UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

☒			QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2020

OR

☐			TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 For the transition period from ________ to ____________ 

Commission File No. 001-35845 

HUNT COMPANIES FINANCE TRUST, INC.

(Exact name of registrant as specified in its charter) 

Maryland			45-4966519
(State or other jurisdiction of			(I.R.S. Employer
incorporation or organization)			Identification Number)

230 Park Avenue, 19th Floor, New York, New York 10169

(Address of principal executive office) (Zip Code)

(212) 521-6323

(Registrant’s telephone number, including area code)

N/A

(Former name, former address and former fiscal year, if changed since last report) 

Securities Registered Pursuant to Section 12(b) of the Act:

Title of Each Class:

Trading Symbol(s)

Name of Exchange on Which Registered:

Common Stock, par value $0.01 per share

HCFT

New York Stock Exchange

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days:

Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See definitions of “large accelerated filer,” “accelerated filer,” "smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act.  

Large accelerated filer ☐			Accelerated Filer ☒
Non-accelerated filer ☐			Smaller reporting company ☒
			Emerging growth company ☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

Class						Outstanding at November 6, 2020
Common stock, $0.01 par value						24,943,383

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HUNT COMPANIES FINANCE TRUST, INC.

 

INDEX

 

PART I - Financial Information
Item 1.			Financial Statements
			Condensed Consolidated Balance Sheets as of September 30, 2020 (unaudited) and December 31, 2019			1
			Condensed Consolidated Statements of Operations for the three and nine months ended September 30, 2020 (unaudited) and September 30, 2019 (unaudited)			2
			Condensed Consolidated Statement of Changes in Equity for the three and nine months ended September 30, 2020 (unaudited) and September 30, 2019 (unaudited)			3
			Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2020 (unaudited) and September 30, 2019 (unaudited)			5
			Notes to Unaudited Condensed Consolidated Financial Statements			6
Item 2.			Management’s Discussion and Analysis of Financial Condition and Results of Operations			23
Item 3.			Quantitative and Qualitative Disclosures about Market Risks			36
Item 4.			Controls and Procedures			37
PART II - Other Information						37
Item 1.			Legal Proceedings			37
Item 1A.			Risk Factors			37
Item 2.			Unregistered Sales of Equity Securities and Use of Proceeds			37
Item 3.			Defaults Upon Senior Securities			37
Item 4.			Mine Safety Disclosures			37
Item 5.			Other Information			38
Item 6.			Exhibits			38
Signatures						39

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PART I - FINANCIAL INFORMATION

Item 1. Financial Statements 

HUNT COMPANIES FINANCE TRUST, INC. AND SUBSIDIARIES

Condensed Consolidated Balance Sheets

						September 30, 2020(1)						December 31, 2019(1)
						(unaudited)
ASSETS
Cash and cash equivalents						$	9,720,138					$	10,942,115
Restricted cash						14,548,916						5,069,715
Commercial mortgage loans held-for-investment, at amortized cost						598,933,122						635,260,420
Mortgage servicing rights, at fair value						1,097,154						2,700,207
Deferred offering costs						—						40,000
Accrued interest receivable						2,280,494						2,342,354
Investment related receivable						9,247,423						—
Other assets						2,000,279						1,547,187
Total assets						$	637,827,526					$	657,901,998
LIABILITIES AND EQUITY
LIABILITIES:
Collateralized loan obligations, net						479,704,710						505,930,065
Secured term loan, net						39,512,924						39,384,041
Accrued interest payable						411,609						805,126
Dividends payable						2,123,980						1,776,912
Fees and expenses payable to Manager						1,115,577						991,981
Other accounts payable and accrued expenses						480,562						369,161
Total liabilities						523,349,362						549,257,286
COMMITMENTS AND CONTINGENCIES (NOTES 11 & 12)
EQUITY:
Common Stock: par value $0.01 per share; 450,000,000 shares authorized, 24,943,383 and 23,692,164 shares issued and outstanding, at September 30, 2020 and December 31, 2019, respectively						249,389						236,877
Additional paid-in capital						233,847,322						228,135,116
Cumulative distributions to stockholders						(128,109,631)						(122,236,981)
Accumulated earnings						8,391,584						2,410,200
Total stockholders' equity						114,378,664						108,545,212
Noncontrolling interests						$	99,500					$	99,500
Total equity						$	114,478,164					$	108,644,712
Total liabilities and equity						$	637,827,526					$	657,901,998

(1)     Our consolidated balance sheets include assets and liabilities of consolidated variable interest entities ("VIEs") as the Company was the primary beneficiary of these VIEs. As of September 30, 2020 and December 31, 2019, assets of consolidated VIEs related to Hunt CRE 2017-F1, Ltd. and Hunt CRE 2018-FL2, Ltd. totaled $608,690,756 and $636,541,489, respectively and the liabilities of consolidated VIEs related to Hunt CRE 2017-FL1, Ltd. and Hunt CRE 2018-FL2, Ltd totaled $480,043,366 and $506,662,238 respectively. See Note 5 for further discussion.

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

1

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HUNT COMPANIES FINANCE TRUST, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Operations

(unaudited)

						Three Months Ended September 30, 2020						Three Months Ended September 30, 2019						Nine Months Ended September 30, 2020						Nine Months Ended September 30, 2019
Revenues:
Interest income:
Commercial mortgage loans held-for-investment						$	8,111,324					$	9,825,455					$	25,749,282					$	30,018,760
Multi-family loans held in securitization trusts						—						—						—						78,361
Cash and cash equivalents						5,674						6,551						41,461						6,551
Interest expense:
Collateralized loan obligations						(2,495,996)						(5,244,001)						(9,649,523)						(16,147,178)
Secured term loan						(789,018)						(792,121)						(2,349,900)						(1,907,348)
Net interest income						4,831,984						3,795,884						13,791,320						12,049,146
Other loss:
Realized (loss) on investments, net						—						—						—						(709,439)
Unrealized (loss) on mortgage servicing rights						(350,127)						(444,860)						(1,603,052)						(1,283,977)
Unrealized gain on multi-family loans held in securitization trusts						—						—						—						694,339
Servicing income, net						187,989						243,265						586,516						676,944
Other income						—						—						2						—
Total other (loss)						(162,138)						(201,595)						(1,016,534)						(622,133)
Expenses:
Management and incentive fees						675,107						557,833						1,850,139						1,677,456
General and administrative expenses						786,651						904,413						2,531,385						3,266,757
Operating expenses reimbursable to Manager						441,349						175,174						1,249,123						1,232,211
Other operating expenses						309,125						19,212						1,444,049						204,228
Compensation expense						49,199						46,585						156,093						146,672
Total expenses						2,261,431						1,703,217						7,230,789						6,527,324
Net income before provision for income taxes						2,408,415						1,891,072						5,543,997						4,899,689
Benefit from income taxes						142,595						266,676						437,387						126,996
Net income						2,551,010						2,157,748						5,981,384						5,026,685
Dividends to preferred stockholders						(3,792)						(3,792)						(11,292)						(488,056)
Deemed dividend on preferred stock related to redemption						—						—						—						(3,093,028)
Net income attributable to common stockholders						$	2,547,218					$	2,153,956					$	5,970,092					$	1,445,601
Earnings per share:
Net income attributable to common stockholders (basic and diluted)						$	2,547,218					$	2,153,956					$	5,970,092					$	1,445,601
Weighted average number of shares of common stock outstanding						24,943,383						23,687,664						24,931,524						23,687,664
Basic and diluted income per share						$	0.10					$	0.09					$	0.24					$	0.06
Dividends declared per share of common stock						$	0.09					$	0.08					$	0.24					$	0.22

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

2

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HUNT COMPANIES FINANCE TRUST, INC. AND SUBSIDIARIES

Condensed Consolidated Statement of Changes in Equity

(unaudited)

						Common Stock												Additional Paid-in Capital						Cumulative Distributions to Stockholders						Accumulated Earnings						Total Stockholders' Equity						Noncontrolling interests						Total Equity
						Shares						Par Value
Balance at December 31, 2019						23,692,164						$	236,877					$	228,135,116					$	(122,236,981)					$	2,410,200					$	108,545,212					$	99,500					$	108,644,712
Issuance of common stock						1,246,719						12,467						5,734,908						—						—						$	5,747,375					—						$	5,747,375
Cost of issuing common stock						—						—						(13,333)						—						—						$	(13,333)					—						$	(13,333)
Restricted stock compensation expense						—						—						7,882						—						—						$	7,882					—						$	7,882
Net income (loss)						—						—						—						—						1,551,671						$	1,551,671					—						$	1,551,671
Common dividends declared						—						—						—						(1,870,416)						—						$	(1,870,416)					—						$	(1,870,416)
Preferred dividends declared						—						—						—						(3,750)						—						(3,750)						—						$	(3,750)
Balance at March 31, 2020						24,938,883						$	249,344					$	233,864,573					$	(124,111,147)					$	3,961,871					$	113,964,641					$	99,500					$	114,064,141
Issuance of common stock						4,500						45						14,940						—						—						$	14,985					—						$	14,985
Cost of issuing common stock						—						—						(13,333)						—						—						$	(13,333)					—						$	(13,333)
Restricted stock compensation expense						—						—						(8,473)						—						—						$	(8,473)					—						$	(8,473)
Net income (loss)						—						—						—						—						1,878,703						$	1,878,703					—						$	1,878,703
Common dividends declared						—						—						—						(1,870,754)						—						$	(1,870,754)					—						$	(1,870,754)
Preferred dividends declared						—						—						—						(3,750)						—						$	(3,750)					—						$	(3,750)
Balance at June 30, 2020						24,943,383						249,389						233,857,707						(125,985,651)						5,840,574						113,962,019						99,500						114,061,519
Issuance of common stock, net						—						—						—						—						—						$	—					—						$	—
Cost of issuing common stock						—						—						(13,334)						—						—						$	(13,334)					—						$	(13,334)
Restricted stock compensation expense						—						—						2,949						—						—						$	2,949					—						$	2,949
Net income (loss)						—						—						—						—						2,551,010						$	2,551,010					—						$	2,551,010
Common dividends declared						—						—						—						(2,120,188)						—						$	(2,120,188)					—						$	(2,120,188)
Preferred dividends declared						—						—						—						(3,792)						—						$	(3,792)					—						$	(3,792)
Balance at September 30, 2020						24,943,383						249,389						233,847,322						(128,109,631)						8,391,584						114,378,664						99,500						114,478,164

 

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

3

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HUNT COMPANIES FINANCE TRUST, INC. AND SUBSIDIARIES

Condensed Consolidated Statement of Changes in Equity

(unaudited)

						Preferred Stock												Common Stock												Additional Paid-in Capital						Cumulative Distributions to Stockholders						Accumulated Earnings (Deficit)						Total Stockholders' Equity						Noncontrolling interests						Total Equity
						Shares						Par Value						Shares						Par Value
Balance at December 31, 2018						1,610,000						$	37,156,972					23,687,664						$	236,832					$	231,305,743					$	(114,757,019)					$	(3,838,690)					$	150,103,838					$	99,500					$	150,203,338
Cost of issuing common stock						—						—						—						—						(22,383)						—						—						$	(22,383)					—						$	(22,383)
Redemption of preferred stock, net						(1,610,000)						(37,156,972)						—						—						(3,093,028)						—						—						$	(40,250,000)					—						$	(40,250,000)
Restricted stock compensation expense						—						—						—						—						3,773						—						—						$	3,773					—						$	3,773
Net income						—						—						—						—						—						—						1,474,767						$	1,474,767					—						$	1,474,767
Common dividends declared						—						—						—						—						—						(1,658,136)						—						$	(1,658,136)					—						$	(1,658,136)
Preferred dividends declared						—						—						—						—						—						(480,472)						—						$	(480,472)					—						$	(480,472)
Balance at March 31, 2019						—						—						23,687,664						236,832						228,194,105						(116,895,627)						(2,363,923)						109,171,387						99,500						109,270,887
Cost of issuing common stock						—						—						—						—						(22,382)						—						—						$	(22,382)					—						$	(22,382)
Redemption of preferred stock, net						—						—						—						—						—						—						—						$	—					—						$	—
Restricted stock compensation expense						—						—						—						—						3,814						—						—						$	3,814					—						$	3,814
Net income						—						—						—						—						—						—						1,394,170						$	1,394,170					—						$	1,394,170
Common dividends declared						—						—						—						—						—						(1,776,575)						—						$	(1,776,575)					—						$	(1,776,575)
Preferred dividends declared						—						—						—						—						—						(3,792)						—						$	(3,792)					—						$	(3,792)
Balance at June 30, 2019						—						—						23,687,664						236,832						228,175,537						(118,675,994)						(969,753)						108,766,622						99,500						108,866,122
Cost of issuing common stock						—						—						4,500						45						15,255						—						—						$	15,300					—						$	15,300
Redemption of preferred stock, net						—						—						—						—						(22,385)						—						—						$	(22,385)					—						$	(22,385)
Restricted stock compensation expense						—						—						(4,500)						—						(14,965)						—						—						$	(14,965)					—						$	(14,965)
Net income						—						—						—						—						—						—						2,157,748						$	2,157,748					—						$	2,157,748
Common dividends declared						—						—						—						—						—						(1,776,575)						—						$	(1,776,575)					—						$	(1,776,575)
Preferred dividends declared						—						—						—						—						—						(3,792)						—						$	(3,792)					—						$	(3,792)
Balance at September 30, 2019						—						—						23,687,664						236,877						228,153,442						(120,456,361)						1,187,995						109,121,953						99,500						109,221,453

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

4

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HUNT COMPANIES FINANCE TRUST, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Cash Flows

(unaudited)

						Nine Months Ended September 30, 2020						Nine Months Ended September 30, 2019
Cash flows from operating activities:
Net income						$	5,981,384					$	5,026,685
Adjustments to reconcile net income to net cash provided by operating activities:
Amortization of collateralized loan obligations discounts, net						872,869						819,562
Amortization of deferred offering costs						(40,000)						(67,150)
Amortization of deferred financing costs						771,017						755,735
Realized loss on investments, net						—						709,439
Unrealized loss on mortgage servicing rights						1,603,052						1,283,977
Unrealized (gain) on multi-family loans held in securitization trusts						—						(694,339)
Restricted stock compensation expense						17,343						7,922
Net change in:
Accrued interest receivable						61,860						189,977
Deferred offering costs						40,000						67,150
Other assets						(453,092)						(467,172)
Accrued interest payable						(393,517)						(52,401)
Fees and expenses payable to Manager						123,596						(439,439)
Other accounts payable and accrued expenses						39,675						(1,981,591)
Net cash provided by operating activities						8,624,187						5,158,355
Cash flows from investing activities:
Purchase of commercial mortgage loans held-for-investment						(52,580,443)						(179,075,497)
Principal payments from retained beneficial interests						—						4,747,049
Principal payments from commercial mortgage loans held-for-investment						88,907,741						174,726,836
Investment related receivable						(9,247,423)						33,042,234
Due to affiliate						71,727						—
Net cash provided by investing activities						27,151,602						33,440,622
Cash flows from financing activities:
Proceeds from issuance of common stock						5,747,375						—
Redemption of preferred stock						—						(40,250,000)
Dividends paid on common stock						(5,518,082)						(4,855,971)
Dividends paid on preferred stock						(7,500)						(528,614)
Proceeds from collateralized loan obligations						—						—
Proceeds from secured term loan						—						40,250,000
Payment of collateralized loan obligations						(27,740,358)						—
Payment of deferred financing costs						—						(1,090,372)
Net cash (used in) financing activities						(27,518,565)						(6,474,957)
Net increase in cash, cash equivalents and restricted cash						8,257,224						32,124,020
Cash, cash equivalents and restricted cash, beginning of period						16,011,830						59,213,812
Cash, cash equivalents and restricted cash, end of period						$	24,269,054					$	91,337,832
Supplemental disclosure of cash flow information
Cash paid for interest						$	10,747,082					$	16,531,631
Cash paid for income taxes						$	180,898					$	1,956,337
Non-cash investing and financing activities information
Dividends declared but not paid at end of period						$	2,123,980					$	1,780,367

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

5

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HUNT COMPANIES FINANCE TRUST, INC. AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements September 30, 2020 (unaudited)

NOTE 1 – ORGANIZATION AND BUSINESS OPERATIONS

Hunt Companies Finance Trust, Inc. (together with its consolidated subsidiaries, the "Company"), is a Maryland corporation that focuses primarily on investing in, financing and managing a portfolio of commercial real estate debt investments. Effective January 3, 2020, the Company is externally managed by OREC Investment Management, LLC (the "Manager" or "OREC IM"), who replaced the prior manager, Hunt Investment Management, LLC ("HIM"). The Company's common stock is listed on the NYSE under the symbol "HCFT."

The Company was incorporated on March 28, 2012 and commenced operations on May 16, 2012. The Company began trading as a publicly traded company on March 22, 2013.

The Company has elected to be taxed as a real estate investment trust ("REIT") and to comply with Sections 856 through 859 of the Internal Revenue Code of 1986, as amended (the "Code"). Accordingly, the Company generally will not be subject to U.S. federal income tax to the extent of its distributions to stockholders and as long as certain asset, income and share ownership tests are met.

 

On February 14, 2019, the Company drew on its secured term loan ("Secured Term Loan") in the aggregate principal amount of $40.25 million and used the net proceeds of $39.2 million and working capital of $1.1 million to redeem all 1,610,000 shares of its outstanding 8.75% Series A Cumulative Redeemable Preferred Stock at its $25 per share liquidation preference plus accrued and unpaid dividends.

On March 18, 2019, the Company entered into a support agreement with HIM, pursuant to which HIM agreed to reduce the expense reimbursement cap by 25% per annum (subject to such reduction not exceeding $568,000 per annum) until such time as the aggregate support provided thereunder equaled approximately $1.96 million. The terms of the support agreement are materially unchanged in the new management agreement with the Manager.

On January 3, 2020, the Company and HIM entered into a termination agreement to which the Company and HIM agreed to mutually and immediately terminate its management agreement dated January 18, 2018. The Company simultaneously entered into a new management agreement with OREC IM. 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. See Note 10 for further discussion.

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation

The unaudited condensed consolidated financial statements and related notes have been prepared in accordance with GAAP for interim financial reporting and the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, certain information and note disclosures normally included in the financial statements prepared under GAAP have been condensed or omitted. In the opinion of management, all adjustments considered necessary for a fair presentation of the Company’s financial position, results of operations and cash flows have been included and are of a normal and recurring nature. The operating results presented for interim periods are not necessarily indicative of the results that may be expected for any other interim period or for the entire year. These condensed consolidated financial statements should be read in conjunction with the Company’s financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2019, which was filed with the Securities and Exchange Commission (“SEC”) on March 16, 2020.

Principles of Consolidation

The accompanying condensed consolidated financial statements of the Company include the accounts of the Company and all subsidiaries which it controls (i) through voting or similar rights or (ii) by means other than voting rights if the Company is the primary beneficiary of a variable interest entity ("VIE"). Entities which the Company does not control and entities which are VIEs in which the Company is not the primary beneficiary are accounted for under the equity method or other appropriate GAAP. All significant intercompany transactions have been eliminated on consolidation.

VIEs

An entity is considered a VIE when any of the following applies: (1) the equity investors (if any) lack one or more essential characteristics of a controlling financial interest; (2) the equity investment at risk is not sufficient to finance that entity's activities without additional subordinated financial support; or (3) the equity investors have voting rights that are not proportionate to their economic interests and the activities of the entity involve or are conducted on behalf of an investor with a disproportionately small voting interest. The Company consolidates VIEs in which it is considered to be the primary beneficiary. The primary beneficiary is defined as the entity having both the following characteristics: (1) the power to direct the activities that, when taken together, most significantly impact the VIE's performance; and (2) the obligation to absorb losses and right to receive returns from the VIE that would be significant to the VIE.

The Company evaluates quarterly its junior retained notes and preferred shares of Hunt CRE 2017-FL1, Ltd. and Hunt CRE 2018-FL2, Ltd. for potential consolidation. At September 30, 2020, the Company determined it was the primary beneficiary of Hunt CRE 2017-FL1, Ltd. and Hunt CRE 2018-FL2, Ltd. based on its obligation to absorb losses derived from ownership of its preferred shares. Accordingly, the Company consolidated the assets, liabilities, income and expenses of the underlying issuing entities. The Company's maximum exposure to loss from collateralized loan obligations was $124,046,671 at September 30, 2020 and December 31, 2019.

Use of Estimates

The financial statements have been prepared on the accrual basis of accounting in accordance with GAAP. The preparation of financial statements in conformity with GAAP requires the Company to make a number of significant estimates. On March 11, 2020, the World Health Organization ("WHO") declared COVID-19 a global pandemic, which continues to spread throughout the United States and around the world. The outbreak has adversely impacted, and continues to adversely impact economic and market conditions globally, nationally and locally. Actions taken around the world to help mitigate the spread of COVID-19 include imposition of quarantines, "stay-at-home" orders, restrictions on travel and forced closures for certain types of public places, businesses and schools. The prolonged duration of the COVID-19 pandemic and its impact on our borrowers and their tenants, cash flows and future results of operations could be significant and will largely depend on future developments, which are highly uncertain and cannot be predicted. We believe the estimates and

6

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HUNT COMPANIES FINANCE TRUST, INC. AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements September 30, 2020 (unaudited)

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

assumptions underlying our consolidated financial statements are reasonable and supportable based on the information available as of September 30, 2020, however uncertainty over the ultimate impact of COVID-19 on the global economy generally, and our business in particular, makes any estimates and assumptions inherently less certain than they would be absent the current and potential impacts of COVID-19. Actual results could differ from its estimates and the differences may be material.

Cash and Cash Equivalents and Restricted Cash

Cash and cash equivalents at time of purchase include cash held in bank accounts on an overnight basis and other short term deposit accounts with banks having maturities of 90 days or less. The Company maintains its cash and cash equivalents with highly rated financial institutions, and at times these balances exceed insurable amounts.

Restricted cash includes cash held within Hunt CRE 2018-FL2 as of September 30, 2020 and within Hunt CRE 2017-FL1, Ltd. and Hunt CRE 2018-FL2, Ltd. as of December 31, 2019 for purposes of reinvestment in qualifying commercial mortgage loans. The reinvestment period for Hunt CRE 2017-FL1 expired on February 20, 2020.

The following table provides a reconciliation of cash, cash equivalents and restricted cash reported within the condensed consolidated balance sheets that sum to the total of the same amounts shown in the statements of cash flows.

			September 30, 2020						December 31, 2019
Cash and cash equivalents			$	9,720,138					$	10,942,115
Restricted cash CRE 2017-FL1, Ltd.			—						2,158,497
Restricted cash CRE 2018-FL2, Ltd.			$	14,548,916					$	2,911,218
Total cash, cash equivalents and restricted cash			$	24,269,054					$	16,011,830

Deferred Offering Costs

Direct costs incurred to issue shares classified as equity, such as legal and accounting fees, are deducted from the related proceeds and the net amount recorded as stockholders’ equity. Accordingly, payments made by the Company in respect of such costs related to the issuance of shares are recorded as an asset in the accompanying consolidated balance sheets in the line item “Deferred offering costs”, for subsequent deduction from the related proceeds upon closing of the offering. To the extent that certain costs, in particular legal fees, are known to have been accrued but have not yet been invoiced and paid, they are included in “Other accounts payable and accrued expenses” on the accompanying consolidated balance sheets.

Fair Value Measurements

The "Fair Value Measurements and Disclosures" Topic 820 of the FASB, or ASC 820, defines fair value, establishes a framework for measuring fair value, and requires certain disclosures about fair value measurement under GAAP. Specifically, the guidance defines fair value based on exit price, or the price that would be received upon the sale of an asset or the transfer of a liability in an orderly transaction between market participants at measurement date. ASC 820 specifies a hierarchy of valuation techniques based on the inputs used in measuring fair value.

Valuation techniques are based on observable and unobservable inputs. Observable inputs reflect readily obtainable market data from independent sources, while unobservable inputs reflect the Company's market assumptions. The three levels are defined as follows:

•Level 1 Inputs – Quoted prices for identical instruments in active markets.

•Level 2 Inputs – Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and model-derived valuations whose inputs are observable or whose significant value drivers are observable.

•Level 3 Inputs – Instruments with primarily unobservable value drivers.

Pursuant to ASC 820 we disclose fair value information about financial instruments, which are not otherwise reported at fair value in our consolidated balance sheet, to the extent it is practicable to estimate fair value for those certain instruments.

The following methods and assumptions are used to estimate the fair value of each class of financial instrument, for which it is practicable to estimate that value:

•Cash and cash equivalents: The carrying amount of cash and cash equivalents approximates fair value.

•Restricted cash: The carrying amount of restricted cash approximates fair value.

•Commercial mortgage loans: The Company determines the fair value of commercial mortgage loans by utilizing a pricing model based on discounted cash flow methodologies using discount rates, which reflect current market interest rates that would be offered for loans with similar characteristics and credit quality. Additionally, the Company may record fair value adjustments on a non-recurring basis when it has determined it necessary to record a specific impairment reserve or charge-off against a loan and the Company measures such specific reserve or charge-off using the fair value of the loan's collateral. To determine the fair value of loan collateral, the Company employs the income capitalization approach, appraised values, broker opinion of value, sale offers, letter of intentions of purchase, or other valuation benchmarks, as applicable, depending upon the nature of such collateral and other relevant market factors.

•Mortgage servicing rights: The Company determines the fair value of MSRs from a third-party pricing service on a recurring basis. The third-party pricing service uses common market pricing methods that include using discounted cash flow models to calculate the present value, estimated net servicing income and observed market pricing for MSR purchase and sale transactions. The model considers contractually specified servicing fees, prepayment assumptions, delinquency rates, late charges, other ancillary revenue, costs to service and other economic factors.

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HUNT COMPANIES FINANCE TRUST, INC. AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements September 30, 2020 (unaudited)

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

•Collateralized loan obligations: The Company determines the fair value of collateralized loan obligations by utilizing a third-party pricing service. In determining the value of a particular investment, pricing service providers may use market spreads, inventory levels, trade and bid list history, as well as market insight from clients, trading desks and global research platform.

•Secured term loan: The Company determines the fair value of its secured term loan based on a discounted cash flow methodology.

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 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 September 30, 2020, the Company did not hold any loans placed on 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 September 30, 2020, the Company has not recognized any impairments on its loans held-for-investment. We also assessed the remainder of the portfolio, considering the absence of delinquencies and current market conditions, and, as such have not recorded any allowance for loan losses.

Mortgage Servicing 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 sub-servicer, the associated loan. MSRs are reported at fair value. Residential mortgage loans for which the Company owns the MSRs are directly serviced by two 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.

Collateralized Loan Obligations

Collateralized loan obligations represent third-party liabilities of Hunt CRE 2017-FL1, Ltd. and Hunt CRE 2018-FL2, Ltd. (the "CLOs"). The CLOs are VIEs that the Company has determined it is the primary beneficiary of and accordingly are consolidated in the Company's financial statements, excluding liabilities of the CLOs acquired by the Company that are eliminated on consolidation. The third-party obligations of the CLOs do not have any recourse to the Company as the consolidator of the CLOs. CLOs are carried at their outstanding unpaid principal balances, net of any unamortized discounts or deferred financing costs. Any premiums, discounts or deferred financing costs associated with these liabilities are amortized to interest expense using the effective interest method over the expected average life of the related obligations, or on a straight line basis when it approximates the effective interest method. In light of the current market environment, which has been impacted by the ongoing COVID-19 pandemic, the Company has determined it is unlikely that a collateralized loan obligation transaction that had been contemplated will be executed by year-end. Accordingly, $624,816 in costs related to the contemplated transaction were expensed as "Other operating expenses" in the consolidated statements of operations in the second quarter of 2020. Such costs had previously been deferred as "Other assets" in the consolidated balance sheets.

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HUNT COMPANIES FINANCE TRUST, INC. AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements September 30, 2020 (unaudited)

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

Secured Term Loan

The Company and certain of its subsidiaries are party to a $40.25 million credit and guaranty agreement with the lenders referred to therein and Cortland Capital Service LLC, as administrative agent and collateral agent for the lenders (the "Secured Term Loan"). The Secured Term Loan is carried at its unpaid principal balance, net of deferred financing costs. Deferred financing costs of $1,017,419 associated with this liability are amortized to interest expense on a straight line basis when it approximates the effective interest method.

Common Stock

At September 30, 2020 and December 31, 2019, the Company was authorized to issue up to 450,000,000 shares of common stock, par value $0.01 per share, with such designations, voting and other rights and preferences as may be determined from time to time by the Company’s Board of Directors. The Company had 24,943,383 shares of common stock issued and outstanding at September 30, 2020 and 23,692,164 at December 31, 2019.

Stock Repurchase Program

On December 15, 2015, the Company’s Board of Directors authorized a stock repurchase program (“Repurchase Program”), to repurchase up to $10 million of the Company’s outstanding common stock. Subject to applicable securities laws, repurchase of common stock under the Repurchase Program may be made at times and in amounts as the Company deems appropriate, using available cash resources. Shares of common stock repurchased by the Company under the Repurchase Program, if any, will be canceled and, until reissued by the Company, will be deemed to be authorized but unissued shares of common stock. The Repurchase Program may be suspended or discontinued by the Company at any time and without prior notice.

Preferred Stock

On February 14, 2019, the Company redeemed all 1,610,000 shares of its outstanding 8.75% Series A Cumulative Redeemable Preferred Stock at its $25 per share liquidation preference plus accrued and unpaid dividends.

Income Taxes

The Company has elected to be taxed as a REIT under the Code for U.S. federal income tax purposes, commencing with the Company’s short taxable period ended December 31, 2012. A REIT is generally taxable as a U.S. C-Corporation; however, so long as the Company qualifies as a REIT it is entitled to a special deduction for dividends paid to shareholders not otherwise available to corporations. Accordingly, the Company generally will not be subject to U.S. federal income tax to the extent its distributions to stockholders equals, or exceeds, its REIT taxable income for the year. In addition, the Company must continue to meet certain REIT qualification requirements with respect to distributions, as well as certain asset, income and share ownership tests, in accordance with Sections 856 through 860 of the Code, as summarized below. In addition, the TRS is maintained to perform certain services and earn income for the Company that the Company is not permitted as a REIT.

To maintain its qualification as a REIT, the Company must meet certain requirements, including but not limited to the following: (i) distribute at least 90% of its REIT taxable income to its stockholders; (ii) invest at least 75% of its assets in REIT qualifying assets, with additional restrictions with respect to asset concentration risk; and (iii) earn at least 95% of its gross income from qualifying sources of income, including at least 75% from qualifying real estate and real estate related sources. Regardless of the REIT election, the Company may also be subject to certain state, local and franchise taxes. Under certain circumstances, federal income and excise taxes may be due on its undistributed taxable income. If the Company were to fail to meet these requirements, it would be subject to U.S. federal income tax as a U.S. C-Corporation, which could have a material adverse impact on its results of operations and amounts available for distributions to its stockholders. The Company has historically met the requisite ownership, asset and income tests, with the exception of a failure to meet the 75% gross income test for the 2018 calendar year ("2018 75% Income Test Failure"). Refer to Note 16 for further discussion of the 2018 75% Income Test Failure.

Certain activities of the Company are conducted through a TRS and therefore are taxed as a standalone U.S. C-Corporation. Accordingly, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.

 

The TRS is not subject to a distribution requirement with respect to its REIT owner. The TRS may retain earnings annually, resulting in an increase in the consolidated book equity of the Company and without a corresponding distribution requirement by the REIT. If the TRS generates net income, and declares dividends to the Company, such dividends will be included in its taxable income and necessitate a distribution to its stockholders in accordance with the REIT distribution requirements.

The Company assesses its tax positions for all open tax years and determines whether the Company has any material unrecognized liabilities in accordance with ASC 740, Income Taxes. The Company records these liabilities to the extent the Company deems them more likely than not to be incurred. The Company's accounting policy with respect to interest and penalties is to classify these amounts as other interest expense.

Earnings per Share

The Company calculates basic and diluted earnings per share by dividing net income attributable to common stockholders for the period by the weighted-average shares of the Company’s common stock outstanding for that period. Diluted earnings per share takes into account the effect of dilutive instruments, such as warrants, stock options, and unvested restricted stock, but use the average share price for the period in determining the number of incremental shares that are to be added to the weighted-average number of shares outstanding. See Note 14 for details of the computation of basic and diluted earnings per share.

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HUNT COMPANIES FINANCE TRUST, INC. AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements September 30, 2020 (unaudited)

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

Stock-Based Compensation

The Company is required to recognize compensation costs relating to stock-based payment transactions in the consolidated financial statements. The Company accounts for share-based compensation issued to its Manager and non-management directors using the fair-value based methodology prescribed by ASC 505, Equity (“ASC 505”), or ASC 718, Share-Based Payment (“ASC 718”), as appropriate. Compensation cost related to restricted common stock issued to the Manager is initially measured at estimated fair value at the grant date, and is re-measured on subsequent dates to the extent the awards are unvested. Additionally, the compensation cost related to restricted common stock issued to the non-management directors is measured at its estimated fair value at the grant date and amortized and expensed over the vesting period. See Note 10 for details of stock-based awards issuable under the Manager Equity Plan.

Comprehensive Income (Loss) Attributable to Common Stockholders

For the three and nine months ended September 30, 2020 and 2019, comprehensive income equaled net income; therefore, a separate consolidated statement of comprehensive income is not included in the accompanying consolidated financial statements.

Recently Issued and/or Adopted Accounting Standards

Credit Losses

In June 2016, the FASB issued ASU 2016-13, which is a comprehensive amendment of credit losses on financial instruments. Currently GAAP requires an “incurred loss” methodology for recognizing credit losses that delays recognition until it is probable a loss has been incurred. The standard’s core principle is that an entity replaces the “incurred loss” impairment methodology in current GAAP with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to support credit loss estimates. For public business entities that are SEC filers, the amendment in this update is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years.

In November 2019, the FASB issued ASU 2019-10 which amended the effective dates for implementation of ASU 2016-13. ASU 2019-10 defers the effective date of ASU 2016-13 for SEC filers that are eligible to be smaller reporting companies, public business entities that are not SEC filers and all other companies, including not-for-profit companies and employee benefit plans for fiscal years beginning after December 15 2022, including interim periods within those fiscal years. The Company is designated as a smaller reporting company and has deferred implementation of ASU 2016-13 pursuant to ASU 2019-10 and is continuing to assess the impact of this guidance.

In February 2020, the FASB issued ASU 2020-02, amending SEC paragraphs in the Codification to reflect the issuance of SEC Staff Accounting Bulletin ("SAB") No. 119 related to the new credit losses standard and revised effective date of the new leases standard. SAB No. 119 provides interpretive guidance on methodologies and supporting documentation for measuring credit losses, with a focus on the documentation the staff would normally expect registrants engaged in lending transactions to prepare and maintain to support estimates of current expected credit losses for loan transactions. This new guidance is effective for fiscal years beginning after December 15, 2022 for smaller reporting companies.

Accounting for Income Taxes

In December 2019, the FASB issued ASU 2019-12, "Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes." This guidance eliminates certain exceptions to the general principles in Topic 740. This new guidance is effective for us on January 1, 2021, with early adoption permitted. We are evaluating the potential impact of this new guidance on our consolidated financial statements.

Financial Instruments

In March 2020, the FASB issued ASU 2020-03 which makes improvements to financial instruments guidance, including the current expected credit losses (CECL) guidance. Only Issue 1, of the 7 improvement issues applies to the Company, which is effective upon issuance, requires all entities to provide fair value option disclosures. MSRs are reported at fair value as a result of the fair value election, disclosed in Mortgage Servicing Rights, at Fair Value above.

Reference Rate Reform

In March 2020, the FASB issued ASU 2020-04, "Reference Rate Reform (Topic 828): Facilitation of the Effects of Reference Rate Reform on Financial Reporting." The standard was issued to ease the accounting effects of reform to the London Interbank Offered Rate ("LIBOR") and other reference rates. The standard provides optional expedients and exceptions for applying GAAP to debt instruments, leases, derivatives and other contracts affected by reference rate reform. ASU 2020-04 generally considers contract modifications related to reference rate reform to be an event that does not require contract remeasurement at the modification date nor a reassessment of a previous accounting determination. The standard is effective for all entities as of March 12, 2020 through December 31, 2022 and may be elected over time as reference rate reform activities occur. We are currently evaluating the impact of this guidance on our consolidated financial statements.

CARES Act

On March 27, 2020, President Trump signed into law the Coronavirus Aid, Relief and Economic Security Act ("CARES Act"). Section 4013 of the CARES Act includes a provision that permits financial institutions an election to suspend temporarily troubled debt restructuring ("TDR") accounting under ASC Subtopic 310-40 in certain circumstances ("Section 4013 Elections"). Additionally, Section 4014 of the CARES Act includes a provision that permits deferral of the effective date of ASU 2016-13, Financial Instruments - Credit Losses (Topic 326), for insured depository institutions, bank holding companies, or any affiliates thereof ("Section 4014 Election"). The Company is not a financial institution, nor a depository institution, bank holding company or an affiliate of one and therefore would not be permitted to make Section 4013 or Sections 4014 Elections. The Company is designated as a smaller reporting company and has previously deferred implementation of ASU 2016-13 until January 1, 2023 pursuant to ASU 2019-10.

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HUNT COMPANIES FINANCE TRUST, INC. AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements September 30, 2020 (unaudited)

NOTE 3 – COMMERCIAL MORTGAGE LOANS HELD-FOR-INVESTMENT

The following tables summarize certain characteristics of the Company's investments in commercial mortgage loans as of September 30, 2020 and December 31, 2019:

																								Weighted Average
Loan Type						Unpaid Principal Balance						Carrying Value						Loan Count						Floating Rate Loan %						Coupon(1)						Remaining Term  (Years)(2)
September 30, 2020
Loans held-for-investment
Senior secured loans(3)						$	598,933,122					$	598,933,122					44						100.0		%				5.1		%				3.2
						598,933,122						598,933,122						44						100.0		%				5.1		%				3.2

																								Weighted Average
Loan Type						Unpaid Principal Balance						Carrying Value						Loan Count						Floating Rate Loan %						Coupon(1)						Remaining Term  (Years)(2)
December 31, 2019
Loans held-for-investment
Senior secured loans(3)						$	635,260,420					$	635,260,420					51						100.0		%				5.4		%				3.8
						635,260,420						635,260,420						51						100.0		%				5.4		%				3.8

(1)    Weighted average coupon assumes applicable one-month LIBOR of 0.16% and 1.70% as of September 30, 2020 and December 31, 2019, respectively, inclusive of weighted average floors of 1.61% and 1.56%, respectively.

(2)    Weighted average remaining term assumes all extension options are exercised by the borrower, provided, however, that our loans may be repaid prior to such date.

(3)    As of September 30, 2020, $582,771,880 of the outstanding senior secured loans were held in VIEs and $16,161,242 of the outstanding senior secured loans were held outside VIEs. As of December 31, 2019, $629,157,956 of the outstanding senior secured loans were held in VIEs and $6,102,464 of the outstanding senior secured loans were held outside VIEs.

Activity: For the nine months ended September 30, 2020, the loan portfolio activity was as follows:

						Commercial Mortgage Loans Held-for-Investment
Balance at December 31, 2019						$	635,260,420
Purchases and fundings						52,580,443
Proceeds from principal payments						(88,907,741)
Balance at September 30, 2020						$	598,933,122

Loan Risk Ratings: As further described in Note 2, the Company evaluates the commercial mortgage loan portfolio on a quarterly basis and assigns a risk rating based on a variety of factors. The following tables present the principal balance and net book value of the loan portfolio based on the Company's internal risk ratings utilized as of September 30, 2020 and December 31, 2019:

						September 30, 2020																		December 31, 2019
Risk Rating						Number of Loans						Unpaid Principal Balance						Net Carrying Value						Number of Loans						Unpaid Principal Balance						Net Carrying Value
1						—						$	—					—						1						9,000,000						9,000,000
2						8						91,155,086						91,155,086						9						87,176,088						87,176,088
3						27						393,803,374						393,803,374						37						487,513,256						487,513,256
4						9						113,974,662						113,974,662						4						51,571,076						51,571,076
5						—						—						—						—						—						—
						44						$	598,933,122					598,933,122						51						635,260,420						635,260,420

As of September 30, 2020, the average risk rating of the commercial mortgage loan portfolio was 3.1 (Moderate Risk), weighted by investment carrying value, with 81.0% of commercial loans held-for-investment rated 3 (Moderate Risk) or better by the Company's Manager.

As of December 31, 2019, the average risk rating of the commercial mortgage loan portfolio was 2.8 (Moderate Risk), weighted by investment carrying value, with 91.9% of commercial loans held-for-invested rated 3 (Moderate Risk) or better by the Company's Manager.

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HUNT COMPANIES FINANCE TRUST, INC. AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements September 30, 2020 (unaudited)

NOTE 3 - COMMERCIAL MORTGAGE LOANS HELD-FOR-INVESTMENT (Continued)

The increase in the average risk rating during 2020 is primarily the result of downgrade of several non multi-family loans to a risk rating of "4" to reflect higher risk in loans collateralized by retail and office properties that are particularly negatively impacted by the COVID-19 pandemic.

Concentration of Credit Risk: The following tables present the geographic and property types of collateral underlying the Company's commercial mortgage loans as a percentage of the loans' carrying value as of September 30, 2020 and December 31, 2019:

Loans Held-for-Investment

						September 30, 2020						December 31, 2019
Geography
Southwest						37.0		%				38.7		%
South						35.5						27.5
Midwest						18.8						16.9
Mid-Atlantic						7.0						8.4
West						1.7						3.0
Various						—						5.5
Total						100.0		%				100.0		%

						September 30, 2020(1)						December 31, 2019
Collateral Property Type
Multi-Family						90.4		%				93.9		%
Retail						5.9						2.7
Office						3.0						2.0
Self-Storage						0.7						0.7
Mixed-Use						—						0.7
Total						100.0		%				100.0		%

(1)    During the period ended March 31, 2020, two multi-family loans were adjusted to retail and office, respectively, due to the primary nature of the underlying properties. The adjustment represents a reduction in multi-family of 3.6% and an increase to retail and office of 2.8% and 0.8%, respectively, to the percentages presented for December 31, 2019.

We did not have any impaired loans, nonaccrual loans, or loans in maturity default as of September 30, 2020 or December 31, 2019.

NOTE 4 - THE FREMF TRUSTS

As of September 30, 2020 the Company no longer held any FREMF Trusts.

The Company previously elected the fair value option on the assets and liabilities of the FREMF 2012-KF01 Trust, which required that changes in valuations of the trust be reflected in the Company’s statements of operations. The Company’s net investment in the trust was limited to the Multi-Family MBS comprised of first loss PO securities and IO securities acquired by the Company in 2014. On January 25, 2019, the FREMF 2012-KF01 trust was paid-in full.

The condensed consolidated statement of operations of the FREMF trusts for the three and nine months ended September 30, 2019 are as follows:

Statements of Operations						Three Months Ended September 30, 2019						Nine Months Ended September 30, 2019
Interest income						$	—					$	78,361
Net interest income						$	—					$	78,361
Realized (loss) on multi-family loans held in securitization trusts						—						(709,439)
Unrealized gain on multi-family loans held in securitization trusts						—						694,339
Net income (loss)						$	—					$	63,261

NOTE 5 - USE OF SPECIAL PURPOSE ENTITIES AND VARIABLE INTEREST ENTITIES

As further discussed in Notes 2 and 4, the Company evaluated its investment in Multi-Family MBS and determined that it was a VIE. The Company determined that it was the primary beneficiary of the FREMF 2012-KF01 Trust through January 25, 2019, the repayment date of the underlying security. Accordingly, the Company consolidated the assets, liabilities, income and expenses of this trust in its financial statements through January 25, 2019. However, the assets of the trust were restricted, and could only have been used to fulfill the obligations of the trust. Additionally, the obligations of the trust did not have any recourse to the Company as the consolidator of the trust. The Company had elected the fair value option in respect of the assets and liabilities of the trust. As noted in Note 4, the FREMF 2012-KF01 was paid-in full effective January 25, 2019, and henceforth the Company no longer consolidates this trust.

On April 30, 2018, the Company acquired Hunt CMT Equity LLC, which was comprised of commercial mortgage loans financed through collateralized loan obligations ("Hunt CRE 2017-FL1, Ltd."), a licensed commercial mortgage lender and eight loan participations. The Company determined Hunt CRE

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HUNT COMPANIES FINANCE TRUST, INC. AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements September 30, 2020 (unaudited)

NOTE 5 – USE OF SPECIAL PURPOSE ENTITIES AND VARIABLE INTEREST ENTITIES (Continued)

2017-FL1, Ltd. was a VIE and that the Company was the primary beneficiary of the issuing entity, and accordingly consolidated its assets and liabilities into the Company's financial statements in accordance with GAAP. On August 20, 2018, the Company closed a collateral loan obligation ("Hunt CRE 2018-FL2, Ltd."). The Company determined Hunt CRE 2018-FL2, Ltd. was a VIE and the Company was the primary beneficiary of the issuing entity, and accordingly consolidated its assets and liabilities into the Company's financial statements in accordance with GAAP. However, the assets of each of the trusts are restricted, and can only be used to fulfill the obligations of the respective trusts. Additionally, the obligations of each of the trusts do not have any recourse to the Company as the consolidator of the trusts. At September 30, 2020, the Company continued to determine it was the primary beneficiary of Hunt CRE 2017-FL1, Ltd. and Hunt CRE 2018-FL2, Ltd. based on its obligations to absorb losses derived from ownership of preferred shares.

The CLOs we consolidate are subject to collateralization and coverage tests that are customary for these types of securitizations. As of September 30, 2020 and December 31, 2019 all such collateralization and coverage tests in the CLOs we consolidate were met. If the duration of the COVID-19 pandemic continues to prolong, its impact on our borrowers and their tenants could result in a sustained deterioration in a material amount of assets and may impact these tests.

The carrying values of the Company's total assets and liabilities related to Hunt CRE 2017-FL1, Ltd. and Hunt CRE 2018-FL2, Ltd. at September 30, 2020 and December 31, 2019 included the following VIE assets and liabilities:

ASSETS						September 30, 2020						December 31, 2019
Cash, cash equivalents and restricted cash						$	14,548,916					$	5,069,715
Accrued interest receivable(1)						2,203,444						2,313,818
Investment related receivable(2)						9,166,516						—
Loans held for investment						582,771,880						629,157,956
Total Assets						$	608,690,756					$	636,541,489
LIABILITIES
Accrued interest payable						$	338,656					$	732,173
Collateralized loan obligations(3)						479,704,710						505,930,065
Total Liabilities						$	480,043,366					$	506,662,238
Equity						128,647,390						129,879,251
Total liabilities and equity						$	608,690,756					$	636,541,489

(1)    Accrued interest receivable includes $133,723 of interest and exit fees receivable, which were settled subsequent to September 30, 2020.

(2)    Investment related receivable includes one loan in Hunt CRE 2017-FL1 with a principal amount due of $9,166,516 which paid off after the September remittance and was received in October. This repayment will be used to pay down the Class A Notes of the CLO.

(3)     The stated maturity of the collateral loan obligations per the terms of the underlying collateralized loan obligation agreement is August 15, 2034 for Hunt CRE 2017-FL1, Ltd. and August 15, 2028 for Hunt CRE 2018-FL2, Ltd.

The following tables present certain loan and borrowing characteristics of Hunt CRE 2017-FL1, Ltd. and Hunt CRE 2018-FL2, Ltd. as of September 30, 2020 and December 31, 2019:

As of September 30, 2020
Collateralized Loan Obligations						Count						Principal Value						Carrying Value(1)						Wtd. Avg. Yield
Collateral (loan investments)						44						$	582,771,880					$	582,771,880					L + 3.53%
Financings provided						2						482,440,642						479,704,710						L + 1.43%

As of December 31, 2019
Collateralized Loan Obligations						Count						Principal Value						Carrying Value(1)						Wtd. Avg. Yield
Collateral (loan investments)						51						$	629,157,956					$	629,157,956					L + 3.60%
Financing provided						2						510,181,000						505,930,065						L + 1.40%

(1)     The carrying value for Hunt CRE 2017-FL1, Ltd. is net of discount of $472,055 and $1,344,923 for September 30, 2020 and December 31, 2019, respectively and the carrying value for Hunt CRE 2018-FL2, Ltd. is net of debt issuance costs of $2,263,877 and $2,906,012 for September 30, 2020 and December 31, 2019, respectively.

The statement of operations related to Hunt CRE 2017-FL1, Ltd. and Hunt CRE 2018-FL2, Ltd. for the three and nine months ended September 30, 2020 and September 30, 2019 include the following income and expense items:

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HUNT COMPANIES FINANCE TRUST, INC. AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements September 30, 2020 (unaudited)

NOTE 5 – USE OF SPECIAL PURPOSE ENTITIES AND VARIABLE INTEREST ENTITIES (Continued)

Statements of Operations						Three Months Ended September 30, 2020						Three Months Ended September 30, 2019
Interest income						$	7,900,183					$	9,717,060
Interest expense						(2,495,996)						(5,244,001)
						$	5,404,187					$	4,473,059
General and administrative fees						(201,459)						(256,269)
Net income						$	5,202,728					$	4,216,790

Statements of Operations						Nine Months Ended September 30, 2020						Nine Months Ended September 30, 2019
Interest income						$	25,225,152					$	29,695,218
Interest expense						(9,649,523)						(16,147,178)
						$	15,575,629					$	13,548,040
General and administrative fees						(497,088)						(538,028)
Net income (loss)						$	15,078,541					$	13,010,012

NOTE 6 - RESTRICTED CASH

Hunt CRE 2017-FL1, Ltd. was actively managed with an initial reinvestment period of 30 months which expired on February 20, 2020. Hunt CRE 2018-FL2, Ltd. is actively managed with an initial reinvestment period of 36 months. As loans payoff or mature, as applicable, during this reinvestment period, cash received is restricted and intended to be reinvested within Hunt CRE 2018-FL2, Ltd. in accordance with the terms and conditions of their respective governing agreements.

NOTE 7 - SECURED TERM LOAN

On January 15, 2019, the Company, together with its FOAC and Hunt CMT Equity subsidiaries (together with the Company, the "Credit Parties"), entered into the Secured Term Loan, as amended on February 13, 2019 and July 9, 2020 with the lenders party thereto and Cortland Capital Market Services, LLC, as administrative agent (in such capacity, the "Agent"), providing for a term facility ("Credit Agreement") to be drawn in an aggregate principal amount of $40.25 million with a maturity of 6 years.

On February 14, 2019, the Company drew on the Secured Term Loan in the aggregate principal amount of $40.25 million generating net proceeds of $39.2 million. The outstanding balance of the Secured Term Loan in the table below is presented gross of deferred financing costs ($737,076 and $865,959 at September 30, 2020 and December 31, 2019, respectively). As of September 30, 2020 and December 31, 2019, the outstanding balance and total commitment under the Credit Agreement consisted of the following:

						September 30, 2020												December 31, 2019
						Outstanding Balance						Total Commitment						Outstanding Balance						Total Commitment
Secured Term Loan						$	40,250,000					$	40,250,000					$	40,250,000					$	40,250,000
Total						$	40,250,000					$	40,250,000					$	40,250,000					$	40,250,000

The borrowings under the Secured Term Loan are joint and several obligations of the Credit Parties. In addition, the Credit Parties’ obligations under the Secured Term Loan are secured by substantially all the assets of the Credit Parties through pledge and security documentation. Amounts advanced under the Secured Term Loan are subject to compliance with a borrowing base comprised of assets of the Credit Parties and certain of their subsidiaries, and includes senior and subordinated commercial real estate mortgage loans, preferred equity in commercial real estate assets (directly or indirectly), commercial real estate construction mortgage loans and certain types of equity interests (the “Eligible Assets”). Borrowings under the Secured Term Loan bear interest at a fixed rate of 7.25% for the five-year period following the initial draw-down, which is subject to step up by 0.25% for the first four months after the fifth anniversary of the borrowing of the Senior Secured Term Loan, then by 0.375% for the following four months, then by 0.50% for the last four months until the maturity.

In response to the continued COVID-19 pandemic, on July 9, 2020, the Company successfully entered into the Second Amendment to the Credit and Guaranty Agreement. This amendment provides the Company with additional flexibility to effectively manage any potential borrower distress related to COVID-19 that were not originally contemplated in loan documentation.

The Credit Agreement contains affirmative and negative covenants binding the Company and its subsidiaries that are customary for credit facilities of this type, including, but not limited to: minimum asset coverage ratio; minimum unencumbered assets ratio; maximum total net leverage ratio; minimum tangible net worth; and an interest charge coverage ratio. As of September 30, 2020 and December 31, 2019 we were in compliance with these covenants. If the duration of the COVID-19 pandemic continues to prolong, its impact on our borrowers and their tenants could result in a sustained deterioration in a material amount of assets and may impact these covenants.

The Credit Agreement contains events of default that are customary for facilities of this type, including, but not limited to, nonpayment of principal, interest, fees and other amounts when due, violation of covenants, cross default with material indebtedness, and change of control.

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HUNT COMPANIES FINANCE TRUST, INC. AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements September 30, 2020 (unaudited)

NOTE 8 – MSRs

As of September 30, 2020, the Company retained the servicing rights associated with an aggregate principal balance of $239,180,324 of residential mortgage loans that the Company had previously transferred to residential mortgage loan securitization trusts. The Company’s MSRs are held and managed at the Company’s TRS, and the Company employs two licensed sub-servicers to perform the related servicing activities.

The following table presents the Company’s MSR activity for the nine months ended September 30, 2020 and the nine months ended September 30, 2019:

						September 30, 2020						September 30, 2019
Balance at beginning of period						$	2,700,207					$	3,997,786
Changes in fair value due to:
Changes in valuation inputs or assumptions used in valuation model						(838,437)						(817,137)
Other changes to fair value(1)						(764,616)						(466,840)
Balance at end of period						$	1,097,154					$	2,713,809
Loans associated with MSRs(2)						$	239,180,324					$	359,718,840
MSR values as percent of loans(3)						0.46		%				0.75		%

(1)Amounts represent changes due to realization of expected cash flows and prepayment of principal of the underlying loan portfolio.

(2)Amounts represent the unpaid principal balance of loans associated with MSRs outstanding at September 30, 2020 and September 30, 2019, respectively.

(3)Amounts represent the carrying value of MSRs at September 30, 2020 and September 30, 2019, respectively divided by the outstanding balance of the loans associated with these MSRs

The following table presents the servicing income recorded on the Company’s condensed consolidated statements of operations for the three and nine months ended September 30, 2020 and September 30, 2019:

						Three Months Ended September 30, 2020						Three Months Ended September 30, 2019
Servicing income, net						$	187,989					$	243,265
Total servicing income						$	187,989					$	243,265

						Nine Months Ended September 30, 2020						Nine Months Ended September 30, 2019
Servicing income, net						$	586,516					$	676,944
Total servicing income						$	586,516					$	676,944

NOTE 9 - FAIR VALUE

The following tables summarize the valuation of the Company’s assets and liabilities carried at fair value on a recurring basis within the fair value hierarchy levels as of September 30, 2020 and December 31, 2019:

						September 30, 2020
						Quoted prices in active markets for identical assets Level 1						Significant other observable inputs Level 2						Unobservable inputs Level 3						Balance as of September 30, 2020
Assets:
Mortgage servicing rights						—						—						1,097,154						1,097,154
Total						$	—					$	—					$	1,097,154					$	1,097,154

						December 31, 2019
						Quoted prices in active markets for identical assets Level 1						Significant other observable inputs Level 2						Unobservable inputs Level 3						Balance as of December 31, 2019
Assets:
Mortgage servicing rights						—						—						2,700,207						2,700,207
Total						$	—					$	—					$	2,700,207					$	2,700,207

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HUNT COMPANIES FINANCE TRUST, INC. AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements September 30, 2020 (unaudited)

NOTE 9 – FAIR VALUE (Continued)

As of September 30, 2020 and December 31, 2019, the Company had $1,097,154 and $2,700,207, respectively, in Level 3 assets. The Company’s Level 3 assets are comprised of MSRs. For more detail about Level 3 assets, also see Notes 2 and 8.

The following table provides quantitative information about the significant unobservable inputs used in the fair value measurement of the Company’s MSRs classified as Level 3 fair value assets at September 30, 2020 and December 31, 2019:

As of September 30, 2020
Valuation Technique						Unobservable Input						Range						Weighted Average
Discounted cash flow						Constant prepayment rate						12.4 - 28.0%						22.5		%
						Discount rate						12.0		%				12.0		%

As of December 31, 2019
Valuation Technique						Unobservable Input						Range						Weighted Average
Discounted cash flow						Constant prepayment rate						7.4 - 27.6%						13.3		%
						Discount rate						12.0		%				12.0		%

As discussed in Note 2, GAAP requires disclosure of fair value information about financial instruments, whether or not recognized in the condensed consolidated balance sheets, for which it is practicable to estimate that value. The following table details the carrying amount, face amount and fair value of the financial instruments described in Note 2:

						September 30, 2020
						Level in Fair Value Hierarchy						Carrying Value						Face Amount						Fair Value
Assets:
Cash and cash equivalents						1						9,720,138						9,720,138						9,720,138
Restricted cash						1						14,548,916						14,548,916						14,548,916
Commercial mortgage loans held-for-investment						3						598,933,122						598,933,122						594,213,194
Total												$	623,202,176					$	623,202,176					$	618,482,248
Liabilities:
Collateralized loan obligations						2						479,704,710						482,440,642						470,291,430
Secured Term Loan						3						39,512,924						40,250,000						42,046,142
Total												$	519,217,634					$	522,690,642					$	512,337,572

						December 31, 2019
						Level in Fair Value Hierarchy						Carrying Value						Face Amount						Fair Value
Assets:
Cash and cash equivalents						1						10,942,115						10,942,115						10,942,115
Restricted cash						1						5,069,715						5,069,715						5,069,715
Commercial mortgage loans held-for-investment						3						635,260,420						635,260,420						635,260,420
Total												$	651,272,250					$	651,272,250					$	651,272,250
Liabilities:
Collateralized loan obligations						2						505,930,065						510,181,000						510,834,435
Secured term loan						3						39,384,041						40,250,000						42,999,082
Total												$	545,314,106					$	550,431,000					$	553,833,517

Estimates of cash and cash equivalents and restricted cash are measured using quoted market prices, or Level 1 inputs. Estimates of the fair value of collateralized loan obligations are measured using observable, quoted market prices, in active markets, or Level 2 inputs. All other fair value significant estimates are measured using unobservable inputs, or Level 3 inputs. See Note 2 for further discussion regarding fair value measurement of certain of our assets and liabilities.

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HUNT COMPANIES FINANCE TRUST, INC. AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements September 30, 2020 (unaudited)

NOTE 10 - RELATED PARTY TRANSACTIONS (Continued)

Management and Incentive Fee

The Company is externally managed and advised by the Manager and through January 3, 2020 by HIM, our prior manager. Pursuant to the terms of the prior management agreement in effect for the year ended December 31, 2019, the Company paid the prior manager a management fee equal to 1.5% per annum, calculated and payable quarterly (0.375% per quarter) in arrears. For purposes of calculating the management fee, the Company’s stockholders’ equity included the sum of the net proceeds from all issuances of the Company’s equity securities since inception (allocated on a pro rata daily basis for such issuances during the fiscal quarter of any such issuance), plus the Company’s retained earnings at the end of the most recently completed calendar quarter (without taking into account any non-cash equity compensation expense incurred in current or prior periods), less any amount that the Company paid for repurchases of the Company’s common stock since inception, and excluding any unrealized gains, losses or other items that did not affect realized net income (regardless of whether such items were included in other comprehensive income or loss, or in net income). This amount was adjusted to exclude one-time events pursuant to changes in GAAP and certain non-cash items after discussions between the manager and the Company’s independent directors and approval by a majority of the Company’s independent directors. To the extent asset impairment reduced the Company’s retained earnings at the end of any completed calendar quarter, it would reduce the management fee for such quarter. The Company’s stockholders’ equity for the purposes of calculating the management fee could be greater than the amount of stockholders’ equity shown on the consolidated financial statements. Additionally, under the terms of the prior management agreement, starting in the first full calendar quarter following January 18, 2019, the Company was also required to pay the Manager a quarterly incentive fee equal to 20% of the excess of Core Earnings (as defined in the management agreement) over the product of (i) Stockholders' Equity as of the end of such fiscal quarter, and (ii) 8% per annum. On January 3, 2020, the management agreement in effect for the year ended December 31, 2019 was terminated, and a new management agreement with the Manager became effective. Pursuant to the terms of the new management contract, the Company is required to pay the Manager an annual base management fee of 1.50% of Stockholders' Equity (as defined in the management agreement), payable quarterly (0.375% per quarter) in arrears. The definition of stockholders' equity in the new management agreement is materially unchanged from the definition in the prior management agreement. Additionally, starting in the first full calendar quarter following January 3, 2020, the Company is also required to pay the Manager a quarterly incentive fee equal to 20% of the excess of Core Earnings (as defined in the management agreement) over the product of (i) the Stockholders' Equity as of the end of such fiscal quarter, and (ii) 8% per annum.

For the three months ended September 30, 2020, the Company incurred management fees of $588,530 (September 30, 2019: $557,833), recorded as "Management Fee" in the condensed consolidated statement of operations, of which $588,000 (September 30, 2019: $561,000) was accrued but had not been paid, included in "fees and expenses payable to Manager" in the condensed consolidated balance sheets.

For the nine months ended September 30, 2020, the Company incurred management fees of $1,763,562 (September 30, 2019: $1,677,456), recorded as "Management Fee" in the condensed consolidated statement of operations, of which $588,000 (September 30, 2019: $561,000) was accrued but had not been paid, included in "fees and expenses payable to Manager" in the condensed consolidated financial statements.

For the three and nine months ended September 30, 2020 the Company accrued $86,577 in incentive fees and for the three and nine months ended September 30, 2019, the Company did not incur any incentive fees.

Expense Reimbursement

Pursuant to the management agreement, the Company is required to reimburse the Manager for operating expenses related to the Company incurred by the Manager, including accounting, auditing and tax services, technology and office facilities, operations, compliance, legal and filing fees, and miscellaneous general and administrative costs, including the cost of non-investment management personnel of the Manager who spend all or a portion of their time managing the Company’s affairs. The Manager has agreed to certain limitations on manager expense reimbursement from the Company.

On March 18, 2019, the Company entered into a support agreement with the prior manager, pursuant to which, the prior manager agreed to reduce the reimbursement cap by 25% per annum (subject to such reduction not exceeding $568,000 per annum) until such time as the aggregate support provided thereunder equaled approximately $1.96 million. Pursuant to the new management agreement, the terms of the support agreement are materially unchanged.

For the three months ended September 30, 2020, the Company incurred reimbursable expenses of $441,349 (September 30, 2019: $175,174), recorded as "operating expenses reimbursable to Manager" in the condensed consolidated statement of operations, of which $441,000 (September 30, 2019: $174,561) was accrued but had not yet been paid, included in "fees and expenses payable to Manager" in the condensed consolidated balance sheets. Per the management agreement, any exit fees waived by the Company as a result of permanent financing by the Manager or any of its affiliates, shall result in a reduction to reimbursed expenses by an amount equal to 50% of the amount of any such waived exit fee. For the three months ended September 30, 2020, the Company did not waive any reimbursable expenses and for the three months ended September 30, 2019, the Company waived $345,988 of exit fees.

For the nine months ended September 30, 2020, the Company incurred reimbursable expenses of $1,249,123 (September 30, 2019: $1,232,211), recorded as "operating expenses reimbursable to Manager" in the condensed consolidated statement of operations, of which $441,000 (September 30, 2019: $174,561) was accrued but had not yet been paid, included in "fees and expense payable to Manager" in the condensed consolidated balance sheets. Per the management agreement, any exit fees waived by the Company as a result of permanent financing by the Manager or any of its affiliates, shall result in a reduction to reimbursed expenses by an amount equal to 50% of the amount of any such waived exit fee. For the nine months ended September 30, 2020, the Company waived $73,549 of reimbursable expense and for the nine months ended September 30, 2019, the Company waived $345,988 of exit fees.

Manager Equity Plan

The Company has in place a Manager Equity Plan under which the Company may compensate the Manager and the Company’s independent directors or consultants, or officers whom it may employ in the future. In turn, the Manager, in its sole discretion, grants such awards to its directors, officers, employees or consultants. The Company is able to issue under the Manager Equity Plan up to 3.0% of the total number of issued and outstanding shares of common stock (on a fully diluted basis) at the time of each award. Stock based compensation arrangements may include incentive stock options and non-qualified stock options, stock appreciation rights, restricted stock, restricted stock units, unrestricted stock awards and other awards based on the Company’s common stock.

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HUNT COMPANIES FINANCE TRUST, INC. AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements September 30, 2020 (unaudited)

NOTE 10 - RELATED PARTY TRANSACTIONS (Continued)

The following table summarizes the activity related to restricted common stock for the nine months ended September 30, 2020 and September 30, 2019:

						Nine Months Ended September 30,
						2020												2019
						Shares						Weighted Average Grant Date Fair Market Value						Shares						Weighted Average Grant Date Fair Market Value
Outstanding Unvested Shares at Beginning of Period						4,500						$	3.33					4,500						$	3.40
Granted						4,500						2.60						—						—
Vested						(4,500)						3.33						(4,500)						$	3.40
Outstanding Unvested Shares at End of Period						4,500						$	2.60					—						$	—

For the period ended September 30, 2020, the Company recognized compensation expense related to restricted common stock of $17,343 (2019: $7,922). The Company has unrecognized compensation expense of $8,302 as of September 30, 2020 (2019: $0) for unvested shares of restricted common stock. As of September 30, 2020, the weighted average period for which the unrecognized compensation expense will be recognized is 8.6 months.

OREC Structured Finance, LLC

During the first quarter of 2020, Hunt CRE 2017-FL1, Ltd. purchased two loans with an aggregate unpaid principal balance of $31,940,000 at par from OREC Structured Finance, LLC ("OREC SF"), an affiliate of our Manager.

During the third quarter of 2020, Hunt CRE 2018-FL2, Ltd. purchased one loan with an unpaid principal balance of $9,527,000 at par from OREC SF.

During the first quarter of 2019, Hunt CRE 2017-FL1, Ltd. purchased three loans with an aggregate unpaid principal balance of $40,820,000 at par and Hunt CRE 2018-FL2 purchased one loan with an unpaid principal balance of $18,000,000 at par and funded nine loan advances with an unpaid principal balance of $3,975,905 from OREC SF, an affiliate of our Manager.

During the second quarter of 2019, Hunt CRE 2017-FL1, Ltd. purchased seven loans with an aggregate principal balance of $41,318,000 at par and Hunt CRE 2018-FL2 funded five loan advances with an unpaid principal balance of $3,276,635 from OREC SF.

During the third quarter of 2019, Hunt CRE 2017-FL1, Ltd. purchased five loans with an aggregate principal balance of $47,667,352 at par and Hunt CRE 2018-Fl2, Ltd. purchased one loan with an unpaid principal balance of $9,135,000 at par from OREC SF. Additionally, Hunt CRE 2017-FL1, Seller sold six loan advances with an aggregate unpaid principal balance of $6,816,250 at par to OREC SF.

On August 5, 2020, the Company entered into an amendment to its Participation Agreements amongst Hunt CRE 2017-FL1 Seller, LLC ("FL1 Seller"), Hunt CRE 2017-FL1, Ltd., ORIX Real Estate Capital Holdings, LLC and OREC SF to transfer future funding participation interests from FL1 Seller to OREC SF, an affiliate of the Manager (the "FL1 Future Funding Participation Transfer"). As a result of the FL1 Future Funding Participation Transfer, OREC SF will make all 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. The maximum amount of future payments that the Company could be required to purchase from OREC SF under the Future Funding Participation Transfer, which represents the unfunded commitments of FL1 Seller, was $31.3 million as of September 30, 2020. As of September 30, 2020, $1.8 million of participation interests had been funded by OREC SF and $29.5 million remain unfunded.

Hunt Servicing Company, LLC

Hunt Servicing Company, LLC, an affiliate of the Manager, was appointed as the sub-servicer to the servicer with respect to mortgage assets for Hunt CRE 2017-FL1, Ltd. and Hunt CRE 2018-FL2, Ltd. by KeyBank in its capacity as servicer of both CLOs. Additionally, Hunt Servicing Company, LLC has been appointed by KeyBank as servicer to act as special servicer of any serviced mortgage loan that becomes a specially serviced mortgage loan.

NOTE 11 - GUARANTEES

The Company, through FOAC, is party to customary and standard loan repurchase obligations in respect of residential mortgage loans that it has sold into securitizations or to third parties, to the extent it is determined that there has been a breach of standard seller representations and warranties in respect of such loans. To date, the Company has not been required to repurchase any loan due to a claim of breached seller representations and warranties.

In July 2016, the Company announced that it would no longer aggregate and securitize residential mortgage loans; however, the Company sought to capitalize on its infrastructure and knowledge to become the provider of seller eligibility review and backstop services to MAXEX. See Note 13 for a further description of MAXEX. MAXEX's wholly owned clearinghouse subsidiary, MAXEX Clearing LLC, formerly known as Central Clearing and Settlement LLC ("MAXEX Clearing LLC"), functions as the central counterparty with which buyers and sellers transact, and acts as the buyer's counterparty for each transaction. Pursuant to a Master Agreement dated June 15, 2016, as amended on August 29, 2016, January 30, 2017 and June 27, 2018, among MAXEX, MAXEX Clearing LLC and FOAC (the "Master Agreement"), FOAC provided seller eligibility review services under which it reviewed, approved and monitored sellers that sold loans via MAXEX Clearing LLC. Once approved, and having signed the standardized loan sale contract, the seller sold loan(s) to MAXEX Clearing LLC, and MAXEX Clearing LLC simultaneously sold loan(s) to the buyer on substantially the same terms including representations and warranties. The Master Agreement was terminated on November 28, 2018 (the "MAXEX Termination Date"). To the extent that a seller approved by FOAC prior to the MAXEX Termination Date failed to honor its obligations to repurchase a loan based on an arbitration finding that it breached its representations and

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HUNT COMPANIES FINANCE TRUST, INC. AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements September 30, 2020 (unaudited)

NOTE 11 - GUARANTEES (Continued)

warranties, FOAC was obligated to backstop the seller's repurchase obligation. The term of the backstop guarantee is the earlier of the contractual maturity of the underlying mortgage, or its earlier 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 further seller eligibility review and backstop guarantee services terminated on the MAXEX Termination Date. Pursuant to an Assumption Agreement dated December 31, 2018, among MAXEX 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 paid MAXEX Clearing LLC, as the replacement backstop provider, a fee of $426,770 (the "Alternate 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 $20,000,000 and (b) minimum available liquidity equal to the greater of (x) $5,000,000 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 by MAXEX Clearing LLC with the aforementioned criteria on a quarterly basis and if MAXEX 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 Alternate 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.

The maximum potential amount of future payments that the Company could be required to make under the outstanding backstop guarantees, which represents the outstanding balance of all underlying mortgage loans sold by approved sellers to MAXEX Clearing LLC, was estimated to be $860,525,494 and $1,405,182,222 as of September 30, 2020 and December 31, 2019, respectively, although the Company believes this amount is not indicative of the Company's actual potential losses. Amounts payable in excess of the outstanding principal balance of the related mortgage, for example any premium paid by the loan buyer or costs associated with collecting mortgage payments, are not currently estimable. Amounts that may become payable under the backstop guarantee are normally recoverable from the related seller, as well as from any payments received on (or from sale of property securing) the mortgage loan repurchased and, as noted above, MAXEX Clearing LLC has assumed all of FOAC's obligations in respect of its backstop guarantees. Pursuant to the Master Agreement, FOAC is required to maintain minimum available liquidity equal to the greater of (i) $5.0 million or (ii) 0.10% of the aggregate unpaid principal balance of loans backstopped by FOAC, either directly or through a credit support agreement acceptable to MAXEX. As of September 30, 2020, the Company was not aware of any circumstances expected to lead to the triggering of a backstop guarantee obligation.

In addition, the Company enters into certain contracts that contain a variety of indemnification obligations, principally with the Manager, brokers and counterparties to repurchase agreements. The maximum potential future payment amount the Company could be required to pay under these indemnification obligations is unlimited. The Company has not incurred any costs to defend lawsuits or settle claims related to the indemnification obligations. As a result, the estimated fair value of these agreements is minimal. Accordingly, the Company recorded no liabilities for these agreements as of September 30, 2020.

NOTE 12 - COMMITMENTS AND CONTINGENCIES

Impact of COVID-19

As further discussed in Note 2, the full extent of the impact of COVID-19 on the global economy generally, and our business in particular, remains uncertain. As of September 30, 2020, no contingencies have been recorded on our consolidated balance sheet as a result of COVID-19, however, as the global pandemic continues and the economic implications worsen, it may have long-term impacts on our financial condition, results of operations, and cash flows. Refer to Note 2 for further discussion of COVID-19.

Unfunded Commitments

As of September 30, 2020, OREC SF, an affiliate of the Manager, had $1.8 million in funded commitments and $29.5 million of unfunded commitments related to loans held in Hunt CRE 2017-FL1 that the Company could be required to purchase from OREC SF under the Future Funding Participation Transfer. See Note 10 for discussion of the August 5, 2020 FL1 Future Funding Participation Agreement. These commitments are not reflected on the Company's condensed consolidated balance sheets.

As of December 31, 2019, the Company had $50.5 million of unfunded commitments related to loans held in Hunt CRE 2017-FL1, Ltd. These commitments are not reflected on the Company's condensed consolidated balance sheets.

As of September 30, 2020 and December 31, 2019, OREC SF, an affiliate of the Manager, had $40.9 million and $41.6 million, respectively, of unfunded commitments related to loans held in Hunt CRE 2018-FL2, Ltd. These commitments are not reflected on the Company's condensed consolidated balance sheets.

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 at 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. Due to the ongoing COVID-19 pandemic, the progress of capital improvements and leasing is anticipated to be slower than otherwise expected, and, as such the pace of future funding relating to these capital needs may be commensurately lower.

NOTE 13 - EQUITY

Common Stock

The Company has 450,000,000 authorized shares of common stock, par value $0.01 per share, with 24,943,383 and 23,692,164 shares issued and outstanding as of September 30, 2020 and December 31, 2019, respectively.

On January 3, 2020, the Company issued 1,246,719 shares of common stock to an affiliate of the Manager in a private placement at a purchase price of $4.61 per share resulting in aggregate net proceeds of $5.7 million.

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HUNT COMPANIES FINANCE TRUST, INC. AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements September 30, 2020 (unaudited)

NOTE 13 – EQUITY (Continued)

Stock Repurchase Program

On December 15, 2015, the Company’s board of directors authorized a stock repurchase program (or the “Repurchase Program”), to repurchase up to $10 million of the Company’s outstanding common stock. Shares of the Company’s common stock may be purchased in the open market, including through block purchases, or through privately negotiated transactions, or pursuant to any trading plan that may be adopted in accordance with Rule 10b18(b)(1) of the Securities Exchange Act of 1934, as amended. The timing, manner, price and amount of any repurchases will be determined at the Company’s discretion and the program may be suspended, terminated or modified at any time for any reason. Among other factors, the Company intends to only consider repurchasing shares of the Company’s common stock when the purchase price is less than the Company’s estimate of the Company’s current net asset value per common share. Shares of common stock repurchased by the Company under the Repurchase Program, if any, will be canceled and, until reissued by the Company, will be deemed to be authorized but unissued shares of the Company’s common stock. Through September 30, 2020, the Company had repurchased 126,856 shares of common stock at a weighted average share price of $5.09. No share repurchases have been made since January 19, 2016. As of September 30, 2020, $9.4 million of common stock remained authorized for future share repurchase under the Repurchase Program.

Preferred Stock

The Company had 50,000,000 authorized shares of preferred stock, par value $0.01 per share, with 1,610,000 shares of 8.75% Series A Cumulative Redeemable Preferred Stock (“Series A Preferred Stock”), par value of $0.01 per share and liquidation preference of $25.00 per share, issued and outstanding as of December 31, 2018. The Series A Preferred Stock was entitled to receive a dividend rate of 8.75% per year on the $25 liquidation preference and was senior to the common stock with respect to distributions upon liquidation, dissolution or winding up. The Company declared quarterly and paid monthly dividends on the shares of the Series A Preferred Stock, in arrears, on the 27th day of each month to holders of record at the close of business on the 15th day of each month. No dividends may be paid on the Company's common stock unless full cumulative dividends have been paid on the preferred stock. The Company paid full cumulative dividends on its preferred stock on a monthly basis since it was first issued in December 2013. On February 14, 2019, the Company redeemed all 1,610,000 shares of its outstanding 8.75% Series A Cumulative Redeemable Preferred Stock at its $25 per share liquidation preference plus accrued and unpaid dividends.

Distributions to stockholders

For the 2020 taxable year to date, the Company has declared dividends to common stockholders totaling $5,861,358, or $0.24 per share. The following table presents cash dividends declared by the Company on its common stock during the nine months ended September 30, 2020:

Declaration Date						Record Date						Payment Date						Dividend Amount						Cash Dividend Per Weighted Average Share
March 12, 2020						March 31, 2020						April 15, 2020						$	1,870,416					$	0.075
June 17, 2020						June 30, 2020						July 15, 2020						$	1,870,754					$	0.075
September 17, 2020						September 30, 2020						October 15, 2020						$	2,120,188					$	0.085

Non-controlling interests

 

On November 29, 2018, Hunt Commercial Mortgage Trust (“HCMT”), an indirect wholly-owned subsidiary of the Company that has elected to be taxed as a REIT issued 125 shares of Series A Preferred Shares (“HCMT Preferred Shares”).  Net proceeds to HCMT were $99,500 representing $125,000 in equity raised, less $25,500 in expenses and is reflected as “Non-controlling interests” in the Company’s consolidated balance sheets.  Dividends on the HCMT Preferred Shares are cumulative annually, in an amount equal to 12% of the initial purchase price plus any accrued unpaid dividends.  The HCMT Preferred Shares are redeemable at any time by HCMT.  The redemption price through December 31, 2020 is 1.1x the initial purchase price plus all accrued and unpaid dividends, and the initial purchase price plus all accrued and unpaid dividends thereafter.  The holders of the HCMT Preferred Shares have limited voting rights, which do not entitle the holders to participate or otherwise direct the management of HCMT or the Company.  The HCMT Preferred Shares are not convertible into or exchangeable for any other property or securities of HCMT or the Company.  Dividends on the HCMT Preferred Shares, which amounted to $15,000 for the year ended December 31, 2019 are reflected in “Dividends to preferred stockholders” in the Company’s consolidated statements of operations. As of September 30, 2020, HCMT had $11,292 in accrued dividends on the preferred shares which are reflected in "Dividends to preferred stockholders" in the Company's condensed consolidated statements of operations of which $3,792 were accrued and unpaid dividends on the preferred shares which are reflected in "Dividends payable" in the Company's condensed consolidated balance sheet.

NOTE 14 - EARNINGS PER SHARE

In accordance with ASC 260, outstanding instruments that contain rights to non-forfeitable dividends are considered participating securities. The Company is required to apply the two-class method or the treasury stock method of computing basic and diluted earnings per share when there are participating securities outstanding. The Company has determined that outstanding unvested restricted shares issued under the Manager Equity Plan are participating securities, and they are therefore included in the computation of basic and diluted earnings per share. The following tables provide additional disclosure regarding the computation for the three and nine months ended September 30, 2020 and September 30, 2019:

						Three Months Ended September 30, 2020												Three Months Ended September 30, 2019
Net income												$	2,551,010											$	2,157,748
Less dividends:
Common stock						$	2,120,188											$	1,776,575
Preferred stock						3,792												3,792
												2,123,980												1,780,367
Undistributed earnings (deficit)												$	427,030											$	377,381

						Unvested Share-Based Payment Awards						Common Stock						Unvested Share-Based Payment Awards						Common Stock
Distributed earnings						$	0.09					$	0.09					$	0.08					$	0.08
Undistributed earnings (deficit)						0.01						0.01						0.01						0.01
Total						$	0.10					$	0.10					$	0.09					$	0.09

						For the three months ended September 30,
						2020						2019
Basic weighted average shares of common stock						24,938,883						23,683,164
Weighted average of non-vested restricted stock						4,500						4,500
Diluted weighted average shares of common stock outstanding						24,943,383						23,687,664

						Nine Months Ended September 30, 2020												Nine Months Ended September 30, 2019
Net income												$	5,981,384											$	5,026,685
Less dividends:
Common stock						$	5,861,358											$	5,211,286
Preferred stock						11,292												488,056
Deemed dividend on preferred stock related to redemption						—												3,093,028
												5,872,650												8,792,370
Undistributed earnings (deficit)												$	108,734											$	(3,765,685)

						Unvested Share-Based Payment Awards						Common Stock						Unvested Share-Based Payment Awards						Common Stock
Distributed earnings						$	0.24					$	0.24					$	0.22					$	0.22
Undistributed earnings (deficit)						$	—					$	—					$	—					$	(0.16)
Total						$	0.24					$	0.24					$	0.22					$	0.06

						For the nine months ended September 30,
						2020						2019
Basic weighted average shares of common stock						24,927,122						23,683,164
Weighted average of non-vested restricted stock						4,402						4,500
Diluted weighted average shares of common stock outstanding						24,931,524						23,687,664

NOTE 15 - SEGMENT REPORTING

The Company invests in a portfolio comprised of commercial mortgage loans and other mortgage-related investments, and operates as a single reporting segment.

NOTE 16 - INCOME TAXES

The Company has elected to be treated as a REIT under federal income tax laws. As a REIT, the Company is generally not subject to federal income taxation at the corporate level to the extent that it distributes 100% of its taxable earnings to shareholders annually and does not engage in prohibited transactions. Certain activities of the Company that produce prohibited income are conducted through a TRS, FOAC, to protect REIT election and FOAC is therefore subject to tax as a U.S. C-Corporation. To maintain our REIT election, the Company must continue to meet certain ownership, asset and income

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HUNT COMPANIES FINANCE TRUST, INC. AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements September 30, 2020 (unaudited)

NOTE 16 - INCOME TAXES (Continued)

requirements set forth in the Code. As further discussed below, the Company may be subject to non-income taxes on excess amounts of assets or income that cause a failure of any of the REIT testing requirements.

REIT Testing and Tax on 75% Income Test Failure

During tax years 2018 and 2019 the Company passed all the requisite ownership, asset and income tests, with the exception of the 2018 test under Section 856(c)(3) of the Code, also known as the 75% Income Test ("2018 75% Income Test Failure"). The 75% Income Test required that at least 75% of the gross income earned by the Company be generated by qualifying real estate income, including interest income on mortgages and realized gain on the sale of real estate assets. In our case, the gains generated by the asset protection hedging strategy resulting from the complete dissolution of the MBS asset portfolio during 2018 were determined to be non-qualified income for the purpose of the 75% Income Test and resulted in a failure of the 75% Income Test for the year-ended December 31, 2018. As a result, the Company also owed an income tax on the amount of the gross income that exceeded the 75% Income Test threshold. The calculation of the tax under Section 857(b)(5) of the Code resulted in an accrued tax liability of $1.96 million for 2018, which was paid by the Company on April 12, 2019, in connection with filing its 2018 tax extensions. The Company in consultation with its external tax advisor requested a pre-filing agreement from the IRS concerning the application of Section 856(c)(6), a statutory relief provision. In October 2019, the Company filed its 2018 tax return taking relief under Section 856(c)(6). On July 13, 2020, the Company entered into a closing agreement with the IRS in which it was agreed that (i) the 2018 75% Income Test Failure was due to reasonable cause and not due to willful neglect within the meaning of Section 856(c)(6); (ii) the Company satisfied the requirements of Section 856(c)(6) with respect to the 2018 75% Income Test Failure and; (iii) such failure will not cause the Company to be treated as failing to satisfy the 75% gross income test for the 2018 taxable year. Accordingly, the Company's REIT election will not be impacted by the 2018 75% Income Test Failure.

NOTE 17 - SUBSEQUENT EVENTS

We have reviewed subsequent events occurring through the date that these condensed consolidated financial statements were issued, and determined that no subsequent events occurred that would require accrual or additional disclosure.

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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION

 

In this Quarterly Report on Form 10-Q, or this “report”, we refer to Hunt Companies Finance Trust as “we,” ”us,” or “our,” unless we specifically state otherwise or the context indicates otherwise. We refer to our external manager, OREC Investment Management, LLC, as our “Manager” or “OREC IM”.

 

The following discussion should be read in conjunction with our condensed consolidated financial statements and the accompanying notes to our financial statements which are included in Item 1 of this report, as well as information contained in our Annual Report on Form 10-K for the year ended December 31, 2019, or our 2019 10-K, filed with the Securities and Exchange Commission, or SEC, on March 16, 2020.

 

Forward-Looking Statements

 

This Quarterly Report on Form 10-Q contains forward-looking statements intended to qualify for the safe harbor contained in Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act, as amended. Forward-looking statements are subject to risks and uncertainties. These forward-looking statements include information about possible or assumed future results of our business, financial condition, liquidity, results of operations, plans and objectives. You can identify forward-looking statements by use of words such as “believe,” “expect,” “anticipate,” "project," “estimate,” “plan,” “continue,” “intend,” “should,” “may,” "will," "seek," "would," "could" or similar expressions or other comparable terms, or by discussions of strategy, plans or intentions. Statements regarding the following subjects, among others, may be forward-looking: the return on equity; the yield on investments; the ability to borrow to finance assets; and risks associated with investing in real estate assets, including changes in business conditions and the general economy. Forward-looking statements are based on our beliefs, assumptions and expectations of our future performance, taking into account all information currently available to us on the date of this quarterly report. Actual results may differ from expectations, estimates and projections. Readers are cautioned not to place undue reliance on forward-looking statements in this quarterly report and should consider carefully the risk factors described in Part I, Item IA "Risk Factors" in our annual report on Form10-K for the year ended December 31, 2019 in evaluating these forward-looking statements. Forward-looking statements are subject to substantial risks and uncertainties, many of which are difficult to predict and are generally beyond our control. Additionally, many of these risks and uncertainties are currently amplified by and will continue to be amplified by, or in the future may be amplified by, the COVID-19 pandemic. It is not possible to predict or identify all such risks. Additional information concerning these and other risk factors are contained in our 2019 10-K which is available on the Securities and Exchange Commission’s website at www.sec.gov.

 

Overview 

 

We are a Maryland corporation that is focused on investing in, financing and managing a portfolio of commercial real estate debt investments.

 

In 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, LLC ("OREC IM"), while another affiliate of ORIX USA purchased an ownership stake of approximately 5.0% through a privately-placed stock issuance. These transactions are expected to enhance the scale of HCFT and generate shareholder value through leveraging ORIX USA's expansive originations, asset management and servicing platform.

Today, we primarily invest in transitional floating rate commercial mortgage loans with an emphasis on middle market multi-family assets. We may also invest in other commercial real estate-related investments including mezzanine loans, preferred equity, commercial mortgage-backed securities, fixed rate loans, construction loans and other commercial real estate debt instruments. We finance our current investments in transitional multi-family and other commercial real estate loans primarily through match term collateralized loan obligations, and may utilize warehouse repurchase agreement 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 we earn on investments less the expense of funding these investments.

Today, the loans we target for origination and investment typically have the following characteristics:

 

•Sponsors with experience in particular real estate sectors and geographic markets

•Located in markets in the U.S. 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 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 our stockholders for attractive risk-adjusted returns 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 supported by our Manager's significant commercial real estate experience and the extensive resources of ORIX USA will allow us to take advantage of changing market conditions to maximize risk-adjusted returns to our stockholders.

We have elected to be taxed as a REIT and comply with the provisions of the Internal Revenue Code with respect thereto. Accordingly, we are generally not subject to federal income tax on our REIT taxable income that we currently distribute to our stockholders so long as we maintain our qualification as a REIT. Our continued qualification as a REIT depends on our ability to meet, on a continuing basis, various complex requirements under the Internal Revenue Code relating to, among other things, the source of our gross income, the composition and values of our assets, our distribution levels and the concentration of ownership of our capital stock. Even if we maintain our qualification as a REIT, we may become subject to some federal, state and local taxes on our income generated in our wholly owned taxable REIT subsidiary, Five Oaks Acquisition Corp. ("FOAC").

Third Quarter 2020 Summary

 

•Our loan portfolio decreased by $10.9 million to $598.9 million, comprised of loan purchases of $10.6 million offset by $21.5 million in loan payoffs.

•On September 17, 2020, the Company announced its third quarter dividend of $0.085 per share of common stock, which represents a 13.3% increase over the second quarter dividend of $0.075.

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The ORIX Transaction

On January 6, 2020 we announced the entry into a new external management agreement with OREC IM and the concurrent mutual termination of our management agreement with HIM. OREC IM is part of ORIX Real Estate Capital's finance and investment management platform, which was created through the combination of RED Capital Group, Lancaster Pollard and Hunt Real Estate Capital. The terms of the new management agreement align with the terms of HCFT's 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 USA purchased 1,246,719 shares of the Company's common stock in a private placement by the Company at a purchase price of $4.61 per share, resulting in an aggregate capital raise of $5,747,375. The purchase price per share represented a 43% premium over the HCFT common share price on January 2, 2020. As a result of this share purchase, an affiliate of ORIX USA owns approximately 5% of HCFT's outstanding common shares. Also, in connection with the transaction, James C. Hunt resigned 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. Briggs as Chief Financial Officer of the Company. James Flynn continues to serve as Chief Executive Officer and now serves as Chairman of the Board, and Michael Larsen continues to serve as President.

Recent Developments

On March 11, 2020, the World Health Organization ("WHO") declared COVID-19 a global pandemic, which continues to spread throughout the United States and around the world. The outbreak continues to adversely impact economic and market conditions globally, nationally and locally. Actions taken around the world to help mitigate the spread of COVID-19 include imposition of quarantines, "stay-at-home" orders, restrictions on travel and forced closures for certain types of public places, businesses and schools. Such actions have created disruption in global supply chains, increasing rates of global unemployment and adversely impacted many industries. The outbreak could have a continued adverse impact on economic and market conditions and a continued period of global economic slowdown.

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. 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 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.

The effects of the COVID-19 pandemic did not significantly impact our operating results for the three and nine months ended September 30, 2020, other than previously deferred debt issuance costs of $624,816 expensed in the second quarter as a result of the current market environment related to a collateralized loan obligation transaction that has been determined as unlikely to be executed by year-end. However, should the pandemic and resulting economic deterioration persist, we expect it may further affect our financial condition and results of operations going forward, including but not limited to, interest income, credit losses and commercial mortgage loan reinvestment.

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, 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.    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 investment portfolio 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 1.61% as of September 30, 2020. With the drastic decline in LIBOR due to COVID-19, 100.0% of our current commercial loan portfolio has 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 floors 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 September 30, 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 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 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, 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

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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 September 30, 2020, 100% of the commercial mortgage loans in our portfolio were current as to principal and interest. Furthermore, 100% of commercial mortgage loans in our portfolio made their October payments. 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 September 30, 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 are net proceeds of common or preferred stock issuances, net proceeds from corporate debt obligations, net cash provided by operating activities, and other financing arrangements. We finance our commercial mortgage loans primarily with collateralized loan obligations, the maturities of which are matched to the maturities of the loans, and which are not subject to margin calls or additional collateralization requirements. However, to the extent that we seek to invest in additional commercial mortgage loans, 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 risk.    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, 2020 and remains in place for Hunt CRE 2018-FL2. As of September 30, 2020 we have experienced $36.9 million in 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 a result of adverse credit performance, an allowance is recorded to reduce the carrying value through a charge to the provision for loan losses. Impairment is measured by comparing the estimated fair value of the underlying collateral, less costs to sell, to the book value of the respective loan. Provisions for loan losses will directly impact our earnings. Given the widespread impact of the COVID-19 pandemic, we consider there to be a heightened credit risk associated with our commercial mortgage loan portfolio.

 Governmental actions. Since 2008, when both Fannie Mae and Freddie Mac were placed under the conservatorship of the U.S. government, there have been a number of proposals to reform the U.S. housing finance system in general, and Fannie Mae and Freddie Mac in particular. We anticipate debate on residential housing and mortgage reform to continue through 2020 and beyond, but a deep divide persists between factions in Congress and as such it remains unclear what shape any reform would take and what impact, if any, reform would have on mortgage REITs.

Managing Our Business through COVID-19

As of March 13, 2020, our Manager, and its affiliates, implemented a work from home ("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 incorporates 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 CDC issued a nationwide moratorium on residential evictions. Specifically, from September 4, 2020, through December 31, 2020, residential 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 $99,000 or $198,000 jointly; (c) have suffered loss of income or extraordinary medical expenses; (d) use of best efforts to make partial payments; and (e) have no other housing options. 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, such as appraisers, environmental and engineering consultants we rely on to make new investments which may make it more difficult to make these investments.

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Investment Portfolio

Commercial Mortgage Loans

As of September 30, 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 loan activity by unpaid principal balance:

						Commercial Mortgage Loans Held-for-Investment
Balance at December 31, 2019						$	635,260,420
Purchases and fundings						52,580,443
Proceeds from principal repayments						(88,907,741)
Balance at September 30, 2020						$	598,933,122

The following table details overall statistics for our loan portfolio as of September 30, 2020 and December 31, 2019:

																								Weighted Average
Loan Type						Unpaid Principal Balance						Carrying Value						Loan Count						Floating Rate Loan %						Coupon(1)						Remaining  Term  (Years)(2)
September 30, 2020
Loans held-for-investment
Senior secured loans(3)						$	598,933,122					$	598,933,122					44						100.0		%				5.1		%				3.2
						$	598,933,122					$	598,933,122					44						100.0		%				5.1		%				3.2

																								Weighted Average
Loan Type						Unpaid Principal Balance						Carrying Value						Loan Count						Floating Rate Loan %						Coupon(1)						Remaining  Term  (Years)(2)
December 31, 2019
Loans held-for-investment
Senior secured loans(3)						$	635,260,420					$	635,260,420					51						100.0		%				5.4		%				3.8
						$	635,260,420					$	635,260,420					51						100.0		%				5.4		%				3.8

(1)    Weighted average coupon assumes applicable one-month LIBOR of 0.16% and 1.70% as of September 30, 2020 and December 31, 2019, respectively, inclusive of weighted average floors of 1.61% and 1.56%, respectively.

(2)    Weighted average remaining term assumes all extension options are exercised by the borrower, provided, however, that our loans may be repaid prior to such date.

(3)    As of September 30, 2020, $582,771,880 of the outstanding senior secured loans are held in VIEs and $16,161,242 of the outstanding senior secured loans were held outside VIEs. As of December 31, 2019, $629,157,956 of the outstanding senior secured loans were held in VIEs and $6,102,464 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 September 30, 2020:

Loan #						Form of Investment						Origination Date						Total Loan Commitment						Current Principal Amount						Location						Property Type						Coupon						Max Remaining Term (Years)						LTV
1						Senior secured						June 5, 2018						$	44,699,829					$	35,625,000					Palatine, IL						Multi-Family						1mL + 4.3						2.8						68.5		%
2						Senior secured						November 30, 2018						$	35,441,350					$	35,441,348					Nacogdoches, TX						Multi-Family						1mL + 4.1						3.3						70.4		%
3						Senior secured						July 9, 2018						$	33,830,000					$	33,650,982					Pikesville, MD						Multi-Family						1mL + 3.3						2.9						77.6		%
4						Senior secured						August 8, 2018						$	35,000,000					$	32,526,660					Dallas, TX						Multi-Family						1mL + 3.7						2.9						81.2		%
5						Senior secured						November 22, 2019						$	31,163,300					$	26,500,000					Virginia Beach, VA						Multi-Family						1mL + 2.8						4.3						77.1		%

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6						Senior secured						May 18, 2018						$	28,000,000					$	25,355,116					Woodridge, IL						Multi-Family						1mL + 3.8						2.8						76.4		%
7						Senior secured						December 10, 2019						$	26,871,000					$	24,540,507					San Antonio, TX						Multi-Family						1mL + 3.2						4.3						71.9		%
8						Senior secured						January 15, 2020						$	27,350,000					$	24,180,000					Chattanooga, TN						Multi-Family						1mL + 3.0						4.4						80.6		%
9						Senior secured						May 31, 2018						$	24,700,000					$	20,853,067					Omaha, NE						Multi-Family						1mL + 3.7						2.8						77.3		%
10						Senior secured						November 26, 2019						$	21,625,000					$	20,000,000					Doraville, GA						Multi-Family						1mL + 2.8						4.3						76.1		%
11						Senior secured						December 6, 2018						$	21,000,000					$	18,703,039					Greensboro, NC						Multi-Family						1mL + 3.4						3.3						79.8		%
12						Senior secured						December 28, 2018						$	20,850,000					$	18,000,000					Austin, TX						Retail						1mL + 3.9						2.3						71.4		%
13						Senior secured						July 10, 2019						$	19,000,000					$	17,754,112					Amarillo, TX						Multi-Family						1mL + 2.9						3.9						76.4		%
14						Senior secured						December 28, 2018						$	24,123,000					$	17,172,624					Austin, TX						Retail						1mL + 4.1						2.3						60.5		%
15						Senior secured						March 13, 2019						$	19,360,000					$	16,707,856					Baytown, TX						Multi-Family						1mL + 3.1						2.6						80.5		%
16						Senior secured						June 28, 2018						$	17,000,000					$	15,245,253					Greenville, SC						Multi-Family						1mL + 3.9						2.8						76.3		%
17						Senior secured						August 29, 2019						$	16,800,000					$	14,632,203					Austell, GA						Multi-Family						1mL + 3.4						4.0						72.5		%
18						Senior secured						July 23, 2018						$	16,200,000					$	12,828,794					Chicago, IL						Office						1mL + 3.8						2.9						72.7		%
19						Senior secured						August 8, 2019						$	14,400,000					$	12,649,099					Fort Worth, TX						Multi-Family						1mL + 3.0						4.0						75.8		%
20						Senior secured						January 9, 2018						$	10,317,000					$	10,158,934					North Highlands, CA						Multi-Family						1mL + 4.0						2.4						79.0		%
21						Senior secured						March 29, 2019						$	10,000,000					$	10,000,000					Portsmouth, VA						Multi-Family						1mL + 3.3						1.6						61.4		%
22						Senior secured						May 25, 2018						$	11,000,000					$	9,794,371					Phoenix, AZ						Multi-Family						1mL + 3.9						2.8						69.4		%
23						Senior secured						September 10, 2020						$	9,527,000					$	9,527,000					Winchester, OH						Multi-Family						1mL + 4.3						1.1						61.9		%
24						Senior secured						September 11, 2019						$	11,135,000					$	9,135,000					Orlando, FL						Multi-Family						1mL + 2.8						4.1						69.2		%
25						Senior secured						February 15, 2018						$	10,500,000					$	9,047,396					Atlanta, GA						Multi-Family						1mL + 4.3						2.5						80.2		%
26						Senior secured						August 30, 2018						$	9,034,000					$	8,675,645					Blacksburg, VA						Multi-Family						1mL + 3.9						3.0						66.6		%
27						Senior secured						March 12, 2018						$	8,612,000					$	8,612,000					Waco, TX						Multi-Family						1mL + 4.8						2.6						72.9		%
28						Senior secured						January 18, 2019						$	10,750,000					$	8,238,438					Philadelphia, PA						Multi-Family						1mL + 4.0						1.4						71.3		%
29						Senior secured						August 7, 2018						$	9,000,000					$	8,235,825					Birmingham, AL						Multi-Family						1mL + 3.5						3.0						78.0		%
30						Senior secured						February 23, 2018						$	8,070,000					$	8,070,000					Little Rock, AR						Multi-Family						1mL + 4.3						2.5						81.3		%
31						Senior secured						January 13, 2020						$	8,510,000					$	7,930,194					Fort Lauderdale, FL						Multi-Family						1mL + 3.2						4.4						78.4		%
32						Senior secured						November 13, 2019						$	9,310,000					$	7,780,000					Holly Hill, FL						Multi-Family						1mL + 2.9						2.3						77.8		%
33						Senior secured						June 10, 2019						$	7,000,000					$	6,525,817					San Antonio, TX						Multi-Family						1mL + 3.4						3.8						77.7		%
34						Senior secured						December 9, 2019						$	6,495,000					$	6,230,000					Fort Worth, TX						Multi-Family						1mL + 3.2						4.3						77.7		%
35						Senior secured						March 29, 2019						$	6,270,000					$	5,992,424					Raleigh, NC						Multi-Family						1mL + 3.5						3.6						79.0		%
36						Senior secured						August 28, 2019						$	6,250,000					$	5,966,157					Austin, TX						Multi-Family						1mL + 3.3						4.0						69.9		%
37						Senior secured						June 22, 2018						$	6,200,000					$	5,900,550					Chicago, IL						Multi-Family						1mL + 4.1						2.8						80.5		%
38						Senior secured						June 10, 2019						$	6,000,000					$	5,295,605					San Antonio, TX						Multi-Family						1mL + 2.9						3.8						62.9		%

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39						Senior secured						December 13, 2019						$	5,900,000					$	5,070,339					Jacksonville, FL						Multi-Family						1mL + 2.9						4.3						74.9		%
40						Senior secured						November 30, 2018						$	8,250,000					$	5,036,066					Decatur, GA						Office						1mL + 4.1						3.2						56.8		%
41						Senior secured						May 31, 2019						$	4,350,000					$	4,275,035					Austin, TX						Multi-Family						1mL + 3.5						3.8						74.1		%
42						Senior secured						November 12, 2019						$	4,225,000					$	4,225,000					Chesapeake, VA						Self-Storage						1mL + 3.2						4.3						64.5		%
43						Senior secured						December 13, 2019						$	4,407,000					$	4,010,000					Marietta, GA						Multi-Family						1mL + 3.0						4.3						77.9		%
44						Senior secured						June 5, 2018						$	2,835,667					$	2,835,666					Palatine, IL						Multi-Family						1mL + 4.3						2.8						68.5		%

(1)    See Note 12 Commitments and Contingencies to our condensed consolidated financial statements for further discussion of unfunded commitments.

(2)    LTV as of the date the loan was originated by a Hunt/ORIX affiliate and is calculated after giving effect to capex and earn-out reserves, if applicable. LTV has not been updated for any subsequent draws or loan modifications and is not reflective of any changes in value, which may have occurred subsequent to the origination date.

Our loan portfolio is 100% performing with no loan impairments, loan defaults, or non-accrual loans as of September 30, 2020. Furthermore, 100% of commercial mortgage loans in our portfolio made their October payments.

We maintain strong relationships with our borrowers and have utilized those relationships to address potential impacts of the COVID-19 pandemic on our 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 in order to protect the value of our commercial mortgage loan assets.

As discussed in Note 2 to our consolidated financial statements, our Manager performs a quarterly review of our loan portfolio, assesses the performance of each loan, and assigns a risk rating between "1" and "5," from less risk to greater risk. The weighted average risk rating of our total loan exposure was 3.1 and 2.8 as of September 30, 2020 and December 31, 2019, respectively. The increase in risk rating was primarily the result of downgrading non multi-family loans to a risk rating of "4" to reflect higher risk in loans collateralized by retail and office properties that are particularly negatively impacted by the COVID-19 pandemic. The following table presents the principal balance and net book value based on our internal risk ratings:

						September 30, 2020
Risk Rating						Number of Loans						Unpaid Principal Balance						Net Carrying Value
1						—						$	—					—
2						8						91,155,086						91,155,086
3						27						393,803,374						393,803,374
4						9						113,974,662						113,974,662
5						—						—						—
						44						$	598,933,122					598,933,122

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 repurchase agreement financing. To the extent available, we intend to securitize the senior portion of some of our loans, while retaining the subordinate securities in our investment portfolio. The securitizations of this senior portion will be accounted for as either a "sale" or as a "financing." If they are accounted for as a sale, the loan will be removed from the balance sheet and if they are accounted for as a financing the loans will be classified as "commercial mortgage loans held-for-investment" in our consolidated balance sheets, depending on the structure of the securitization. As of September 30, 2020, the carrying amounts and outstanding principal balances of our collateralized loan obligations were $479.7 million and $482.4 million, respectively. See Note 5 to our condensed consolidated financial statements included in this Quarterly Report on Form 10-Q for additional terms and details of our CLOs.

  

FOAC and Our Residential Mortgage Loan Business

 

In June 2013, we established FOAC as a Taxable REIT Subsidiary, or TRS, to increase the range of our investments in mortgage-related assets. Until August 1, 2016, FOAC aggregated mortgage loans primarily for sale into securitization transactions, with the expectation that we would purchase the subordinated tranches issued by the related securitization trusts, and that these would represent high quality credit investments for our portfolio. Residential mortgage loans for which FOAC owns the MSRs continue to be directly serviced by one or more licensed sub-servicers since FOAC does not directly service any residential mortgage loans.

 

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As noted earlier, we previously determined to cease the aggregation of prime jumbo loans for the foreseeable future, and therefore no longer maintain warehouse financing to acquire prime jumbo loans. We do not expect the previous changes to our mortgage loan business strategy to impact the existing MSRs that we own, or the securitizations we have sponsored to date.

Pursuant to a Master Agreement dated June 15, 2016, as amended on August 29, 2016, January 30, 2017 and June 27, 2018, among MAXEX, LLC ("MAXEX"), MAXEX Clearing LLC, MAXEX's wholly-owned clearinghouse subsidiary and FOAC, FOAC provided seller eligibility review services under which it reviewed, approved and monitored sellers that sold loans via MAXEX Clearing LLC. To the extent that a seller approved by FOAC failed to honor its obligations to repurchase a loan based on an arbitration finding that it breached its representations and warranties, FOAC was obligated to backstop the seller's repurchase obligation. The term of such backstop guarantee was the earlier of the contractual maturity of the underlying mortgage and its repayment in full. However, the incidence of claims for breaches of representations and warranties over time is considered unlikely to occur more than five years from the sale of a mortgage. FOAC's obligations to provide such seller eligibility review and backstop guarantee services terminated on November 28, 2018. Pursuant to an Assumption Agreement dated December 31, 2018, among MAXEX Clearing 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 paid MAXEX 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 $20,000,000 and (b) minimum available liquidity equal to the greater of (x) $5,000,000 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 by MAXEX Clearing LLC with the aforementioned criteria on a quarterly basis and if MAXEX Clearing LLC fails to satisfy such criteria, MAXEX Clearing LLC is required to deposit into an escrow account FOAC's benefit an amount equal to the greater of (A) the unamortized Alternative Backstop Fee for each outstanding loan covered by the backstop guarantee and (B) the product of 0.01% multiplied by the scheduled unpaid principal balance of each outstanding loan covered by the backstop guarantees. See Notes 13 and 14 to our condensed consolidated financial statements included in this Quarterly Report on form 10-Q for a further description of MAXEX.

 

 Equity and Book Value Per Share  

 

As of September 30, 2020, our equity was $114.5 million, and our book value per common share was $4.59 on a basic and fully diluted basis. Book value per common share increased from the previous quarter-end amount of $4.57. The increase in book value is reflective of increased net income in the quarter driven by lower operating expenses which more than offset the increase in common dividend in the quarter.

 

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. The three and nine months ended September 30, 2020 were 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 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 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 September 30, 2020, the Company did not hold any loans placed on 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

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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 September 30, 2020, the Company has not recognized any impairments on its loans held-for-investment. We also assessed the remainder of the portfolio, considering the absence of delinquencies and current market conditions, and, have not recorded any allowance for loan losses.

Mortgage Servicing 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 sub-servicer, 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 two 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 the complete listing of our significant accounting policies.

Capital Allocation

 

The following tables set forth our allocated capital by investment type at September 30, 2020 and December 31, 2019:

This information represents non-GAAP financial measures within the meaning of Item 10(e) of Regulation S-K, as promulgated by the SEC. We believe that this non-GAAP information enhances the ability of investors to better understand the capital necessary to support each income-earning asset category, and thus our ability to generate operating earnings. While we believe that the non-GAAP information included in this report provides supplemental information to assist investors in analyzing our portfolio, these measures are not in accordance with GAAP, and they should not be considered a substitute for, or superior to, our financial information calculated in accordance with GAAP.

						September 30, 2020
						Commercial Mortgage Loans						MSRs						Unrestricted Cash(1)						Total(2)
Carrying Value						$	598,933,122					$	1,097,154					$	9,720,138					$	609,750,414
Collateralized Loan Obligations						(479,704,710)						—						—						(479,704,710)
Other(3)						11,170,941						18,320						(1,792,793)						9,396,468
Restricted Cash						14,548,916						—						—						14,548,916
Capital Allocated						$	144,948,269					$	1,115,474					$	7,927,345					$	153,991,088
% Capital						94.1		%				0.7		%				5.2		%				100.0		%

						December 31, 2019
						Commercial Mortgage Loans						MSRs						Unrestricted Cash(1)						Total(2)
Carrying Value						$	635,260,420					$	2,700,207					$	10,942,115					$	648,902,742
Collateralized 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, investment related receivable, prepaid and other assets, interest payable, dividend payable and accrued expenses and other liabilities.

 

Results of Operations  

 

As of September 30, 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 September 30, 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 in the first quarter of 2019; (ii) the redemption of preferred stock in the first quarter of 2019; and (iii) the draw of Secured

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Term Loan in the first quarter of 2019. Consequently, our results of operations for the periods ended September 30, 2020 and September 30, 2019 are not directly comparable. Additionally, although the COVID-19 pandemic did not significantly impact our operating results for the period ended September 30, 2020, other than previously deferred debt issuance costs of $624,816 expensed in the second quarter as a result of the current market environment related to a collateralized loan obligation transaction that has been determined as unlikely to be executed by year-end, 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 mortgage loan reinvestment, in ways that may vary widely depending on the duration and magnitude of the COVID-19 pandemic and ensuing economic turmoil, as well as numerous factors, many of which are outside of our control.

The table below presents certain information from our Statement of Operations for the three and nine months ended September 30, 2020 and September 30, 2019, respectively:

						Three Months Ended September 30, 2020						Three Months Ended September 30, 2019						Nine Months Ended September 30, 2020						Nine Months Ended September 30, 2019
						(unaudited)						(unaudited)
Revenues:
Interest income:
Commercial mortgage loans held-for-investment						$	8,111,324					$	9,825,455					$	25,749,282					$	30,018,760
Multi-family loans held in securitization trusts						—						—						—						78,361
Cash and cash equivalents						5,674						6,551						41,461						6,551
Interest expense:
Collateralized loan obligations						(2,495,996)						(5,244,001)						(9,649,523)						(16,147,178)
Secured Term Loan						(789,018)						(792,121)						(2,349,900)						(1,907,348)
Net interest income						4,831,984						3,795,884						13,791,320						12,049,146
Other loss:
Realized (loss) on investments, net						—						—						—						(709,439)
Unrealized (loss) on mortgage servicing rights						(350,127)						(444,860)						(1,603,052)						(1,283,977)
Unrealized gain on multi-family loans held in securitization trusts						—						—						—						694,339
Servicing income, net						187,989						243,265						586,516						676,944
Other income						—						—						2						—
Total other (loss)						(162,138)						(201,595)						(1,016,534)						(622,133)
Expenses:
Management and incentive fees						675,107						557,833						1,850,139						1,677,456
General and administrative expenses						786,651						904,413						2,531,385						3,266,757
Operating expenses reimbursable to Manager						441,349						175,174						1,249,123						1,232,211
Other operating expenses						309,125						19,212						1,444,049						204,228
Compensation expense						49,199						46,585						156,093						146,672
Total expenses						2,261,431						1,703,217						7,230,789						6,527,324
Net income before provision for income taxes						2,408,415						1,891,072						5,543,997						4,899,689
Benefit from income taxes						142,595						266,676						437,387						126,996
Net income						2,551,010						2,157,748						5,981,384						5,026,685
Dividends to preferred stockholders						(3,792)						(3,792)						(11,292)						(488,056)
Deemed dividend on preferred stock related to redemption						—						—						—						(3,093,028)
Net income attributable to common stockholders						$	2,547,218					$	2,153,956					$	5,970,092					$	1,445,601
Earnings per share:
Net income attributable to common stockholders (basic and diluted)						$	2,547,218					$	2,153,956					5,970,092						1,445,601
Weighted average number of shares of common stock outstanding						24,943,383						23,687,664						24,931,524						23,687,664
Basic and diluted income per share						$	0.10					$	0.09					0.24						0.06
Dividends declared per share of common stock						$	0.09					$	0.08					0.24						0.22

 

Net Income Summary

 

For the nine months ended September 30, 2020, our net income attributable to common stockholders was $5,970,092, or $0.24 basic and diluted net income per average share, compared with net income of $1,445,601, or $0.06 basic and diluted net income per average share, for the nine months ended September 30, 2019.  The principal drivers of this net income variance were an increase in net interest income from $12,049,146 for the nine months ended September 30, 2019 to $13,791,320 for the nine months ended September 30, 2020, a decrease in preferred dividends from $488,056 for the nine months ended September 30, 2019 to $11,292 for the nine months ended September 30, 2020 and the deemed dividend of $3,093,028 for the nine months ended September

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30, 2019, which more than offset an increase in total other loss from $622,133 for the nine months ended September 30, 2019 to $1,016,534 for the nine months ended September 30, 2020 and an increase in total expenses from $6,527,324 for the nine months ended September 30, 2019 to $7,230,789 for the nine months ended September 30, 2020.

For the three months ended September 30, 2020, our net income attributable to common shareholders was $2,547,218, or $0.10 basic and diluted net income per average share, compared with net income of $2,153,956, or $0.09 basic and diluted net income per average share, for the three months ended September 30, 2019. The principal drivers of this net income variance were an increase in net interest income from $3,795,884 for the three months ended September 30, 2019 to $4,831,984 for the three months ended September 30, 2020 and a decrease in total other loss from $201,595 for the three months ended September 30, 2019 to $162,138 for the three months ended September 30, 2020, which more than offset an increase in total expenses from $1,703,217 three months ended September 30, 2019 to $2,261,431 three months ended September 30, 2020.

Net Interest Income

 

For the nine months ended September 30, 2020 and the nine months ended September 30, 2019, our net interest income was $13,791,320 and $12,049,146, respectively. The increase was primarily due to (i) a $40.3 million increase in weighted-average principal balance of our loan portfolio; (ii) an increase of 26bps in weighted-average LIBOR floors on our loan portfolio for the nine months ended September 30, 2020 compared 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 39bps decrease in weighted-average spread on the loan portfolio for the nine months ended September 30, 2020 compared 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.

For the three months ended September 30, 2020 and the three months ended September 30, 2019, our net interest income was $4,831,984 and $3,795,884, respectively. The increase was primarily due to (i) a $19.0 million increase in weighted-average principal balance of our loan portfolio; (iii) an increase of 17bps in weighted-average LIBOR floors on our loan portfolio for the three months ended September 30, 2020, compared to the corresponding period in 2019 and; (iii) a decrease in weighted-average LIBOR of 207bps for our CLO liabilities. This was offset by a 31bps decrease in weighted-average spread on the loan portfolio for the three months ended September 30, 2020, compared to the corresponding period in 2019.

Other Income

 

For the nine months ended September 30, 2020, we incurred a change in other losses of $1,016,534. This loss was driven by the impact of net unrealized losses on mortgage servicing rights of $1,603,052 caused by a decrease in interest rates which increased prepayments and lower projected float income, which more than offset net mortgage servicing income of $586,516.

 

For the nine months ended September 30, 2019, we incurred a change in other losses of $622,133. This loss was primarily driven by the impact of (i) net realized losses on sales of investments of $709,439 and (ii) net unrealized losses on mortgage servicing rights of $1,283,977. These factors were partially offset by (i) net unrealized gains on multi-family mortgage loans held in the FREMF 2012-KF01 Trust of $694,339 and (ii) net mortgage servicing income of $676,944.

The period-over-period increase in other loss was primarily due to the change in unrealized gain (loss) on mortgage servicing rights as a result of lower interest rates and higher prepayment speeds.

For the three months ended September 30, 2020, we incurred a change in other losses of $162,138. This loss was driven by the impact of net unrealized losses on mortgage servicing rights of $350,127 caused by a decrease in interest rates which increased prepayments and lower projected float income, which more than offset net mortgage servicing income of $187,989.

 

For the three months ended September 30, 2019, we incurred a change in other losses of $201,595. This loss was driven by the impact of net unrealized losses on mortgage servicing rights of $444,860, which more than offset net mortgage servicing income of $243,265.

Expenses

 

For the nine months ended September 30, 2020, we incurred management and incentive fees of $1,850,139 representing amounts payable to our Manager under our management agreement. We also incurred operating expense of $5,380,650, of which $1,249,123 was payable to our Manager and $4,131,527 was payable directly by us.

 

For the nine months ended September 30, 2019, we incurred management fees of $1,677,456 representing amounts payable to our Manager under our management agreement. We also incurred operating expense of $4,849,868 of which $1,232,211 was payable to our Manager and $3,617,657 was payable directly by us.

The period-over-period increase in operating expenses primarily reflects an increase in insurance and legal fees as well as deferred costs expensed during the period, which more than offset decreased expense reimbursement, accounting, audit and other fees.

For the three months ended September 30, 2020, we incurred management and incentive fees of $675,107 representing amounts payable to our Manager under our management agreement. We also incurred operating expense of $1,586,324, of which $441,349 was payable to our Manager and $1,144,975 was payable directly by us.

 

For the three months ended September 30, 2019, we incurred management fees of $557,833 representing amounts payable to our Manager under our management agreement. We also incurred operating expense of $1,145,384 of which $175,174 was payable to our Manager and $970,210 was payable directly by us.

The period-over-period increase in operating expenses primarily reflects increased insurance, legal and professional fees and expense reimbursement, which more than offset a decrease in audit fees.

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Impairment

 

We review each loan classified as held-for-investment for impairment on a quarterly basis. For the three and nine months ended September 30, 2020 and the three and nine months ended September 30, 2019, the Company has not recognized any impairments on its loans held-for-investment and therefore has not recorded any allowance for loan losses.

Income Tax (Benefit) Expense

For the nine months ended September 30, 2020, the Company recognized a benefit from income taxes of $437,387 and for the nine months ended September 30, 2019, the Company recognized a benefit for income taxes in the amount of $126,996.

For the three months ended September 30, 2020, the Company recognized a benefit from income taxes of $142,595 and for the three months ended September 30, 2019, the Company recognized a benefit from income taxes in the amount of $266,676.

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. As of September 30, 2020, our balance sheet included $40.2 million of a secured term loan and $482.4 million in collateralized loan financing, gross of discounts and debt issuance costs. Our secured term loan matures in January 2025 and 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 IRS relating 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 Trust and ORIX Real Estate Capital LLC to transfer future funding participation interest 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. 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 at 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 payments 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 $31.3 million as of September 30, 2020. As of September 30, 2020, OREC SF had funded $1.8 million of participation interests and $29.5 million remain 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 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 September 30, 2020, we had unrestricted cash and cash equivalents of $9.7 million, compared to $10.9 million as of December 31, 2019.

 

As of September 30, 2020, we had $40.2 million in 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 September 30, 2020, the ratio of our recourse debt to equity was 0.4:1.

As of September 30, 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 September 30, 2020, the carrying value of these non-recourse liabilities aggregated to $479,704,710. As of September 30, 2020, our total debt to equity ratio was 4.6:1 on a GAAP basis.

Cash Flows

The following table sets forth changes in cash, cash equivalents and restricted cash for the nine months ended September 30, 2020 and 2019:

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						For the nine months ended September 30,
						2020						2019
Cash Flows From Operating Activities						8,624,187						5,158,355
Cash Flows From Investing Activities						27,151,602						33,440,622
Cash Flows From Financing Activities						(27,518,565)						(6,474,957)
Net Increase (Decrease) in Cash, Cash Equivalents and Restricted Cash						$	8,257,224					$	32,124,020

During the nine months ended September 30, 2020 cash, cash equivalents and restricted cash increased by 8.3 million and for the nine months ended September 30, 2019, cash, cash equivalents and restricted cash increased by $32.1 million.

Operating Activities

For the nine months ended September 30, 2020 and 2019, net cash provided by operating activities totaled $8.6 million and $5.2 million, respectively. For the nine months ended September, 2020, our cash flows from operating activities were primarily driven by interest received from the junior retained notes and preferred shares of Hunt CRE 2017-FL1, Ltd. and Hunt CRE 2018-FL2, Ltd., VIE’s we consolidate, of $16.3 million, interest received from our senior secured loans held outside the VIE’s we consolidate of $0.5 million and cash received from mortgage servicing rights of $0.6 million exceeding cash interest expense paid on our Secured Term Loan of $2.2 million, management fees of $1.7 million, expense reimbursements of $1.2 million and other operating expenditures of $3.7 million. For the nine months ended September 30, 2019, our cash flows from operating activities were primarily driven by interest received from the junior retained notes and preferred shares of Hunt CRE 2017-FL1, Ltd. and Hunt CRE 2018-FL2, Ltd., VIE’s we consolidate, of 14.5 million, interest received from our senior secured loans held outside VIE’s we consolidate of $0.3 million and cash received from mortgage servicing rights of $0.7 million exceeding cash interest expense paid on our Secured Term Loan of $1.7 million, management fees of $1.7 million, expense reimbursement of $1.6 million and other operating expenditures of $5.4 million.

Investing Activities

For the nine months ended September 30, 2020 net cash provided by investing activities totaled $27.2 million. This was a result of the cash received from principal repayment of commercial mortgage loans held for investment exceeding the purchase and funding of commercial mortgage loans held for investment during the period. For the nine months ended September 30, 2019 net cash provided by investing activities totaled $33.4 million. This was primarily a result of receiving cash from unsettled trades, principal repayment of loans held for investment and retained beneficial interests exceeding the cash used for the purchase and funding of commercial mortgage loans held for investment for the nine months ended September 30, 2019.

Financing Activities

For the nine months ended September 30, 2020, net cash used in financing activities totaled $27.5 million and primarily related to proceeds from issuance of common stock of $5.7 million more than offset by payments of common dividends of $5.5 million and repayment of collateralized loan obligations of $27.7 million. For the nine months ended September 30, 2019, net cash used in financing activities totaled $6.5 million and primarily related to the redemption of preferred stock of $40.3 million, payment of common and preferred dividends of $5.4 million and payment of deferred financing costs of $1.0 million partially 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 and 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 of September 30, 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 September 30, 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 condensed consolidated balance sheet as a liability. As of September 30, 2020, pursuant to an Assumption Agreement dated December 31, 2018, among MAXEX 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, see Note 11 for further information.

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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, and 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 REIT 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 September 17, 2020, we announced that our board of directors had declared a cash dividend rate for the third quarter of 2020 of $0.085 per share of common stock which was paid on October 15, 2020.

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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS

 

Not applicable.

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ITEM 4.  CONTROLS AND PROCEDURES

 

Evaluation of Disclosure Controls and Procedures

 

Our management is responsible for establishing and maintaining disclosure controls and procedures (as defined in Rules 13a-15(e) or 15d-15(e)) under the Securities Exchange Act of 1934, as amended, or Exchange Act, that are designed to ensure that information we are required to disclose in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include controls and procedures designed to ensure that information required to be disclosed by us in the reports we file or submit under the Exchange Act is accumulated and communicated to our management, including our principal executive officer and principal financial officer, to allow timely decisions regarding required disclosure.

 

Under the supervision and with the participation of management, including our principal executive officer and principal financial officer, we carried out an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures pursuant to paragraph (b) of Exchange Act Rules 13a-15 or 15d-15 as of September 30, 2020. Based upon our evaluation, our principal executive officer and principal financial officer have concluded that our disclosure controls and procedures were effective as of September 30, 2020.

Changes in Internal Control Over Financial Reporting

 

There have been no changes in our internal control over financial reporting identified in connection with the evaluation required by paragraph (d) of Exchange Act Rule 13a-15 or 15d-15 that occurred during our most recently completed fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

   

PART II - OTHER INFORMATION

 

Item 1. Legal Proceedings

 

From time to time, we may be involved in various claims and legal actions arising in the ordinary course of business. As of the date hereof, neither we nor, to our knowledge, our Manager, are subject to any legal proceedings that we or our Manager considers to be material (individually or in the aggregate). 

 

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

 

None.

Item 1A. Risk Factors

Other than items noted below, there have been no material changes to the Risk Factors previously disclosed in Part I, Item 1A in our Annual Report on Form 10-K for the year ended December 31, 2019.

The spread of COVID-19 could have a material adverse effect on our business.

Although the full scope and extent of the impacts of COVID-19 on the Company's operations are unknown, we continue to monitor the impacts of the COVID-19 pandemic on the Company's workforce, liquidity and reliability, as well as capital market and macroeconomic conditions and cannot predict with certainty the full extent of the COVID-19 pandemic's impact on its business. However, a protracted slowdown of broad sectors of the economy, changes in demand for commodities, or significant changes in legislation or regulatory policy to address the COVID-19 pandemic may adversely affect the general real estate lending market, lending volume and the market's overall liquidity and may reduce the number of suitable investment opportunities available to us and the pace at which we are able to make investments.

The outbreak of COVID-19 may have a material adverse impact on our financial condition, liquidity, results of operations and the market price of our common stock, among other things. We expect that these impacts are likely to continue to some extent as the outbreak persists and potentially even longer. Although our business has been or could be impacted by COVID-19, we currently believe the following to be among the most material to us:

•COVID-19 could have a significant long-term impact on the global economy and the commercial real estate market generally, which would negatively impact the value of our assets collateralizing our loans. While we believe the principal amount of our loans are protected by the underlying value of the collateral securing the loans, deterioration in the performance of the properties securing out investments may cause deterioration in the performance of our investments and, potentially, principal losses to us;

•We are actively engaged in discussions with our borrowers to monitor their ability to pay principal and interest, some of whom have indicated that due to the COVID-19 pandemic, they may request forbearance agreements or other loan modifications. These forbearance requests or loan modifications may impact our ability to meet our debt obligations to lenders or satisfy our debt covenants and pay dividends at our current rate or at all to preserve liquidity;

•Economic and market conditions may limit our ability to redeploy proceeds from payment of our existing investments in commercial mortgage loans with similar spreads which may reduce future interest income;

•Interest rates and credit spreads have been significantly impacted since the outbreak of COVID-19 which may result in significant changes to the fair value of our floating rate commercial mortgage loans.

•There are potential challenges facing third-party providers, such as appraisers, environmental and engineering consultants we rely on to make new investments which may make it more difficult to make new investments

Item 3. Defaults Upon Senior Securities

 

None.

Item 4. Mine Safety Disclosures

 

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Not applicable.

 

Item 5. Other Information

 

None.

 

Item 6. Exhibits

 

The exhibits listed on the accompanying Index of Exhibits are filed or furnished herewith, as applicable, as a part of this report. Such Index is incorporated herein by reference.

EXHIBIT INDEX

 

Exhibit Number						Exhibit Description
3.1						Amended and Restated Articles of Incorporation of Five Oaks Investment Corp. (incorporated by reference to Exhibit 3.1 to Five Oaks Investment Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2013 (File No. 001-35845), which was filed with the Securities and Exchange Commission on May 3, 2013).
3.2						Articles Supplementary, designating the Series A Cumulative Redeemable Preferred Stock (Liquidation Preference $25.00 per share) (incorporated by reference to Exhibit 3.1 to Five Oaks Investment Corp. Current Report on Form 8-K (File No. 001-35845), which was filed with the Securities and Exchange Commission on December 23, 2013).
3.3						Article of Amendment, increasing the aggregate number of authorized shares of Series A Cumulative Redeemable Preferred Stock (Liquidation Preference $25.00 per share) (incorporated by reference to Exhibit 3.2 to Five Oaks Investment Corp. Current Report on form 8-K (File 001-35845), which was filed with the Securities and Exchange Commission on May 27, 2014).
3.4						Third Amended and Restated Bylaws of Hunt Companies Finance Trust, Inc. (incorporated by reference to Exhibit 3.4 to Hunt Companies Finance Trust, Inc. Annual Report on Form 10-K for the year ended December 31, 2018, which was filed with the Securities and Exchange Commission on March 18, 2019).
3.5						Articles Supplementary, dated February 15, 2019, of Hunt Companies Finance Trust, Inc. reclassifying as authorized and unissued shares of the Series A Cumulative Redeemable Preferred Stock (Liquidation Preference $25.00 per share) (incorporated by reference to Exhibit 3.1 to Hunt Companies Finance Trust, Inc. Current Report on Form 8-K (File 001-35845), which was filed with the Securities and Exchange Commission on February 19, 2019).
31.1*						Certification of Chief Executive Officer pursuant to Rule 13a-14(a) and Rule 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2*						Certification of Chief Financial Officer pursuant to Rule 13a-14(a) and Rule 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1**						Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2**						Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101.INS*						XBRL Instance Document
101.SCH*						XBRL Taxonomy Extension Schema Document
101.CAL*						XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF*						XBRL Taxonomy Extension Definition Linkbase Document
101.LAB*						XBRL Taxonomy Extension Label Linkbase Document
101.PRE*						XBRL Taxonomy Extension Presentation Linkbase Document

			*			Filed herewith
			**			Furnished herewith

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SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

			HUNT COMPANIES FINANCE TRUST, INC.
Dated: November 6, 2020			By			/s/ James P. Flynn
						James P. Flynn
						Chief Executive Officer (Principal Executive Officer)
Dated: November 6, 2020			By			/s/ James A. Briggs
						James A. Briggs
						Chief Financial Officer (Principal Financial Officer and Principal Accounting Officer)

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