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

Good day, all, and I appreciate your attendance on this call while we review what Lument Finance Trust achieved financially in the fourth quarter and across the entirety of 2025. With me right now are our CEO, Jim Flynn; our CFO, Jim Briggs; Greg Calvert, who serves as our President; and Zach Halpern, who handles the Portfolio Manager role. Last night, we filed our 10-K with the SEC and issued a press release detailing our latest financial results. Additionally, a supplemental earnings presentation is now accessible on our website for your review. Before handing the call over to Jim Flynn, I'd like to remind everyone that certain remarks we make today aren't grounded in historical facts and could qualify as forward-looking statements under Section 27A of the Securities Act of 1933, along with Section 21E of the Securities Exchange Act of 1934. A range of risks and uncertainties accompany these forward-looking statements, and those factors could cause actual results to differ materially from what's expressed in them. You'll find those risks and uncertainties addressed in the reports the company files with the SEC, particularly the Risk Factors portion of our Form 10-K and our Form 10-Qs. No one can predict or pinpoint each of those risks, and we'd caution listeners not to put undue reliance on our forward-looking statements. Nothing here obligates the company to refresh any forward-looking statements. On top of that, a few non-GAAP financial measures are going to be discussed during the call. We don't intend for that information to stand alone, nor should it serve as a substitute for figures put together under GAAP. You can find reconciliations connecting those non-GAAP financial measures to the closest GAAP-based measures in the documents we file with the SEC. Turning to the fourth quarter and the 2025 fiscal year, our GAAP net loss came in at $0.17 and $0.14 per share of common stock, respectively. During the fourth quarter of fiscal year 2025, distributable earnings landed at roughly $0 and $0.14 per share of common stock, respectively. During December, we announced a quarterly payout to holders of our common stock of $0.04 per share for Q4, which lifted the total dividends declared across 2025 to $0.22 per common share. Then, on Thursday of last week, we declared another quarterly dividend of $0.04 per common share, this time for the first quarter of 2026, which matches what we paid out in Q4. At this point, I'll hand things over to Jim Flynn. Go ahead, please.

Thanks, Andrew, and good morning to all of you. It's a pleasure to have everyone with us for Lument Finance Trust's earnings call covering the fourth quarter of 2025. We're grateful for your participation today. Turning briefly to the broader market picture, the U.S. economy is still showing resilience, even as growth cools and uncertainty ticks up somewhat, shaped by shifting monetary policy, fiscal developments, and geopolitical risks and considerations. The Federal Reserve started easing in 2025, yet the road ahead for rates is likely to stay gradual and tied to incoming data, with inflation and labor market trends continuing to shape policy. On the commercial real estate side, capital markets have strengthened, with more liquidity flowing through both securitized and warehouse financing channels. Even so, transaction volume is still under historical averages, since buyers and sellers keep working through pricing discovery amid an elevated cost of capital environment. In multifamily, fundamentals are leveling out after the recent supply cycle peaked. New deliveries are still high in some Sunbelt markets, but they're now projected to fall significantly by late '26 and '27, thanks to the steep drop in starts over the past 18 months. Consequently, rent growth is still modest, though early signals of reacceleration are appearing in markets where supply is constrained, and occupancy has held fairly steady on the whole, even with ongoing pressure in a handful of high delivery regions. Crucially, the structural demand drivers behind rental housing are still in place. Affordability limits in the single-family housing market, together with scarce for-sale inventory and mortgage rates that remain elevated, keep supporting rental demand and long-term multifamily fundamentals. On the financing front, short-term interest rates that are lower than their peak, paired with a forward curve that's still positive, represent constructive developments for our borrowers. Debt service coverage is still strained for some transitional assets, but the slight easing in index rates and better operating trends are assisting in stabilizing credit performance throughout the sector. The CRE CLO market continues to serve as a key liquidity source, with 2025 issuance volumes above $30 billion and a healthy pace of activity carrying into 2026. Investor appetite for floating rate exposure remains robust, especially for well-structured transactions backed by institutional quality collateral. Spreads have narrowed somewhat, reflecting better sentiment, though they're still wide compared with long-term averages. Asset management — active asset management stays our number one priority; we keep collaborating closely with borrowers to achieve outcomes that protect capital and boost long-term value, including modifications, extensions and asset level strategies where appropriate. Given the operating and financing environment is still uneven, especially for assets affected by the recent supplier capital structure challenges, we stay proactive and disciplined in managing every position. Portfolio credit metrics improved quarter over quarter, mainly because of acquiring additional performing assets tied to our recent CLO execution. Meanwhile, we raised reserves on certain challenged legacy positions to reflect revised expectations and current market conditions. We've stayed active in carrying out our financing strategy, capitalizing on improved yet still selective capital market conditions while keeping a disciplined approach to leverage and cost of capital. During the earnings call for the prior quarter, we mentioned that in November 2025 we signed an uncommitted master repurchase agreement with JPMorgan Chase. Through this arrangement, the company can borrow as much as $450 million to fund first mortgage loans, controlling loan participations, and other commercial mortgage loan debt instruments backed by commercial real estate. Then, in the first part of December, we established a fresh loan agreement with Northeast Bank, giving the company access to as much as $50 million in advances for financing parts of our investment portfolio. This match term financing facility grants us added flexibility to work through our REO holdings and secure favorable asset management results. The same day that the Northeast Bank facility was finalized, we completed the LMNT 2025-FL3 CLO transaction — a $664 million deal carrying an effective advance rate of 88% and a weighted average cost of funds of roughly 191 basis points over SOFR, not counting fees and transaction costs. The initial collateral pool was made up of 32 first lien floating rate mortgage loans with participation secured by 49 multifamily and commercial real estate properties spread throughout the United States. Some of that collateral had been held by LFT before closing, while the company purchased the rest at fair market value plus accrued interest from an affiliate of Lument Investment Management LLC, our external manager. Across the whole pool, the weighted average collateral spread came to roughly 321 basis points over 1-month SOFR. The FL3 CLO carries a 30-month reinvestment period, letting us put loan principal repayments back to work in new loan investments through June 2028. In February, we redeemed the outstanding loans and notes that remained from the LMF 2023 to 1 financing transaction and refinanced the underlying pool using our current warehouse facilities. Because of the fairly elevated weighted average cost of capital and LMF's low leverage at present, this redemption gave the company room to shift part of its investable capital into levered loan assets on more appealing financing terms down the road. Lastly, after the quarter closed, we amended the terms of our existing secured corporate term loan, pushing the maturity date out to 2030 and adding $2.3 million of liquidity before fees and deal expenses. Going forward, the term loan carries an interest rate of 9.75%. In Q4, we brought in roughly $104 million of payoffs, with the proceeds mainly applied toward lowering securitization liabilities; we also put about $400 million to work in loan assets, mostly tied to the FL3 transaction. We finished the year holding roughly $23 million of unrestricted cash, and together with our available warehouse capacity, we feel our liquidity position is still suitable for supporting portfolio management, asset resolution, and selective capital deployment. Our near-term priority continues to be active asset management, efficient resolution of legacy positions, and disciplined balance sheet management. Although we take encouragement from improving conditions in commercial real estate credit markets, the recovery is still uneven and will probably need time to fully normalize. Our expectation is still for a market defined by selectivity, where results are set apart more and more by the quality of assets, the sponsor behind them, and how the capital is structured. Given that setting, we stay cautious and very choosy when putting capital to work, concentrating on solid credit fundamentals, protective structures, and returns adjusted for risk. This strategy, in our view, leaves us well placed to steer through today's conditions and still keep the ability to seize opportunities as the market keeps changing; having said that, I'd now hand things over to Jim Briggs, who will walk us through the specifics of our financial results.

Appreciate that, Jim. Morning, everyone. Yesterday evening we submitted our 10-K annual report and posted a supplemental investor presentation to our site, and we'll be referencing that deck throughout our comments. That same supplemental investor presentation is now available on the webcast too, should you want to look at it. Pages 4 through 7 of that deck contain the key updates along with an earnings summary covering the quarter. During Q4 of '25, net loss to common stockholders came in at $8.9 million, equal to $0.17 per share; distributable earnings came in at roughly $0. A handful of things on the Q4 P&L deserve mention. Net interest income for Q4 reached $5.3 million, modestly better than the $5.1 million we posted in Q3. Sequentially, the weighted average coupon on our loan portfolio fell to 717 basis points from 777 basis points a quarter earlier, driven by tighter spreads on loans we newly acquired plus a decrease in the SOFR benchmark rate. Ending outstanding UPB for the portfolio rose, reflecting the FL3 CLO transaction we discussed previously that closed in December, through which we picked up about $383 million of assets from an affiliate of our manager. Total operating expenses, manager fees included, ran higher quarter-over-quarter, landing at $3.8 million against $3.1 million the quarter before, mostly because of onetime legal costs tied to REO assets, the FL1 redemption in November that we mentioned earlier, and the financing initiative we chose not to pursue after obtaining more attractive terms through the facilities referenced previously. The main gap between reported net income and distributable earnings in Q4 came largely from $8.6 million of unrealized provision for credit losses, a $200,000 realized loss on an REO sale, and roughly $296,000 of depreciation on REO. At December 31, 8 loans carried a risk rating of 5. Each one is collateralized by multifamily assets. Greg will go into more detail when he speaks; regarding the allowance for credit losses, we looked at those 8 risk-rated 5 loans one by one to figure out whether asset-specific reserves were needed. Following our analysis of the underlying collateral, we booked a provision for credit losses this quarter of about $8.6 million. Consequently, our specific allowance for credit losses grew to $17.6 million, up from $8.3 million at September 30. Meanwhile, our general allowance for credit losses dropped $5 million — falling to $5 million from $5.7 million last quarter, mainly because of certain transfers into specific evaluation, payoffs made during the quarter, and revisions to the macroeconomic forecast. We closed 2025 with an unrestricted cash balance of $23 million, and FL3 — the CLO we finalized in December — was fully deployed. As Jim mentioned earlier, FL3 delivered effective leverage of 88% at a weighted average cost of funds of SOFR plus 191 basis points. The company's total book equity stood at roughly $219 million when the quarter ended. The book value for all common stock came to roughly $159 million, which works out to $3.03 per share. That's a drop from the $3.25 per share we recorded on September 30. At this point I'd like to hand things over to Greg Calvert, who will walk through what happened with the company's investments and how the portfolio did over the quarter. Greg?

Thanks, Jim. In Q4, LFT either bought or provided funding for $400 million in loan assets, and most of those came in as the initial collateral tied to the FL3 deal. Over that same stretch, the company saw $104 million in loan payoffs. At December 31, our loan portfolio as a whole was made up of 61 floating rate loans, with total unpaid principal balance of roughly $1.1 billion, a weighted average floating rate of 333 basis points above SOFR, and an unamortized aggregate purchase discount of $1.7 million. Assuming borrowers use every extension available to them, the weighted average remaining term on our book at quarter end came to about 21 months. Every bit of the portfolio—100%—was indexed to 1-month SOFR, and 93% of it was backed by multifamily properties. At December 31, about 83% of loans in our portfolio carried a risk rating of 3 or better, versus 46% at September 30. Our weighted average risk rating improved quarter-over-quarter, moving to 3.2 from 3.6; the main reason is that we brought in more loans during the period from an affiliate of the manager as part of the FL3 transaction. In the period, we moved 1 loan with a UPB of $9.8 million from a 5 risk rating at September 30 to a 4 or better rating at December 30, following the execution of a loan modification that involved the borrower partially paying down the loan in return for an extension through Q4 2026. At December 31, 2025, we held 8 risk-rated 5 loans with an aggregate principal amount of roughly $117 million, which is about 10% of the unpaid principal balance of the quarter end investment portfolio. Those consisted of one loan in maturity default, downgraded to a risk rating of 5 during the quarter, with a balance of $22 million collateralized by a multifamily property in Arlington, Texas; 1 loan in monetary default, downgraded to a risk rating of 5 during the quarter, with a balance of $18 million collateralized by a multifamily property in Tampa, Florida; 3 loans in maturity default that remain risk rated 5 with an aggregate principal balance of $40 million collateralized by multifamily properties in Philadelphia, Colorado Springs and Cedar Park, Texas; and 3 loans in monetary default that remain risk rated 5 with an aggregate principal balance of $38 million collateralized by multifamily properties in Des Moines, Iowa, Tallahassee, Florida and Ypsilanti, Michigan. Across 2025, the company foreclosed on 4 REO assets. Late in December, we sold one of the properties, located in San Antonio, Texas, to a third party for $8.2 million and booked a $500,000 loss in the fourth quarter on that sale. At December 31, our REO consisted of 3 multifamily properties. Two of the remaining properties sit in San Antonio, and the other is in Houston, Texas. At quarter end, those properties had a weighted average occupancy rate of 69%. Getting favorable outcomes in asset management and pushing recovery values as high as possible is still what we're focused on. So with that, I'll hand things back over to Jim Flynn, who'll give some closing remarks and take any questions.

Much appreciated, Greg. And thanks to each of you for being here — we're grateful for the partnership and support you keep giving us. So with that said, I'll have the operator open things up now for questions.

I wanted to ask whether you could provide some perspective on how you're thinking about the risk-reward and the opportunity right now when it comes to putting new capital to work, given the backdrop over the past few weeks of elevated rate volatility?

Sure. Obviously, the market environment as it stands today has introduced some additional difficulties when we're looking at assets. But the place we begin is still what the sponsor is concentrating on in that market, what growth expectations exist for that market, and what the supply dynamics look like together with demand. So that's definitely one piece of the assessment, or a component of the assessment — the geopolitical volatility we're seeing. But we remain firmly confident in the strength of the multifamily market and need to take a somewhat longer-term perspective. Our deals are usually put together with interest rate caps; so in the near term, we're shielding ourselves through the initial term of the loan. But we do run stress tests on those scenarios, though I believe the most critical elements of assessing risk around the sponsor and the market still win out even during the most turbulent periods. And then from a structural standpoint, you do everything you can to safeguard yourselves both on the leverage side and on the interest rate volatility side through structure and caps. But once again, sponsor and market are going to be essential to that. Certainly, the expectation is that across the 2- to 3-year period of a bridge loan, you get some stability coming back to the market, ideally sooner rather than later, but it's clearly something we consider as we deploy capital. And again, I think it makes those first components even more important.

Understood. And on that note, now that the new CLO has closed, do you have a refreshed range you're comfortable with for leverage in the near term?

Are you asking about it at the loan level? Is that what you're getting at, or...

Yeah. So, stepping back and looking at the whole picture.