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

Hello, and good morning to all of you. We appreciate you being on this call to go over the financial results for Lument Finance Trust's second quarter of 2026. Joining me today are Jim Flynn, who serves as our CEO; Jim Briggs, our CFO; Greg Calvert, our President; and Zach Halpern, who is our Portfolio Manager. Yesterday evening, our 10-Q was filed with the SEC, and we put out a press release offering specifics regarding our latest financial results. In addition, a supplemental earnings presentation was made available, and you can find it on our website. Before I pass the call to Jim Flynn, I want to remind everyone that some statements delivered during this call are not rooted in historical information and might qualify as 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 might lead actual results to differ materially from what those forward-looking statements contain; those results and uncertainties get covered in the company's reports filed with the SEC, especially the Risk Factors section of our Form 10-K and Form 10-Qs. Predicting or identifying every one of those risks isn't possible, and listeners should be cautioned against placing undue reliance on these forward-looking statements. No obligation is undertaken by the company to update any of these forward-looking statements. Additionally, certain non-GAAP financial measures are going to be discussed on this conference call. Presenting this information is not meant to be viewed in isolation or as a replacement for the financial information presented in accordance with GAAP. Reconciliations of these non-GAAP financial measures to the most comparable measures prepared in accordance with GAAP may be accessed through our filings with the SEC. During 2026's second quarter, we reported a GAAP net loss of $0.18 and a distributable loss of $0.10 per share of common stock. In June, a quarterly dividend of $0.04 per share had been declared by us with respect to the second quarter, which matched the prior quarterly dividend. I'll now hand the call over to Jim Flynn. Please go ahead.

Thanks, Andrew. Morning, everybody. It's great to have you on Lument Finance Trust's call covering our results for Q2 2026. Your participation today means a lot to us. We'd also like to thank our investors for sticking with us, for their backing, and for staying engaged as we sort through the problems in the legacy portfolio. We know the difficulties this company has encountered, and each day we stay committed to securing better results for our shareholders. If we look at where the economy and markets stand across the country right now, things are broadly steady. Ongoing ambiguity about monetary policy is holding back investment activity. Fresh economic figures have added to the doubt about where the Fed is headed, among other things whether short-term rates could stay higher for a longer stretch than people had anticipated. Long-term rates are also still high, which keeps weighing on deal activity and property valuations. In the multifamily space, fundamentals keep getting better as the sector works past its supply peak. Rents are rising only slightly, and the long-term demand drivers, such as affordability problems in housing, keep bolstering the multifamily rental sector. Capital markets are still busy, with liquidity on hand across warehouse, securitization, and institutional lending channels, all of which stayed robust during the first half of this year. For multifamily mortgage assets, the CRE CLO market is still a key financing source, and investor appetite for floating rate credit is fairly solid, especially when it comes to repeat issuers who have demonstrated track records. Our top priority remains active asset management. We keep collaborating closely with borrowers and operating partners so we can get the best possible results from both performing and nonperforming investments; we keep proactively assessing ways to resolve legacy assets while sticking to a disciplined credit approach. Although the market for some legacy assets is still weak, resolution activity is starting to pick up speed, spanning negotiated sales as well as other avenues to monetize or stabilize troubled positions. We keep working relentlessly to settle these assets in a way that safeguards value, boosts liquidity, and sets the company up to put capital back to work effectively. Turning to the portfolio, this quarter we were deliberate about handling liquidity on our balance sheet so we could back ongoing portfolio management work while selectively putting CLO capital back out whenever possible; by and large, we retained cash generated by payoffs on nonsecuritized asset loans. After the refinancing efforts wrapped up earlier this year, our financing profile is still in good shape. In our view, the liquidity we currently hold is suitable for supporting asset resolution work, portfolio management, and chosen chances to deploy capital. When capital comes free through resolutions and repayments, our aim is to put it back to work effectively in investments that satisfy our credit standards and should add to earnings. We're staying disciplined about timing and which assets we pick, yet we're equally determined to make sure the company's capital gets back to work as effectively and swiftly as we can. Our Board of Directors just gave the green light to a 10-for-1 reverse stock split of our common stock, having concluded this move serves the best interests of both the company and its stockholders, offering flexibility to stay in compliance with applicable New York Stock Exchange listing requirements and to help maintain an efficient public market for the company's common stock. The reverse stock split should take effect when business closes on Wednesday, September 9, and the company's common stock should start trading on a split-adjusted basis on the New York Stock Exchange when trading opens on Thursday, September 10, keeping the existing ticker symbol LFT. Every stockholder will be impacted by the reverse stock split in the same way, and nobody's percentage ownership interest in the company will change, aside from how fractional shares are handled, which will be settled in cash. We've also put up a reverse stock split FAQ document on our website for our investors. In our view, the reverse stock split represents a significant step toward easing technical pressure on the public stock price and fostering a more orderly market for our shares. Although this move doesn't alter the underlying economics of the company, we think it assists in tackling one of the external pressures on the stock and lets investors concentrate more clearly on the portfolio's value, the progress we're making on asset resolution, and our earnings trajectory. Our priorities haven't shifted. We're dedicated to resolving legacy assets, safeguarding book value, and thoughtfully redeploying capital into high-quality multifamily investments. We're grateful for the ongoing patience and support of our investors and capital partners as we carry out this plan. Although we acknowledge that resolving our nonperforming and REO assets is still difficult, we're witnessing stronger momentum in deal resolutions and sales activity. When those resolutions happen, our intention is to reinvest capital efficiently and with discipline. We're still committed to fully deploying our capital in 2027, which we think will be a key driver of better earnings and, over time, boost shareholder value. We know there's still work ahead, and the timing of certain MPL and REO resolutions continues to depend on market conditions. Even so, we believe the company enjoys the backing of its capital partners, a clear path to redeployment, and the platform capabilities needed to move forward constructively; with that, I'd like to hand the call over to Jim Briggs, who will walk through our financial results. Jim?

Thanks, Jim. Good morning, everyone. Yesterday evening, we submitted our quarterly report on Form 10-Q and posted a supplemental investor presentation to our website, and we'll be referencing that during our comments. That same supplemental investor presentation has also been made available on the webcast for your reference. Key updates along with an earnings summary for the quarter can be found on Pages 4 through 7 of the presentation. During the second quarter of 2026, we recorded a net loss to common stockholders of $9.2 million, equating to $0.18 per share. We also recorded a distributable loss of $5.3 million, or $0.10 per share. There are several Q2 P&L items I want to call out. Net interest income for Q2 came in at $4.5 million, which represents a sequential decrease from the $5.7 million we recorded in Q1. The main reason for this was a lower average balance of performing loans on a quarter-over-quarter basis, since we opted to build up liquidity during the quarter instead of reinvesting principal repayments from loans held outside of CLO. The ending outstanding UPB for the total portfolio stood at roughly $1 billion, down from $1.13 billion as of March 31. The weighted average coupon on our loan portfolio fell to 704 basis points from 709 basis points in the prior quarter, driven by payoffs of loans with higher spreads relative to newly acquired assets, along with a modest decrease in the average SOFR rate during the period. Even though payoffs exceeded those in Q1, our exit fee income was roughly unchanged from the prior quarter, and recognition of extension fee income dropped by approximately $300,000 on a quarter-over-quarter basis. Total operating expenses, which include fees paid to our manager, came in higher quarter-on-quarter at $3.9 million compared to $3.7 million. The main factor was increased reimbursable expenses relative to Q1, largely due to resource allocation. The gap between reported GAAP net loss and distributable loss for the quarter was mostly the result of an $8.6 million net provision for credit losses taken during the period, $5.1 million of realized losses on mortgage loans and REO that are included in distributable earnings, and $390,000 of depreciation on REO. The $8.6 million net provision for credit losses recorded in the quarter, which is excluded from distributable earnings, was driven mainly by specific reserves on loans rated risk-rated 5. As of June 30, we held 6 loans rated risk-rated 5, all of which are collateralized by multifamily assets. Greg will go into a bit more detail on this in his remarks. We reviewed each of our risk-rated 5 loans on an individual basis to determine whether asset-specific reserves were needed. During the quarter, we recorded specific provisions tied to 2 loans that were downgraded to a 5 risk rating during the quarter and 3 loans that had already been risk-rated 5 at March 31, including 1 property that was foreclosed upon and moved to REO during the period. Specific reserves totaled $7.4 million at quarter end, which represents roughly 18% of the associated UPB of specifically evaluated assets. The $5.1 million of realized losses included in distributable earnings related to 3 assets that were fully resolved during the quarter. Among those were negotiated settlements on a pair of earlier loans carrying a 5 risk rating — one located in Philadelphia, the other in Des Moines — where the money received was broadly in line with the net carrying values shown as of March 31. Beyond that, a single REO property located in San Antonio was disposed of for $12.1 million, producing a modest GAAP gain on the transaction. The realized losses that showed up in distributable earnings for this period came mostly from reserves tied to earlier periods as well as impairments taken on those assets. When the quarter closed, our CLO's capital stood essentially fully invested, with an advance rate of 88% and a cost of funds of SOFR plus 1.91. As of June 30, part of our loan and REO portfolio had been pledged to warehouse facilities, which supplied financing at an effective advance rate of 68% alongside a weighted average cost of funds of SOFR plus 209. We closed out Q2 holding $29 million in unrestricted cash, and FL3 was essentially fully deployed. At the close of the quarter, the company's total book equity came to roughly $205 million. Common stock's total book value was about $145 million, equal to $2.76 per share, down sequentially from $2.97 a share as of March 31. At this point I'll hand the call to Greg Calvert, who will walk through the company's investment activity and portfolio performance for the quarter. Greg?

Appreciate that, Jim. During the second quarter, LFT either acquired or funded four loans, and together their UPB reached $91 million, while payoffs on loans amounted to $184 million. As of June 30, the portfolio consisted of 51 floating rate loans, with total unpaid principal balance of about $1 billion, a weighted average floating rate of 330 basis points over SOFR, and an unamortized aggregate purchase discount of roughly $800,000. If all of our borrowers take every extension available to them, the weighted average remaining term of our book as of quarter end was about 18 months. All of the loans in the portfolio — 100% — were tied to 1-month SOFR, and multifamily properties served as collateral for 91.7% of it. As of June 30, roughly 81% of loans in our portfolio had a risk rating of 3 or better, compared with 77% at March 31. On a quarter-over-quarter basis, our weighted average risk rating stayed at 3.1. We completed several positive asset resolutions in the quarter, including the resolutions of the 2 loan assets Jim mentioned in his remarks, which as of March 31 had a risk rating of 5 and for which payoff proceeds aligned with March 31 net carrying values. At June 30, we held 6 risk-rated 5 loans with total principal of $98 million, which equals about 10% of the unpaid principal balance of our quarter end investment portfolio. Four of those loans, with combined UPB of $62 million, had also been risk-rated 5 as of the previous quarter, whether due to maturity or monetary default. Two of those loans, with combined UPB of $36 million, were downgraded to a 5 risk rating for the first time because of monetary default. At quarter end, the REO portfolio overall consisted of 4 multifamily properties, with total carrying value of roughly $61.6 million and a weighted average occupancy rate of about 67%. In the period, we completed the sale of 1 San Antonio REO asset valued at $12.2 million. We also foreclosed on a multifamily property in Arlington, Texas. The $16.7 million loan tied to that property had a risk rating of 5 as of March 31. Following quarter end, we foreclosed on a multifamily property in Dallas, Texas. A $21.9 million mortgage loan was connected to this property, and it was risk-rated 5 as of 6/30. We have worked hard to pursue positive asset resolutions and maximize recovery values, and we are pleased with the significant progress achieved so far, yet we recognize there remains more work to do on behalf of our shareholders; with that, I'll hand it back to Jim Flynn for his closing remarks and questions. Additionally, $15.7 million.

Thank you, Greg. I want to express my appreciation to all of you for being with us today, and for the partnership and backing you keep providing. We see and value how patient our investors have been while we deal with our legacy assets and reshape this company to deliver better earnings. Our attention stays fixed on clearing up those troubled assets, putting capital back to work in an efficient manner, and steering the company toward a portfolio that is completely invested and producing higher earnings in 2027. Crucially, our capital partners keep standing behind us as we proceed, and we feel the steps being taken right now put LFT in position to build shareholder value down the road. On that note, I'll turn it over to the operator to begin the Q&A portion of the call.

For a very long stretch of time—many, many years now—I've held shares in this company, and what troubles me is watching book value fall substantially while the stock price drops too. Also, the dividend I purchased into a long time back has shrunk a great deal as well. I can see the amount you're currently distributing. So my question becomes: how on earth will you keep making that payment? Here's something quite straightforward I'd like to ask—it's really about size. When it comes to assets and market cap within this specific sector, I doubt any other firm is smaller than yours. I also own another business, Cherry Hill, and it just completed a merger with MITT. What I'm asking is this: your costs are clearly climbing. I don't hold that against you. Inflation exists, folks have to spend money, and these days everything carries a price. But given that the scale simply doesn't add up, do you see a chance to combine with some other company—or alternatively, just sell off the assets, since you mentioned book value sits at $2.70?

I appreciate the question, and I appreciate the time you've spent as an investor. That backing means a lot to us. You've definitely put your finger on something difficult, and we've talked about it before: our size, especially when measured against the bigger players in this sector — that's a fair point. It's also partly why our portfolio, on average, likely holds troubled assets at roughly the same proportional rates as our peers do. Size is the problem we face, so we've kept liquidity sitting on our balance sheet rather than putting that capital back to work. That has weighed further on earnings, on top of losses we've absorbed from loans that didn't perform; so as you note, that's among the causes. And as we work through these assets and put capital back to work, we ought to be in a position to lift earnings going forward. On the subject of weighing possible M&A opportunities or other strategic alternatives, that's something we keep doing alongside our bankers, alongside anyone who talks with us, and alongside our Board. Every one of those options gets assessed whenever it arises. Regrettably, across the last 2 years, we haven't managed to complete any of the ones that came up for discussion. And should something emerge, we would of course bring it to the Board and treat any path capable of building shareholder value as something to take seriously, and we'll keep doing that going forward.

And then there's this other thing — what do you think about simply finishing up and offloading the assets at $2.75 before they drop any further?

That is a reasonable thing to ask, and it is definitely something our Board and management look at, along with the conversations we have with the Board. The one thing I would add as a caution is that, when you look at the market — the market for offloading asset portfolios like these, especially some of the multifamily assets from older vintages — if we tried to bring that to market, selling the whole portfolio at those recoverable values could prove hard; but as you say, to the degree that a strategic investor exists or someone like that could be located, that would be a matter our management team and the Board would need to weigh.

The thing that concerns me is book value — and I don't mean just yours. A lot of other companies in this industry carry book values that are blown up way past what makes sense. The way I see it, book value should reflect what you could truly get, and that figure sits at 191.

So, our view is that the book value reflects the amount we expect to collect on those assets.

All right. Look, I've already used up a good chunk of your time. Thank you for taking my questions. Like I mentioned, I owned shares before the offering you did through a REIT. So that tells you how far back I go. And out of all the REITs I hold, this one has let me down the most. My REIT portfolio is sizable, and this one is the biggest disappointment. I hope you're able to fix this. I recall that when I made my purchase, everyone described you as cautious and said this was going to be an extremely, extremely strong management team. That's the reason I bought in. So I hope you folks can fix it, or decide to put shareholders first rather than letting expenses climb — which honestly feels like a slap in the face to me as someone who owns the stock. Everyone has to absorb the pain. The share price has fallen, but in my view the employees — management ought to bear some of that burden, and the finest form of accountability comes down to a single word: money. So those are all the questions I have. Thank you for the time I was given here, and thank you for your responses. And once more, I hope you put shareholders first. That's what worries me. Thanks a lot.

We appreciate both your questions and your time as an investor.

Does the stock repurchase program dated 12/15/'25 remain active? Is that $10 million set aside for purchasing common shares?

Regarding when that agreement takes effect, I'll turn things over to Jim Briggs. Broadly speaking, though, buying back shares along with other strategic alternatives are matters our Board is discussing, and all options remain open. What I believe sits beneath that is the more technical point of whether this agreement is...

That remains available. Indeed.

If your share repurchase program remains available and shares are changing hands at 25% of NAV, what explains the board and management not having executed a single buyback on the open market?

Any conversation regarding buybacks or other options must also take into account the complete picture of liquidity and keeping enough of it so that we are able to work through underperforming assets. That said, our present share price clearly fails to capture what we consider the fair value of our assets, and we will keep talking with the board about whether we pursue any steps on that front.

So do you have any ideas about how we might narrow that difference?

Well, there are a number of them, correct? For sure, as you brought up, buying back stock would definitely be of assistance. The main method by which we can boost book value involves processing assets and getting them cleared from our balance sheet and put back to work productively. As of now, we have approximately $1 billion in assets still on the books, nonperforming loans included. We ought to be nearer to $1.4 billion. That represents a major weight on earnings, and beyond that, a chunk of those assets — around $300 million, REO included — are financed poorly or have no financing whatsoever. That stands as the largest burden on our earnings. Therefore, in processing these assets — I ought to note, with 3 resolutions completed in the prior quarter, we anticipate several additional ones in the coming quarter or 2 — and truly working through that legacy portfolio, it will let us proceed with putting that capital back to work productively; that is the greatest burden. Yet as we go, we will keep examining whether certain other possible chances exist to improve book value or the price at which our shares trade in relation to book value.

Okay, and we appreciate that you hold these calls and speak with shareholders and investors.

On the supplemental data you provide, when there's a closing date for a loan and also a maturity date, you look at some of those loans made in '21, let's say — I treat that as the problem portfolio. Is it right that the majority of these problem loans were originated in '21 and '22? Would that be accurate?

That would usually be accurate, perhaps into early '23, but generally that is the period — kind of across the industry and within our portfolio — of the most challenged assets, typically valuation issues, meaning they were overvalued to start with.

Therefore, as we examine these along with the maturity date, certain ones show a closing date of '21, yet they'll possess an — I suppose my real question is how many among these carry an extension. Consider a loan originated in '21 where the maturity date now reads '27; originally that would have been a 6-year loan. Should that maturity date carry an asterisk, signaling that a loan extension actually took place, allowing us perhaps to flag these as the weaker loans? Is a loan extension baked into the maturity date? Or does that figure represent the original term?

So it would reflect the current maturity date shown in the supplemental. I'll have the team jump in should I misspeak; however, the majority of our bridge loans carry a total maturity of 5 years, typically 3 years initial term plus 2, 1-year extensions. On occasion, it's 2 with 3, 1-year extensions; and the outside maturity date gets listed as that 5-year period. Yet for any loan that has undergone a modification with an extended maturity date, the maturity date in the supplemental would appear as the current maturity date. Thus we can supply that data in future supplementals, to be clear. But regarding loans made in '21 that have a maturity date of '27, that would be an extension, since we hold no loans whose initial maturity goes beyond 6 years — I mean, beyond 5 years. I don't know whether < > is back or — okay, go ahead.

Please continue.

I was merely going to mention that I have a hunch somebody may not have those figures immediately available, though we can definitely supply them later on. That said, if another person on the team happens to have it — I mean the count of extensions — that would help. A number of them lengthen it further as well, correct? Once the 3 years wrap up, they receive a first term owing to an arrangement they've worked out with us regarding an extension, usually a pay down.