LUMENT FINANCE TRUST, INC. MANAGEMENT REPORT AND ANALYSIS OF FINANCIAL POSITION AND OPERATING RESULTS (Form 10-Q)
In this Quarterly Report on Form 10-Q, or this "report", we refer to
Lument Finance Trustas "we," "us," or "our," unless we specifically state otherwise or the context indicates otherwise. We refer to our external manager, OREC Investment Management, LLCdoing business as Lument Investment Management, as our "Manager" or "Lument IM". The following discussion should be read in conjunction with our condensed consolidated financial statements and the accompanying notes to our financial statements which are included in Item 1 of this report, as well as information contained in our Annual Report on Form 10-K for the year ended December 31, 2021, or our 2021 10-K, filed with the Securities and Exchange Commission, or SEC, on March 15, 2022. Forward-Looking Statements This Quarterly Report on Form 10-Q contains forward-looking statements intended to qualify for the safe harbor contained in Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act, as amended. Forward-looking statements are subject to risks and uncertainties. These forward-looking statements include information about possible or assumed future results of our business, financial condition, liquidity, results of operations, plans and objectives. In addition, our management may from time to time make oral forward-looking statements. You can identify forward-looking statements by use of words such as "believe," "expect," "anticipate," "estimate" "project," "plan," "continue," "intend," "should," "may," "will," "seek," "would," "could" or the negative of these words and phrases or similar words and phrases, or by discussions of strategy, plans or intentions. Statements regarding the following subjects, among others, may be forward-looking: the return on equity; the yield on investments; the ability to borrow to finance assets; and risks associated with investing in real estate assets, including changes in business conditions and the general economy. Forward-looking statements are based on our beliefs, assumptions and expectations of our future performance, taking into account all information currently available to us on the date of this quarterly report. Actual results may differ from expectations, estimates and projections. Readers are cautioned not to place undue reliance on forward-looking statements in this quarterly report and should consider carefully the risk factors described in Part I, Item IA "Risk Factors" in our annual report on Form 10-K for the year ended December 31, 2021in evaluating these forward-looking statements. Forward-looking statements are subject to substantial risks and uncertainties, many of which are difficult to predict and are generally beyond our control. Additionally, many of these risks and uncertainties are currently amplified by and will continue to be amplified by, or in the future may be amplified by, the COVID-19 pandemic. It is not possible to predict or identify all such risks. Additional information concerning these and other risk factors are contained in our 2021 10-K which is available on the Securities and Exchange Commission'swebsite at www.sec.gov. Overview
We are a
January 2020, we entered into a series of transactions with subsidiaries of ORIX 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 with Lument IM, while another affiliate of ORIX USApurchased an ownership stake of approximately 5.0% through a privately-placed stock issuance. On February 22, 2022, the affiliate purchased an additional 13,071,895 shares of common stock from the transferable common stock rights offering, increasing its beneficial ownership in the Company to approximately 27.4%. These transactions have enhanced the scale of LFT and are expected to generate shareholder value through leveraging ORIX USA'sexpansive 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 ("CLO"). 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 in
U.S.markets with multiple demand drivers, such as growth in employment and household formation; •Fully funded principal balance greater than $5 millionand 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 tied to one-month term SOFR, previously to one-month U.S.denominated LIBOR, and/or in the future potentially any index replacement; and •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 the significant CRE experience of Lument's investment team, and the extensive resources of ORIX 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, Five Oaks Acquisition Corp.("FOAC"). 20
As the COVID-19 pandemic has evolved from its emergence in early 2020, so has its global impact. In response to COVID-19,
the United Statesand numerous other countries declared national emergencies, which has led to large scale quarantines as well as restrictions to business deemed non-essential. Although more normalized activities have resumed, we are not in a position to estimate the ultimate impact COVID-19 and its variants will have on our business and the economy as a whole. We cannot predict the potential impact related to both known and unknown risks, including future quarantines, closures and other restrictions resulting from the pandemic. The effects of the COVID-19 pandemic did not significantly impact our operating results for the three months ended March 31, 2022. 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 ending December 31, 2022and potentially longer.
Summary of the first quarter of 2022
•Acquired nine loans with an initial unpaid principal balance of
$119.2 millionwith a weighted average interest rate of one-month U.S.LIBOR plus 3.26% and a weighted average LIBOR floor of 0.09%. •Acquired five loans with an initial unpaid principal balance of $65.8 millionwith a weighted average interest rate of 30-day term SOFR plus 3.65% and a weighted average SOFR floor of 0.06%. •On February 22, 2022, the Company closed a transferable common stock rights offering. The Company issued and sold 27,277,269 shares of common stock for gross proceeds of approximately $83.5 million. •On February 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. •On March 15, 2022, the Company announced its first quarter common dividend of $0.06per share of common stock, in line with the previous quarter. •On March 15, 2022, the Company announced its first quarter preferred dividend of $0.49219per share of Series A Preferred Stock.
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 general
U.S.real estate fundamentals and the overall U.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 increase our net interest income, while declining interest rates will decrease our net interest income. As of March 31, 2022, 99.9% of our investments by total investment exposure earned a floating rate of interest, of which 93.9% were indexed to one-month LIBOR and 6.1% were indexed to 30-day term SOFR, and all of our collateralized loan obligations were indexed to one-month 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 LIBOR/SOFR floors in our commercial loan portfolio, with a weighted average LIBOR floor of 0.28% and a weighted average SOFR floor of 0.06% as of March 31, 2022. As of March 31, 2022, 99.0% of the loans in our commercial mortgage loan portfolio are structured with LIBOR/SOFR floors, 13.8% of which had a floor greater than the current spot interest rate. When interest rates are above our average interest rate floor, an increase in interest rates will increase our interest income. Alternatively, when interest rates are below our average interest rate floor, an increase in interest rates will decrease our net interest income until such time as interest rates rise above our average interest rate floor. Although our Manager is currently originating loans with SOFR floors, there can be no assurance that we will continue to obtain SOFR floors on future originations or LIBOR floors on future acquisitions. Similarly, net interest income is also impacted by the spread in our commercial mortgage loan portfolio As of March 31, 2022, the weighted average spread of our commercial loan portfolio was 3.36%, but there is no assurance that these spreads will be maintained as market environments fluctuate. Current market conditions have reflected a widening trend in commercial mortgage loan credit spreads which provide a benefit to interest income. In addition to the risk related to fluctuations in cash flows associated with movements 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. On November 30, 2020, the ICE Benchmark Administration("IBA"), with the support of the United States Federal Reserve and United Kingdom's Financial Conduct Authority("FCA"), announced plans to consult on ceasing publication of LIBOR on December 31, 2021for only the one week and two month LIBOR tenors, and on June 30, 2023for all other LIBOR tenors. While this announcement extends the transition period to June 2023, the United States Federal Reserve concurrently issued a statement advising banks to stop new LIBOR issuances by the end of 2021. As of January 1, 2022, our Manager is only originating loans based on 30-day term SOFR, however, our Manager continues to have one-month LIBOR based loans in its pipeline assets available for investment. On March 5, 2021, the FCAconfirmed that all LIBOR settings will either cease to be provided by any administrator or no longer be representative: (a) immediately after December 31, 2021, in the case of the one week and two month U.S.dollar settings; and (b) immediately after June 30, 2023, in the case of the remaining U.S.dollar settings. The Alternative Reference Rate Committee ("ARRC"), a committee convened by the Federal Reservethat includes major market participants, has proposed an alternative rate to replace U.S.Dollar LIBOR: SOFR. On July 29, 2021the ARRC 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 in the methods by which LIBOR is determined or regulatory activity related to LIBOR's phase-out could cause LIBOR to perform differently than in the past. As of March 31, 2022, 93.9% of our commercial mortgage loans by principal balance and 100% of our collateralized loan obligations bear interest related to one-month U.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 21 -------------------------------------------------------------------------------- with our lenders and borrowers to minimize the impact of any LIBOR transition 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 of March 31, 2022, 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 of March 31, 2022, 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 issuances, 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 millionwith an aggregate purchase premium of $538,146and aggregate purchase discount of $171,186, all of our commercial mortgage loans were acquired at par. As of March 31, 2022, our aggregate unamortized purchase premium was $45,349and our aggregate unamortized purchase discount was $100,572, 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 CRE 2021-FL1 remains in place through December 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 a 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 the 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 the U.S.government, there have been a number of proposals to reform the U.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 in Congressand 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
March 13, 2020, our Manager, and its affiliates, implemented a work from home, or WFH, policy for employees in all locations. On October 1, 2021, our Manager began reopening offices on a limited basis with certain staff returning to the office on a staggered partial schedule. As of April 1, 2022, all of our offices have reopened with with continued flexible work arrangements. Our Manager's highly experienced senior team and dedicated employees have been and continue to be fully operational during this ongoing disruption and are continuing to execute on all investment 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. From September 4, 2020, through August 26, 2021, when the Centers for Disease Control("CDC") Agency Order was overturned by the U.S. Supreme Court, residential landlords and those with similar eviction rights could not evict "covered persons" for nonpayment of rent in any U.S.state or territory. Covered persons (a) use best efforts to obtain government assistance; (b) make less than $99,000or $198,000jointly; (c) have suffered loss of income or extraordinary medical expenses; (d) use of best efforts to make partial payments; and (e) have no other housing options. In the last month before the Supreme Courtlifted the order, the moratorium added to the definition of "covered persons" to include (f) the individual 22 -------------------------------------------------------------------------------- resides in a U.S.county experiencing substantial or high rates of community transmission levels of SARS-COV-2 as defined by CDC. As a result of the national restriction, multifamily apartments 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 the Supreme Courthaving lifted the CSC order, individual states and localities continue to maintain limited evictions restrictions. New York, Washington D.C., Massachusetts, Minnesota, New Mexico, Oregonand Nevadaall have some form of limited or prohibited residential evictions while the tenant applies for rental assistance. Californiahas local eviction moratoriums that may extend beyond that in different 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 ended
March 31, 2022, we recorded earnings per share of $0.05, declared a quarterly dividend of $0.06per share, and reported $0.05per share of Distributable Earnings. In addition, our book value per share of common stock was $3.62.
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 completed
March 31, 2022 March 31, 2021 Net income(1)
$ 1,769,841 $ 2,804,935Weighted-average shares outstanding, basic and diluted 36,464,952 24,943,383 Net income per share, basic and diluted $ 0.05 $ 0.11 Dividends declared per share $
(1) Represents net income attributable to
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 15 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 same or similar performance measures, and accordingly, our reported Distributable Earnings may not be comparable to the Distributable Earnings reported by other companies.
The following table provides a reconciliation of distributable earnings to GAAP net income:
Three months completed
March 31, 2022 March 31, 2021 Net income attributable to common stockholders
$ 1,769,841 $ 2,804,935Unrealized (gain) loss on mortgage servicing rights (147,382) 20,455
Recognized compensation expense related to restricted common shares
4,638 2,885 Adjustment for income taxes 51,665 14,713 Distributable Earnings
$ 1,678,762 $ 2,842,988Weighted-average shares outstanding, basic and diluted 36,464,952 24,943,383 Distributable Earnings per share, basic and diluted $
Book value per common share
The following table calculates our book value per common share:
March 31, 2022 December 31, 2021Total stockholders' equity $
248 981 343
Fewer preferred shares (preferred liquidation of
(60,000,000) (60,000,000) Total common stockholders' equity 188,981,343 109,276,000 Shares of common stock issued and outstanding at period end 52,225,152 24,947,883 Book value per share of common stock $ 3.62 $ 4.38 As of
March 31, 2022, our common stockholders' equity was $189.0 million, and our book value per share of common stock was $3.62on a basic and fully diluted basis. Our equity increased by $79.7 millioncompared to our equity as of December 31, 2021primarily as a result of the closing of the transferable common stock rights offering on February 22, 2022generating net proceeds of approximately $81.1 millionpartially offset by $1.2 millionin distributions greater than net income the quarter.
March 31, 2022, 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:
Commercial Mortgage Loans Held-for-Investment Balance at December 31, 2021 $ 1,001,825,294 Purchases and fundings 184,992,167 Proceeds from principal repayments
Accretion of purchase discount
Amortization of purchase premium (45,349) Balance at March 31, 2022 $ 1,077,516,319
The following table details the overall statistics of our loan portfolio in
Weighted Average Remaining Unpaid Principal Floating Rate Term Loan Type Balance Carrying Value Loan Count Loan % Coupon(1) (Years)(2)
March 31, 2022Loans held-for-investment Senior secured loans(3) $ 1,077,505,797 $ 1,077,516,31971 100.0 % 3.8 % 3.9 $ 1,077,505,797 $ 1,077,516,31971 100.0 % 3.8 % 3.9 24
Weighted Average Remaining Unpaid Principal Floating Rate Term Loan Type Balance Carrying Value Loan Count Loan % Coupon(1) (Years)(2)
December 31, 2021Loans held-for-investment Senior secured loans(3) $ 1,001,869,994 $ 1,001,825,29466 100.0 % 3.9 % 3.7 $ 1,001,869,994 $ 1,001,825,29466 100.0 % 3.9 % 3.7 (1) Weighted average coupon assumes applicable one-month LIBOR of 0.29% and 0.10% and 30-day Term SOFR of 0.24% and 0.00% as of March 31, 2022and December 31, 2021, respectively, inclusive of weighted average interest rate floors of 0.27% and 0.49%, respectively. As of March 31, 2022, 93.9% of the investments by total investment exposure earned a floating rate indexed to one-month USD LIBOR and 6.1% of the investments by total investment exposure earned a floating rate indexed to 30-day Term SOFR. As of December 31, 2021, 100% of the investments by total investment exposure earned a floating rate indexed to one-month LIBOR (2) Weighted average remaining term assumes all extension options are exercised by the borrower, provided, however, that our loans may be repaid prior to such date. (3) As of March 31, 2022, $998,667,789of the outstanding senior secured loans were held in VIEs and $78,848,530of the outstanding senior secured loans were held outside of VIEs. As of December 31, 2021, $974,025,294of the outstanding senior secured loans were held in VIEs and $27,800,000of the outstanding senior secured loans were held outside VIEs.
The table below presents additional information relating to the Company’s portfolio as at
Total Loan Current Max Remaining Loan # Form of Investment Origination Date Commitment(1) Principal Amount Location Property Type Coupon Term (Years) LTV(2) 1 Senior secured
December 16, 2021 $ 54,455,784 $ 51,375,000Daytona, FL Multi-Family 1mL + 3.1 4.8 71.7 % 2 Senior secured November 22, 2019 $ 39,500,000 $ 36,781,588 Virginia Beach, VAMulti-Family 1mL + 3.2 2.8 77.1 % 3 Senior secured June 28, 2021 $ 39,263,000 $ 34,690,000 Barrington, NJMulti-Family 1mL + 3.1 4.3 78.1 % 4 Senior secured November 2, 2021 $ 33,500,000 $ 33,500,000Warner Robbins, GA Multi-Family 1mL + 3.0 2.7 51.4 % 5 Senior secured June 8, 2021 $ 35,877,500 $ 33,360,000 Chattanooga, TNMulti-Family 1mL + 3.7 4.3 79.8 % 6 Senior secured June 8, 2021 $ 32,500,000 $ 30,576,666 Miami, FLMulti-Family 1mL + 3.2 4.3 74.3 % 7 Senior secured June 30, 2021 $ 32,250,000 $ 28,650,000 Porter, TXMulti-Family 1mL + 3.3 4.3 71.6 % 8 Senior secured May 20, 2021 $ 33,000,000 $ 27,803,800 Marietta, GAMulti-Family 1mL + 3.1 4.3 77.0 % 9 Senior secured April 22, 2021 $ 27,750,000 $ 27,750,000 Los Angeles, CAMulti-Family 1mL + 3.3 0.7 55.0 % 10 Senior secured June 7, 2021 $ 29,400,000 $ 26,400,000 San Antonio, TXMulti-Family 1mL + 3.4 4.3 80.0 % 11 Senior secured August 26, 2021 $ 27,268,000 $ 24,832,000 Clarkston, GAMulti-Family 1mL + 3.5 4.4 79.0 % 12 Senior secured November 15, 2021 $ 26,003,000 $ 24,330,000 El Paso, TXMulti-Family 1mL + 3.1 4.8 76.0 % 13 Senior secured October 18, 2021 $ 28,250,000 $ 23,348,000 Cherry Hill, NJMulti-Family 1mL + 3.0 4.7 72.4 % 14 Senior secured August 26, 2021 $ 23,370,000 $ 21,957,240 Union City, GAMulti-Family 1mL + 3.4 4.5 70.4 % 15 Senior secured November 16, 2021 $ 21,975,000 $ 20,960,000 Dallas, TXMulti-Family 1mL + 3.2 4.8 73.5 % 16 Senior secured August 31, 2021 $ 21,750,000 $ 20,700,000 Houston, TXMulti-Family 1mL + 3.3 4.5 74.2 % 17 Senior secured October 29, 2021 $ 20,500,000 $ 20,500,000 Knoxville, TNMulti-Family 1mL + 3.8 4.7 70.0 % 18 Senior secured June 30, 2021 $ 21,968,000 $ 20,188,700 Jacksonville, FLMulti-Family 1mL + 3.5 4.3 77.1 % 19 Senior secured October 13, 2017 $ 20,000,000 $ 19,648,818 Seattle, WASelf Storage 1mL + 3.6 2.7 46.5 % 20 Senior secured November 5, 2021 $ 20,965,000 $ 19,200,000 Orlando, FLMulti-Family 1mL + 3.0 4.7 78.1 % 25
21 Senior secured
February 11, 2022 $ 20,165,000 $ 18,599,480 Tampa, FLMulti-Family 1mS + 3.6 5.0 78.0 % 22 Senior secured November 23, 2021 $ 19,925,000 $ 18,400,000 Orange, NJMulti-Family 1mL + 3.2 4.8 78.0 % 23 Senior secured October 12, 2021 $ 17,500,000 $ 17,500,000 Atlanta, GAMulti-Family 1mL + 3.2 2.6 42.9 % 24 Senior secured July 8, 2021 $ 17,000,000 $ 17,000,000 Knoxville, TNMulti-Family 1mL + 4.0 4.4 69.7 % 25 Senior secured December 28, 2018 $ 24,123,000 $ 16,672,623 Austin, TXRetail 1mL + 4.1 0.8 60.5 % 26 Senior secured September 30, 2021 $ 17,583,000 $ 16,663,000 Hanahan, SCMulti-Family 1mL + 3.2 4.6 76.4 % 27 Senior secured February 1, 2022 $ 16,160,000 $ 15,400,000 San Antonio, TXMulti-Family 1mS + 3.5 4.9 79.8 % 28 Senior secured February 22, 2022 $ 19,241,527 $ 15,000,000 Philadelphia, PAMulti-Family 1mS + 3.8 5.0 80.0 % 29 Senior secured April 12, 2021 $ 17,000,000 $ 15,000,000 Cedar Park, TXMulti-Family 1mL + 3.8 4.2 66.7 % 30 Senior secured December 2, 2021 $ 16,250,000 $ 14,857,637 Colorado Springs, COMulti-Family 1mL + 3.0 4.8 72.5 % 31 Senior secured October 11, 2019 $ 17,000,000 $ 14,500,000 Pompano Beach, FLSelf Storage 1mL + 3.8 2.6 75.0 % 32 Senior secured December 1, 2021 $ 16,071,800 $ 14,080,000 Horn Lake, MSMulti-Family 1mL + 3.3 4.8 75.7 % 33 Senior secured November 3, 2021 $ 13,870,000 $ 13,720,000 Louisville, KYMulti-Family 1mL + 3.4 4.7 75.4 % 34 Senior secured October 14, 2021 $ 13,440,000 $ 13,440,000 Bridgeton, NJMulti-Family 1mL + 3.3 1.2 70.0 % 35 Senior secured May 28, 2021 $ 13,675,000 $ 13,332,734 Houston, TXMulti-Family 1mL + 3.4 2.3 73.8 % 36 Senior secured May 12, 2021 $ 13,930,000 $ 13,026,000 Fort Worth, TXMulti-Family 1mL + 3.4 4.3 74.9 % 37 Senior secured August 16, 2021 $ 15,886,000 $ 12,750,000 Columbus, OHMulti-Family 1mL + 3.7 4.5 75.0 % 38 Senior secured March 12, 2021 $ 13,703,000 $ 12,375,000 Mesa, AZMulti-Family 1mL + 3.6 4.1 75.0 % 39 Senior secured October 1, 2021 $ 13,775,000 $ 12,100,000 East Nashville, TNMulti-Family 1mL + 3.4 4.6 79.1 % 40 Senior secured July 23, 2018 $ 16,200,000 $ 11,748,199 Chicago, ILOffice 1mL + 3.8 1.2 72.7 % 41 Senior secured October 28, 2021 $ 12,250,000 $ 11,202,535 Tampa, FLMulti-Family 1mL + 3.0 4.7 75.7 % 42 Senior secured September 30, 2021 $ 11,300,000 $ 10,795,000 Clearfield, UTMulti-Family 1mL + 3.2 4.6 68.0 % 43 Senior secured April 23, 2021 $ 11,600,000 $ 10,497,000 Tualatin, ORMulti-Family 1mL + 3.2 4.2 73.9 % 44 Senior secured December 29, 2021 $ 11,000,000 $ 10,239,800 Phoenix, AZMulti-Family 1mL + 3.7 4.8 75.9 % 45 Senior secured December 2, 2021 $ 9,975,000 $ 9,975,000 Tomball, TXMulti-Family 1mL + 3.4 4.8 68.5 % 46 Senior secured November 23, 2021 $ 10,706,000 $ 9,856,000 Atlanta, GAMulti-Family 1mL + 3.4 4.8 79.5 % 47 Senior secured March 26, 2021 $ 9,623,000 $ 9,623,000 Alhambra, CAMulti-Family 1mL + 3.3 0.6 49.0 % 48 Senior secured January 14, 2022 $ 10,234,000 $ 9,609,250 Houston, TXMulti-Family 1mS + 3.6 4.9 78.8 % 49 Senior secured October 21, 2021 $ 11,500,000 $ 9,100,000 Madison, TNMulti-Family 1mL + 3.2 4.7 68.4 % 50 Senior secured November 30, 2021 $ 11,276,000 $ 8,400,000 Lindenwood, NJ Multi-Family 1mL + 3.6 4.8 76.4 % 51 Senior secured May 12, 2021 $ 8,950,000 $ 8,220,000 Lakeland, FLMulti-Family 1mL + 3.4 4.3 76.8 % 52 Senior secured April 7, 2021 $ 10,152,000 $ 7,963,794 Phoenix, AZMulti-Family 1mL + 3.6 4.2 69.5 % 53 Senior secured October 29, 2021 $ 9,000,000 $ 7,934,000 Riverside, MO Multi-Family 1mL + 3.4 4.7 76.6 % 26
-------------------------------------------------------------------------------- 54 Senior secured
March 12, 2018 $ 9,112,000 $ 7,912,000 Waco, TXMulti-Family 1mL + 4.8 1.1 72.9 % 55 Senior secured November 16, 2021 $ 7,680,000 $ 7,680,000 Cape Coral, FLMulti-Family 1mL + 3.3 2.8 79.2 % 56 Senior secured October 27, 2021 $ 9,300,000 $ 7,624,400 Ambler, PAMulti-Family 1mL + 3.3 4.7 79.9 % 57 Senior secured March 19, 2021 $ 8,348,000 $ 7,513,000 Glendora, CAMulti-Family 1mL + 3.6 4.1 72.2 % 58 Senior secured September 28, 2021 $ 8,125,000 $ 7,286,000 Chicago, ILMulti-Family 1mL + 3.7 4.6 75.9 % 59 Senior secured February 18, 2022 $ 7,800,000 $ 7,200,000 Drexel Hills, PA Multi-Family 1mS + 4.0 5.0 78.1 % 60 Senior secured December 30, 2021 $ 7,000,000 $ 7,000,000 New Haven, CTMulti-Family 1mL + 3.5 1.3 59.8 % 61 Senior secured March 31, 2021 $ 8,432,000 $ 6,893,000 Tucson, AZMulti-Family 1mL + 3.6 4.1 72.8 % 62 Senior secured July 1, 2021 $ 7,285,000 $ 6,290,000 Harker Heights, TXMulti-Family 1mL + 3.6 4.3 72.3 % 63 Senior secured August 28, 2019 $ 6,250,000 $ 6,054,427 Austin, TXMulti-Family 1mL + 3.3 2.5 69.9 % 64 Senior secured May 21, 2021 $ 7,172,000 $ 5,994,000 Youngtown, AZMulti-Family 1mL + 3.7 4.3 71.4 % 65 Senior secured October 26, 2021 $ 6,807,000 $ 5,812,000 Indianapolis, INMulti-Family 1mL + 3.9 4.7 77.1 % 66 Senior secured June 10, 2019 $ 6,000,000 $ 5,295,605 San Antonio, TXMulti-Family 1mL + 2.9 2.3 62.9 % 67 Senior secured April 30, 2021 $ 5,472,000 $ 5,285,500 Daytona Beach, FLMulti-Family 1mL + 3.7 4.2 77.4 % 68 Senior secured July 14, 2021 $ 6,048,000 $ 5,248,000 Birmingham, ALMulti-Family 1mL + 3.7 4.4 71.7 % 69 Senior secured November 19, 2021 $ 6,453,000 $ 5,040,000 Huntsville, ALMulti-Family 1mL + 3.8 4.8 78.8 % 70 Senior secured November 30, 2018 $ 4,446,000 $ 4,446,000 Anderson, SCMulti-Family 1mL + 3.3 0.7 53.7 % 71 Senior secured December 28, 2021 $ 52,800,000 $ 2,800,000 Houston, TXMulti-Family 1mL + 3.2 4.8 71.2 % (1) See Note 11 Commitments and Contingencies to our condensed 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 earn-out 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 the origination date.
Our loan portfolio is 100% performing, with no loan impairments, monetary 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 continued 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 in 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 2.1 and 2.3 as of
March 31, 2022and December 31, 2021, respectively. The decrease in average risk rating is primarily the result of commercial mortgage loans that paid off with a risk rating of "2" of $32.3 million, a risk rating of "3" of $69.0 millionand a risk rating of "4" of $8.0 million, offset by the purchase of commercial mortgage loans with a risk rating of "2" of $185.0 millionduring the three months ended March 31, 2022. Additionally, $47.9 millionof loans with a risk rating of "2" transitioned to a risk rating of "3", $96.2 millionof loans with a risk rating of "3" transitioned to a risk rating of "2" and $12.8 millionof loans transitioned from a risk rating of "3" to a risk rating of "4". The following table presents the principal balance and net book value based on our internal risk ratings: 27 --------------------------------------------------------------------------------
March 31, 2022 Risk Rating Number of Loans Unpaid Principal Balance Net Carrying Value 1 - $ - $ - 2 56 835,421,563 835,397,037 3 12 212,290,430 212,325,478 4 3 29,793,804 29,793,804 5 - - - 71 $ 1,077,505,797
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 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 of
March 31, 2022, the carrying amounts and outstanding principal balances of our collateralized loan obligations were $827.4 millionand $833.8 million, respectively. See Note 4 to our condensed consolidated financial statements included in this Quarterly Report on Form 10-Q for additional terms and details of our CLOs.
FOAC and our residential mortgage business
June 2013, we established FOAC as a Taxable REIT Subsidiary, or TRS, to increase the range of our investments in mortgage-related assets. Until August 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 one or more licensed sub-servicers since FOAC does not directly service any residential mortgage loans. As noted earlier, 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, or the securitizations we have sponsored to date. Pursuant to a Master Agreement dated June 15, 2016, as amended on August 29, 2016, January 30, 2017and June 27, 2018, among MAXEX, 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 via MAXEX Clearing LLC. To the extent that a seller approved by FOAC failed 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 on November 28, 2018. Pursuant to an Assumption Agreement dated December 31, 2018, among MAXEX Clearing LLCand FOAC, MAXEX Clearing LLCassumed 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 paid MAXEX Clearing LLC, as the replacement backstop provider, a fee of $426,770(the "Alternative Backstop Fee"). MAXEX Clearing LLCrepresented 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 millionand (b) minimum available liquidity equal to the greater of (x) $5.0 millionand (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 by MAXEX Clearing LLCwith the aforementioned criteria on a quarterly basis and if MAXEX Clearing LLCfails to satisfy such criteria, MAXEX Clearing LLCis required to deposit into an escrow account 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 Note 10 to our condensed consolidated financial statements included in this Quarterly Report on form 10-Q 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
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: 28 -------------------------------------------------------------------------------- 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: consistent 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
March 31, 2022, the Company has not recognized any impairments on its loans held-for-investment. We also assessed the remainder of the portfolio, considering the absence of delinquencies and current market conditions, and, have not recorded any allowance for loan losses.
The following tables present our capital allocated by type of investment to
This information represents non-GAAP financial measures within the meaning of Item 10(e) of Regulation S-K, as promulgated by the
SEC. 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. March 31, 2022 Commercial Mortgage Unrestricted Loans MSRs Cash(1) Total(2) Carrying Value $ 1,077,516,319
Secured Loan Obligations
(827,405,880) - - (827,405,880) Other(3) 1,997,600 - (4,132,529) (2,134,929) Restricted Cash 1,342,733 - - 1,342,733 Capital Allocated
$ 253,450,772 $ 699,379 $ 41,713,992 $ 295,864,143% Capital 85.7 % 0.2 % 14.1 % 100.0 % December 31, 2021 Commercial Mortgage Unrestricted Loans MSRs Cash(1) Total(2) Carrying Value $ 1,001,825,294$
Secured 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 % (1)Includes cash and cash equivalents. (2)Includes the carrying value of our Secured Term Loan. (3)Includes principal and interest receivable, investment related receivable, prepaid and other assets, interest payable, dividend payable and accrued expenses and other liabilities.
March 31, 2022, we consolidated the assets and liabilities of one CRE CLO, LFT CRE 2021- FL1, Ltd.Additionally, although the COVID-19 pandemic did not significantly impact our operating results for the period ended March 31, 2022, 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 factors, many of which are outside of our control. 29
-------------------------------------------------------------------------------- Further in
May 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. On August 23, 2021, the Incremental Secured Term Loan of $7.5 millionprovided for in the Third Amendment to the Credit and Guaranty Agreement was funded. Additionally, in February 2022, we issued 27,277,269 shares of common stock resulting in net proceeds of $81.1 million. 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 may take time and as such, may result in a temporary decline in net interest income. Additionally, as a result of the Series A Preferred Stock and common 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 to the reimbursable expense cap.
The table below presents our income statement information for the three months ended
Three Months Three Months Ended March 31, Ended March 31, 2022 2021 (unaudited) (unaudited) Revenues: Interest income: Commercial mortgage loans held-for-investment
$ 10,009,064 $ 7,470,117Cash and cash equivalents 4,855 4,300 Interest expense: Collateralized loan obligations (4,004,238) (2,185,242) Secured Term Loan (922,643) (771,865) Net interest income 5,087,038 4,517,310 Other income (loss): Unrealized gain (loss) on mortgage servicing rights 147,382 (20,455) Servicing income, net 67,181 124,156 Total other income (loss) 214,563 103,701 Expenses: Management and incentive fees 924,617 720,999 General and administrative expenses 852,732 680,314 Operating expenses reimbursable to Manager 390,710 312,454 Other operating expenses 76,190 34,753 Compensation expense 50,888 49,135 Total expenses 2,295,137 1,797,655 Net income before provision for income taxes 3,006,464 2,823,356 Benefit from (provision for) income taxes (51,665) (14,713) Net income 2,954,799 2,808,643 Dividends accrued to preferred stockholders (1,184,958) (3,708) Net income attributable to common stockholders $ 1,769,841 $ 2,804,935Earnings per share: Net income attributable to common stockholders (basic and diluted) $ 1,769,841 $ 2,804,935Weighted average number of shares of common stock outstanding 36,464,952 24,943,383 Basic and diluted income per share $ 0.05 $ 0.11Dividends declared per share of common stock $ 0.06 $ 0.09Net Income Summary For the three months ended March 31, 2022, our net income attributable to common stockholders was $1,769,841, or $0.05basic and diluted net income per average share, compared with net income of $2,804,935, or $0.11basic and diluted net income per average share, for the three months ended March 31, 2021. The principal drivers of this net income decline were an increase in total expenses from $1,797,655for the three months ended March 31, 2021to $2,295,137for the three months ended March 31, 2022and an increase in accrued preferred dividends of $3,708for the three months ended March 31, 2021to $1,184,958for the three months ended March 31, 2022, which more than offset an increase in net interest income from $4,517,310for the three months ended March 31, 2021to $5,087,038for the three months ended March 31, 2022and an increase in total other income from $103,701for the three months ended March 31, 2021to $214,563for the three months ended March 31, 2022.
Net interest income
30 -------------------------------------------------------------------------------- For the three months ended
March 31, 2022and the three months ended March 31, 2021, our net interest income was $5,087,038and $4,517,310, respectively. The increase was primarily due to (i) a $469.8 millionincrease in weighted-average principal of our loan portfolio; (ii) a 4bps increase in weighted-average floating rate of our loan portfolio and (iii) a 3bps decrease in weighted average spread for our CLO liabilities. This was offset by (i) a $388.1 millionincrease in weighted-average principal balance of our CLO liabilities; (ii) a decrease in exit/extension fees of $233 thousandfor our loan portfolio; (iii) a decrease of 124bps in weighted-average LIBOR/SOFR floors on our loan portfolio for the three months ended March 31, 2021compared to the corresponding period in 2020; (iv) a 14bps decrease in weighted-average spread on the loan portfolio for the three months ended March 31, 2022compared to the corresponding period in 2020, (v) a 6bps increase in weighted-average LIBOR for our CLO liabilities and (vi) an increase of $205 thousandin amortized debt issuance costs.
Other income (losses)
For the three months ended
March 31, 2022, our other income was $214,563. This gain was driven by net servicing income of 67,181 and net unrealized gains on mortgage servicing rights of $147,382as a result of increased interest rates in the period. For the three months ended March 31, 2021, our other income was $103,701. This gain was driven by net servicing income of $124,156, which more than offset the impact of net unrealized losses on mortgage servicing rights of $20,455..
The period-over-period increase in other income is primarily due to the change in unrealized gain on mortgage servicing fees due to higher interest rates in the period which reduced the CPR of the management portfolio.
For the three months ended
March 31, 2022, we incurred management and incentive fees of $924,617representing amounts payable to our Manager under our management agreement. We also incurred operating expenses of $1,370,520, of which $390,710was payable to our Manager and $979,810was payable directly by us.
For the three months ended
was payable to our manager and
The period-over-period increase in operating expenses primarily reflects an increase in management, accounting, administrative, audit and professional fees and expense reimbursement.
Impairment We review each loan classified as held-for-investment for impairment on a quarterly basis. For the three months ended
March 31, 2022and the three months ended March 31, 2021, 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 (benefit)
For the three months ended
March 31, 2022, the Company recognized a provision for income taxes of $51,665and for the three months ended March 31, 2021, the Company recognized a provision for income taxes in the amount of $14,713. The period-over-period increase in tax expense primarily reflects the change in gross deferred revenue at FOAC due to the change in unrealized gain 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 in
February 2022, by completing a transferable common stock rights offering issuing and selling 27,277,269 shares of common stock for net proceeds of approximately $81.1 millionand in May 2021by 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. On June 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 millionwere investment grade notes issued to third-party investors and $70 millionwere below investment-grade notes retained by us. On August 23, 2021we drew an additional $7.5 millionof our Secured Term Loan pursuant to the Third Amendment. As of March 31, 2022, our balance sheet included $47.8 millionof a secured term loan and $833.8 millionin collateralized loan financing, gross of discounts and debt issuance costs. Our secured term loan matures in January 2026and 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. 31
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 of
March 31, 2022, we had unrestricted cash and cash equivalents of $45.8 million, compared to $14.7 millionas of December 31, 2021. As of March 31, 2022, we had $47.8 millionin outstanding principal under our Senior Secured Term Loan, with a borrowing rate of 7.25%. As of March 31, 2022, the ratio of our recourse debt to equity was 0.2:1. As of March 31, 2022, we consolidated the assets and liabilities of LFT CRE 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 of March 31, 2022, the carrying value of these non-recourse liabilities aggregated to $827.4 million. As of March 31, 2022, our total debt to equity ratio was 3.5:1 on a GAAP basis.
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