LUMENT FINANCE TRUST, INC. 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 with Lument IM, while another affiliate ofORIX USA purchased an ownership stake of approximately 5.0% through a privately-placed stock issuance. OnFebruary 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 leveragingORIX USA's expansive originations, asset management and servicing platform.
Lument IM is an affiliate of Lument, a nationally recognized leader in multifamily and seniors housing and care finance. The Company leverages Lument's broad platform and significant 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 typically 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 tied to one-month term SOFR, previously to one-monthU.S. denominated LIBOR, and/or in the future potentially other 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 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
The year endedDecember 31, 2022 has been characterized by significant volatility in global markets, driven by heightened inflation, changes to fiscal and monetary policy, higher interest rates, slowing economic growth, currency fluctuations, labor shortages and challenges in the supply chain and geopolitical uncertainty. Inflation reached generational highs in many economies, prompting central banks to take monetary policy tightening actions that have and are likely continue to create headwinds to economic growth. The ongoing war inUkraine is also contributing to economic and geopolitical uncertainty. TheU.S. Federal Reserve has taken action to increase interest rates in order to control inflation which has created further uncertainty for the economy and our borrowers. Although our business model is such that rising interest rates will, all else being equal, correlate to increases in our net income, increases in interest rates may adversely affect our existing borrowers. Additionally, the anticipated continual rise in interest rates and unpredictable geopolitical landscape may cause further dislocation in the capital markets resulting in a continual reduction of available liquidity and an increase in borrowing costs. A lack of liquidity for a prolonged period of time could limit our ability to grow our business. It is difficult to predict the full impact of recent changes and any future changes in interest rates, inflation or its impact on the debt capital markets.
2022 Highlights
•Net income attributable to common stockholders of$5.1 million , or$0.11 per share of common stock, and Distributable Earnings of$9.2 million , or$0.19 per share of common stock, with common dividends declared of$12.5 million , or$0.24 per share of common stock. Distributable Earnings is a non-GAAP financial measure. For a definition of Distributable Earnings and a reconciliation of our Distributable Earnings to our net income attributable to common stockholders, see "Key Financial Measure and Indicators."
•Book value per share of common stock was
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•Acquired eleven loans with an initial unpaid principal balance of
•Acquired twelve loans with an initial unpaid principal balance of
•Originated five loans with an initial unpaid principal balance of
•On
•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 amended the maximum total net leverage covenant.
•Incurred a
Factors Impacting Our Operating Results
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. 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. Our operating results will also be affected by generalU.S. real estate fundamentals and the overallU.S. economic environment. 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. This year has been characterized by significant volatility in global markets, driven by investor concerns over inflation, rising interest rates, slowing economic growth and geopolitical uncertainty. While there is debate among economists as whether such factors, coupled with economic contraction in theU.S. in 2022, indicate that theU.S. has entered, or in the near term will enter a recession, it remains difficult to predict the full impact of the recent changes and any future changes in interest rates or inflation. 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. As ofDecember 31, 2022 , 99.9% of our investments by total investment exposure earned a floating rate of interest, of which 77.4% were indexed to one-month LIBOR and 22.6% 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/SOFR floor of 0.27% as ofDecember 31, 2022 . As ofDecember 31, 2022 , 99.0% of the loans in our commercial loan portfolio are structured with LIBOR/SOFR floors, none of which currently has a floor greater than the current spot interest rate. 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 ofDecember 31, 2022 , the weighted average spread of our commercial loan portfolio was 3.43%, 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. TheFederal Reserve maintained the federal funds target range at 0.0% to 0.25% for much of 2021, however, inMarch 2022 , theFederal Reserve approved a 0.25% rate increase and increased rates an additional six times during the year, raising the federal funds target range to 4.25% to 4.50%. OnFebruary 2, 2023 andMarch 22, 2023 theFederal Reserve approved its eighth and ninth rate increases, increasing the federal funds target range to 4.75% to 5.00%. TheFederal Reserve has indicated that they remain highly attentive to inflation risks and foresee potential for further increases in interest rates throughout 2023 and 2024. 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 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. InNovember 2022 , theFCA announced a public consultation regarding whether it should compel the IBA to continue publishing "synthetic" USD LIBOR settings fromJune 2023 to the end ofSeptember 2024 . 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. As ofDecember 31, 2022 , 77.4% of our commercial loans by principal balance and 100% of our collateralized loan obligations bear interest related to one-monthU.S. LIBOR. We expect to complete the process of converting our LIBOR-based loans and CLO liabilities to term SOFR during the second quarter of 2023 in advance of theJune 30, 2023 phase-out date for 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 33 -------------------------------------------------------------------------------- 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, 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 and Default 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, 2022 , the Company has identified one office loan as impaired and established an allowance for loan loss of$4.3 million for the year endedDecember 31, 2022 . 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. The anticipated continual rise in interest rates and unpredictable geopolitical landscape may cause a further dislocation in the capital markets resulting in a continual reduction of available liquidity and an increase in borrowing costs. A lack of liquidity for a prolonged period of time could limit our ability to grow our business. 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, 2022 , our aggregate unamortized purchase premium was$19,253 and our purchase discount was fully amortized, 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. 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 typically 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. 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 2023 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.
Key Financial Measure 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, 2022 , we recorded earnings per share of$0.02 , declared a quarterly common dividend of$0.06 per share, and reported$0.06 per share of Distributable Earnings. In addition, our book value per share was$3.50 per share. For the year endedDecember 31, 2022 , we recorded earnings per share of$0.11 , declared aggregate common dividends of$0.24 per share, and reported$0.19 per share of Distributable Earnings.
As further described below, Distributable Earnings is a measure that is not
prepared in accordance with accounting principles generally accepted in
Earnings Per Share and Dividends Declared
The following table sets forth the calculation of basic and diluted net income per share and dividends declared per share:
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Three Months
Ended Year Ended
December 31, December 31,
2022 2022 2021
Net income attributable to common stockholders $ 879,776 $ 5,123,660 $ 7,414,722
Weighted-average shares outstanding, basic and
diluted 52,231,152 48,342,347 24,945,824
Net income per share, basic and diluted $ 0.02 $ 0.11 $ 0.30
Dividends declared per share $ 0.06 $ 0.24 $ 0.36
Distributable Earnings
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 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
Ended Year Ended
December 31, December 31,
2022 2022 2021
Net income attributable to common stockholders $ 879,776 $ 5,123,660 $ 7,414,722
Unrealized gain (loss) on mortgage servicing
rights 22,251 (243,659) 356,772
Unrealized provision for loan losses 2,385,731 4,258,668 -
Purchase premium payoffs - - 150,990
Loss on extinguishment of debt - - 1,663,926
Recognized compensation expense related to
restricted common stock 3,433 15,980 15,608
Adjustment for (provision for) income taxes 31,728 11,088 77,894
Distributable Earnings $ 3,322,919 $ 9,165,737 $ 9,679,912
Weighted-average shares outstanding, basic and
diluted 52,231,152 48,342,347 24,945,824
Distributable Earnings per share, basic and
diluted $ 0.06 $ 0.19 $ 0.39
Book Value Per Share
The following table calculates our book value per share:
December 31, 2022 December 31, 2021 Total stockholders' equity $
242,901,997
(60,000,000) (60,000,000)
Total common stockholders' equity 182,901,997 109,276,000
Common stock outstanding 52,231,152 24,947,883
Book value per share $ 3.50 $ 4.38
As of December 31, 2022 , our common stockholders' equity was $182.9 million , and
our book value per common share was $3.50 on a basic and fully diluted basis.
Our equity increased by $73.6 million compared to our stockholders' equity as of
December 31, 2021 primarily as a result of the closing of the
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transferable rights offering generating net proceeds of approximately
Investment Portfolio
Commercial Mortgage Loans
As ofDecember 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 loan activity by unpaid principal balance:
Year Ended December 31, 2022
Balance at December 31, 2021 $ 1,001,825,294
Purchases and advances 345,158,577
Proceeds from principal repayments (270,926,723)
Accretion of purchase discount $ 125,098
Amortization of purchase discount $ (61,144)
Accretion of deferred loan fees 27,084
Provision for loan losses (4,258,668)
Balance at December 31, 2022 $ 1,071,889,518
The following table details overall statistics for our loan portfolio as of
Weighted Average
Unpaid Principal Floating Rate
Loan Type Balance Carrying Value Loan Count Loan % Coupon(1) Term (Years)(2) LTV(3)
December 31, 2022
Loans held-for-investment
Senior secured loans(4) $ 1,076,865,099 $ 1,076,148,186 71 100.0 % 7.6 % 3.5 71.5 %
Allowance for loan losses N/A $ (4,258,668)
$ 1,076,865,099 $ 1,071,889,518 71 100.0 % 7.6 % 3.5 71.5 %
Weighted Average
Unpaid Principal Floating Rate Loan
Loan Type Balance Carrying Value Loan Count % Coupon(1) Life (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 71 100.0 % 3.9 % 3.7 71.2 %
(1) Weighted average coupon assumes applicable one-month LIBOR of 4.18% and
0.10% as of December 31, 2022 and December 31, 2021 , respectively and 30-day
Term SOFR of 4.19% as of December 31, 2022 inclusive of weighted average
interest rate floors of 0.27% and 0.49%, respectively. As of December 31, 2022 ,
77.4% of the investments by total exposure earned a floating rate indexed to
one-month LIBOR and 22.6% 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 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, 2022 , $996,511,403 of the outstanding senior secured
loans were held in VIEs and $75,378,115 of the outstanding senior secured loans
were held outside VIEs. 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.
The table below sets forth additional information relating to the Company's
portfolio as of
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Max RemainingLoan # Form of Investment Origination Date Total Loan Commitment(1) Current Principal Amount
Location Property Type Coupon Term (Years) LTV(2)
1 Senior secured December 16, 2021 54,455,784 51,375,000 Daytona, FL Multi-Family 1mL + 3.1 4.1 71.7%
2 Senior secured November 22, 2019 42,600,000 36,781,588 Virginia Beach, VA Multi-Family 1mS + 3.3 2.0 77.1%
3 Senior secured June 28, 2021 39,263,000 34,690,000 Barrington, NJ Multi-Family 1mL + 3.1 3.6 78.1%
4 Senior secured November 2, 2021 33,500,000 33,500,000 Warner Robins, GA Multi-Family 1mL + 3.0 1.9 51.4%
5 Senior secured June 8, 2021 35,877,500 33,360,000 Chattanooga, TN Multi-Family 1mL + 3.7 3.6 79.8%
6 Senior secured June 8, 2021 32,500,000 30,576,666 Miami, FL Multi-Family 1mL + 3.2 3.6 74.3%
7 Senior secured May 20, 2021 33,000,000 27,803,800 Marietta, GA Multi-Family 1mL + 3.1 3.5 77.0%
8 Senior secured June 7, 2021 29,400,000 26,400,000 San Antonio, TX Multi-Family 1mL + 3.4 3.6 80.0%
9 Senior secured August 26, 2021 27,268,000 24,832,000 Clarkston, GA Multi-Family 1mL + 3.5 3.7 79.0%
10 Senior secured November 15, 2021 26,003,000 24,330,000 El Paso, TX Multi-Family 1mL + 3.1 4.0 76.0%
11 Senior secured October 18, 2021 28,250,000 23,348,000 Cherry Hill, NJ Multi-Family 1mL + 3.0 3.9 72.4%
12 Senior secured August 26, 2021 23,370,000 21,957,240 Union City, GA Multi-Family 1mL + 3.4 3.8 70.4%
13 Senior secured November 16, 2021 21,975,000 20,960,000 Dallas, TX Multi-Family 1mL + 3.2 4.0 73.5%
14 Senior secured August 31, 2021 21,750,000 20,700,000 Houston, TX Multi-Family 1mL + 3.3 3.8 74.2%
15 Senior secured October 29, 2021 20,500,000 20,500,000 Knoxville, TN Multi-Family 1mL + 3.8 3.9 70.0%
16 Senior secured November 29, 2022 21,283,348 20,360,000 Glendale, WI Healthcare 1mS + 4.0 4.0 45.0%
17 Senior secured June 30, 2021 21,968,000 20,188,700 Jacksonville, FL Multi-Family 1mL + 3.5 3.6 77.1%
18 Senior secured October 13, 2017 20,000,000 19,648,818 Seattle, WA Self Storage 1mL + 3.6 1.9 46.5%
19 Senior secured November 5, 2021 20,965,000 19,200,000 Orlando, FL Multi-Family 1mL + 3.0 3.9 78.1%
20 Senior secured November 21, 2022 21,135,000 18,920,000 Houston, TX Healthcare 1mS + 4.0 4.0 67.0%
21 Senior secured February 11, 2022 20,165,000 18,599,480 Tampa, FL Multi-Family 1mS + 3.6 4.3 78.0%
22 Senior secured November 23, 2021 19,925,000 18,400,000 Orange, NJ Multi-Family 1mL + 3.2 4.0 78.0%
23 Senior secured October 12, 2021 17,500,000 17,500,000 Atlanta, GA Multi-Family 1mL + 3.2 1.8 42.9%
24 Senior secured July 8, 2021 17,000,000 17,000,000 Knoxville, TN Multi-Family 1mL + 4.0 1.7 69.7%
25 Senior secured November 10, 2022 18,590,000 16,690,000 Austin, TX Healthcare 1mS + 4.0 4.0 65.0%
26 Senior secured December 28, 2018 24,123,000 16,672,623 Austin, TX Retail 1mL + 4.6 0.1 60.5%
27 Senior secured September 30, 2021 17,583,000 16,663,000 Hanahan, SC Multi-Family 1mL + 3.2 3.8 76.4%
28 Senior secured February 1, 2022 16,160,000 15,400,000 San Antonio, TX Multi-Family 1mS + 3.5 4.2 79.8%
29 Senior secured April 12, 2021 17,000,000 15,000,000 Cedar Park, TX Multi-Family 1mL + 3.8 3.4 66.7%
30 Senior secured February 22, 2022 18,241,527 15,000,000 Philadelphia, PA Multi-Family 1mS + 3.8 4.3 80.0%
31 Senior secured December 2, 2021 16,250,000 14,857,637 Colorado Springs, CO Multi-Family 1mL + 3.0 4.0 72.5%
32 Senior secured December 1, 2021 16,071,800 14,080,000 Horn Lake, MS Multi-Family 1mL + 3.3 4.0 75.7%
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33 Senior securedNovember 21, 2022 15,735,000 14,030,000Southlake, TX Healthcare 1mS + 4.0 4.0 48.0% 34 Senior securedNovember 3, 2021 13,870,000 13,720,000Louisville, KY Multi-Family 1mL + 3.4 3.9 75.4% 35 Senior securedJune 15, 2022 15,371,600 13,575,000Denton, TX Multi-Family 1mS + 3.9 4.6 73.0% 36 Senior securedMay 28, 2021 13,675,000 13,332,734Houston, TX Multi-Family 1mL + 3.4 1.5 73.8% 37 Senior securedMay 26, 2022 17,500,000 13,300,000Brooklyn, NY Multi-Family 1mS + 3.8 2.5 64.3% 38 Senior securedMay 12, 2021 13,930,000 13,026,000Fort Worth, TX Multi-Family 1mL + 3.4 3.5 74.9% 39 Senior securedAugust 16, 2021 15,886,000 12,750,000Columbus, OH Multi-Family 1mL + 3.7 3.8 75.0% 40 Senior securedDecember 13, 2021 15,656,650 12,600,000Evansville, IN Multi-Family 1mL + 3.3 4.1 74.3% 41 Senior securedOctober 1, 2021 13,775,000 12,100,000East Nashville, TN Multi-Family 1mL + 3.4 3.8 79.1% 42 Senior securedJune 28, 2022 12,880,000 11,470,000Colorado Springs, CO Multi-Family 1mS + 3.9 4.6 73.1% 43 Senior securedOctober 28, 2021 12,250,000 11,202,535Tampa, FL Multi-Family 1mL + 3.0 3.9 75.7% 44 Senior securedSeptember 30, 2021 11,300,000 10,795,000Clearfield, UT Multi-Family 1mL + 3.2 3.8 68.0% 45 Senior securedApril 23, 2021 11,600,000 10,497,000Tualatin, OR Multi-Family 1mL + 3.2 3.4 73.9% 46 Senior securedJuly 23, 2018 16,200,000 10,258,668Chicago, IL Office 1mL + 3.8 0.7 72.7% 47 Senior securedDecember 29, 2021 11,000,000 10,239,800Phoenix, AZ Multi-Family 1mL + 3.7 4.1 75.9% 48 Senior securedDecember 2, 2021 9,975,000 9,975,000Tomball, TX Multi-Family 1mL + 3.4 4.0 68.5% 49 Senior securedNovember 23, 2021 10,706,000 9,856,000Atlanta, GA Multi-Family 1mL + 3.4 4.0 79.5% 50 Senior securedJanuary 14, 2022 10,234,000 9,609,250Houston, TX Multi-Family 1mS + 3.6 4.2 78.8% 51 Senior securedOctober 21, 2021 11,500,000 9,100,000Madison, TN Multi-Family 1mL + 3.2 3.9 68.4% 52 Senior securedNovember 30, 2021 11,276,000 8,400,000Lindenwood , NJ Multi-Family 1mL + 3.6 4.0 76.4% 53 Senior securedMay 12, 2021 8,950,000 8,220,000Lakeland, FL Multi-Family 1mL + 3.4 3.5 76.8% 54 Senior securedJune 22, 2022 9,772,000 8,175,500Des Moines, IA Multi-Family 1mS + 4.0 4.6 72.0% 55 Senior securedApril 7, 2021 10,152,000 7,963,794Phoenix, AZ Multi-Family 1mL + 3.6 3.4 69.5% 56 Senior securedJune 24, 2022 7,934,160 7,934,160 Monks Corner, SC Multi-Family 1mS + 4.2 4.6 67.8% 57 Senior securedOctober 29, 2021 9,000,000 7,934,000Riverside , MO Multi-Family 1mL + 3.4 3.9 76.6% 58 Senior securedNovember 16, 2021 7,680,000 7,680,000Cape Coral, FL Multi-Family 1mL + 3.3 2.0 79.2% 59 Senior securedSeptember 28, 2021 8,125,000 7,286,000Chicago, IL Multi-Family 1mL + 3.7 3.8 75.9% 60 Senior securedFebruary 18, 2022 7,800,000 7,200,000Drexel Hills , PA Multi-Family 1mS + 4.0 4.3 78.1% 61 Senior securedDecember 19, 2022 6,325,000 6,325,000Asheville, NC Multi-Family 1mS + 3.8 2.6 41.1% 62 Senior securedJuly 1, 2021 7,285,000 6,290,000Harker Heights, TX Multi-Family 1mL + 3.6 3.6 72.3% 63 Senior securedApril 27, 2022 55,220,000 6,000,000North Brunswick, NJ Multi-Family 1mS + 3.4 4.4 79.9% 64 Senior securedMay 21, 2021 7,172,000 5,994,000Youngtown, AZ Multi-Family 1mL + 3.7 3.5 71.4% 65 Senior securedOctober 26, 2021 6,807,000 5,812,000Indianapolis, IN Multi-Family 1mL + 3.9 3.9 77.1% 38
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66 Senior securedJune 10, 2019 6,000,000 5,295,605San Antonio, TX Multi-Family 1mL + 2.9 1.6 62.9% 67 Senior securedApril 30, 2021 5,472,000 5,285,500Daytona Beach, FL Multi-Family 1mL + 3.7 3.4 77.4% 68 Senior securedDecember 13, 2021 6,799,000 5,250,000Evansville, IN Multi-Family 1mL + 3.3 4.1 73.9% 69 Senior securedJuly 14, 2021 6,048,000 5,248,000Birmingham, AL Multi-Family 1mL + 3.7 3.7 71.7% 70 Senior securedNovember 19, 2021 6,453,000 5,040,000Huntsville, AL Multi-Family 1mL + 3.8 4.0 78.8% 71 Senior securedDecember 28, 2021 52,800,000 2,800,000Houston, TX Multi-Family 1mS + 3.3 4.1 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. During the period endedDecember 31, 2022 , management identified one loan, collateralized by an office building, with an unpaid principal value of$10.3 million as impaired, reflecting a decline in collateral value attributable to (i) recent and near term vacancies at the property; (ii) new information available during the year endedDecember 31, 2022 regarding the addition of office space supply that will increase the submarket vacancy rate in the local market and (iii) declining market conditions. As ofAugust 8, 2022 , this loan has been placed in maturity default. We entered into a forbearance agreement with the borrower extending the maturity date toDecember 2022 to allow the borrower more time to market and sell the property, however the borrower was unable to execute a sale in this timeframe. Subsequent to theDecember 2022 maturity, the loan paid off generating net proceeds of approximately$6 million . Based on this review, a reserve of$4.3 million was recorded for this impaired loan in the year endedDecember 31, 2022 . Additionally, this loan was placed on non-accrual as result of the impaired loan classification, however, the borrower remained current on debt service payments throughDecember 31, 2022 .
During the period ended
We maintain strong relationships with our borrowers and utilized those relationships to address potential impacts on loans secured by properties experiencing cash flow pressure. All of our loans are current with respect to principal and interest, other than the loans discussed above, however, we will continue to engage in discussions with them should these difficulties arrive. We have not entered into any forbearance agreements or loan modifications to date, other than the forbearance agreement discussed above. However, 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. The average risk rating of the portfolio has increased during the year endedDecember 31, 2022 . The change in underlying risk rating consisted of loans that paid off with a risk rating of "2" of$144.6 million , a risk rating of "3" of$103.5 million and a risk rating of "4" of$9.5 million , offset by purchases of commercial mortgage loans with a risk rating of "2" of$85.9 million , a risk rating of "3" of$231.7 million and a risk rating of "4" of$15.0 million during the year endedDecember 31, 2022 . Additionally,$437.0 million of loans with a risk rating of "2" transitioned to a risk rating of "3",$32.4 million of loans with a risk rating of "2" transitioned to a risk rating of "4",$47.7 million of loans with a risk rating of "3" transitioned to a risk rating of "2",$12.8 million of loans transitioned from a risk rating of "3" to a risk rating of "5",$5.3 million of loans transitioned from a risk rating of "4" to a risk rating of "3", and a loan with an unpaid principal balance of$10.3 million transitioned from a risk rating of "4" to a risk rating of "5". The following table presents the principal balance and net book value based on our internal risk ratings: December 31, 2022 Amortized Cost by Year of Origination Risk Rating Number of Loans Outstanding Principal 2022 2021 2019 2018 2017 1 - $ - - - - - - 2 11 153,933,750 85,198,084 67,999,500 - - - 3 55 852,474,681 101,654,140 672,421,907 42,077,193 16,672,623 19,668,071 4 3 47,448,000 15,000,000 32,448,000 - - - 5 2 23,008,668 - 12,750,000 - 6,000,000 - 71 1,076,865,099 201,852,224 785,619,407 42,077,193 22,672,623 19,668,071
Collateralized 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, 2022 , the carrying amounts and outstanding principal balances of our collateralized loan obligations were$803.3 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. 39 --------------------------------------------------------------------------------
FOAC and Changes to Our Residential Mortgage Loan 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.
Critical 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 Mortgage Loans 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 on a straight line basis approximating 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 ofDecember 31, 2022 , the Company held two loans placed on non-accrual status where interest income is accounted for on a cash basis. 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. Impaired loans are individually evaluated based on the Company's quarterly assessment of each loan and assignment of a risk rating. Impairment occurs when the Company determines that the facts and 40 -------------------------------------------------------------------------------- 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, all of which are deemed 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. As ofDecember 31, 2022 , the Company identified its sole office loan collateralized by an office building inChicago , as impaired and established an allowance of$4.3 million for the year endedDecember 31, 2022 . See Note 3 for further detail. 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 ofDecember 31, 2022 , the Company has not recognized any additional impairments on its loans held-for-investment, other than the loan noted above. 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.
Current Expected Credit Losses
InJune 2016 , theFinancial Accounting Standards Board , or FASB, issued ASU 2013-16 "Financial Instruments - Credit Losses - Measurement of Credit Losses on Financial Instruments (Topic 326)," or ASU 2016-13. ASU 2016-13 significantly changes how entities will measure credit losses for most financial assets and certain other instruments that are not measured at fair value through net income. ASU 2016-13 will replace the incurred loss model under existing guidance with a current expected credit loss, or CECL, model for instruments measure at amortized cost, and require entities to record allowances for available-for-sale debt securities rather than reduce the carrying amount, as they do under the other-than-temporary impairment model. It also simplifies the accounting model for purchased credit-impaired debt securities and loan. ASU 2016-13 is effective for fiscal years beginning afterDecember 15, 2022 and is to be adopted through a cumulative-effect adjustment to retained earnings as ofJanuary 1, 2023 . The CECL reserve required under ASU 2016-13 is a valuation account that is deducted from the related loans' and debt securities' amortized cost basis on our consolidated balance sheets, and which will reduce our total stockholders' equity. The initial CECL reserve recorded onJanuary 1, 2023 will be reflected as a direct charge to retained earnings; however future changes to CECL reserve will be recognized through net income on our consolidated statements of operations. While ASU 2016-13 does not require any particular method for determining the CECL allowance, it does specify the allowance should be based on relevant information about past events, including historical loss experience, current portfolio and market conditions, and reasonable and supportable forecasts for the duration of each respective loan. In addition, other than a few narrow exceptions, ASU 2016-13 requires that all financial instruments subject to the CECL model have some amount of reserve to reflect the GAAP principal underlying the CECL model that all loans, debt securities, and similar assets have some inherent risk of loss, regardless of credit quality, subordinate capital, or other mitigating factors. In the absence of any Company history of valuation reserves or realized loan losses since our inception in 2013, other than one office loan, the Company elected to utilize a widely-used analytical model incorporating a loss-given-default methodology and loan performance data for over 100,000 commercial real estate loans dating back to 1998. The Company expects to utilize this data set, or variants of it, unless the Company develops its own history of realized losses. The Company selected for use in its CECL estimate a weighted macroeconomic forecast that includes baseline, optimistic and pessimistic scenarios during the reasonable forecast period. The Company determined the key variables driving its CECL loss estimate are debt service coverage ratio and LTV ratio. Other notable variables include property type, property location and loan vintage. Upon adoption of ASU 2016-13 onJanuary 1, 2023 , the Company expects that, based on current expectations of future economic conditions, its general allowance for credit losses on loans held for investment, including future loan funding commitments, will be between$3.0 million and$4.025633 million , or 0.30% and 0.40% of the Company's total loan commitment balance of$1.1 billion as ofDecember 31, 2022 . The Company currently has$4.3 million in specific reserves recorded in its consolidated financial statements.
See Note 2 to our consolidated financial statements for the complete listing of our significant accounting policies.
Capital Allocation
The following tables set forth our allocated capital by investment type at
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, 2022 Commercial Mortgage Loans MSRs Unrestricted Cash(1) Total(2) Market Value 1,071,889,518 795,656 43,858,515
1,116,543,689
Collateralized Loan Obligations (829,310,498) - - (829,310,498)
Other(3) 3,533,345 - (4,301,847) (768,502)
Restricted Cash 3,507,850 - - 3,507,850
Capital Allocated 249,620,215 795,656 39,556,668 289,972,539
% Capital 86.1 % 0.3 % 13.6 % 100.0 %
41--------------------------------------------------------------------------------
December 31, 2021
Commercial Mortgage Unrestricted
Loans MSRs Cash(1) Total(2)
Market Value $ 1,001,825,294
(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, prepaid and other assets, interest
payable, dividends payable and accrued expenses and other liabilities.
Results of Operations
As ofDecember 31, 2022 , 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, 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 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. Additionally, inFebruary 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 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 Consolidated Statement of
Operations for the years ended
42
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Year Ended
December 31,
2022 2021
Revenues:
Interest income:
Commercial mortgage loans held-for-investment 56,610,324 36,162,050
Cash and cash equivalents 74,676 28,779
Interest expense:
Collateralized loan obligations (29,055,324) (12,178,545)
Secured term loan (3,754,872) (3,333,536)
Net interest income 23,874,804 20,678,748
Other income:
Provision for loan losses (4,258,668) -
Realized loss on mortgage servicing rights - (10,910)
Change in unrealized gain (loss) on mortgage servicing rights 243,659 (356,772)
Loss on extinguishment of debt - (1,663,926)
Servicing income, net 347,838 398,939
Total other (loss) (3,667,171) (1,632,669)
Expenses:
Management fee 4,197,819 3,041,600
General and administrative expenses 3,467,653 2,879,655
Operating expenses reimbursable to Manager 2,116,636 2,038,130
Other operating expenses 309,797 280,970
Compensation expense 240,980 200,608
Total expenses 10,332,885 8,440,963
Net income before provision for income taxes 9,874,748 10,605,116
Benefit from income taxes (11,088) (77,894)
Net income 9,863,660 10,527,222
Dividends to preferred stockholders (4,740,000) (3,112,500)
Net income attributable to common stockholders $ 5,123,660 $ 7,414,722
Earnings per share:
Net income attributable to common stockholders (basic and diluted) $ 5,123,660 $ 7,414,722
Weighted average number of shares of common stock outstanding 48,342,347 24,945,824
Basic and diluted income per share $ 0.11 $ 0.30
Dividends declared per share of common stock $ 0.24 $ 0.36
Net Income Summary
For the year ended December 31, 2022 , our net income attributable to common
stockholders was $5,123,660 or $0.11 basic and diluted net income per average
share, compared with net income of $7,414,722 or $0.30 basic and diluted net
loss per share, for the year ended December 31, 2021 . The principal drivers of
this net income variance were an increase in total expenses from $8,440,963 for
the year ended December 31, 2021 to $10,332,885 for the year ended December 31,
2022 , an increase total other loss from $1,632,669 for the year ended
December 31, 2021 to $3,667,171 for the year ended December 31, 2022 , and an
increase in preferred dividends from $3,112,500 for the year ended December 31,
2021 to $4,740,000 for the year ended December 31, 2022 , which more than offset
an increase in net interest income from $20,678,748 for the year ended
December 31, 2021 to $23,874,804 for the year ended December 31, 2022 .
Net Interest Income
For the years endedDecember 31, 2022 andDecember 31, 2021 , our net interest income was$23,874,804 and$20,678,748 , respectively. The increase was primarily due to (i) a$306.1 million increase in weighted-average principal balance of our CLO loan portfolio; (ii) a 160bps increase in weighted-average floating rate of our loan portfolio and (iii) a 2bps decrease in weighted-average spread for our CLO liabilities. This was offset by (i) a$184.0 million increase in weighted-average principal balance of our CLO liabilities; (ii) a decrease in exit/extension/prepayment fees of$2.5 million for our loan portfolio; (iii) a decrease of 82bps in weighted-average LIBOR/SOFR floors on our CLO loan portfolio for the year-endedDecember 31, 2022 compared to the corresponding period in 2021; (iv) a 14bps decrease in weighted-average spread on the loan portfolio for the year endedDecember 31, 2022 compared to the corresponding period in 2021; (v) a 161bps increase in weighted-average LIBOR for our CLO liabilities and (vi) an increase of$0.5 million in amortized debt issuance costs. As disclosed above, we experienced a decrease of$2.5 million in exit/extension/prepayment fees for the year endedDecember 31, 2022 . The primary driver of this change was attributed to exit fees. For the year endedDecember 31, 2022 , we experienced loan payoffs on 12 loans with net principal balances of$133.1 million which generated exit fees of$1.3 million included in interest income and 9 loans with net principal balances of$128.9 million which waived exit fees of$1.2 million resulting in a reduction to expense reimbursement of$0.6 million included in operating expenses reimbursable to Manager. For the year endedDecember 31, 2021 , we experienced loan payoffs on 25 loans with net principal balances of$430.2 million which generated exit fees of$4.0 43 -------------------------------------------------------------------------------- million included in interest income and 5 loans with net principal balances of$51.1 million which waived exit fees of$0.6 million resulting in a reduction to expense reimbursement of$0.3 million included in operating expenses reimbursable to Manager.
Other (Loss)
For the year endedDecember 31, 2022 , we incurred a loss of$3,667,171 . This loss was driven by allowance for loan losses of$4,258,668 which more than offset the impact of net unrealized gains on mortgage servicing rights of$243,659 as a result of increased interest rates in the period and net mortgage servicing income of$347,838 . For the year endedDecember 31, 2021 , we incurred a loss of$1,632,669 . This loss was primarily 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 . The year-over-year increase in other loss was primarily due to the loss on extinguishment of debt from the unwind of Hunt CRE 2018-FL2, the allowance for loan loss taken in 2022 and the change in unrealized gain on mortgage servicing rights as a result of increased interest rates in the period reducing the CPR of the servicing portfolio. Expenses
We incurred management and incentive fees of
For the year endedDecember 31, 2021 , we incurred management and incentive fees of$3,041,600 representing amounts payable to our Manager under our management agreement. We also incurred operating expenses of$5,399,363 , of which$2,038,130 was payable to our Manager and$3,361,233 was payable to third parties.
The year-over-year increase in expenses primarily reflects an increase in management, accounting, administration, audit, CLO, compensation, legal, listing and professional fees and expense reimbursement.
Income Tax Expense
For the year endedDecember 31, 2022 the Company recognized a provision for income taxes in the amount of$11,088 and for the year endedDecember 31, 2021 , the Company recognized a provision for income taxes in the amount of$77,894 . The year-over-year decrease in tax expense primarily reflects the change in gross deferred revenue at FOAC due to the change in unrealized loss on mortgage servicing rights.
Liquidity 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 inFebruary 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 million and 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. As ofDecember 31, 2022 , 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. The anticipated continual rise in interest rates and unpredictable geopolitical landscape may cause a further dislocation in the capital markets resulting in a continual reduction of available liquidity and an increase in borrowing costs. A lack of liquidity for a prolonged period of time could limit our ability to grow our business. 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. 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, 2022 , we had unrestricted cash and cash equivalents of$43.9 million , compared to$14.7 million as ofDecember 31, 2021 . As ofDecember 31, 2022 , we had$47.8 million in outstanding principal under our Senior Secured Term Loan, with a borrowing rate of 7.25%. As ofDecember 31, 2022 , the ratio of our recourse debt to our equity was 0.2:1. 44 -------------------------------------------------------------------------------- As ofDecember 31, 2022 , 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, 2022 , the carrying value of these non-recourse liabilities aggregated to$829.3 million . As ofDecember 31, 2022 , our total debt-to-equity ratio was 3.6:1 on a GAAP basis.
Cash Flows
The following table sets forth changes in cash, cash equivalents and restricted
cash for the years ended
For the
years ended
2022 2021
Cash Flows From Operating Activities 16,289,054 13,846,947
Cash Flows From Investing Activities (51,831,854) (477,291,621)
Cash Flows From Financing Activities 64,630,113 412,348,370
Net Increase (Decrease) in Cash, Cash Equivalents
and Restricted Cash $
29,087,313
During the year endedDecember 31, 2022 , cash, cash equivalents and restricted cash increased by$29.1 million and for the year endedDecember 31, 2021 , cash, cash equivalents and restricted cash decreased by$51.1 million .
Operating Activities
For the years endedDecember 31, 2022 andDecember 31, 2021 , net cash provided by operating activities totaled$16.3 million and$13.8 million , respectively. For the year endedDecember 31, 2022 , our cash flows from operating activities were primarily driven by$26.1 million of interest received from the junior retained notes and preferred shares of LFT 2021-FL1, Ltd. , a VIE we consolidated,$3.3 million of interest received from our senior secured loans held outside the VIE we consolidate and$0.3 million of cash received from mortgage servicing rights exceeding cash interest expense paid on our Secured Term Loan of$3.5 million , management fees of$4.2 million , expense reimbursements of$2.3 million and other operating expenditures of$3.5 million . 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 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 reimbursement of$1.7 million and other operating expenditures of$3.4 million .
Investing Activities
For the year endedDecember 31, 2022 , net cash used in investing activities totaled$51.8 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, 2021 net cash provided by investing activities totaled$477.3 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, 2021 . Financing Activities For the year endedDecember 31, 2022 , net cash provided by financing activities totaled$64.6 million and primarily related to proceeds from issuance of common stock of$81.1 million , which more than offset payments of common and preferred dividends of$16.4 million payment of debt issuance costs of$0.1 million . For the year endedDecember 31, 2021 , net cash used in 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 .
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. 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, 2022 , 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, 2022 , we had not guaranteed any obligations of unconsolidated entities or entered into any commitment or intent to provide funding to any such entities. 45
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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, 2022 , 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, 2022 , we announced that our board of directors had declared a cash dividend rate for the fourth quarter of 2022 of$0.06 per share of common stock. Additionally, onMarch 16, 2023 , we announced that our board of directors had declared a cash dividend for the first quarter of 2023 of$0.06 per share of common stock.
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