mae and Freddie Mac in particular. We anticipate debate on residential housing and mortgage reform to continue through 2022 and beyond, but a deep divide persists between factions inCongress and as such it remains unclear what shape any reform would take and what impact, if any, reform would have on mortgage REITs.
Managing our business during COVID-19
As ofMarch 13, 2020 , our Manager and its affiliates, implemented a work from home, or WFH, policy for employees in all locations. As ofOctober 1, 2021 , our Manager has begun reopening offices on a limited basis with certain staff returning to the office on a staggered partial schedule. Our Manager's highly experienced senior team and dedicated employees are fully operational during this ongoing disruption and are continuing to execute on all investment 34 -------------------------------------------------------------------------------- management, asset management, servicing, portfolio monitoring, financial reporting and related control activities. Our Manager's and affiliates employees are in constant communication to ensure timely coordination and early identification of issues. We continue to engage in ongoing active dialogue with the borrowers in our commercial mortgage loan portfolio to understand what is taking place at the properties collateralizing our investments. Considering the current economic environment caused by COVID-19 we are mindful of constraints on landlord enforcement rights and continue to monitor the impact of fiscal stimulus on our loan portfolio. FromSeptember 4, 2020 throughAugust 26, 2021 , when theCenters for Disease Control ("CDC") Agency Order was overturned by theU.S. Supreme Court , residential landlords and those with similar eviction rights could not evict "covered persons" for nonpayment of rent in anyU.S. state or territory. Covered persons (a) use best efforts to obtain government assistance; (b) make less than$99,000 or$198,000 jointly; (c) have suffered loss of income or extraordinary medical expenses; (d) use the best efforts to make partial payments; and (e) have no other housing options. In the last month before theSupreme Court lifted the order, the moratorium added to the definition of "covered persons" to include (f) the individual resides in aU.S. county experiencing substantial or high rates of community transmission levels of SARS-COV-2 as defined by theCDC . As a result of the national restriction, multifamily apartment borrowers had less ability to address nonpayment of tenants, which in turn may have negatively impacted a property's cash flow coverage of the debt service of their loans. Additionally, due to COVID-19, there have been potential challenges facing third-party providers, such as appraisers, environmental and engineering consultants we rely on to make new investments which may make it more difficult to make these investments. Currently, despite theSupreme Court having lifted theCDC order, individual states and localities continue to maintain limited evictions restrictions.New York ,Washington D.C. ,Massachusetts ,Minnesota ,Oregon andNevada all have some form of limited or prohibited residential evictions while the tenant applies for rental assistance.California has local eviction moratoriums that may extend beyond that in difference municipalities, but not statewide.
Key financial measures and indicators
As a real estate investment trust, we believe the key financial measures and indicators for our business are earnings per share, dividends declared, Distributable Earnings, and book value per share of common stock. For the three months endedDecember 31, 2021 , we recorded earnings per share of$0.09 , declared a quarterly common dividend of$0.09 per share, and reported$0.11 per share of Distributable Earnings. In addition, our book value per share was$4.38 per share. For the year endedDecember 31, 2021 , we recorded earnings per share of$0.30 , declared aggregate common dividends of$0.36 per share, and reported$0.39 per share of Distributable Earnings.
As described in more detail below, distributable income is a measure that is not prepared in accordance with generally accepted accounting principles in
Earnings per share and dividends declared
The following table shows the calculation of basic and diluted net earnings per share and declared dividends per share:
Three Months
Ended Year Ended
December 31, December 31,
2021 2021 2020
Net income(1) $ 2,478,911 $ 7,414,722 $ 8,434,770
Weighted-average shares outstanding, basic and
diluted 24,947,883 24,945,824 24,934,505
Net income per share, basic and diluted $ 0.10 $ 0.30 $ 0.34
Dividends declared per share $ 0.09 $ 0.36 $ 0.37
(1) Represents net income attributable to Lument Finance Trust, Inc.
distributable profit
Distributable Earnings is a non-GAAP financial measure, which we define as GAAP
net income (loss) attributable to holders of common stock, or, without
duplication, owners of our subsidiaries, computed in accordance with GAAP,
including realized losses not otherwise included in GAAP net income (loss) and
excluding (i) non-cash equity compensation, (ii) depreciation and amortization,
(iii) any unrealized gains or losses or other similar non-cash items that are
included in net income for that applicable reporting period, regardless of
whether such items are included in other comprehensive income (loss) or net
income (loss), and (iv) one-time events pursuant to changes in GAAP and certain
material non-cash income or expense items after discussions with the Company's
board of directors and approved by a majority of the Company's independent
directors.
While Distributable Earnings excludes the impact of any unrealized provisions
for credit losses, any loan losses are charged off and realized through
Distributable Earnings when deemed non-recoverable. Non-recoverability is
determined (i) upon the resolution of a loan (i.e. when the loan is repaid,
fully or partially, or in the case of foreclosures, when the underlying asset is
sold), or (ii) with respect to any amount due under any loan, when such amount
is determined to be non-collectible.
We believe that Distributable Earnings provides meaningful information to
consider in addition to our net income (loss) and cash flows from operating
activities determined in accordance with GAAP. We believe Distributable Earnings
is a useful financial metric for existing and potential future holders of our
common stock as historically, over time, Distributable Earnings has been a
strong indicator of our dividends per share. As a REIT, we generally must
distribute annually at least 90% of our taxable income, subject to certain
adjustments, and therefore we believe our dividends are one of the principal
reasons stockholders may invest in our common stock. Refer to Note 16 to our
consolidated financial statements for further discussion of our distribution
requirements as a REIT. Furthermore, Distributable Earnings help us to evaluate
our performance excluding the effects of certain transactions and GAAP
adjustments that we believe are not necessarily indicative of our current loan
portfolio and operations, and is a performance metric we consider when declaring
our dividends.
Distributable Earnings does not represent net income (loss) or cash generated
from operating activities and should not be considered as an alternative to GAAP
net income (loss), or an indication of GAAP cash flows from operations, a
measure of our liquidity, or an indication of funds available for our cash
needs. In addition, our methodology for calculating Distributable Earnings may
differ from the methodologies employed by other companies to calculate the
35
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same or similar measures of performance and therefore our reported Distributable Income may not be comparable to Distributable Income reported by other companies.
The following table provides a reconciliation of Distributable Earnings to GAAP
net income:
Three Months
Ended Year Ended
December 31, December 31,
2021 2021 2020
Net income(1) $ 2,478,911 $ 7,414,722 $ 8,434,770
Unrealized gain (loss) on mortgage servicing
rights 56,106 356,772 1,780,528
Purchase premium payoffs - 150,990 -
Loss on extinguishment of debt - 1,663,926 -
Recognized compensation expense related to
restricted common stock 4,741 15,608 20,292
Adjustment for (provision for) income taxes 109,336 77,894 (476,248)
Distributable Earnings $ 2,649,094 $ 9,679,912 $ 9,759,342
Weighted-average shares outstanding, basic and
diluted 24,947,883 24,945,824 24,934,505
Distributable Earnings per share, basic and
diluted $ 0.11
(1) Represents the net profit attributable to ordinary shareholders of
Book Value Per Share
The following table calculates our book value per share:
December 31, 2021 December 31, 2020 Total stockholders' equity $
169,276,000
Fewer preferred shares (preferred liquidation of
per share)
(60,000,000) - Total common stockholders' equity 109,276,000 113,703,152 Common stock outstanding 24,947,883 24,943,383 Book value per share $ 4.38 $ 4.56 As ofDecember 31, 2021 , our common stockholders' equity was$109.3 million , and our book value per common share was$4.38 on a basic and fully diluted basis. Our equity decreased by$4.4 million compared to our stockholders' equity as ofDecember 31, 2020 primarily as a result of the$1.7 million loss on extinguishment of debt and$2.7 million of preferred offering costs related to the issuance of the Series A Preferred Stock.
Investment portfolio
Commercial Mortgages
As ofDecember 31, 2021 , we have determined that we are the primary beneficiary of LFT CRE 2021-FL1, Ltd. based on our obligation to absorb losses derived from ownership of our residual interests. Accordingly, the Company consolidated the assets, liabilities, income and expenses of the underlying issuing entities, collateralized loan obligations.
The following table details our lending activity by outstanding principal balance:
Year Ended December 31, 2021 Balance at December 31, 2020 $ 547,345,334 Purchases and advances 983,694,326 Proceeds from principal repayments (528,802,705) Accretion of purchase discount $ 46,088 Amortization of purchase discount $ (457,749) Balance at December 31, 2021 $ 1,001,825,294
The following table details the overall statistics of our loan portfolio in
36 --------------------------------------------------------------------------------
Weighted Average
Unpaid Principal Floating Rate
Loan Type Balance Carrying Value Loan Count Loan % Coupon(1) Term (Years)(2) LTV(3)
December 31, 2021
Loans held-for-investment
Senior secured loans(4) $ 1,001,869,994 $ 1,001,825,294 66 100.0 % 3.9 % 3.7 71.2 %
$ 1,001,869,994 $ 1,001,825,294 66 100.0 % 3.9 % 3.7 71.2 %
Weighted Average
Unpaid Principal Floating Rate
Loan Type Balance Carrying Value Loan Count Loan % Coupon(1) Term (Years)(2) LTV(3)
December 31, 2020
Loans held-for-investment $ 547,345,334 $ 547,345,334 40 100.0 % 5.1 % 3.1 73.6 %
Senior secured loans(3) $ 547,345,334 $ 547,345,334 40 100.0 % 5.1 % 3.1 73.6 %
(1) Weighted average coupon assumes applicable one-month LIBOR of 0.10% and
0.14% as of December 31, 2021 and December 31, 2020 , respectively, and weighted
average LIBOR floors of 0.49% and 1.64%, respectively.
(2) Weighted average term assumes all extension options are exercised by the
borrower; provided, however, that our loans may be repaid prior to such date.
(3) LTV as of the date the loan was originated and is calculated after giving
effect to capex and earnout reserves, if applicable. LTV has not been updated
for any subsequent draws or loan modifications and is not reflective of any
changes in value which may have occurred subsequent to origination date.
(4) As of December 31, 2021 , $974,025,294 of the outstanding senior secured
loans were held in VIEs and $27,800,000 of the outstanding senior secured loans
were held outside VIEs. As of December 31, 2020 , $531,363,401 of the outstanding
senior secured loans were held in VIEs and $15,981,933 of the outstanding senior
secured loans were held outside VIEs.
The table below presents additional information relating to the Company’s portfolio as at
Max Remaining
Loan No. Form of Investment Date of Origination Total Loan Commitment(1) Current Principal Amount
Location Property Type Coupon Term (Years) LTV(2)
1 Senior secured November 22, 2019 39,500,000 36,781,588 Virginia Beach, VA Multi-Family 1mL + 2.8 3.0 77.1 %
2 Senior secured June 28, 2021 39,263,000 34,690,000 Barrington, NJ Multi-Family 1mL + 3.1 4.6 78.1 %
3 Senior secured November 2, 2021 33,500,000 33,500,000 Warner Robbins, GA Multi-Family 1mL + 3.0 2.9 51.4 %
4 Senior secured June 8, 2021 35,877,500 33,360,000 Chattanooga, TN Multi-Family 1mL + 3.7 4.6 79.8 %
5 Senior secured June 8, 2021 32,500,000 30,576,666 Miami, FL Multi-Family 1mL + 3.2 4.6 74.3 %
6 Senior secured June 30, 2021 32,250,000 28,650,000 Porter, TX Multi-Family 1mL + 3.3 4.6 71.6 %
7 Senior secured February 25, 2021 28,000,000 28,000,000 Sacramento, CA Multi-Family 1mL + 3.5 0.3 63.6 %
8 Senior secured May 20, 2021 33,000,000 27,803,800 Marietta, GA Multi-Family 1mL + 3.1 4.5 77.0 %
9 Senior secured April 22, 2021 27,750,000 27,750,000 Los Angeles, CA Multi-Family 1mL + 3.3 0.9 55.0 %
10 Senior secured December 10, 2019 37,046,136 27,411,724 San Antonio, TX Multi-Family 1mL + 3.2 3.1 71.9 %
11 Senior secured June 7, 2021 29,400,000 26,400,000 San Antonio, TX Multi-Family 1mL + 3.4 4.6 80.0 %
12 Senior secured December 16, 2021 25,000,000 25,000,000 Daytona, FL Multi-Family 1mL + 3.1 5.1 71.7 %
13 Senior secured August 26, 2021 27,268,000 24,832,000 Clarkston, GA Multi-Family 1mL + 3.5 4.7 79.0 %
14 Senior secured November 15, 2021 26,003,000 24,330,000 El Paso, TX Multi-Family 1mL + 3.1 5.0 76.0 %
15 Senior secured October 18, 2021 28,250,000 23,348,000 Cherry Hill, NJ Multi-Family 1mL + 3.0 4.9 72.4 %
37
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16 Senior securedAugust 26, 2021 23,370,000 21,957,240Union City, GA Multi-Family 1mL + 3.4 4.8 70.4 % 17 Senior securedNovember 16, 2021 21,975,000 20,960,000Dallas, TX Multi-Family 1mL + 3.2 5.0 73.5 % 18 Senior securedAugust 31, 2021 21,750,000 20,700,000Houston, TX Multi-Family 1mL + 3.3 4.8 74.2 % 19 Senior securedOctober 29, 2021 20,500,000 20,500,000Knoxville, TN Multi-Family 1mL + 3.8 4.9 70.0 % 20 Senior securedJune 30, 2021 21,968,000 20,188,700Jacksonville, FL Multi-Family 1mL + 3.5 4.6 77.1 % 21 Senior securedOctober 13, 2017 20,000,000 19,648,818Seattle, WA Self Storage 1mL + 3.6 2.9 46.5 % 22 Senior securedNovember 5, 2021 20,965,000 19,200,000Orlando, FL Multi-Family 1mL + 3.0 4.9 78.1 % 23 Senior securedOctober 12, 2021 17,500,000 17,500,000Atlanta, GA Multi-Family 1mL + 3.2 2.8 42.9 % 24 Senior securedDecember 28, 2018 24,123,000 17,172,623Austin, TX Retail 1mL + 4.1 1.1 60.5 % 25 Senior securedJuly 8, 2021 17,000,000 17,000,000Knoxville, TN Multi-Family 1mL + 4.0 2.7 69.7 % 26 Senior securedSeptember 30, 2021 17,583,000 16,663,000Hanahan, SC Multi-Family 1mL + 3.2 4.8 76.4 % 27 Senior securedApril 12, 2021 17,000,000 15,000,000Cedar Park, TX Multi-Family 1mL + 3.8 4.4 66.7 % 28 Senior securedOctober 11, 2019 17,000,000 14,500,000Pompano Beach, FL Self Storage 1mL + 3.8 2.8 75.0 % 29 Senior securedFebruary 28, 2018 14,550,000 14,230,100Portland, OR Multi-Family 1mL + 7.5 1.2 75.9 % 30 Senior securedNovember 3, 2021 13,870,000 13,720,000Louisville, KY Multi-Family 1mL + 3.4 4.9 75.4 % 31 Senior securedOctober 14, 2021 13,440,000 13,440,000Bridgeton, NJ Multi-Family 1mL + 3.3 1.4 70.0 % 32 Senior securedMay 28, 2021 13,675,000 13,332,734Houston, TX Multi-Family 1mL + 3.4 2.5 73.8 % 33 Senior securedMay 12, 2021 13,930,000 13,026,000Fort Worth, TX Multi-Family 1mL + 3.4 4.5 74.9 % 34 Senior securedAugust 16, 2021 15,886,000 12,750,000Columbus, OH Multi-Family 1mL + 3.7 4.8 75.0 % 35 Senior securedMarch 12, 2021 13,703,000 12,375,000Mesa, AZ Multi-Family 1mL + 3.6 4.3 75.0 % 36 Senior securedOctober 1, 2021 13,775,000 12,100,000East Nashville, TN Multi-Family 1mL + 3.4 4.8 79.1 % 37 Senior securedJuly 23, 2018 16,200,000 11,748,199Chicago, IL Office 1mL + 3.8 1.7 72.7 % 38 Senior securedOctober 28, 2021 12,250,000 11,202,535Tampa, FL Multi-Family 1mL + 3.0 4.9 75.7 % 39 Senior securedSeptember 30, 2021 11,300,000 10,795,000Clearfield, UT Multi-Family 1mL + 3.2 4.8 68.0 % 40 Senior securedFebruary 8, 2019 12,625,000 10,676,822Federal Way, WA Self Storage 1mL + 4.8 2.2 65.8 % 41 Senior securedApril 23, 2021 11,600,000 10,497,000Tualatin, OR Multi-Family 1mL + 3.2 4.4 73.9 % 42 Senior securedMarch 26, 2021 9,623,000 9,623,000Alhambra, CA Multi-Family 1mL + 3.3 0.8 49.0 % 43 Senior securedOctober 21, 2021 11,500,000 9,100,000Madison, TN Multi-Family 1mL + 3.2 4.9 68.4 % 44 Senior securedNovember 13, 2019 9,310,000 8,620,367Holly Hill, FL Multi-Family 1mL + 2.9 1.0 77.8 % 45 Senior securedMay 12, 2021 8,950,000 8,220,000Lakeland, FL Multi-Family 1mL + 3.4 4.5 76.8 % 46 Senior securedJanuary 13, 2020 8,510,000 8,037,399Fort Lauderdale, FL Multi-Family 1mL + 3.2 3.2 78.4 % 47 Senior securedApril 7, 2021 10,152,000 7,963,794Phoenix, AZ Multi-Family 1mL + 3.6 4.4 69.5 % 48 Senior securedOctober 29, 2021 9,000,000 7,934,000Riverside , MO Multi-Family 1mL + 3.4 4.9 76.6 % 38
-------------------------------------------------------------------------------- 49 Senior securedMarch 12, 2018 9,112,000 7,912,000Waco, TX Multi-Family 1mL + 4.8 1.3 72.9 % 50 Senior securedNovember 16, 2021 7,680,000 7,680,000Cape Coral, FL Multi-Family 1mL + 3.3 3.0 79.2 % 51 Senior securedOctober 27, 2021 9,300,000 7,624,400Ambler, PA Multi-Family 1mL + 3.3 4.9 79.9 % 52 Senior securedMarch 19, 2021 8,348,000 7,513,000Glendora, CA Multi-Family 1mL + 3.6 4.3 72.2 % 53 Senior securedSeptember 28, 2021 8,125,000 7,286,000Chicago, IL Multi-Family 1mL + 3.7 4.8 75.9 % 54 Senior securedFebruary 3, 2020 7,250,000 6,959,953Fort Worth, TX Self Storage 1mL + 3.8 3.3 63.8 % 55 Senior securedMarch 31, 2021 8,432,000 6,893,000Tucson, AZ Multi-Family 1mL + 3.6 4.3 72.8 % 56 Senior securedJuly 1, 2021 7,285,000 6,290,000Harker Heights, TX Multi-Family 1mL + 3.6 4.6 72.3 % 57 Senior securedAugust 28, 2019 6,250,000 6,054,427Austin, TX Multi-Family 1mL + 3.3 2.8 69.9 % 58 Senior securedMay 21, 2021 7,172,000 5,994,000Youngtown, AZ Multi-Family 1mL + 3.7 4.5 71.4 % 59 Senior securedOctober 26, 2021 6,807,000 5,812,000Indianapolis, IN Multi-Family 1mL + 3.9 4.9 77.1 % 60 Senior securedJune 10, 2019 6,000,000 5,295,605San Antonio, TX Multi-Family 1mL + 2.9 2.6 62.9 % 61 Senior securedApril 30, 2021 5,472,000 5,285,500Daytona Beach, FL Multi-Family 1mL + 3.7 4.4 77.4 % 62 Senior securedJuly 14, 2021 6,048,000 5,248,000Birmingham, AL Multi-Family 1mL + 3.7 4.7 71.7 % 63 Senior securedNovember 19, 2021 6,453,000 5,040,000Huntsville, AL Multi-Family 1mL + 3.8 5.0 78.8 % 64 Senior securedDecember 29, 2020 4,920,000 4,920,000Fayetteville, NC Multi-Family 1mL + 4.0 0.6 70.3 % 65 Senior securedNovember 30, 2018 4,446,000 4,446,000Anderson, SC Multi-Family 1mL + 3.3 0.9 53.7 % 66 Senior securedDecember 28, 2021 2,800,000 2,800,000Houston, TX Multi-Family 1mL + 3.2 5.1 71.2 % (1) See Note 11 Commitments and Contingencies to our consolidated financial statements for further discussion of unfunded commitments. (2) LTV as of the date the loan was originated by a Hunt/ORIX affiliate and is calculated after giving effect to capex and earnout reserves, if applicable. LTV has not been updated for any subsequent draws or loan modifications and is not reflective of any changes in value which may have occurred subsequent to origination date.
Our loan portfolio is 100% performing with no loan impairments, defaults or unearned loans from
We maintain strong relationships with our borrowers and utilized those relationships to address potential impacts of the COVID-19 pandemic on loans secured by properties experiencing cash flow pressure. All of our loans are current with respect to principal and interest, however, some of our borrowers have expressed concern on delays in the implementation of business plans due to the prolonged impact of the COVID-19 pandemic. Accordingly, we will continue to engage in discussions with them to work towards the maximization of cash flows and values of our commercial mortgage loan assets should these difficulties arise. We have not entered into any forbearance agreements or loan modifications to date. However, due to the widespread economic impact of the COVID-19 pandemic we consider there to be heightened credit risk associated with our commercial mortgage loan portfolio. As such, we can provide no assurances that our borrowers will remain current as to principal and interest, or that we will not enter into any forbearance agreements or loan modifications on order to protect the value of our commercial mortgage loan assets. As discussed in Note 2 to our consolidated financial statements, our Manager performs a quarterly review of our loan portfolio, assesses the performance of each loan, and assigns a risk rating between "1" and "5," from less risk to greater risk. The weighted average risk rating of our total loan exposure was 2.3 and 3.1 as ofDecember 31, 2021 andDecember 31, 2020 , respectively. The decrease in risk ratings is primarily the result of commercial mortgage loans that paid off with a risk rating of "2" of$133.6 million , a risk rating of "3" of$276.1 million and a risk rating of "4" of$17.8 million , offset by purchases of commercial mortgage loans with a risk rating of "2" of$599.0 million , a risk rating of "3" of$283.0 million and a risk rating of '4" of$0.1 million during the year endedDecember 31, 2021 . The following table presents the principal balance and net book value based on our internal risk ratings: 39 --------------------------------------------------------------------------------
December 31, 2021
Risk Rating Number of Loans Unpaid Principal Balance Net Carrying Value
1 - $ - -
2 40 634,438,386 634,438,386
3 23 342,350,405 342,305,705
4 3 25,081,203 25,081,203
5 - - -
66 1,001,869,994 1,001,825,294
Secured Loan Obligations
We may seek to enhance returns on our commercial mortgage loan investments through securitizations, or CLOs, if available, as well as the utilization of warehouse or repurchase agreement financing. To the extent available, we intend to securitize the senior portion of some of our loans, while retaining the subordinate securities in our investment portfolio. The securitizations of this senior portion will be accounted for as either a "sale" or as a "financing." If they are accounted for as a sale, the loan will be removed from the balance sheet and if they are accounted for as a financing the loans will be classified as "commercial mortgage loans held-for-investment" in our consolidated balance sheets, depending on the structure of the securitization. As ofDecember 31, 2021 , the carrying amounts and outstanding principal balances of our collateralized loan obligations were$826.8 million and$833.8 million , respectively. See Note 4 to our consolidated financial statements included in this Annual Report on Form 10-K for additional terms and details of our CLOs.
FOAC and changes to our residential mortgage business
InJune 2013 , we established FOAC as a Taxable REIT Subsidiary, or TRS, to increase the range of our investments in mortgage-related assets. UntilAugust 1, 2016 , FOAC aggregated mortgage loans primarily for sale into securitization transactions, with the expectation that we would purchase the subordinated tranches issued by the related securitization trusts, and that these would represent high quality credit investments for our portfolio. Residential mortgage loans for which FOAC owns the MSRs continue to be directly serviced by two licensed sub-servicers since FOAC does not directly service any residential mortgage loans. As noted above, we previously determined to cease the aggregation of prime jumbo loans for the foreseeable future, and therefore no longer maintain warehouse financing to acquire prime jumbo loans. We do not expect the previous changes to our mortgage loan business strategy to impact the existing MSRs that we own, nor the securitizations we have sponsored to date. Pursuant to a Master Agreement datedJune 15, 2016 , as amended onAugust 29, 2016 ,January 30, 2017 andJune 27, 2018 , amongMAXEX, LLC ("MAXEX"),MAXEX Clearing LLC , MAXEX's wholly-owned clearinghouse subsidiary and FOAC, FOAC provided seller eligibility review services under which it reviewed, approved and monitored sellers that sold loans viaMAXEX Clearing LLC . To the extent that a seller approved by FOAC fails to honor its obligations to repurchase a loan based on an arbitration finding that it breached its representations and warranties, FOAC was obligated to backstop the seller's repurchase obligation. The term of such backstop guarantee was the earlier of the contractual maturity of the underlying mortgage and its repayment in full. However, the incidence of claims for breaches of representations and warranties over time is considered unlikely to occur more than five years from the sale of a mortgage. FOAC's obligations to provide such seller eligibility review and backstop guarantee services terminated onNovember 28, 2018 . Pursuant to an Assumption Agreement datedDecember 31, 2018 , amongMAXEX Clearing LLC and FOAC,MAXEX Clearing LLC assumed all of FOAC's obligations under its backstop guarantees and agreed to indemnify and hold FOAC harmless against any losses, liabilities, costs, expenses and obligations under the backstop guarantee. FOAC paidMAXEX Clearing LLC , as the replacement backstop provider, a fee of$426,770 (the "Alternative Backstop Fee").MAXEX Clearing LLC represented to FOAC in the Assumption Agreement that it (i) is rated at least "A" (or equivalent) by at least one nationally recognized statistical rating agency or (ii) has (a) adjusted tangible net worth of at least$20.0 million and (b) minimum available liquidity equal to the greater of (x)$5.0 million and (y) 0.1% multiplied by the scheduled unpaid principal balance of each outstanding loan covered by the backstop guarantees. MAXEX's chief financial officer is required to certify ongoing compliance byMAXEX Clearing LLC with the aforementioned criteria on a quarterly basis and ifMAXEX Clearing LLC fails to satisfy such criteria,MAXEX Clearing LLC is required to deposit into an escrow account for FOAC's benefit an amount equal to the greater of (A) the unamortized Alternative Backstop Fee for each outstanding loan covered by the backstop guarantee and (B) the product of 0.01% multiplied by the scheduled unpaid principal balance of each outstanding loan covered by the backstop guarantees. See Notes 13 and 14 to our consolidated financial statements included in this Annual Report for a further description of MAXEX.
Significant Accounting Policies and Estimates
Our consolidated financial statements are prepared in accordance with GAAP, which requires the use of estimates and assumptions that involve the exercise of judgment and use of assumptions as to future uncertainties. Accounting estimates and assumptions discussed in this section are those that we consider to be the most critical to understanding our financial statements because they involve significant judgments and uncertainties that could affect our reported assets and liabilities, as well as our reported revenues and expenses. All of these estimates reflect our best judgments about current, and for some estimates, future economic and market conditions and their effects based on information available as of the date of the financial statements. If conditions change from those expected, it is possible that the judgments and estimates described below could change, which may result in a change in our interest income recognition, allowance for loan losses, future impairment of our investments, and valuation of our investment portfolio, among other effects. We believe that the following accounting policies are among the most important to the portrayal of our financial condition and results of operations and require the most difficult, subjective or complex judgments:
Commercial mortgages held for investment
Commercial mortgage loans held-for-investment represent floating-rate
transitional loans and other commercial mortgage loans purchased by the Company.
These loans include loans sold into securitizations that the Company
consolidates. Commercial mortgage loans held-for-investment are intended to be
held-to-maturity and, accordingly, are carried at their unpaid principal
balances, adjusted for net unamortized loan fees and costs (in respect of
originated loans), premiums and discounts (in respect of purchased loans) and
impairment, if any.
Interest income is recognized as revenue using the effective interest method and
is recorded on the accrual basis according to the terms of the underlying loan
agreement. Any fees, costs, premiums and discounts associated with these loan
investments are deferred and amortized over the term of the loan using the
40
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effective interest method, or on a straight line basis when it approximates the
effective interest method. Income accrual is generally suspended and loans are
placed on non-accrual status on the earlier of the date at which payment has
become 90 days past due or when full and timely collection of interest and
principal is considered not probable. The Company may return a loan to accrual
status when repayment of principal and interest is reasonably assured under the
terms of the underlying loan agreement. As of December 31, 2021 , the Company did
not hold any loans placed in non-accrual status.
Quarterly, the Company assesses the risk factors of each loan classified as
held-for-investment and assigns a risk rating based on a variety of factors,
including, without limitation, debt-service coverage ratio ("DSCR"),
loan-to-value ratio ("LTV"), property type, geographic and local market
dynamics, physical condition, leasing and tenant profile, adherence to business
plan and exit plan, maturity default risk and project sponsorship. The Company's
loans are rated on a 5-point scale, from least risk to greatest risk,
respectively, which ratings are described as follows:
1.Very Low Risk: exceeds expectations and is outperforming underwriting or it is
very likely that the underlying loan can be refinanced easily in the period's
prevailing capital market conditions
2.Low Risk: meeting or exceeding underwritten expectations
3.Moderate Risk: in-line with underwritten expectations or the sponsor may be in
the early stages of executing the business plan and the loan structure
appropriately mitigates additional risks
4.High Risk: potential risk of default, a loss may occur in the event of default
5.Default Risk: imminent risk of default, a loss is likely in the event of
default
The Company evaluates each loan rated High Risk or above as to whether it is
impaired on a quarterly basis. Impairment occurs when the Company determines
that the facts and circumstances of the loan deem it probable that the Company
will not be able to collect all amounts due in accordance with the contractual
terms of the loan. If a loan is considered to be impaired, an allowance is
recorded to reduce the carrying value of the loan through a charge to the
provision for loan losses. Impairment of these loans, which are collateral
dependent, is measured by comparing the estimated fair value of the underlying
collateral, less costs to sell, to the book value of the respective loan. These
valuations require significant judgments, which include assumptions regarding
capitalization rates, leasing, creditworthiness of major tenants, occupancy
rates, availability of financing, exit plan, actions of other lenders, and other
factors deemed necessary by the Manager. Actual losses, if any, could ultimately
differ from estimated losses.
In addition, the Company evaluates the entire portfolio to determine whether the
portfolio has any impairment that requires a valuation allowance on the
remainder of the loan portfolio. As of December 31, 2021 , the Company has not
recognized any impairments on its loans held-for-investment. We also assessed
the remainder of the loan portfolio, considering the absence of delinquencies
and current market conditions, and, as such has not recorded any allowance for
loan losses.
See Note 2 to our Consolidated Financial Statements for a complete list of our significant accounting policies.
Capital allocation
The following tables present our capital allocated by type of investment to
This information constitutes non-GAAP financial measures within the meaning of Item 10(e) of Regulation S-K, as promulgated by theSEC . We believe that this non-GAAP information enhances the ability of investors to better understand the capital necessary to support each income-earning asset category, and thus our ability to generate operating earnings. While we believe that the non-GAAP information included in this report provides supplemental information to assist investors in analyzing our portfolio, these measures are not in accordance with GAAP, and they should not be considered a substitute for, or superior to, our financial information calculated in accordance with GAAP. December 31, 2021 Commercial Mortgage Loans MSRs Unrestricted Cash(1) Total(2) Market Value 1,001,825,294 551,997 14,749,046
1,017,126,337
Collateralized Loan Obligations (826,782,543) - - (826,782,543)
Other(3) 25,769,860 - (3,422,658) 22,347,202
Restricted Cash 3,530,006 - - 3,530,006
Capital Allocated 204,342,617 551,997 11,326,388 216,221,002
% Capital 94.5 % 0.3 % 5.2 % 100.0 %
December 31, 2020
Commercial Unrestricted
Mortgage Loans MSRs Cash(1) Total(2)
Market Value $ 547,345,334 $
919 678
Secured Loan Obligations
(463,060,090) - - (463,060,090) Other(3) 1,663,740 - (2,984,668) (1,320,928) Restricted Cash 57,999,396 - - 57,999,396 Capital Allocated$ 143,948,380 $ 919,678 $ 8,391,292 $ 153,259,350 % Capital 93.9 % 0.6 % 5.5 % 100.0 % 1.Includes cash and cash equivalents. 2.Includes the carrying value of our Secured Term Loan. 3.Includes principal and interest receivable, prepaid and other assets, interest payable, dividends payable and accrued expenses and other liabilities. 41 --------------------------------------------------------------------------------
Operating results
As ofDecember 31, 2021 , we consolidated the assets and liabilities of oneCRE CLO , LFT CRE 202-FL1, Ltd. Additionally, although the COVID-19 pandemic did not significantly impact our operating results for the year endedDecember 31, 2021 , should the pandemic and resulting economic deterioration persist, we expect it may affect our business, financial condition, results of operations and cash flows going forward, including but not limited to, interest income credit losses and commercial mortgage loan reinvestment, in ways that may vary widely depending on the duration and magnitude of the COVID-19 pandemic and ensuing economic turmoil, as well as numerous other factors, many of which are outside of our control. Further inMay 2021 , we issued 2,400,000 shares of 7.875% Series A Cumulative Redeemable Preferred Stock resulting in net proceeds (after underwriting discount and commission but before operating expenses) of$58.1 million . OnAugust 23, 2021 , the Incremental Secured Term Loan of$7.5 million provided for in the Third Amendment to the Credit and Guaranty Agreement was funded. We believe that Lument IM and its affiliates continue to identify attractive CRE lending opportunities, which we expect will allow us to deploy our capital base into assets that are consistent with our investment strategy. The deployment of these proceeds into our target assets took time and as such, and resulted in a temporary decline in net interest income. Additionally, as a result of the Series A Preferred Stock issuances, Stockholders' Equity as calculated per our management agreement will increase, resulting in increased management fees, changes to the core earnings hurdle over which incentive fees are due and payable to our Manager and increase the reimbursable expense cap.
The table below presents certain information from our income statement for the years ended
Year Ended
December 31,
2021 2020
Revenues:
Interest income:
Commercial mortgage loans held-for-investment 36,162,050 33,570,949
Cash and cash equivalents 28,779 45,782
Interest expense:
Collateralized loan obligations (12,178,545) (12,047,300)
Secured term loan (3,333,536) (3,138,917)
Net interest income 20,678,748 18,430,514
Other income:
Realized loss on mortgage servicing rights (10,910) -
Change in unrealized (loss) on mortgage servicing rights (356,772) (1,780,528)
Loss on extinguishment of debt (1,663,926) -
Servicing income, net 398,939 709,565
Other income - 2
Total other (loss) (1,632,669) (1,070,961)
Expenses:
Management fee 3,041,600 2,524,139
General and administrative expenses 2,879,655 3,518,500
Operating expenses reimbursable to Manager 2,038,130 1,644,886
Other operating expenses 280,970 1,493,214
Compensation expense 200,608 205,292
Total expenses 8,440,963 9,386,031
Net income before provision for income taxes 10,605,116 7,973,522
Benefit from income taxes (77,894) 476,248
Net income 10,527,222 8,449,770
Dividends to preferred stockholders (3,112,500) (15,000)
Net income attributable to common stockholders $ 7,414,722 $ 8,434,770
Earnings per share:
Net income attributable to common stockholders (basic and diluted) $ 7,414,722 $ 8,434,770
Weighted average number of shares of common stock outstanding 24,945,824 24,934,505
Basic and diluted income per share $ 0.30 $ 0.34
Dividends declared per share of common stock $ 0.36 $ 0.37
Net Income Summary
For the year ended December 31, 2021 , our net income attributable to common
stockholders was $7,414,722 or $0.30 basic and diluted net income per average
share, compared with net income of $8,434,770 or $0.34 basic and diluted net
loss per share, for the year ended December 31, 2020 . The principal drivers of
this net income variance were an increase in net interest income from
$18,430,514 for the year ended December 31, 2020 to $20,678,748 for the year
ended December 31, 2021 , and a decrease in total expenses from $9,386,031 for
the year ended December 31, 2020 to $8,440,963 for the year ended December 31,
2021 , which was more than offset by an increase in total other loss from
$1,070,961 for the year ended December 31, 2020 to a loss of
42
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$1,632,669 for the year ended December 31, 2021 , and an increase in preferred
dividends from $15,000 for the year ended December 31, 2020 to $3,112,500 for
the year ended December 31, 2021 .
Net interest income
For the years endedDecember 31, 2021 andDecember 31, 2020 , our net interest income was$20,678,748 and$18,430,514 , respectively. The increase was primarily due to (i) a$67.6 million increase in weighted-average principal balance of our CLO loan portfolio; (ii) a decrease in weighted-average LIBOR of 49bps for our CLO liabilities, and (iii) an increase in exit/extension fees of$3.2 million for our loan portfolio. This was offset by (i) a$156.2 million increase in weighted average principal balance of our CLO liabilities; (ii) a decrease of 54bps in weighted-average LIBOR floor on our CLO loan portfolio for the year-endedDecember 31, 2021 compared to the corresponding period in 2020 (iii) a 3bps decrease in weighted-average spread on the CLO loan portfolio for the year-endedDecember 31, 2021 compared to the corresponding period in 2020, and (iv) an increase of 4bps in weighted-average spread for our CLO liabilities for the year-endedDecember 31, 2021 compared to the corresponding period in 2020 .
Other (Loss)
For the year endedDecember 31, 2021 , we incurred a loss of$1,632,669 . This loss was driven by loss on extinguishment of debt of$1,663,926 resulting from the unwind of Hunt CRE 2018-FL2 and the impact of net unrealized losses on mortgage servicing rights of$356,772 caused by decreased unpaid principal balances, which more than offset net mortgage servicing income of$398,939 . For the year endedDecember 31, 2020 , we incurred a loss of$1,070,961 . This loss was primarily driven by the impact of net realized losses on mortgage servicing rights of$1,780,528 caused by a decrease in interest rates which increased prepayment speeds and decreased projected float income, which more than offset net mortgage servicing income of$709,565 . The year-over-year increase in other loss was primarily due to the change in loss on extinguishment of debt and unrealized loss on mortgage servicing rights as a result of higher prepayment speeds.
Expenses
We incurred management and incentive fees of
For the year endedDecember 31, 2020 , we incurred management and incentive fees of$2,524,139 representing amounts payable to our Manager under our management agreement. We also incurred operating expenses of$6,861,892 , of which$1,644,886 was payable to our Manager and$5,217,006 was payable to third parties. The year-over-year decrease in expenses primarily reflects a decrease in accounting, audit and legal fees, CLO expense and discontinued deal costs, which more than offset increased insurance, management and incentive fees and expense reimbursement. Impairment We review each loan classified as held-for-investment for impairment on a quarterly basis. For the years endedDecember 31, 2021 andDecember 31, 2020 , the Company has not recognized any impairments on its loans held-for-investment and therefore has not recorded any allowance for loan losses.
Income tax expense (benefits)
For the year endedDecember 31, 2021 the Company recognized a provision for income taxes in the amount of$77,894 and for the year endedDecember 31, 2020 , the Company recognized a benefit from income taxes in the amount of$476,248 . The year-over-year increase in tax expense primarily reflects the change in gross deferred revenue at FOAC due to the change in unrealized loss on mortgage servicing rights.
Cash and capital resources
Liquidity is a measurement of our ability to meet potential cash requirements, including ongoing commitments to pay dividends, fund investments, comply with margin requirements, if any, and repay borrowings and other general business needs. Our primary sources of liquidity have been met with net proceeds of common or preferred stock issuance, net proceeds from debt offerings and net cash provided by operating activities. We have added to our liquidity position inMay 2021 by issuing 2,400,000 shares of 7.875% Series a Cumulative Redeemable Preferred Stock resulting in net proceeds (after underwriting discount and commission but before operating expense) of$ 58.1 million . We finance our commercial mortgage loans primarily with match term collateralized loan obligations, which are not subject to margin calls or additional collateralization requirements. OnJune 14, 2021 , we closed LFT CRE 2021-FL1 issuing eight tranches of CLO notes totaling$903.8 million . Of the total CLO notes issued$833.8 million were investment grade notes issued to third-party investors and$70 million were below investment-grade notes retained by us. OnAugust 23, 2021 , we drew an additional$7.5 million of our Secured Term Loan pursuant to the Third Amendment. Additionally, onFebruary 22, 2022 , the Company issued 27,277,269 shares of common stock resulting in gross proceeds of$83.5 million . As ofDecember 31, 2021 , our balance sheet included$47.8 million of a secured term loan and$833.8 million in collateralized loan financing, gross of discounts and debt issuance costs. Our secured term loan matures inJanuary 2026 and our collateralized loan financing is term-matched and matures in 2039 or later. However, to the extent that we seek to invest in additional commercial mortgage loans, we will in part be dependent on our ability to issue additional collateralized loan obligations to secure alternative financing facilities or to raise additional common or preferred equity. If we were required to liquidate all or a portion of our portfolio quickly, we may realize significantly less than the value at which we previously recorded our assets, particularly in a financial market that has been significantly disrupted and less liquid as a result of the ongoing COVID-19 pandemic. Assets that are illiquid are more difficult to finance, and to the extent that we use leverage to finance assets that become illiquid, we may lose that leverage or have it reduced if such leverage is, at least in part, dependent on the market value of our assets. Assets tend to become less liquid during times of financial stress, which is often the time that liquidity is most needed. As a result, our ability to sell assets or vary our portfolio in response to changes in economic and other conditions may be limited by liquidity constraints, which could adversely affect our results of operations and financial condition. We seek to limit our exposure to illiquidity risk to the extent possible, by ensuring that the collateralized loan obligations that we use to finance our commercial mortgage loans are not subject to margin calls or other limitations that are dependent on the market value of the related loan collateral. 43 -------------------------------------------------------------------------------- We intend to continue to maintain a level of liquidity in relation to our assets that enables us to meet reasonably anticipated investment requirements and unforeseen business needs but that also allows us to be substantially invested in our target assets. We may misjudge the appropriate amount of our liquidity by maintaining excessive liquidity, which would lower our investment returns, or by maintaining insufficient liquidity, which would force us to liquidate assets into unfavorable market conditions and harm our operating results. As ofDecember 31, 2021 , we had unrestricted cash and cash equivalents of$14.7 million , compared to$11.4 million as ofDecember 31, 2020 . As ofDecember 31, 2021 , we had$47.8 million in outstanding principal under our Senior Secured Term Loan, with a borrowing rate of 7.25%. As ofDecember 31, 2021 , the ratio of our recourse debt to our equity was 0.2:1. As ofDecember 31, 2021 , we consolidated the assets and liabilities of LFT 2021-FL1, Ltd. The assets of the trust are restricted and can only be used to fulfill their respective obligations, and accordingly the obligations of the trust, which we classify as collateralized loan obligations, do not have any recourse to us as the consolidator of the trust. As ofDecember 31, 2021 , the carrying value of these non-recourse liabilities aggregated to$826.8 million . As ofDecember 31, 2021 , our total debt-to-equity ratio was 5.2:1 on a GAAP basis.
Cash flow
The following table shows the changes in cash, cash equivalents and restricted cash for the years ended
For the
years ended
2021 2020 Cash Flows From Operating Activities 13,846,947 12,219,209 Cash Flows From Investing Activities (477,291,621) 87,915,086 Cash Flows From Financing Activities 412,348,370 (46,770,769) Net Increase (Decrease) in Cash, Cash Equivalents and Restricted Cash$ (51,096,304) $ 53,363,526 During the year endedDecember 31, 2021 , cash, cash equivalents and restricted cash decreased by$51.1 million and for the year endedDecember 31, 2020 , cash, cash equivalents and restricted cash increased by$53.4 million .
Operational activities
For the years endedDecember 31, 2021 andDecember 31, 2020 , net cash provided by operating activities totaled$13.8 million and$12.2 million , respectively. For the year endedDecember 31, 2021 , our cash flows from operating activities were primarily driven by$23.8 million of interest received from the junior retained notes and preferred shares of Hunt CRE 2017-FL1, Ltd. , Hunt CRE 2018-FL2, Ltd. and LFT 2021-FL1, Ltd. , the CRE CLOs that we consolidate,$0.6 million of interest received from our senior secured loans held outside the CRE CLOs we consolidate and$0.4 million of cash received from mortgage servicing rights exceeding cash interest expense paid on our Secured Term Loan of$3.1 million , management fees of$2.7 million , expense reimbursements of$1.7 million and other operating expenditures of$3.4 million . For the year endedDecember 31, 2020 , our cash flows from operating activities were primarily driven by$22.1 million of interest received from the junior retained notes and preferred shares of Hunt CRE 2017-FL1, Ltd. and Hunt CRE 2018-FL2, Ltd. , the CRE CLOs we consolidate,$0.7 million of interest received from our senior secured loans held outside the CRE CLOs we consolidate and$0.7 million of cash received from mortgage servicing rights exceeding cash interest expense paid on our Secured Term Loan of$3.0 million , management fees of$2.3 million , expense reimbursement of$1.7 million and other operating expenditures of$4.5 million .
Investing activities
For the year endedDecember 31, 2021 , net cash used in investing activities totaled$477.3 million . This was a result of the cash used for the purchase and funding of commercial mortgage loans held for investment exceeding the principal repayment of commercial mortgage loans held for investment during the period. For the year endedDecember 31, 2020 net cash provided by investing activities totaled$87.9 million . This was a result of the cash received from principal repayments of commercial mortgage loans held-for-investment exceeding the purchase and funding of commercial mortgage loans held for investment for the year endedDecember 31, 2020 . Financing Activities For the year endedDecember 31, 2021 , net cash provided by financing activities totaled$412.3 million and primarily related to proceeds from issuance of our Series A Preferred Stock of$57.3 million , proceeds from issuance of collateralized loan obligations of$833.8 million and proceeds from our Secured Term Loan of$7.5 million which more than offset by payments of common and preferred dividends of$12.1 million , repayment of collateralized loan obligations of$465.3 million and payment of debt issuance costs of$8.7 million . For the year endedDecember 31, 2020 , net cash used in financing activities totaled$46.8 million and primarily related to proceeds of issuing common stock of$5.7 million more than offset by payments of common and preferred dividends of$7.6 million and repayment of collateralized loan obligations of$44.9 million .
Forward-Looking Statements Regarding Liquidity
Based upon our current portfolio, leverage rate and available borrowing
arrangements, we believe that the net proceeds of our prior equity sales,
combined with cash flow from operations and available borrowing capacity will be
sufficient to enable us to meet anticipated short-term (one year or less)
liquidity requirements to fund our investment activities, pay fees under our
management agreement, fund our distributions to stockholders and for other
general corporate expenses.
Our ability to meet our long-term (greater than one year) liquidity and capital
resource requirements will be subject to, amongst other things, obtaining
additional debt financing and equity capital. We may increase our capital
resources by obtaining long-term credit facilities, additional collateralized
loan obligations or making additional public or private offerings of equity or
debt securities, possibly including classes of preferred stock, common stock and
senior or subordinated notes.
44
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To maintain our qualification as a REIT, we generally must distribute annually
at least 90% of our "REIT taxable income" (determined without regard to the
deduction for dividends paid and excluding net capital gain). These distribution
requirements limit our ability to retain earnings and thereby replenish or
increase capital for operations.
Off-balance sheet arrangements
As ofDecember 31, 2021 , we did not maintain any relationships with unconsolidated financial partnerships, or special purpose or variable interest entities established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes. Further, as ofDecember 31, 2021 , we had not guaranteed any obligations of unconsolidated entities or entered into any commitment or intent to provide funding to any such entities. In connection with the provision of seller eligibility and backstop guarantee services provided to MAXEX, we previously accounted for the related non-contingent liability at its fair value on our consolidated balance sheet as a liability. As ofDecember 31, 2021 , pursuant to an Assumption Agreement datedDecember 31, 2018 , amongMAXEX Clearing LLC and FOAC,MAXEX Clearing LLC assumed all of FOAC's obligations under its backstop guarantees and agreed to indemnify and hold FOAC harmless against any losses, liabilities, costs, expenses and obligations under the backstop guarantees. See Note 11 for further information. Distributions We intend to continue to make regular quarterly distributions to holders of our common stock.U.S. federal income tax law generally requires that a REIT distribute annually at least 90% of its "REIT taxable income" (determined without regard to the deduction for dividends paid and excluding net capital gain) and that it pay tax at regular corporate rates to the extent that it annually distributes less than 100% of its "REIT taxable income." We have historically made regular monthly distributions, but with effect from the third quarter of 2018 we now make regular quarterly distributions, to our stockholders in an amount equal to all or substantially all of our taxable income. Although FOAC no longer aggregates and securitizes residential mortgages, it continues to generate taxable income from MSRs and other mortgage-related activities. This taxable income will be subject to regular corporate income taxes. We generally anticipate the retention of profits generated and taxed at FOAC. Before we make any distribution on our common stock, whether forU.S. federal income tax purposes or otherwise, we must first meet both our operating requirements and any debt service obligations on debt payable. If cash available for distribution to our stockholders is less than our taxable income, we could be required to sell assets or borrow funds to make cash distributions, or we may make a portion of the required distribution in the form of a taxable stock distribution or distribution of debt securities. If substantially all of our taxable income has not been paid by the close of any calendar year, we may declare a special dividend prior to the end of such calendar year, to achieve this result. OnDecember 15, 2021 , we announced that our board of directors had declared a cash dividend rate for the fourth quarter of 2021 of$0.09 per share of common stock.
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