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

Hello, everyone, and good morning. We appreciate you being on this call to go over Lument Finance Trust's financial results for the third quarter of 2025. Joining me today are our CEO, Jim Flynn; our CFO, Jim Briggs; our President, Greg Calvert; and Zach Halpern, who serves as our Managing Director of Portfolio Management. On Wednesday, November 12, we submitted our 10-Q to the SEC and put out a press release covering the details of our recent financial results. Additionally, a supplemental earnings presentation is available, and you can find it on our website. Before I pass things to Jim Flynn, I want to remind everybody that some statements shared during this call aren't based on historical information and might be forward-looking statements as defined 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 might lead to actual results differing materially from what's expressed in the forward-looking statements. Those risks and uncertainties get covered in the company's reports filed with the SEC, especially in the Risk Factors section of our Form 10-K and Form 10-Qs. It's impossible to foresee or identify every such risk, and listeners should be careful not to rely excessively on these forward-looking statements. The company isn't obligated to update any of these forward-looking statements. Also, we'll be talking about certain non-GAAP financial measures on this conference call. Presenting this information isn't meant to be viewed alone or as a replacement for the financial information presented under GAAP. You can access reconciliations of these non-GAAP financial measures to the most comparable GAAP measures through our SEC filings. During the third quarter of 2025, we recorded GAAP net income of $0.01 per share and distributable earnings of $0.02 per share of common stock. In September, we declared a quarterly dividend of $0.04 per common share for the third quarter. Now I'll hand the call over to Jim Flynn. Please go ahead.

Thank you, Andrew. Good morning to all of you. We're glad you could join us for Lument Finance Trust's Earnings Call covering the Third Quarter of 2025. To begin, let's examine the current market landscape. Throughout this stretch of changing monetary policy and geopolitical unpredictability, the economy has continued to demonstrate resilience. On October 29, the Fed funds reduced the fed funds rate by 25 basis points, bringing it to a range of 3.75% to 4%. Yet during that same meeting, the Fed signaled that further cuts are anything but guaranteed, which leaves near-term uncertainty lingering, amplified by continuing geopolitical turbulence and rapidly evolving trade and tariff policy changes within the U.S. On top of that, we are now contending with the economic strain caused by the recent federal government shutdown, along with ambiguity surrounding upcoming negotiations as we anticipate reopening the government, ideally within the next few days. Fundamentals in the multifamily sector continue to look favorable. Rent growth remains moderate and steady. Occupancy is still solid. As we've mentioned on previous calls, new supply is decelerating substantially — all factors that foster balance and the possibility of rent recovery across the medium and long term. Affordability hurdles in the single-family market, alongside numerous other elements, keep supporting multifamily demand and credit quality at the asset level. We see the latest Fed funds cut as a cautiously optimistic development for multifamily lending, since lower short-term index rates should generally assist our borrowers in meeting their existing debt obligations as they progress toward completing their business plans. In the meantime, the CRE CLO market remains accessible to issuers. Issuance so far this year has surpassed $25 billion, indicating robust liquidity and investor confidence. This recovery relative to the previous year reinforces our view regarding the company's capacity to re-enter the securitization market as a repeat issuer down the road, contingent on market and pricing conditions, naturally. Regarding asset management, our focus stays on actively overseeing the portfolio. Our team remains closely engaged with borrowers, proactively pursuing favorable outcomes via modifications, extensions, and REO strategies when suitable. On a weighted average basis, the portfolio's credit ratings held fairly steady from quarter to quarter, and reserves stay in line with sensible expectations; we keep prioritizing capital preservation and disciplined risk management throughout every position. From a liquidity and financing perspective, we maintained a conservative liquidity stance this quarter, retaining sufficient unrestricted cash to safeguard flexibility while addressing legacy credits and pursuing portfolio refinancing. Loan payoffs came to roughly $49 million, with those proceeds largely directed toward lowering securitization liabilities. As we've referenced in earlier quarters, the company has concentrated heavily on establishing new portfolio financing that gives us the flexibility to manage our capital more effectively as we navigate legacy credit difficulties. Last week, we signed a new repurchase agreement with JPMorgan, extending up to $450 million in aggregate advances to the company. So now that this warehouse capacity is set up, last week, the people holding securities from our 2021 CRE CLO received notice that the company plans to redeem those related notes and preferred shares later this month. Getting the JPM facility closed was a key move in repositioning the portfolio we already have and, assuming market conditions allow, it lets us pursue new financing opportunities. Near term, our focus is straightforward: creating value through active asset management, working through legacy positions efficiently, and carrying out our financing strategy. Going forward, we plan to put capital back to work in our core lending strategy, which centers on middle market multifamily. We think this disciplined approach will leave the company well positioned as the market stabilizes and fresh opportunities appear. The origination and asset management expertise of our managers continues to be a key differentiator, and we're confident that our focus, prudence, and flexibility will produce lasting shareholder value. With that, I'd like to hand the call to Jim Briggs, who will walk through our financial results. Jim?

Thanks, Jim, and good morning to everyone. Yesterday evening, we submitted our Form 10-Q quarterly report and posted a supplemental investor presentation on our site, and we'll be citing that material as we go through our comments. That supplemental investor presentation is also available on the webcast, and on Pages 4 through 7 you can locate the quarter's key updates along with an earnings summary. For Q3 of '25, net income to common stockholders came in at roughly $700,000, or $0.01 per share. Distributable earnings were approximately $1 million, or $0.02 per share. I want to call out a handful of items regarding the Q3 P&L. Net interest income for Q3 reached $5.1 million, down from the $7 million we posted in Q2. Sequentially, the weighted average coupon on our loan portfolio was essentially unchanged. The portfolio's average outstanding UPB came down, and principal repayments on loans went toward reducing part of our secured financings, which drove a meaningful share of the drop in net interest income for the period. On top of that, reversing certain accrued interest and not recording interest on nonaccrual loans added about $800,000 to that decrease. Total operating expenses, which include fees to our manager, edged lower versus the prior quarter, with $3.1 million recognized in Q3 compared with $3.2 million in Q2. That decrease stemmed mainly from a sequential reduction in fees paid to our manager. The main gap between reported net income and distributable earnings came largely from $345,000 of depreciation on real estate owned. As of September 30, we had 7 loans risk rated 5. Every one of those loans is collateralized by multifamily assets. Greg will go into somewhat more detail on those loans during his remarks. Regarding our allowance for credit losses, we assessed these 7 risk-rated 5 loans one by one to establish whether asset-specific reserves were needed. Following our analysis of the underlying collateral, we recorded a provision for credit losses of approximately $900,000; we also charged off roughly $200,000 of reserves booked in earlier quarters against the allowance for an asset that became REO in Q3. Our general allowance for credit losses fell to $5.7 million from $6.6 million in Q2, and that decline was driven mainly by a lower portfolio balance, which largely offset the increase in specific reserves; the second quarter closed with an unrestricted cash balance of $56 million, and our investment capacity through our two secured financings was fully deployed. The CRE CLO securitization transaction we issued in 2021 gave our loan assets effective leverage of 72% at a weighted average cost of funds of SOFR plus 179 basis points. Through the 2023 LMF financing, the portfolio received effective leverage of 77% at a weighted average cost of funds of SOFR plus 325. Taken together, as of quarter end, the two securitizations gave our portfolio effective leverage of 74% and a weighted average cost of funds of SOFR plus 230. As Jim said earlier, holders of notes in our 2021 CRE CLO have been told we plan to redeem the related notes and preferred shares later this month. At quarter's end, the company's total equity came to roughly $230 million. The total book value of common stock stood at about $170 million, or $3.25 per share, down sequentially from $3.27 a share as of June 30. Now I'll hand the call to Greg Calvert, who will walk through the company's investment activity and portfolio performance for the quarter. Greg? The total book value of common stock was approximately $670 million, or $3.25 per share, decreasing sequentially from $3.27 a share as of June 30.

Thanks, Jim. In Q3, LFT saw $49 million in loan payoffs. By September 30, our loan portfolio was made up of 51 floating rate loans, with an aggregate unpaid principal balance of roughly $840 million, a weighted average floating rate of SOFR plus 355 basis points, and an unamortized aggregate purchase discount of $1.9 million. Assuming borrowers exercise all available extensions, the weighted average remaining term of our book at quarter end was about 16 months. Every loan in the portfolio—100%—was indexed to 1-month SOFR, and multifamily properties collateralized 90% of it. As of September 30, roughly 40% of loans in our portfolio carried a risk rating of 3 or better, versus 63% in the prior quarter. Our weighted average risk rating stayed flat quarter-over-quarter at 3.5. In the period, we moved two loans with a combined UPB of $44.1 million from a 5 rating as of June 30 to a 4 or better rating as of September 30. At September 30, we held 7 loan assets risk-rated 5, with an aggregate principal amount of approximately $86.4 million, or about 10% of the unpaid principal balance of our quarter-end investment portfolio. Among these, 4 were risk rated 5 in the prior quarter, and they included an $11.9 million loan collateralized by a multifamily property in Ypsilanti, Michigan; a $10.3 million loan collateralized by a multifamily property in Colorado Springs; a $13.7 million loan collateralized by a multifamily property in Cedar Park, Texas; and an $8.2 million loan collateralized by a multifamily property in Des Moines, Iowa. As of quarter end, every one of these loans risk-rated 5 was in monetary default. The other 3 loan assets risk-rated 5 this quarter included a $10.3 million loan collateralized by a multifamily property in Clearfield, Utah; a $15 million loan collateralized by two multifamily properties in Philadelphia, Pennsylvania; and a $17 million loan collateralized by two multifamily properties in Tallahassee, Florida. Of these three 5 risk-weighted loans, one was in maturity default and the other two were in monetary default as of quarter end. As of September 30, our REO consisted of four multifamily properties. Three are located in San Antonio and one is located in Houston. At quarter end, these properties had a weighted average occupancy rate of approximately 73.5%, and achieving positive asset management outcomes while maximizing our recovery values remains our priority. With that, I'll hand it back to Jim Flynn for his closing remarks and questions. Jim?

Thanks, Greg. I want to express appreciation to everyone who came on the line; and right now, I'd like to start the Q&A portion. We're eager to get your input.

Regarding the risk ratings, do you believe the majority of problems in the portfolio have now been pinpointed? Or is the review still ongoing, meaning additional downgrades might lie ahead?

I'd say we have a solid grasp of the portfolio — we know exactly where every asset sits — and we're quite confident in the current risk ratings. Naturally, should market conditions shift or circumstances evolve, that picture could alter. Still, from where we sit, and given how actively we manage every one of these assets, we believe every known issue has been surfaced. If conditions hold and each market stays as it is right now, we wouldn't anticipate any further movement, as we're all aware, especially when we survey the market and everything taking place. Of course, market conditions of any sort can always change, but we do feel we've conducted a thorough examination of the portfolio from top to bottom.

Understood. And looking at it from the other direction, what's your thinking around expanding the portfolio over the next few quarters? Will the main emphasis be on asset management? Or might we see some fresh loans being added, particularly with that new financing in place?

Yeah. Well, I'd say the new financing definitely provides us with greater flexibility to bring on assets, and having a bit more — with more clarity and certainty regarding where we believe the portfolio stands, that will give us a stronger opportunity to consider adding to it. We've been very focused on managing assets, preserving cash, and maintaining liquidity to ensure we're positioned for, honestly, where we think we are right now. So yeah, we certainly hope conditions hold, and that presents us with a chance to get more assets onto the books over the next few quarters.

Understood. If I might fit in one additional question. Could you tell us anything regarding the schedule we should expect for REO dispositions? And please remind me whether any debt is secured by those REO properties, or do you hold them without leverage?

Let me take the second question first, regarding the current situation with REO. Up to now, we have always kept the REO we own; the same applies at the manager level, with no leverage. We retain the option to arrange certain borrowing secured by the worth of such assets, through debt suppliers and credit lines, including those we brought in via JP as well as possible additional lenders; that applies when we intend to keep an asset. And in the majority of instances, our decisions to sell REO rest entirely on how we assess the asset's general credit quality. So usually in such cases, after things have worsened and you are repossessing an asset. There are fairly routine enhancements and betterments in administration that generally must take place over a span of at least 3 to 6 months, after which it becomes more a matter of judging value. And given the staff we have assembled and the magnitude and reach of the sponsor behind LFT, we have generally concluded it is preferable to at minimum carry out those steps for the benefit of LFT's shareholders and possibly beyond that to pre — capture additional value. Consequently, the schedule for REOs depends heavily on the individual asset. We might sell certain ones rapidly within roughly that 3- to 6-month window once we have essentially tidied up the asset, ensured it is as fully leased as possible, and then maybe divest. Yet generally, our REO team, whose role is managing assets, reviews these and perceives considerable potential to boost value, and such assets could be held for a longer horizon; that is when we would turn to certain of our lenders to extend us leverage secured by those on a value basis. At a fairly modest level of leverage, certainly below what a standard new loan would carry.

Is there anything different going on with your sponsor, ORIX USA? From what I know, they bought a business named Hilco, and as far as I can tell, Hilco is involved in asset-backed lending and funding. Could you explain whether there's any competition with...

I can address that. To start, no, nothing has shifted in the way ORIX and Lument work together. As for the Hilco deal — they're a lender focused on assets as collateral. When you look at how they operate, it barely intersects at any meaningful degree with what LFT does in first mortgage bridge lending; therefore, I don't see a significant clash there. They do engage in a bit of real estate lending backed by assets; and naturally, their parent, ORIX, is a major lender, so when it comes to growing the total reach of our real estate lending operation throughout the parent organization, Lument and LFT, I fully anticipate that growth will keep going, and that's a good thing for LFT and for the entire company. Still, I see no basis to believe the Hilco purchase would create a meaningful effect and definitely not a harmful one for LFT.

All right. For my second question, regarding real estate owned — suppose the worth of that property actually rises above the outstanding balance, and then you sell it. Do we get to keep that upside? Or is a portion of it returned to whoever owned it before, or to the lender?