Wednesday - Jones Trading has downgraded shares of Lument Financial Trust (NYSE:LFT) from Buy to Hold, removing its previous price target of $2.50. The downgrade follows a significant increase in the risk profile of Lument's loan portfolio, with loans rated 4 & 5 now comprising 37% of the total, marking the highest percentage in its peer group.
The company's Current Expected Credit Loss (CECL) reserves have been increased by 17.6% quarter over quarter to $9.2 million. This adjustment brings the reserves to 77 basis points of the portfolio, which is reported to be the lowest among its peers.
Despite the generally lower-risk profile of Lument's multifamily-focused portfolio, the firm has expressed concern over the adequacy of credit reserves in light of a potentially deteriorating macroeconomic growth environment.
The analyst highlighted the changes in the loan risk rankings, which have seen a substantial shift since March 31, when 4 & 5 rated loans represented 23% of the total. The revision reflects a more cautious stance on the stock due to the combination of an increased percentage of higher-risk loans and what may be considered insufficient credit reserves.
Jones Trading has indicated that a reevaluation of Lument Financial Trust's shares would require stability in the loan portfolio and an improved macroeconomic outlook, particularly concerning secondary and tertiary multifamily markets. The firm's revised position suggests a wait-and-see approach to the stock until such conditions are met.
In other recent news, Lument Financial Trust's second-quarter earnings have been the subject of attention. Despite falling short of expectations with distributable earnings per share (EPS) of $0.09, below both the consensus estimate of $0.11 and JMP Securities' estimate of $0.10, the company's book value per share remained stable at $3.48.
This value is closely aligned with the $3.50 reported at the end of March. Moreover, Lument Finance Trust increased its quarterly dividend by 14% to $0.08 per share, with distributable earnings providing a coverage ratio of 113%.
JMP Securities maintained a positive outlook on the company, reaffirming a Market Outperform rating and a $3.00 price target. The analyst noted that Lument's focus on affordable housing could be beneficial as the real estate market stabilizes and the Federal Reserve adjusts its rate policies.
Despite a small market capitalization of approximately $133 million and limited trading liquidity potentially narrowing its investor base, the reiterated price target suggests a potential total return of over 30% over the next twelve months. This includes an anticipated price appreciation of 17.6% and a projected cash yield of 12.5% based on the current dividend rate. These are recent developments for Lument Financial Trust.
InvestingPro Insights
Amid the concerns raised by Jones Trading regarding Lument Financial Trust's (NYSE:LFT) loan portfolio and credit reserves, it's worth noting that LFT is currently trading at a low earnings multiple, with a P/E ratio of 6.92, suggesting that the stock may be undervalued relative to its earnings. This aligns with the InvestingPro Data indicating an adjusted P/E ratio for the last twelve months as of Q2 2024 at 7.0.
Moreover, LFT has demonstrated a commitment to returning value to shareholders, maintaining dividend payments for the past 12 years, and currently offering a high dividend yield of 13.11%. The company's dividend growth over the last twelve months as of Q2 2024 stands at 33.33%, reflecting a robust policy in rewarding its investors. These InvestingPro Tips highlight the company's financial resilience and appeal to income-focused investors.
For those interested in further insights, InvestingPro offers additional tips and in-depth analysis. For more information on Lument Financial Trust, including exclusive tips that can guide investment decisions, visit https://www.investing.com/pro/LFT.
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