Why the Outlook for 11.2%-Yield Lument Finance Stock Is Robust
February 8, 2024
LFT Stock Up 32% Since November 1, 2023
Mortgage real estate investment trusts (mREITs) like Lument Finance Trust Inc (NYSE:LFT) provide financing for income-generating real estate by originating or purchasing mortgages and mortgage-backed securities (MBS). They earn revenues from the interest on these investments.
What’s important to remember is that the performance of mREITs is highly correlated with interest rates. This helps explain why VanEck Mortgage REIT Income ETF (NYSE:MORT) did so poorly from the start of 2022 through October 31, 2023.
During that period, the Federal Reserve raised its key lending rate (which affects other interest rates) 11 times, from near-zero to the range of 5.25% to 5.5%. Over that period, shares of VanEck Mortgage REIT Income ETF fell by 32%. Lument Finance stock followed a similar trajectory, losing 38% of its value over that time frame.
A funny thing happened on November 1, 2023, though. The Fed held its overnight lending rate and hinted that its rate increases were over for this cycle. In mid-December, it maintained its lending rate again and hinted that rate cuts were coming in 2024: as many as three of them.
Investors cheered, and the shares of interest-rate-sensitive companies like mREITs rebounded. Since November 1, 2023, MORT stock has rallied by 20.6%, while LFT stock has advanced 32.5% (as of this writing).
With the Fed’s first interest rate cut expected in the middle of this year, the outlook for mREITs like Lument Finance Trust Inc is pretty strong.
Chart courtesy of StockCharts.com
Lument Finance is an mREIT that focuses on commercial real estate debt investments. The vast majority of its portfolio (93%) comprises middle-market multifamily residences. (Source: “Investor Presentation: November 2023,” Lument Finance Trust Inc, last accessed January 26, 2024.)
The company also has exposure to affordable housing, seniors housing, and health-care facilities. As of the end of September 2023, the total value of its portfolio was $1.4 billion.
The mREIT primarily invests in transitional floating-rate commercial mortgage loans, but it has also taken on other commercial real estate investments, including mezzanine loans, preferred equity, commercial MBS, fixed-rate loans, and construction loans.
Q3 Interest Income Jumped 74% Year-Over-Year
For the third quarter ended September 30, 2023, Lument Finance announced that its net interest income jumped by 74% year-over-year to $9.54 million. (Sources: “Q3 2023 Earnings Supplemental: November 2023,” Lument Finance Trust Inc, last accessed January 26, 2024.)
In the first nine months of 2023, its net interest income went up by 49% year-over-year to $25.3 million.
The company reported third-quarter 2023 net income attributable to common shareholders of $5.2 million, or $0.10 per share. That was up significantly from $316,233, or $0.01 per share, in the third quarter of 2022.
For income investors, Lument Finance Trust Inc’s third-quarter distributable earnings came in at $6.0 million, or $0.11 per share. That was up by 207% from $1.94 million, or $0.04 per share, in the second quarter of 2023.
The third-quarter 2023 distributable earnings were also up by 252% from $1.7 million, or $0.03 per share, in the third quarter of 2022. (Sources: “Q3 2022 Earnings Supplemental: November 2022,” Lument Finance Trust Inc, last accessed January 26, 2024.)
Lument Finance Stock’s Dividend Increased 16.7% Quarter-Over-Quarter
As an mREIT, Lument Finance Trust Inc is legally required to distribute at least 90% of its taxable income to investors in the form of dividends. This is why REITs have some of the highest dividend amounts and yields.
In September 2023, Lument Finance declared a dividend of $0.07 per share, which was a 16.7% increase from the $0.06 per share it paid out in the previous quarter. It kept the dividend at that level in January 2024. (Source: “Dividends and Splits,” Lument Finance Trust Inc, last accessed January 26, 2024.)
This works out to a yield of 11.2% (as of this writing).
I’d love to say the company has a long history of raising its dividends, but it doesn’t. This, however, is common for mREITs because their payouts are based on taxable income. At the end of 2021, just before the Federal Reserve said it was going to start raising interest rates, Lument Finance Trust Inc’s quarterly payout stood at $0.09 per share.
There’s every reason to believe that LFT stock’s dividend will eventually return to that level. Interest rates will be coming down, which will make borrowing capital more affordable and will help juice Lument Finance’s profits.
The Lowdown on Lument Finance Trust Inc
Lument Finance Trust Inc is an mREIT with a diverse portfolio of commercial real estate investments with floating-rate loans. The company continues to report solid financial results and provide its shareholders with reliable, high-yield dividends.
Thanks to improving macroeconomic conditions, the outlook for Lument Finance stock is luminous.
