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

Hello, everyone, and welcome to this discussion regarding the Q1 2026 financial outcomes for Lument Finance Trust. Thank you for joining. Present with me are Jim Flynn, our Chief Executive Officer; Jim Briggs, our Chief Financial Officer; Greg Calvert, our President; and Zach Halpern, who holds the role of Portfolio Manager. Earlier today, we issued a press release that outlines our latest financial performance. Additionally, we've prepared a supplemental earnings presentation, which is accessible on our site. We intend to submit our 10-Q to the SEC after the market shuts today. Before turning the call over to Jim Flynn, I want to give everyone a reminder: certain things we say today aren't drawn from historical facts and might 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. Such forward-looking statements come with a range of risks and uncertainties, and those could cause actual outcomes to differ materially from whatever those statements suggest. We discuss these risks and uncertainties in the reports our company files with the SEC, particularly in the Risk Factors portions of our Form 10-K and Form 10-Qs. It's not possible to foresee or pinpoint every one of these risks, so listeners should be warned not to place undue reliance on such forward-looking statements. Additionally, there's no duty on our part to revise any of those forward-looking statements. Also, during this call, we'll go over some non-GAAP financial metrics. You shouldn't view this data on its own, nor should it serve as a replacement for the financial figures that follow GAAP. You can find reconciliations that tie these non-GAAP financial metrics to the closest GAAP-prepared equivalents by looking at the documents we file with the SEC. Turning to the first quarter of 2026, our GAAP net loss came in at $0.02, while earnings were $0.02 for each share of common stock. During March, a quarterly dividend of $0.04 for each common share was announced by us for Q1, matching the dividend from the previous quarter. At this point, I'll hand things over to Jim Flynn. You have the floor.

Thanks, Andrew. Hello, everybody, and good afternoon. It's a pleasure to have you all on the Lument Finance Trust call covering results for Q1 2026. We're grateful that each of you took the time to be with us today. If we look at the economic and market backdrop across the United States, it's still fundamentally steady, even though uncertainty keeps carrying more weight than momentum does. And despite the Fed having moved in a more accommodative direction, how quickly and how far any future reductions in rates happen is still going to depend on data — that includes inflation, labor, market conditions, and broader financial stability. Investment conditions keep facing pressure from geopolitical uncertainty, which strengthens the case for caution when allocating capital. Turning to multifamily, operating fundamentals are steadily finding their footing as this sector works through the later phases of a heavy supply cycle. Construction starts have fallen significantly, which sets things up for a substantial drop in fresh supply across '26 and '27. Nationally, rent growth is still modest, though markets with constrained supply are showing better performance. Certain high-delivery regions still have some lingering pressure that needs to be worked off. The long-term drivers of demand for rental housing haven't changed — affordability limits, scarce for-sale inventory, and high single-family mortgage rates keep propping up rental demand. Longer-term interest rates are still a major constraint. Even though short-term rates have come down from their peaks, long-term rates that stay elevated keep cap rates pinned, weigh on asset values, and restrict access to permanent financing at attractive prices. So financing conditions have gotten more workable, yet they're still selective; things have gotten better across securitization markets, warehouse facilities, and certain balance sheet lenders, which helps refinancing activity for well-capitalized assets backed by strong sponsors. The CRE CLO market is still a vital liquidity source, with issuance carrying on into 2026 thanks to robust investor appetite for floating rate exposure. On the asset management front, managing the portfolio remains at the heart of what we do; we stay closely in touch with borrowers throughout the portfolio and are actively handling our REO portfolio to safeguard shareholders' capital and long-term value. Portfolio credit performance was fairly steady overall during the quarter. Our approach to reserves stays disciplined — we raised reserves on some legacy positions to account for updated expectations and current market conditions; when it comes to activity and liquidity, we keep carrying out the financing strategy we intended, as we discussed on last quarter's call. This past February, we redeemed all remaining debt outstanding under LMF-2023 to 1 and refinanced the collateral through our warehouse facilities, and we also amended our secured corporate loan, pushing the maturity out to 2030 and increasing its size to $50 million. We've been managing equity carefully and are selectively putting invested capital back to work within < >. In Q1, we produced $47 million of aggregate payoffs and deployed reinvestment principal proceeds to buy 2 new multifamily loan assets totaling $47 million, plus a $1 million minority participated participation tied to an existing loan asset. At the close of the quarter, we had about $21 million in unrestricted cash. When we pair that with the warehouse capacity we can access and our capacity to put FL3 capital back to work across its 30-month reinvestment period, we feel our liquidity standing is still suitable for backing portfolio management, asset resolution, and chosen capital deployment. What stays at the top of our list is pushing forward on working out legacy assets and carefully putting investable capital to work in appealing new loan asset opportunities. Even as credit markets turn more favorable, the rebound in commercial real estate is still uneven. Divergence in results based on asset quality, location, sponsorship, and capital structure keeps growing, which highlights how much selectivity matters; under these conditions, we stay cautious and deliberate about committing capital, focusing on rigorous underwriting, defensive structures, appealing risk-adjusted returns, and solid sponsors; with that, I want to hand the call to Jim Briggs, who will walk through our financial results.

Thank you, Jim. Appreciate it, Jim. Good afternoon to all of you. Earlier today, we posted a supplemental investor presentation to our website, and we'll be referencing it as we go through our remarks. That same supplemental investor presentation has also been made available on the webcast for your reference. If you turn to Pages 4 through 7 of that presentation, you'll see the key updates along with your earnings summary for the quarter. Later today, once the market closes, we plan to file our quarterly report with the SEC on Form 10-Q. For Q1 2026, we reported a net loss to common stockholders of $1 million, or $0.02 per share. Distributable earnings came in at $1.1 million, or $0.02 per share. There are a handful of Q1 P&L items I want to call out. Net interest income for Q1 was $5.7 million, which is a sequential improvement over the $5.4 million we recorded in Q4, and that was mostly driven by better leverage and cost of funds through the FL3 CRE CLO, the mid-quarter redemption of our LMF financing, which carried a weighted average cost of funds at year-end of SOFR plus 331, and utilization of our other facilities. On the other side, the weighted average coupon on our loan portfolio fell to 709 basis points from 717 basis points in the prior quarter, because of payoffs of higher spread loans relative to newly acquired assets, along with a decline in the SOFR benchmark rate during the period. Given active management of reinvestment capacity within FL3, ending outstanding UPB of the total portfolio stayed materially flat quarter-over-quarter at $1.1 billion. Total operating expenses, including fees to our manager, were slightly lower quarter-on-quarter, at $3.7 million versus $3.8 million in Q4. Within those expenses, other operating expenses declined sequentially, mainly because of discontinued deal costs we recorded in Q4, and that was partially offset by reimbursable expenses coming in slightly higher this past quarter due to fewer waived exit fees on loan payoffs. As a reminder, when one of our loan assets pays off via an agency refinancing provided by an affiliate of our manager, the borrower's exit fees are waived under the terms of our management agreement, and the company receives a credit against expenses reimbursable to our manager equal to 50% of the waived exit fee. The difference between reported GAAP net loss and distributable earnings during the quarter was primarily attributable to $1.3 million of unrealized impairment expense on REO assets held for sale, a $1.2 million loss on extinguishment of debt relating to the remaining unamortized deferred financing costs associated with the LMF financing structure that was redeemed in February, and a $732,000 net release of provision for credit losses, as well as $305,000 of depreciation on REO. As of March 31, we had 7 loans < > 5, and all of these loans are collateralized by multifamily assets. Greg will provide a bit more detail in his remarks. With respect to our allowance for credit losses, we evaluated these 7 risk-weighted 5 loans individually to determine whether asset-specific reserves were necessary. Following our review of the collateral behind the loans, we booked a specific reserve provision of roughly $550,000. That bump in specific reserves was offset by a $1.3 million reduction in our general allowance, which was mostly the result of updates to the macroeconomic forecast. Once we accounted for a $2.4 million charge-off tied to a specific allowance on an asset that moved into REO, our specific reserves as of 3/31 came to $15.8 million, which works out to about 15% of the $UPB on the loans we evaluate specifically. In the quarter, we also revalued the San Antonio and Houston REO properties that are classified as held for sale, booking a $1.4 million unrealized impairment expense on those 2 properties. In the subsequent events section of our 10-Q, we'll note that we closed the sale of the San Antonio property at the start of May, generating net proceeds of $12.4 million. There won't be any Q2 P&L tied to that REO sale. As of quarter end, we were essentially fully invested in our FL3 CLO, with an advance rate of about 88% and a cost of funds of SOFR plus 191. Period-end financing on the repurchase facility for performing, nonperforming, and REO assets carried a weighted average advance rate of 69% and a weighted average cost of SOFR plus 200. Financing for nonperforming and REO assets on our bank facility had a weighted average advance rate of roughly 53% and a cost of SOFR plus 350. We closed Q1 with $21 million in unrestricted cash, and FL3 was essentially fully deployed. At the end of the quarter, that figure was about $216 million. Total book value of common stock stood at roughly $156 million, or $2.97 per share, down sequentially from $3.03 at December 31. I'll hand the call to Greg Calvert now for details on the company's investment activity and portfolio performance in the quarter. Greg?

Thanks, Jim. In Q1, LFT either bought or advanced $48 million in loan assets, which let us redeploy roughly the same total principal repayments we collected over that stretch. At March 31, our loan book held 57 floating rate loans, with an aggregate unpaid principal balance near $1.1 billion, a weighted average floated rate of 331 basis points above SOFR, and an unamortized aggregate purchase discount of $1.3 million. Assuming borrowers use every extension available, the weighted average remaining term for our book at quarter end came to about 19 months. Every loan, 100%, was tied to 1-month SOFR, while 93% of the portfolio has multifamily properties as collateral. At March 31, roughly 77% of loans in the portfolio carried a risk rating of 3 or better. That compares with 83% at December 31. Our weighted average risk rating improved quarter-over-quarter, moving from 3.2% to 3.1%, mostly because of 1 loan asset rated 5, which we'll get into shortly. That loan was moved into REO during the period. At March 31, we held 7 loans rated risk-weighted 5, with an aggregate principal amount of about $108 million, or roughly 10% of the unpaid principal balance in our quarter-end investment portfolio. These loans were also rated risk-weighted 5 in the prior quarter. They consisted of < > loans in maturity default with an aggregate UPB of $51 million, collateralized by multifamily properties in Philadelphia, Pennsylvania, Arlington, Texas, Deter Park, Texas; plus 4 loans in monetary default with an aggregate UPB of $57 million, collateralized by multifamily properties in Tampa, Florida, Des Moines, Iowa, < > Florida and Salati, Michigan. In Q1, the company foreclosed on 1 loan asset collateralized by a multifamily property in Colorado Springs. This asset had an aggregate net carry value of $8.2 million, net of specific reserves of $4.2 million. At quarter end, the REO portfolio overall comprised 4 multifamily properties, with an aggregate carry value of $57 million and a weighted average occupancy rate of 72%. As Jim mentioned earlier, we closed the sale of a San Antonio REO property at the start of May. We also note in our filing that after quarter end, in Arlington, Texas, a defaulted loan asset was foreclosed on. That asset had a net carry value of $18.2 million, net of specific reserves of $3.6 million. Achieving positive asset resolution and maximizing recovery values remains our priority. With that, I'll hand it back to Jim Flynn for closing remarks and questions.

Thanks, Greg. I’m grateful to have all of you with us today, and for the ongoing backing and collaboration. I value that each of you is here, and at this point I’d like to turn the call over to Q&A.

This is Alvar speaking, standing in for Jason Weber. How are you all evaluating the sustainability of the dividend, and what mix of redeploying the SOFR environment or credit normalization would be required to bring the current dividend back to a run rate basis?