Lument Finance Trust, Inc. (LFT) Earnings Call Transcript

Hello, everyone, and thank you for joining us today as we review the third-quarter 2026 financial results for Lument Finance Trust. With me on the call are our CEO, Jim Flynn; our CFO, Jim Briggs; our President, Greg Calvert; and Zach Halpern, our Portfolio Manager. Last night we released a press release covering the details of our latest financial results, and we've also made available a supplemental earnings presentation, which is posted on our website. Earlier this morning, we filed our 10-Q with the SEC. Before I hand things over to Jim Flynn, I want to remind everyone that some statements made during this call aren't based on historical information and may be forward-looking statements under Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. These forward-looking statements carry various risks and uncertainties that could make actual results differ materially from what those forward-looking statements contain. Those risks and uncertainties are covered in the company's reports filed with the SEC, particularly the risk factors sections of our Form 10-K and Form 10-Qs. It isn't possible to predict or identify every such risk, and listeners should be cautioned against placing undue reliance on these forward-looking statements. There's no requirement for the company to refresh any forward-looking statements. In addition, some non-GAAP financial measures are going to be discussed during today's call. We don't intend for this information to be viewed on its own or as a replacement for the financial data reported under GAAP. You can find reconciliations between these non-GAAP figures and the closest GAAP-prepared measures in our SEC filings. During Q3 of 2026, our GAAP net loss came in at $2.57, alongside a distributable loss of $0.13 for each share of common stock. Effective September 9th, the company enacted a 1-for-10 reverse stock split of its common stock. Every per-share figure we mention on this call—covering earlier periods too—has been restated as needed to account for the reverse common stock split. At this point I'll hand things over to Jim Flynn. Go ahead, please.

Andrew, thanks, and good morning everyone. We’re glad you could join us for Lument Finance Trust’s Q3 earnings call, and we appreciate our investors’ continued backing and involvement as we work through what remains challenging in the legacy portfolio. Our focus stays on resolving those assets, safeguarding value, and putting the company in position to deliver improved results for shareholders. On the market side, the economy continues to demonstrate resilience, though persistent inflation and new uncertainty around interest rates are affecting commercial real estate markets. Following a 25 basis point rise in September, the Fed has held the fed funds rate in the 3.75%-4% range. We expect an increase of 25 basis points in December and/or the first quarter of 2027, and possibly as much as 50 basis points. Even though the path of monetary policy remains uncertain, rates are likely to remain high, which matters a great deal for borrowers and for commercial real estate valuations. Turning to more recent developments, this month's midterm election results point to a divided federal government taking office in January. We do not anticipate that this will materially change multifamily fundamentals in the near term, but we will continue monitoring possible effects on fiscal policy, interest rates, and housing policy at the national level; within multifamily, performance continues to differ by market and by asset. Less new supply coming to market should create a better environment over time, even though expensive debt continues to weigh on refinancing math for transitional assets. Within that segment, the CLO market remains accessible and keeps providing funding capacity to the industry, despite the fact that investor spreads have broadened somewhat on recent deals given wider market jitters. Worth pointing out that this applies to essentially every securitized product in any asset class; in our view, the reinvestment capacity within our existing series CLO is still a key source of flexibility as we work through legacy assets and put capital to work selectively. When it comes to asset management — Greg and Jim will walk you through that in far greater depth — the company's main priority remains grinding through what's left of the legacy assets. For every one of those assets, we're actively chasing the resolution approach that fits best, and we're focused on striking a balance: safeguarding recovery values on one hand, while speeding up resolutions on the other, which lets us move our investable capital into performing assets that deliver suitable risk-adjusted returns. Although some challenged assets are still tough, resolution activity has started picking up. We're exploring various options throughout the portfolio, and we're encouraged by how we're progressing on turning these positions into cash and putting that capital back to work. We keep managing our unrestricted liquidity and CLO reinvestment capacity prudently, and the quarter closed with roughly $27 million in cash on the balance sheet. While we continue working through the legacy assets that remain, keeping liquidity intact stays a leading priority. So in September, after thorough talks with our board, we concluded that pausing the common dividend for Q3 was a sensible move to safeguard operating flexibility. When repayments and asset resolutions produce liquidity for us, we anticipate that our focus will increasingly move toward putting capital back to work in opportunities that add to shareholder value. Going forward, our plan is simple: resolve what remains of the legacy assets, protect shareholder capital, and redeploy the liquidity we have available into high-quality multifamily investments. The timing of any individual NPL or REO resolution will still hinge on conditions specific to each asset and market, but the recent pace of resolution activity encourages us, and we believe we are making meaningful progress in reducing these exposures. As soon as we have freed-up capital, our next focus is deploying it productively, and we anticipate that will be important for restoring the earnings capacity of the company; we are grateful for our investors' patience while we continue working through the difficulties in our legacy investment portfolio, and we believe we possess financing flexibility, backing from our capital partners, and platform capabilities to execute that strategy. With that, I would like to turn the call over to Jim Briggs, who will share specifics about our financial results.

Thanks, Jim, and good morning. We filed our Form 10-Q quarterly report earlier today, and on our website last night we posted a supplemental investor presentation that we'll be referencing during our remarks. That same supplemental investor presentation has also been uploaded to the webcast for your reference. Key updates, along with an earnings summary for the quarter, appear on pages four through seven of the presentation. For the third quarter of 2026, the net loss attributable to common stockholders came in at $13.5 million, or $2.57 per share. Distributable loss was $700,000, or $0.13 per share. Please note that every per-share figure reflects the 1-for-10 reverse stock split that was completed on September 9th. Let me walk through a few P&L line items from Q3. Net interest income was $4.6 million, a bit above the $4.5 million we posted in Q2. The total portfolio's ending outstanding UPB stood at roughly $980 million, down from $1 billion as of June 30. Our loan portfolio's weighted average coupon climbed to 706 basis points from 697 basis points last quarter, mostly because the SOFR rate moved higher over the period. Exit fees were lower this period given fewer sequential payoffs. Extension fee income was higher versus the prior quarter, which provided an offset. Operating expenses totaled $4 million, about even with $3.9 million in the second quarter. Higher costs tied to non-performing loans largely drove that rise — roughly $500,000 in incremental expenses, including protective advances expensed as incurred — though it was partly offset by reduced expense reimbursements to our manager during the period. The gap between GAAP net loss as reported and distributable earnings for the quarter stemmed mainly from an $8.6 million provision for credit losses booked in the period, $3.9 million of REO impairment charges, and $318,000 of depreciation on REO. Several factors primarily drove the $8.6 million credit loss provision recorded during the quarter, which distributable earnings excludes. During the quarter, our general CECL reserve grew by $2.8 million, reaching a balance of $6.6 million as of September 30. That increase came mainly from a rise in high-risk loans, along with shifts in the macroeconomic assumptions we used when calculating the company's model-based general reserve. We charged roughly $5.9 million to our specific reserve. Each of our risk-rated five loans was evaluated on an individual basis to see whether asset-specific reserves were needed. The $5.9 million provision is tied primarily to two loans that were risk-rated five as of June 30th and remained risk-rated five as of September 30th, reflecting movements in the collateral values on those assets. Also in the quarter, we wrote off $2.8 million in specific allowance tied to a single loan that we foreclosed on during that time. Because of that, our specific allowance for credit losses rose to $20.5 million, up from $17.4 million as of June 30th. As of September 30th, we had four REO assets classified as held for sale, with a combined carrying value of $49.8 million. That number includes two REO assets totaling $24.1 million in aggregate carrying value that were moved out of held for use during the quarter, plus one asset that was foreclosed on in the quarter and classified as held for sale. In the quarter, we took an impairment charge of $3.9 million on two of those held-for-sale REO assets, reflecting what the properties are currently worth, which was mostly determined by recent offers to sell. By the end of the quarter, our CLO's capital was almost entirely invested, with an 88% advance rate and a cost of funds of SOFR plus 191. At 9/30, part of our loan and REO portfolio served as collateral for warehouse facilities that gave us financing at an effective advance rate of 68% and a weighted average cost of SOFR plus 203. On 9/30, our unrestricted cash stood at $27 million, and our FL3 CLO was almost completely invested. At quarter's close, book equity for the company stood at roughly $191 million. The common stock's total book value came to about $131 million, equal to $24.97 per share — down from $27.57 per share as of June 30th on a reverse split adjusted basis. Now I'll hand things over to Greg Calvert, who will walk through the company's investment activity and portfolio performance for the quarter. Greg.

Thanks, Jim. In Q3, LFT either acquired or funded 4 loans whose combined UPB came to $67 million, while loan payoffs totaled $79 million. At September 30th, the loan portfolio held 51 floating rate loans with an aggregate unpaid principal balance of roughly $981 million, a weighted average floating rate of 326 basis points over SOFR, and an unamortized aggregate purchase discount of about $440,000. Assuming borrowers exercise every available extension, the weighted average remaining term of our book at quarter end was about 18 months. One hundred percent of the portfolio was indexed to one-month SOFR, and 93% of it is collateralized by multifamily properties. At September 30th, roughly 70% of loans in the portfolio carried a risk grade of three or better, versus 81% at June 30th. Sequentially, our weighted average risk grading rose quarter-over-quarter to 3.2 from 3.1. At September 30, we held 6 loans risk-graded five, with an aggregate principal amount of $94 million, or about 10% of the unpaid principal balance of the quarter-end investment portfolio. Five of those loans, with an aggregate UPB of $76 million, had also been risk-graded five as of the prior quarter, whether because of maturity or monetary default. Every one of these loans is on non-accrual status. One loan, with a UPB of $18 million, was downgraded this quarter to a five risk grading because of a maturity default. Even so, that borrower remains current on interest payments, and no specific allowance for credit losses was recorded against this asset in the period. At quarter end, our REO portfolio as a whole comprised 5 multifamily properties with an aggregate carry value of $77 million and a weighted average occupancy rate of about 67%. As Jim Briggs mentioned, 4 of these assets, with an aggregate carry value of $49.8 million, are classified as held for sale, and we are actively pursuing their disposition. We have worked hard to seek positive asset resolutions and to maximize recovery values, and we are pleased with the substantial progress achieved so far, yet we recognize there is still more work ahead on behalf of our shareholders; with that, I will hand it back to Jim Flynn for closing remarks and questions.

Thank you. Thanks, Greg and Jim. At this point, I'd like to open up the call for any questions.

Hey there, good morning. Valen Alvar here, sitting in for Jason Weaver. I appreciate you taking my questions. To begin with, seven loans got extended during 3Q, mostly for roughly three months, and four of those dates have already gone by. How many of them were extended once more in October and November, and what did the paydowns or fees come to? Also, on the previous call you mentioned flagging modified maturities in the supplemental. Is that still on the way?

Sure. Thanks. Appreciate the question. Greg or Zach, do you have the details on those five? Maybe give you a minute.

Sorry about that. Could you briefly restate the background on those five you're seeking details about?

Those seven loans that got extensions added up to roughly $180 million, though mainly through the three months, and four of those dates were already behind us. Do you know how many of them were extended once more during October and November, and what the paydowns or fees amounted to?

Yeah, hold on a moment while —

Yes, sir.

— I pull up some details there.

Sorry, what was the second part of your question again? Was there another piece apart from that?

Yeah, yeah. On that last call, you folks brought up flagging the modified maturities in the supplemental. I was just wondering whether that is still on the way or whether it's part of the plan down the road.

Yeah, Jim and Andrew, I don't believe that's in the supplemental, or is it?

It is not.

I do not believe it.

That figure isn't in the supplemental we have now, and we'll make an effort to get it included there.

All right, understood.

Regarding your first question, what I can say is that I'm simply going through some paper and attempting to pull it together. That isn't how we typically consolidate data, though. For the most part, certain temporary extensions showed up during Q2 and then moved into more lasting arrangements through longer extensions in Q3. Those carried fee capture and so on. Right now I'm being somewhat forward-looking toward Q3, which I don't really want to do too much of. The answer is that a number of those haven't been formally documented yet, whatever the ultimate resolution turns out to be. That part is accurate. You shouldn't discuss those, but yeah.

All right, understood. Thanks. To bring back the common dividend, what level of Distributable Earnings and which resolution milestones would the board require? Is there any risk to the preferred coverage? I realize you guys addressed this somewhat already, but.

Yes. I mean, there isn't a. Clearly, we go over that question with the board at every one of our meetings. The earnings trend right now is negative, partly of course because of some of these challenged assets, but also since we're significantly under-deployed compared with historical norms, both on leverage and on assets. Although there isn't a specific figure, the main factors in that conversation are how fast, or how many additional, of these assets we've identified — and we do expect meaningful progress in the next couple of quarters on getting those off the balance sheet. It really comes down to preserving liquidity and flexibility to resolve those assets. Once that sits at a point where we feel comfortable and the board feels comfortable, we'll then look at what Distributable Earnings are as a result going forward, and then decide on the dividend; we do believe that once we're able to resolve these assets, return the capital back to the company and redeploy it efficiently into the market, our earnings will improve. But it isn't so much a figure for what the earnings is as it is preserving liquidity and flexibility to get through these resolutions. Obviously, our preference is to do that as soon as possible. As I said in the first part of the call, we're making significant progress, and we do see transactions in the space generally across the industry in terms of lenders being able to sell non-performing loans or non-performing assets or REO at a faster pace today than we've seen over the last year plus. While from a value standpoint, that's obviously lenders resolving assets that have generated losses, which nobody is happy about, but from a getting through this period and getting through legacy portfolios standpoint, that's a positive sign. If I were looking at this, I would monitor the watch list and the number of loans as they — of the higher-risk loans moving off the books — as the key driver of that discussion.

Okay. Thanks for that. Appreciate it.

Morning. We all know conditions are difficult right now, and while the results are disappointing, I believe they reflect considerable hard work and effort. If I understood correctly, there are 12 loans that matured between September 30th and today, and they might or might not belong to this legacy group you've mentioned. I'm curious — and maybe the previous question touched on this — how many of those were repaid or extended? That's the first part of what I want to ask. The second part: you're speaking at a 30,000 ft level about properties and so on. Roughly 10% of the portfolio appears to be non-performing, and I was hoping you could share specific property detail on some of those non-performing assets, so we can gauge how hands-on you are and what to expect going forward. Book value dropped by almost 10% last quarter, largely from markdowns, and given the count of five-rated loans, I expect we may see additional markdowns ahead. I don't know when this so-called "legacy period" will run its course. That's actually an interesting question you could address as well — give us a sense of when we get beyond it and when we reach something closer to, quote, "normal times." Sorry for piling on so many questions.