LUMENT FINANCE TRUST: MANAGEMENT REPORT AND ANALYSIS OF THE FINANCIAL POSITION AND OPERATING RESULTS (Form 10-K)
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.
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 OREC Investment Management, LLCdoing business as Lument Investment Management(the "Manager" or "Lument IM"), while another affiliate of ORIX USApurchased an ownership stake of approximately 5.0% through a privately-placed stock issuance. The transactions are expected to enhance the scale of LFT and generate shareholder value through leveraging ORIX USA'sexpansive originations, asset management and servicing platform.
Lument IM is a subsidiary of Lument, a nationally recognized leader in the financing of housing and care for the elderly and multi-family. The company leverages Lument’s broad platform and significant expertise when creating 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 CLOs. We may utilize warehouse repurchase agreements or other forms of financing in the future. Our primary sources of income are net interest from our investment portfolio and non-interest income from our mortgage loan-related activities. Net interest income represents the interest income we earn on investments less the expense of funding these investments.
Our investments generally have the following characteristics:
•Sponsors with experience in particular real estate sectors and geographic markets; •Located in
U.S.markets with multiple demand drivers, such as growth in employment and household formation; •Fully funded principal balance greater than $5 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 U.S.denominated LIBOR or any index replacement; •Three-year term with two one-year extension options. We believe that our current investment strategy provides significant opportunities to achieve attractive risk-adjusted returns for our stockholders over time. However, to capitalize on the investment opportunities at different points in the economic and real estate investment cycle, we may modify or expand our investment strategy. We believe that the flexibility of our strategy, which is supported by significant CRE experience of Lument's investment team, and the extensive resources 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 ("TRS"), Five Oaks Acquisition Corp.("FOAC").
December 31, 2020, there is an ongoing global outbreak of a novel coronavirus, or COVID-19. On March 11, 2020, the WHO declared COVID-19 a global pandemic, and numerous countries, including the United States, declared national emergencies with respect to COVID-19. The United Statesand other countries reacted to the COVID-19 outbreak with unprecedented government intervention, including interest rate cuts and economic stimulus. The global impact of the outbreak rapidly evolved (and continues to do so), and many countries reacted by instituting, or strongly encouraging, quarantines and restrictions on travel, closing financial markets and/or restricting trading, limiting operations of non-essential offices, retail centers, hotels, and other businesses, and taking other restrictive measures to help slow the spread of COVID-19. Businesses also implemented similar precautionary measures. Such measures, as well as the general uncertainty surrounding the dangers and impact of COVID-19, have created disruption in global supply chains, increasing rates of unemployment and adversely impacting many industries, including industries related to the collateral underlying certain of our loans. Moreover, with the continued spread of COVID-19, governments and businesses are likely to continue to take aggressive measures to help slow its spread. For this reason, among others, as COVID-19 continues to spread, the potential impacts, including a global, regional, or other economic recession, are increasingly uncertain and difficult to assess. Although we are still uncertain of the potential full magnitude or duration of the COVID-19 outbreak and its impact on the current financial, economic and capital markets environment, and future developments in these and other areas, we face future uncertainty and risk with respect to our financial condition, results of operations, liquidity and ability to pay distributions. Possible future declines in rental rates and expectations of future rental concessions, including free rent to renew tenants early, to retain tenants who are up for renewal or to attract new tenants, or rent abatements for tenants severely impacted by the COVID-19 pandemic may result in decreases in cash flows to our borrowers and potentially in defaults in paying debt service on outstanding indebtedness, which could adversely impact our results of operations and financial performance. Impending declines in economic conditions could negatively impact real estate and real estate capital markets and result in lower occupancy, lower rental rates and declining values in our portfolio, which could adversely impact the value of investments, making it more difficult for us to make distributions or meet our financing obligations. Although there are effective vaccines for COVID-19 that have been approved for use, distribution of the vaccines did not begin until late 2020, and a majority of the public will likely not have access to a vaccination until sometime in 2021. Accordingly, the full extent of the impact and effects of COVID-19 will depend on future developments, including, among other factors, the duration and spread of the outbreak, along with travel advisories, quarantines and restrictions, the recovery time of the disrupted 31 -------------------------------------------------------------------------------- supply chains and industries, the impact of labor market interruptions, the impact of government interventions, and uncertainty with respect to the duration of the economic slowdown. We are unable to predict or control these factors. The effects of the COVID-19 pandemic did not significantly impact our operating results for the year ended December 31, 2020, other than previously deferred debt issuance costs of $624,816expensed in the second quarter of 2020 as a result of the current market environment related to a collateralized loan obligations transaction that has been determined as unlikely to be executed prior to December 31, 2020. 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, 2021and potentially longer.
Highlights of 2020
•We believe we successfully navigated the challenging economic environment resulting from the COVID-19 pandemic during 2020. As of
December 31, 2020, our loan portfolio is 100% performing with no loan impairments, loan defaults or non-accrual loans and no forbearance requests granted within our loan portfolio. •Our net income attributable to our common stockholders increased from $2.7 million, or $0.11per share of common stock, in 2019 to $8.4 million, or $0.34per share of common stock, in 2020. Our Distributable Earnings increased by 22% from $7.6 million, or $0.32per share of common stock, in 2019 to $9.8 million, or $0.39per share of common stock, in 2020. 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." •On September 17, 2020, we announced a dividend increase from $0.075per share of common stock to $0.085per share of common stock, a 13.3% increase over the previous quarter. On December 18, 2020, we announced our second consecutive dividend increase from $0.085per share of common stock to $0.09per share of common stock, a 5.9% increase over the previous quarter. On December 21, 2020, we announced a one-time special cash dividend of $0.04per share of common stock. •Our book value per share of common stock was $4.56as of December 31, 2020, which was substantially consistent with our book value per share of common stock of $4.59as of December 31, 2019. •We acquired four loans with an initial unpaid principal balance of $46.4 millionand a weighted average interest rate of one-month LIBOR plus 3.36%. •We funded $11.2 millionin future funding obligations associated with existing loans with a weighted average interest rate of one-month LIBOR plus 3.27% The ORIX Transaction On January 6, 2020, we announced the entry into a new external management agreement with Lument IM and the concurrent mutual termination of our management agreement with HIM. Lument IM is part of Lument, a nationally recognized leader in multifamily and seniors housing and healthcare finance. The terms of the new management agreement align with the terms of our prior management agreement with HIM in all material respects, including a cap on reimbursable expenses. Pursuant to the terms of the termination agreement between the Company and HIM, the termination of the management agreement did not trigger, and HIM was not paid, a termination fee by the Company. In connection with the transaction, an affiliate of ORIX USApurchased 1,246,719 shares of the Company's common stock in a private placement by the Company at a purchase price of $4.61per share, resulting in an aggregate capital raise of $5,747,375. The purchase price per share represented a 43% premium over the LFT common share price on January 2, 2020. As a result of this share purchase, an affiliate of ORIX USAowns approximately 5.0% of LFT's outstanding common shares. Also, in connection with the transaction, James C. Huntresigned as the Company's Chairman of the Board, but continues to serve as a member of the Board. In addition, the Board appointed Interim Chief Financial Officer James A. Briggsas Chief Financial Officer of the Company.
Factors Affecting Our Results of Operations
Market conditions. The results of our operations are and will continue to be affected by a number of factors and primarily depend on, among other things, the level of our net interest income, the market value of our assets and the supply of, and demand for, our target assets in the marketplace. Our net interest income, will vary primarily as a result of changes in market interest rates and prepayment speeds, and by the ability of the borrowers underlying our commercial mortgage loans to continue making payments in accordance with the contractual terms of their loans, which may be impacted by unanticipated credit events experienced by such borrowers, particularly in light of 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 generally increase our net interest income, while declining rates will generally decrease our net interest income. Substantially all of our investments and all of our collateralized loan obligations are indexed to 30-day LIBOR, and as a result we are less sensitive to variability in our net interest income resulting from interest rate changes. Additionally, we benefit from 100% of our commercial loan portfolio having LIBOR floors as a further mitigant to interest variability, with a weighted average LIBOR floor of 1.64% as of December 31, 2020. As of December 31, 2020, 100% of the loans in our commercial loan portfolio had a LIBOR floor greater than the current spot LIBOR rate. While we expect low LIBOR rates to persist amidst the current COVID-19 pandemic, no assurance can be made that our current portfolio profile, including its LIBOR floor will be maintained. A decrease to the weighted average LIBOR floor would result in a decrease to net interest income if the prevailing spot LIBOR rate is less than the weighted average LIBOR floor. LIBOR is expected to be discontinued after 2021. As of December 31, 2020, 100% of commercial mortgage loans by principal balance earned a floating rate of interest indexed to LIBOR, and 100% of our outstanding collateralized loan obligations bear interest indexed to 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 potential discontinuation of LIBOR. We intend to monitor the developments with respect to the potential phasing out of LIBOR after 2021 and to work with our 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. We finance a portion of our commercial loan portfolio with equity, and as such, decreases in interest rates may reduce our net interest income and may impact the competition for and supply of new investment opportunities. 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 32 -------------------------------------------------------------------------------- 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 the mortgages and, potentially, contribute to non-performance or, in severe cases, default. 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 December 31, 2020, 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 December 31, 2020, 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 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, 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. Additionally, due to the expiration of the reinvestment period of Hunt CRE 2017-FL1, our interest earning assets will continue to decline as loans payoff in this collateralized loan obligation until such time this collateralized loan obligation is refinanced. However, due to the current market environment created by the COVID-19 pandemic, it may make obtaining this refinance more difficult. 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. All of our commercial mortgage loans were acquired at par, 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 Hunt CRE 2017-FL1 expired on February 20, 2020and remains in place for Hunt CRE 2018-FL2. As of December 31, 2020, we have experienced $44.9 millionin loan prepayments in Hunt CRE 2017-FL1 subsequent to the expiration of its reinvestment period. 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. Changes in market value of our assets. We account for our commercial mortgage loans at amortized cost. As such, our earnings will generally not be directly impacted by changes in the market values of these loans. However, if a loan is considered to be impaired as the result of adverse credit performance, an allowance is recorded to reduce the carrying value through a charge to the provision for loan losses. Impairment is measured by comparing the estimated fair value of the underlying collateral, less costs to sell, to the book value of the respective loan. Provisions for loan losses will directly impact our earnings. Given the widespread impact of COVID-19 pandemic, we consider there to be a heightened credit risk associated with our commercial mortgage loan portfolio. Governmental actions. Since 2008, when both Fannie Mae and Freddie Mac were placed under the conservatorship of 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 2021 and beyond, but a deep divide persists between factions on Congressand as such it remains unclear what shape any reform would take and what impact, if any, reform would have on mortgage REITs.
Running our business with COVID-19
March 13, 2020, our Manager and its affiliates, implemented a work from home, or WFH, policy for employees in all locations. The WFH policy remains in effect as of the date of this filing. Our Manager's highly experienced senior team and dedicated employees are fully operational during this ongoing disruption and are continuing to execute on all investment 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 taking a more measured approach in our new investment activity and our evaluation of any new investments to incorporate the impact of COVID-19. We are mindful of local ordinance constraints on lender protection and continue to monitor the impact of fiscal stimulus on our loan portfolio. More recently, the CDCissued a nationwide moratorium on residential evictions. Specifically, from September 4, 2020through March 31, 2021residential landlords and those with similar eviction rights may 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 the best efforts to make partial payments; and (e) have no other housing options. As a result of this national restriction, multifamily apartment borrowers have less ability to address non-payment of tenants, which in turn may negatively impact a property's cashflow coverage of the debt service of their loans. Additionally, due to COVID-19, there are potential challenges facing third-party providers, 33 --------------------------------------------------------------------------------
like the appraisers, environmental and engineering consultants we rely on to make new investments that may make it more difficult to make those investments.
Key financial metrics 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. For the three months ended
December 31, 2020, we recorded earnings per share of $0.10, declared a quarterly dividend of $0.09per share and a special dividend of $0.04per share, and reported $0.10per share of Distributable Earnings. In addition, our book value per share was $4.56per share. For the year ended December 31, 2020, we recorded earnings per share of $0.34, declared aggregate dividends of $0.37per share, and reported $0.39per share of Distributable Earnings.
As described in more detail below, distributable profit is a measure that is not prepared in accordance with generally accepted accounting principles.
Earnings per share and declared dividends
The following table presents the calculation of basic and diluted net income per share and dividends declared per share:
Three Months Ended Year Ended December 31, December 31, 2020 2020 2019 Net income(1)
$ 2,464,678 $ 8,434,770 $ 2,664,098Weighted-average shares outstanding, basic and diluted 24,943,383 24,934,505 23,687,812 Net income per share, basic and diluted $ 0.10 $ 0.34 $ 0.11Dividends declared per share(2) $ 0.13 $ 0.37 $ 0.30(1) Represents net income attributable to Lument Finance Trust, Inc.(2) Includes $0.04special dividend declared on December 21, 2020.
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) incentive compensation payable to the Manager, (iii) depreciation and amortization, (iv) any unrealized gains or losses or other similar non-cash items that are included in net income for that applicable repotting period, regardless of whether such items are included in other comprehensive income (loss) or net income (loss), and (v) 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. Distributable Earnings mirrors how we calculate Core Earnings (as defined in our management agreement between our Manager and us) for purposes of calculating the incentive fee payable to our Manager. 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 presents a reconciliation of distributable income and GAAP net income:
Three Months Ended Year Ended December 31, December 31, 2020 2020 2019 Net income(1)
$ 2,464,678 $ 8,434,770 $ 2,664,098Realized loss on sale of investments, net - - 709,439 Unrealized gain (loss) on mortgage servicing rights 177,476 1,780,528 1,297,579 Unrealized (gain) on multifamily loans held in securitization trusts - - (694,339) Recognized compensation expense related to restricted common stock 2,949 20,292 8,962 Adjustment for consolidated securities - - 3,269 Adjustment for one-time charges - - 512,115 Adjustment for (provision for) income taxes (38,861) (476,248) (43,523) Adjustment for deemed dividend related preferred stock redemption - - 3,093,028 Distributable Earnings $ 2,606,242 $ 9,759,342 $ 7,550,628Weighted-average shares outstanding, basic and diluted 24,943,383 24,934,505 23,687,812 Distributable Earnings per share, basic and diluted $ 0.10
(1) Represents the net income attributable to ordinary shareholders of
Book Value Per Share
The following table calculates our book value per share:
December 31, 2020 December 31, 2019 Equity
$ 113,703,152 $ 108,644,712Common stock outstanding 24,943,383 23,692,164 Book value per share $ 4.56 $ 4.59 As of December 31, 2020, our equity was $113.7 million, and our book value per common share was $4.56on a basic and fully diluted basis. Our equity increased by $5.1 millioncompared to our stockholders' equity as of December 31, 2019as a result of the ORIX private placement on January 3, 2020, while book value per common share declined by 0.7% from the previous year-end amount of $4.59. The slight decrease in book value per share is primarily reflective of the one-time special cash dividend of $0.04per share of common stock declared in December 2020in order to satisfy REIT distribution requirements.
Commercial mortgage loans
December 31, 2020, we have determined that we are the primary beneficiary of Hunt CRE 2017- FL1, Ltd.and Hunt CRE 2018- FL2, Ltd.based on our obligation to absorb losses derived from ownership of our residual interests. Accordingly, the Company consolidated the assets, liabilities, income and expenses of the underlying issuing entities, collateralized loan obligations.
The following table details our lending activity by outstanding capital balance:
December 31, 2019$
635 260 420
Purchases and advances
57 601 572
Proceeds from principal repayments
December 31, 2020$
547 345 334
The following table details overall statistics for our loan portfolio as of
December 31, 2020: Weighted Average Unpaid Principal Floating Rate Loan Type Balance Carrying Value Loan Count Loan % Coupon(1) Term (Years)(2) LTV(3) December 31, 2020Loans held-for-investment Senior secured loans(4) $ 547,345,334$
547,345,334 40 100.0 % 5.1 % 3.1 74.2 %
$ 547,345,334 $ 547,345,33440 100.0 % 5.1 % 3.1 74.2 % 35
Weighted Average Unpaid Principal Floating Rate Loan Type Balance Carrying Value Loan Count Loan % Coupon(1) Term (Years)(2) LTV(3)
December 31, 2019Loans held-for-investment $ 635,260,420 $ 635,260,42051 100.0 % 5.4 % 3.8 73.6 % Senior secured loans(3) $ 635,260,420 $ 635,260,42051 100.0 % 5.4 % 3.8 73.6 % (1) Weighted average coupon assumes applicable one-month LIBOR of 0.14% and 1.70% as of December 31, 2020and December 31, 2019, respectively, and weighted average LIBOR floors of 1.64% and 1.56%, respectively. (2) Weighted average term assumes all extension options are exercised by the borrower; provided, however, that our loans may be repaid prior to such date. (3) LTV as of the date the loan was originated and is calculated after giving effect to capex and earnout reserves, if applicable. LTV has not been updated for any subsequent draws or loan modifications and is not reflective of any changes in value which may have occurred subsequent to origination date. (4) As of December 31, 2020, $531,363,401of the outstanding senior secured loans were held in VIEs and $15,981,933of the outstanding senior secured loans were held outside VIEs. As of December 31, 2019, $629,157,956of the outstanding senior secured loans were held in VIEs and $6,102,464of the outstanding senior secured loans were held outside VIEs.
The table below presents additional information relating to the Company’s portfolio as of
Loan number Form of investment Creation date Total loan commitment (1) Current capital
Location Property Type Coupon Term (Years) LTV(2) 1 Senior Loan
June 5, 201844,699,829 35,625,000 Palatine, ILMultifamily 1mL + 4.3% 2.5 68.5 % 2 Senior Loan November 30, 201835,441,350 35,441,348 Nacogdoches, TXMultifamily 1mL + 4.1% 4.0 70.4 % 3 Senior Loan July 9, 201833,830,000 33,752,111 Pikesville, MDMultifamily 1mL + 3.3% 2.7 77.6 % 4 Senior Loan August 8, 201835,000,000 32,526,660 Dallas, TXMultifamily 1mL + 3.7% 2.7 81.2 % 5 Senior Loan November 22, 201931,163,300 26,500,000 Virginia Beach, VAMultifamily 1mL + 2.8% 4.0 77.1 % 6 Senior Loan May 18, 201828,000,000 25,355,116 Woodridge, ILMultifamily 1mL + 3.8% 2.5 76.4 % 7 Senior Loan December 10, 201926,871,000 24,540,507 San Antonio, TXMultifamily 1mL + 3.2% 4.1 71.9 % 8 Senior Loan January 15, 202027,350,000 24,180,000 Chattanooga, TNMultifamily 1mL + 3.0% 4.2 80.6 % 9 Senior Loan November 26, 201921,625,000 20,000,000 Doraville, GAMultifamily 1mL + 2.8% 4.0 76.1 % 10 Senior Loan December 6, 201821,000,000 18,703,039 Greensboro, NCMultifamily 1mL + 3.4% 3.0 79.8 % 11 Senior Loan December 28, 201820,850,000 18,000,000 Austin, TXRetail 1mL + 3.9% 2.1 71.4 % 12 Senior Loan July 10, 201919,000,000 17,754,112 Amarillo, TXMultifamily 1mL + 2.9% 3.7 76.4 % 13 Senior Loan December 28, 201824,123,000 17,172,624 Austin, TXRetail 1mL + 4.1% 2.1 60.5 % 14 Senior Loan March 13, 201919,360,000 16,707,856 Baytown, TXMultifamily 1mL + 3.1% 2.3 80.5 % 15 Senior Loan June 28, 201817,000,000 15,245,253 Greenville, SCMultifamily 1mL + 3.9% 2.6 76.3 % 16 Senior Loan August 29, 201916,800,000 14,632,203 Austell, GAMultifamily 1mL + 3.4% 3.8 72.5 % 17 Senior Loan July 23, 201816,200,000 12,828,794 Chicago, ILOffice 1mL + 3.8% 2.7 72.7 % 18 Senior Loan August 8, 201914,400,000 12,649,099 Fort Worth, TXMultifamily 1mL + 3.0% 3.8 75.8 % 19 Senior Loan January 9, 201810,317,000 10,158,934 North Highlands, CAMultifamily 1mL + 4.0% 2.2 79.0 % 20 Senior Loan March 29, 201910,000,000 10,000,000 Portsmouth, VAMultifamily 1mL + 3.3% 1.3 61.4 % 36
21 Senior Loan
September 10, 20209,527,000 9,527,000 Winchester, OHMultifamily 1mL + 4.3% 0.8 61.9 % 22 Senior Loan September 11, 201911,135,000 9,135,000 Orlando, FLMultifamily 1mL + 2.8% 3.8 69.2 % 23 Senior Loan March 12, 20188,612,000 8,612,000 Waco, TXMultifamily 1mL + 4.8% 3.3 72.9 % 24 Senior Loan August 7, 20189,000,000 8,235,825 Birmingham, ALMultifamily 1mL + 3.5% 2.8 78.0 % 25 Senior Loan February 23, 20188,070,000 8,070,000 Little Rock, ARMultifamily 1mL + 4.3% 2.3 81.3 % 26 Senior Loan January 13, 20208,510,000 7,930,194 Fort Lauderdale, FLMultifamily 1mL + 3.2% 4.2 78.4 % 27 Senior Loan November 13, 20199,310,000 7,780,000 Holly Hill, FLMultifamily 1mL + 2.9% 2.0 77.8 % 28 Senior Loan June 10, 20197,000,000 6,525,817 San Antonio, TXMultifamily 1mL + 3.4% 3.6 77.7 % 29 Senior Loan December 9, 20196,495,000 6,230,000 Fort Worth, TXMultifamily 1mL + 3.2% 4.1 77.7 % 30 Senior Loan March 29, 20196,270,000 5,992,424 Raleigh, NCMultifamily 1mL + 3.5% 3.3 79.0 % 31 Senior Loan August 28, 20196,250,000 5,966,157 Austin, TXMultifamily 1mL + 3.3% 3.8 69.9 % 32 Senior Loan June 22, 20186,200,000 5,900,550 Chicago, ILMultifamily 1mL + 4.1% 2.6 80.5 % 33 Senior Loan June 10, 20196,000,000 5,295,605 San Antonio, TXMultifamily 1mL + 2.9% 3.6 62.9 % 34 Senior Loan December 13, 20195,900,000 5,070,339 Jacksonville, FLMultifamily 1mL + 2.9% 4.1 74.9 % 35 Senior Loan November 30, 20188,250,000 5,036,066 Decatur, GAOffice 1mL + 4.1% 2.9 56.8 % 36 Senior Loan December 29, 20204,920,000 4,920,000 Fayetteville, NCMultifamily 1mL + 4.0% 1.6 70.3 % 37 Senior Loan May 31, 20194,350,000 4,275,035 Austin, TXMultifamily 1mL + 3.5% 3.5 74.1 % 38 Senior Loan November 12, 20194,225,000 4,225,000 Chesapeake, VASelf-Storage 1mL + 3.2% 4.0 64.5 % 39 Senior Loan December 13, 20194,407,000 4,010,000 Marietta, GAMultifamily 1mL + 3.0% 4.1 77.9 % 40 Senior Loan June 5, 20182,835,667 2,835,666 Palatine, ILMultifamily 1mL + 4.3% 2.5 68.5 % (1) See Note 12 Commitments and Contingencies to our consolidated financial statements for further discussion of unfunded commitments. (2) 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.
Our loan portfolio is 100% performing with no loan write-downs, defaults or non-accrual loans as of
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 potential future difficulties due to the prolonged impact of the COVID-19 pandemic. Accordingly, we will engage in discussions with them to work towards the maximization of cash flows and values of our commercial mortgage loan assets should these difficulties arise. We have not entered into any forbearance agreements or loan modifications to date. However, due to the widespread economic impact of the COVID-19 pandemic we consider there to be heightened credit risk associated with our commercial mortgage loan portfolio. As such, we can provide no assurances that our borrowers will remain current as to principal and interest, or that we will not enter into any forbearance agreements or loan modifications on order to protect the value of our commercial mortgage loan assets. As discussed in Note 2 to our consolidated financial statements, our Manager performs a quarterly review of our loan portfolio, assesses the performance of each loan, and assigns a risk rating between "1" and "5," from less risk to greater risk. The weighted average risk rating of our total loan exposure was 3.1 and 2.8 as of
December 31, 2020and December 31, 2019, respectively. The increase in risk rating was primarily the result of downgrading non multifamily loans to a risk rating of "4" to reflect higher risk in loans collateralized by retail and office properties that are more negatively impacted by the COVID-19 pandemic. The following table presents the principal balance and net book value based on our internal risk ratings: 37 --------------------------------------------------------------------------------
December 31, 2020 Risk Rating Number of Loans Unpaid Principal Balance Net Carrying Value 1 - $ - - 2 14 168,401,366 168,401,366 3 20 309,726,343 309,726,343 4 6 69,217,625 69,217,625 5 - - - 40 547,345,334 547,345,334
Secured loan obligations
We may seek to enhance returns on our commercial mortgage loan investments through securitizations, or CLOs, if available, as well as the utilization of warehouse or repurchase agreement financing. To the extent available, we intend to securitize the senior portion of 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
December 31, 2020, the carrying amounts and outstanding principal balances of our collateralized loan obligations were $463.1 millionand $465.3 million, respectively. See Note 5 to our consolidated financial statements included in this Annual Report on Form 10-K for additional terms and details of our CLOs.
FOAC and changes to our residential mortgage lending 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 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 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 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 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 $20,000,000and (b) minimum available liquidity equal to the greater of (x) $5,000,000and (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 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.
Accounting policies and critical 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. The year ended
December 31, 2020was characterized by heightened uncertainty due to the COVID-19 pandemic which could impact estimates made by management. 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, tax liability, future impairment of our investments, and valuation of our investment portfolio, among other effects. We believe that the following accounting policies are among the most important to the portrayal of our financial condition and results of operations and require the most difficult, subjective or complex judgments:
Commercial mortgages held for investment
Commercial mortgage loans held-for-investment represent floating-rate transitional loans and other commercial mortgage loans purchased by the Company. These loans include loans sold into securitizations that the Company consolidates. Commercial mortgage loans held-for-investment are intended to be held-to-maturity and, accordingly, are carried at their unpaid principal balances, adjusted for net unamortized loan fees and costs (in respect of originated loans), premiums and discounts (in respect of purchased loans) and impairment, if any. 38 -------------------------------------------------------------------------------- Interest income is recognized as revenue using the effective interest method and is recorded on the accrual basis according to the terms of the underlying loan agreement. Any fees, costs, premiums and discounts associated with these loan investments are deferred and amortized over the term of the loan using the effective interest method, or on a straight line basis when it approximates the effective interest method. Income accrual is generally suspended and loans are placed on non-accrual status on the earlier of the date at which payment has become 90 days past due or when full and timely collection of interest and principal is considered not probable. The Company may return a loan to accrual status when repayment of principal and interest is reasonably assured under the terms of the underlying loan agreement. As of
December 31, 2020, the Company did not hold any loans placed in non-accrual status. Quarterly, the Company assesses the risk factors of each loan classified as held-for-investment and assigns a risk rating based on a variety of factors, including, without limitation, debt-service coverage ratio ("DSCR"), loan-to-value ratio ("LTV"), property type, geographic and local market dynamics, physical condition, leasing and tenant profile, adherence to business plan and exit plan, maturity default risk and project sponsorship. The Company's loans are rated on a 5-point scale, from least risk to greatest risk, respectively, which ratings are described as follows: 1.Very Low Risk: exceeds expectations and is outperforming underwriting or it is very likely that the underlying loan can be refinanced easily in the period's prevailing capital market conditions 2.Low Risk: meeting or exceeding underwritten expectations 3.Moderate Risk: in-line with underwritten expectations or the sponsor may be in the early stages of executing the business plan and the loan structure appropriately mitigates additional risks 4.High Risk: potential risk of default, a loss may occur in the event of default 5.Default Risk: imminent risk of default, a loss is likely in the event of default The Company evaluates each loan rated High Risk or above as to whether it is impaired on a quarterly basis. Impairment occurs when the Company determines that the facts and circumstances of the loan deem it probable that the Company will not be able to collect all amounts due in accordance with the contractual terms of the loan. If a loan is considered to be impaired, an allowance is recorded to reduce the carrying value of the loan through a charge to the provision for loan losses. Impairment of these loans, which are collateral dependent, is measured by comparing the estimated fair value of the underlying collateral, less costs to sell, to the book value of the respective loan. These valuations require significant judgments, which include assumptions regarding capitalization rates, leasing, creditworthiness of major tenants, occupancy rates, availability of financing, exit plan, actions of other lenders, and other factors deemed necessary by the Manager. Actual losses, if any, could ultimately differ from estimated losses. In addition, the Company evaluates the entire portfolio to determine whether the portfolio has any impairment that requires a valuation allowance on the remainder of the loan portfolio. As of December 31, 2020, the Company has not recognized any impairments on its loans held-for-investment. We also assessed the remainder of the loan portfolio, considering the absence of delinquencies and current market conditions, and, as such has not recorded any allowance for loan losses.
Mortgage management rights, at fair value
Mortgage servicing rights ("MSRs") are associated with residential mortgage loans that the Company historically purchased and subsequently sold or securitized. MSRs are held and managed at
Five Oaks Acquisition Corp.("FOAC"), the Company's taxable REIT subsidiary ("TRS"). As the owner of MSRs, the Company is entitled to receive a portion of the interest payments from the associated residential mortgage loan, and is obligated to service, directly or through a subservicer, the associated loan. MSRs are reported at fair value as a result of a fair value option election. Residential mortgage loans for which the Company owns the MSRs are directly serviced by one or more sub-servicers retained by the Company. The Company does not directly service any residential mortgage loans. MSR income is recognized at the contractually agreed upon rate, net of the costs of sub-servicers retained by the Company. If a sub-servicer with which the Company contracts were to default, an evaluation of MSR assets for impairment would be undertaken at that time.
See note 2 to our consolidated financial statements for a complete list of our significant accounting policies.
The following tables show our allocated capital by type of investment at
This information constitutes 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. December 31, 2020 Commercial Mortgage Loans MSRs Unrestricted Cash(1) Total(2) Market Value 547,345,334 919,678 11,375,960 559,640,972 Collateralized Loan Obligations (463,060,090) - - (463,060,090) Other(3) 1,663,740 - (2,984,668) (1,320,928) Restricted Cash 57,999,396 - - 57,999,396 Capital Allocated 143,948,380 919,678 8,391,292 153,259,350 % Capital 93.9 % 0.6 % 5.5 % 100.0 % 39
December 31, 2019 Commercial Unrestricted Mortgage Loans MSRs Cash(1) Total(2) Market Value
Secured loan obligations
(505,930,065) - - (505,930,065) Other(3) 1,610,181 - (1,623,820) (13,639) Restricted Cash 5,069,715 - - 5,069,715 Capital Allocated
$ 136,010,251 $ 2,700,207 $ 9,318,295 $ 148,028,753% Capital 91.9 % 1.8 % 6.3 % 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
December 31, 2020, we no longer consolidated the assets and liabilities of the FREMF 2012- KF01 Trust, which repaid in full in January 2019, and no longer consolidate the interest and expenses of the trust. As of December 31, 2020, we consolidated the assets and liabilities of two commercial real estate collateralized loan obligations, Hunt CRE 2017- FL1, Ltd.and Hunt CRE 2018- FL2, Ltd.Our results of operations were impacted in part by (i) the repayment in full of the FREMF 2012- KF01 Trustin the first quarter of 2019; (ii) the redemption of preferred stock in the first quarter of 2019; and (iii) the draw of Secured Term Loan in the first quarter of 2019. Consequently, our results of operations for the periods ended December 31, 2020and December 31, 2019are not directly comparable. Additionally, although the COVID-19 pandemic did not significantly impact our operating results for the period ended December 31, 2020, other than previously deferred debt costs of $624,816expensed in the second quarter of 2020, should the pandemic and resulting economic deterioration persist, we expect it may further affect our business, financial condition, results of operations and cash flows going forward, including but not limited to, interest income, credit losses and commercial 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 out of our control.
The table below presents certain information from our income statement for the years ended.
Year Ended December 31, 2020 2019 Revenues: Interest income: Commercial mortgage loans held-for-investment 33,570,949 38,969,471 Multifamily loans held in securitization trusts - 78,361 Cash and cash equivalents 45,782 9,647 Interest expense: Collateralized loan obligations (12,047,300) (20,882,076) Secured term loan (3,138,917) (2,761,561) Net interest income 18,430,514 15,413,842 Other income: Realized (loss) on investments, net - (709,439) Change in unrealized (loss) on mortgage servicing rights (1,780,528) (1,297,579) Change in unrealized gain on multifamily loans held in securitization trusts - 694,339 Servicing income, net 709,565 869,032 Other income 2 - Total other (loss) (1,070,961) (443,647) Expenses: Management fee 2,524,139 2,245,065 General and administrative expenses 3,518,500 4,335,376 Operating expenses reimbursable to Manager 1,644,886 1,629,908 Other operating expenses 1,493,214 360,517 Compensation expense 205,292 193,962 Total expenses 9,386,031 8,764,828 Net income before provision for income taxes 7,973,522 6,205,367 Benefit from income taxes 476,248 43,523 Net income 8,449,770 6,248,890 Dividends to preferred stockholders (15,000) (491,764) Deemed dividend on preferred stock related to redemption $ -
$ (3,093,028)Net income attributable to common stockholders $ 8,434,770 $ 2,664,098Earnings per share: Net income attributable to common stockholders (basic and diluted) $ 8,434,770 $ 2,664,098Weighted average number of shares of common stock outstanding 24,934,505 23,687,812 Basic and diluted income per share $ 0.34 $ 0.11Dividends declared per share of common stock $ 0.37 $ 0.30Net Income Summary For the year ended December 31, 2020, our net income attributable to common stockholders was $8,434,770or $0.34basic and diluted net income per average share, compared with net income of $2,664,098or $0.11basic and diluted net loss per share, for the year ended December 31, 2019. The principal drivers of this net income variance were an increase in net interest income from $15,413,842for the year ended December 31, 2019to $18,430,514for the year ended December 31, 2020, a decrease in preferred dividends from $491,764for the year ended December 31, 2019to $15,000for the year ended December 31, 2020and the deemed dividend of $3,093,028for the year ended December 31, 2019, which more than offset an increase in total other loss from $443,647for the year ended December 31, 2019to a loss of $1,070,961for the year ended December 31, 2020, and an increase in total expenses from $8,764,828for the year ended December 31, 2019to $9,386,031for the year ended December 31, 2020. The year over year increase in net income was primarily the result of an increase in net interest income by $3.0 millionand the deemed preferred dividend of $3.1 milliondeclared in 2019. Net interest income benefited in 2020 from 100% of our commercial mortgage loan portfolio having LIBOR floors greater than prevailing spot LIBOR throughout 2020 as a result of the drastic decline in LIBOR due to the COVID-19 pandemic.
Net interest income
For the years ended
December 31, 2020and December 31, 2019, our net interest income was $18,430,514and $15,413,842, respectively. The increase was primarily due to (i) a $26.3 millionincrease in weighted-average principal balance of our loan portfolio; (ii) an increase of 22bps in weighted-average LIBOR floor on our loan portfolio for the year-ended December 31, 2020compared to the corresponding period in 2019 and; (iii) a decrease in weighted-average LIBOR of 167bps for our CLO liabilities. This was offset by (i) a 35bps decrease in weighted-average spread on the loan portfolio for the year-ended December 31, 2020compared to the corresponding period in 2019, and (ii) a full period of Secured Term Loan interest expense in 2020, compared to a partial period of interest expense due to the draw of the Secured Term Loan on February 14, 2019.
41 -------------------------------------------------------------------------------- For the year ended
December 31, 2020, we incurred a loss of $1,070,961. This loss was driven by the impact of net unrealized losses on mortgage servicing rights of $1,780,528caused by a decrease in interest rates which increased prepayments and decreased projected float income, which more than offset net mortgage servicing income of $709,565. For the year ended December 31, 2019, we incurred a loss of $443,647. This loss was primarily driven by the impact of (i) net realized losses on the FREMF 2012- KF01 Trustof $709,439and (ii) net unrealized losses on mortgage servicing rights of $1,297,579. These factors were partially offset by (i) net unrealized gains on multifamily mortgage loans held in the FREMF 2012- KF01 Trustof $694,339and (ii) net mortgage servicing income of $869,032. The year-over-year increase in other loss was primarily due to the change in unrealized loss on mortgage servicing rights as a result of lower interest rates and higher prepayment speeds.
We incurred management fees of
$2,524,139for the year ended December 31, 2020representing amounts payable to our Manager under our management agreement. We also incurred operating expenses of $6,861,892, of which $1,644,886was payable to our Manager and $5,217,006was payable to third parties. For the year ended December 31, 2019, we incurred management fees of $2,245,065representing amounts payable to our Manager under our management agreement. We also incurred operating expenses of $6,519,763, of which $1,629,908was payable to our Manager and $4,889,855was payable to third parties. The year-over-year increase in expenses reflects the impact of the January 3, 2020ORIX equity offering increasing management fees, accrual of incentive fees during the period, an increase in insurance and legal fees as well as deferred costs expensed during the period, which more than offset decreased accounting, audit and other fees. Impairment We review each loan classified as held-for-investment for impairment on a quarterly basis. For the years ended December 31, 2020and December 31, 2019, the Company has not recognized any impairments on its loans held-for-investment and therefore has not recorded any allowance for loan losses.
Tax expenditures (benefits)
For the year ended
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 finance our commercial mortgage loans primarily with match term collateralized loan obligations, which are not subject to margin calls or additional collateralization requirements. A of
December 31, 2020, our balance sheet included $40.2 millionof a secured term loan and $465.3 millionin collateralized loan financing, gross of discounts and debt issuance costs. Our secured term loan matures in January 2025and our collateralized loan financing is term-matched and matures in 2028 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. On July 13, 2020, we entered into a closing agreement with the IRSrelating to our application of Section 856(c)(6) of the Code in our 2018 tax return, facilitating our ability to execute certain financing transactions and equity capital raises. However, due to the current market environment created by the COVID-19 pandemic, it may make obtaining this financing more difficult. In addition, 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. On August 5, 2020, the Company entered into an amendment to its Participation Agreements amongst Hunt CRE 2017- FL1 Seller LLC("FL1 Seller"), Hunt Commercial Mortgage Trustand ORIX Real Estate Capital LLCto transfer future funding participation interests from FL1 Seller to OREC Structured Finance, LLC("OREC SF"), an affiliate of our Manager (the "FL1 Future Funding Participation Transfer"). As a result of the FL1 Future Funding Participation Transfer, OREC SF will make advances pursuant to the unfunded loan commitments. In connection with the FL1 Future Funding Participation Transfer, the Company has agreed that at such time it (i) has available excess capital and (ii) the satisfaction of the applicable requirements for acquiring such assets, each as determined by the Manager, it will purchase from OREC SF, at a price equal to par, any FL1 Participations funded by OREC SF. We will generally finance the purchase of FL1 Participations funded by OREC SF with net cash provided by operating activities and proceeds from common or preferred stock issuances. Future loan fundings comprise funding for capital improvements, leasing costs, interest and carry costs, and fundings will vary depending on the progress of the business plan and cash flows of the mortgage assets. Therefore, the exact timing and amounts of such future loan fundings are uncertain and will depend on the current and future performance of the underlying mortgage assets. The maximum amount of future advances that the Company could be required to purchase from OREC SF under the Future Funding Participation Transfer, which represents the unfunded commitments of Hunt CRE 2017- FL1, Ltd.was $28.9 millionas of December 31, 2020. As of December 31, 2020, OREC SF had funded $7.7 millionof participation interests and $21.2 millionremain unfunded. 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 42 -------------------------------------------------------------------------------- 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 December 31, 2020, we had unrestricted cash and cash equivalents of $11.4 million, compared to $10.9 millionas of December 31, 2019. As of December 31, 2020, we had $40.2 millionin outstanding principal under our Senior Secured Term Loan, with a borrowing rate of 7.25%, which we used to redeem our 8.75% Series A Cumulative Redeemable Preferred Stock during the first quarter of 2019. As of December 31, 2020, the ratio of our recourse debt to our equity was 0.4:1. As of December 31, 2020, we consolidated the assets and liabilities of Hunt CRE 2017- FL1, Ltd.and Hunt CRE 2018- FL2, Ltd.The assets of the trusts are restricted and can only be used to fulfill their respective obligations, and accordingly the obligations of the trusts, which we classify as collateralized loan obligations, do not have any recourse to us as the consolidator of the trusts. As of December 31, 2020, the carrying value of these non-recourse liabilities aggregated to $463,060,090. As of December 31, 2020, our total debt-to-equity ratio was 4.4:1 on a GAAP basis.
The following table presents the changes in cash, cash equivalents and restricted cash for the years ended.
For the years ended December 31, 2020 2020 2019 Cash Flows From Operating Activities 12,219,209 7,282,343 Cash Flows From Investing Activities 87,915,086 (42,298,246) Cash Flows From Financing Activities (46,770,769) (8,186,079) Net Increase (Decrease) in Cash, Cash Equivalents and Restricted Cash $
53 363 526
During the year ended
December 31, 2020, cash, cash equivalents and restricted cash increased by $53.4 millionand for the year ended December 31, 2019, cash, cash equivalents and restricted cash decreased by $43.2 million.
For the years ended
December 31, 2020and December 31, 2019, net cash provided by operating activities totaled $12.2 millionand $7.3 million, respectively. For the year ended December 31, 2020, our cash flows from operating activities were primarily driven by $22.1 millionof interest received from the junior retained notes and preferred shares of Hunt CRE 2017- FL1, Ltd.and Hunt CRE 2018- FL2, Ltd., the CRE CLOs that we consolidate, $0.7 millionof interest received from our senior secured loans held outside the CRE CLOs we consolidate and $0.7 millionof cash received from mortgage servicing rights exceeding cash interest expense paid on our Secured Term Loan of $3.0 million, management fees of $2.3 million, expense reimbursements of $1.7 millionand other operating expenditures of $4.5 million. For the year ended December 31, 2019, our cash flows from operating activities were primarily driven by $18.8 millionof interest received from the junior retained notes and preferred shares of Hunt CRE 2017- FL1, Ltd.and Hunt CRE 2018- FL2, Ltd., the CRE CLOs we consolidate, $0.4 millionof interest received from our senior secured loans held outside the CRE CLOs we consolidate and $0.9 millionof cash received from mortgage servicing rights exceeding cash interest expense paid on our Secured Term Loan of $2.5 million, management fees of $2.3 million, expense reimbursement of $1.8 millionand other operating expenditures of $6.3 million.
For the year ended
December 31, 2020, net cash provided by investing activities totaled $87.9 million. This was a result of the cash received from principal repayments of commercial mortgage loans held-for-investment exceeding the purchase and funding of commercial mortgage loans held for investment during the period. For the year ended December 31, 2019net cash used in investing activities totaled $42.3 million. This was primarily a result of the cash used in the purchase and funding of commercial mortgage loans held-for-investment exceeding cash received from unsettled trades, principal repayment of loans held-for-investment and retained beneficial interests for the year ended December 31, 2019.
For the year ended
December 31, 2020, net cash used in financing activities totaled $46.8 millionand primarily related to proceeds from issuance of common stock of $5.7 millionmore than offset by payments of common and preferred dividends of $7.6 millionand repayment of collateralized loan obligations of $44.9 million. For the year ended December 31, 2019, net cash used in financing activities totaled $8.2 millionand primarily related to the redemption of preferred stock of $40.3 million, payment of common and preferred dividends of $7.2 millionand payment of deferred financing costs of $1.0 millionpartially offset by proceeds from our Secured Term Loan of $40.3 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. 43 -------------------------------------------------------------------------------- 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
December 31, 2020, 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 of December 31, 2020, we had not guaranteed any obligations of unconsolidated entities or entered into any commitment or intent to provide funding to any such entities. In connection with the provision of seller eligibility and backstop guarantee services provided to MAXEX, we previously accounted for the related non-contingent liability at its fair value on our consolidated balance sheet as a liability. As of December 31, 2020, 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 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 for U.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. On December 18, 2020, we announced that our board of directors had declared a cash dividend rate for the fourth quarter of 2020 of $0.09per share of common stock. Additionally, on December 21, 2020, we announced that our board of directors had declared a one-time special cash dividend of $0.04per share of common stock.
© Edgar Online, source