Lument Finance Trust, Inc.

Good morning. Thank you for joining the Lument Finance Trust fourth quarter 2024 earnings call. Today's call is being recorded and will be made available by a webcast on the company's website. I would now like to turn the conference over to Andrew Zhang with investor relations at Lument Investment Management. Please go ahead.

Thank you. Good morning, everyone. Thank you for joining our call to discuss Lument Finance Trust fourth quarter 2024 financial results. With me on the call today are Jim Flann, our CEO, Jim Briggs, our CFO, Jim Henson, our President, and Zach Halpern, our Managing Director of Portfolio Management. On Wednesday, March 19th, we filed our 10-K with the SEC and issued a press release to provide details on our recent financial results. We also provided a supplemental earnings presentation, which can be found on our website. Before handing the call over to Jim Flynn, I'd like to remind everyone that certain statements made during the course of this call are not based on historical information and may constitute forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, Section 21E of the Securities Exchange Act of 1934. Such forward-looking statements are subject to various risks and uncertainties that could cause actual results to differ materially from those contained in the forward-looking statements. These risks and uncertainties are discussed in the company's reports filed with the SEC, in particular the risk factors section of our form 10-K. It is not possible to predict or identify all such risks, and listeners are cautioned not to place undue reliance on these forward-looking statements. The company undertakes no obligation to update any of these forward-looking statements. Further, certain non-GAAP financial matters will be discussed on this conference call. Presentation of this information is not intended to be considered in isolation nor is it substituted 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 can be accessed through our filings with the FCC. For the fourth quarter and fiscal year 2024, we report GAAP net income of 7 cents per share and 34 cents per share of common stock, respectively. For the fourth quarter of fiscal year 2024, we reported distributable earnings of $0.10 and $0.44 per share of common stock, respectively. This past December, we declared a quarterly dividend of $0.08 per share with respect to the fourth quarter and an additional one-time special dividend of $0.09 per share, bringing our cumulative dividends declared for 2004 to $0.40 per common share.

I will now turn the call over to Jim Flynn. Please go ahead.

Thank you, Andrew. Good morning, everyone. Welcome to Lumen Finance Trust's earnings call for the fourth quarter of 24. Appreciate everyone joining us today. We'll start with a quick view of the overall market. The broader macroeconomic environment continues to be shaped by geopolitical uncertainty, financial market volatility, and to a lesser degree today, inflation. As we entered 2024, we anticipated multiple rate cuts over the course of the year, but given the resilience of the economy and the ongoing inflationary pressures, most of those cuts did not materialize, and now it's clear that interest rates will remain elevated. With inflation currently moderating and the economy cooling, the Federal Reserve is currently projected to make two cuts in 2025. Despite the volatility, we are encouraged by increasing stability in commercial real estate, particularly cap rates, which have begun to normalize after a period of dislocation. Rental growth is anticipated in nearly all major measures this year and beyond, and transaction volumes, while below historic norms, have also picked it up in recent months. We believe the positive momentum for lending activity that we saw in late 2024 relative to earlier in the year will continue in 2025. Although we remain cautious, we are optimistic that as market conditions continue to stabilize, opportunities to deploy capital and attractive risk-adjusted returns will emerge. On the asset management side, we continue to prioritize proactive asset management across our portfolio to drive positive outcomes. The credit risk ratings have remained largely stable, reflecting disciplined underwriting and ongoing borrower engagement. And while we've made modest increases to specific reserves, these adjustments have been prudent and in line with our expectations for the portfolio performance. Managing our existing book of credit remains a core focus, and our team continues to work closely with all borrowers to maximize recovery values and ensure that assets perform in line with our underwriting expectations. We remain confident in our ability to effectively navigate this environment and optimize outcomes for all shareholders. While the manager's lending affiliate, Lumen, continues to actively deploy capital into new loan investments with a focus on multifamily, backed by strong sponsors, LFT's investment activity during the quarter was modest, primarily limited by the available reinvestment capital. Our 2023 Secured Financing Vehicle, LMF 23-1, remains in its reinvestment period into July of this year, and we expect to source new loan assets as investment capacity becomes available. During the period, we also had significant payoffs of season loans in the portfolio. In terms of our financing strategy, as our 2021 securitization continues to deliver, we have dedicated significant time with our lending partners and advisors to explore options to refinance our investment portfolio. In recognition of the fact that our portfolio today is primarily comprised of seasoned assets, and we expect some loan borrowers will be challenged to exit our loans at the time anticipated, in their underwritten property business plans, we believe it prudent to continue to defer the execution of a CRE CLO or similar securitization transaction until such time that we have more visibility into those loan resolutions. In the interim, we have engaged in active discussions with select counterparties for other forms of potential secured financing, including bank-provided warehouse facilities, which provide us with the flexibility to better manage both our performing loan portfolio and a handful of more challenge assets and expect to provide additional details in the coming quarter as these conversations progress. We expect such secured financing will allow us to remain highly flexible from a liquidity perspective and position ourselves to achieve positive asset management outcomes for our existing portfolio without sacrificing significant economics. That said, we continue to believe that a securitization transaction later this year remains a viable potential option as obtaining non-market-to-market match-term secured financing, as always, is an attractive economic priority for the company. As we look ahead, we remain committed to our core investment strategy of deploying capital into transitional floating rate mortgages, with a particular emphasis on middle-market multifamily assets. Multifamily fundamentals remain strong, supported by robust demand, constrained supply, and resilient rental trends. We continue to leverage the origination, underwriting, and asset management expertise of our manager and its affiliates to identify and capitalize on compelling investment opportunities. Our ability to navigate the current environment, purely manage our liquidity, and optimize capital deployment on a levered basis will be key to delivering long-term value to our shareholders. With that, I'd like to turn the call over to Jim Briggs, who will provide details on our financial results.

Jim? Thanks, Jim.

Good morning, everyone. Last evening, we filed our annual report on Form 10-K and provided a supplemental investor presentation on our website, which we'll be referencing during our remarks. Supplemental investor presentation has been uploaded to the webcast as well for your reference. On pages four through seven of the presentation, you'll find key updates and earnings summary for the quarter. For the fourth quarter of 24, reported net income to common stockholders of approximately $3.6 million. or $0.07 per share. We also reported distributable earnings of approximately $5.4 million or $0.10 per share. A few items I'd like to highlight with regards to the Q4 P&L. Our Q4 net interest income was $9.4 million, which is relatively flat to the $9.5 million recorded in Q3. The weighted average coupon and average outstanding UPV of the portfolio declined sequentially. largely due to declines in the SOFR benchmark rate and the deleveraging of our 2021 securitization. These reductions in net interest income were largely offset by increased exit fees related to loan payoffs. Payoffs during Q4 totaled 144 million as compared to 51 million in the prior quarter, with the company recognizing approximately 1.1 million of exit fees during Q4 compared to approximately 150,000 in Q3. Our total operating expenses were largely flat quarter on quarter, so we recognized expenses of 2.8 million in Q4 versus 2.9 million in Q3. The primary difference between our reported net income and distributable earnings was a 1.8 million net increase in our allowance for credit losses. I'll walk through the components of that. As of December 31st, We had six loans risk-graded a five, including four assets downgraded a five in Q4. All six loans were collateralized. Five loans were collateralized by multifamily assets. One of those loans are collateralized by healthcare. Jim Henson will provide a bit more detail on the six in his remarks. We evaluated those six five-rated loans individually to determine whether asset-specific reserves for credit losses were necessary. And after analysis of the fair value of the underlying collateral, we increased our specific reserves to $3.7 million as of 12-31, an increase of $2.9 million versus the prior quarter. Our general reserve for credit losses decreased by $1.1 million during the period, primarily driven by payoffs of performing loans and the move of four assets to specific evaluation. In terms of basis points of reserve on the general pool, that was flat quarter on quarter. We ended the fourth quarter with an unrestricted cash balance of 69 million, and our investment capacity through our two secured finances was fully deployed. The company's total equity at the end of the quarter was 238 million. Total book value of common stock was approximately 178 million, or $3.40 per share, decreasing sequentially from $3.50 per share as of September 30. as a result of aggregate dividends, including the $0.09 special common dividend paid on January 15th. As a REIT, we are required to distribute at least 90% of our taxable income in order to meet REIT testing requirements. Our $0.09 special dividend declared in December was calibrated to distribute 100% of our taxable income so that the company will not be taxed at the corporate rate for any of its 2024 taxable income. The 9-cent special dividend also largely tracks the annual difference between distributable income and GAAP income of 10 cents, which was driven by unrealized provisions for credit losses during 24, which does not impact taxable or distributable income. I'm going to now turn the call over to Jim Henson to provide details to the company's investment activity and portfolio performance during the quarter.

Thank you, Jim. During the fourth quarter, LFT experienced $144 million of loan payoffs and acquired one new loan asset with an initial principal balance of $13 million and a weighted average coupon of SOFR plus 375 basis points. As of December 31st, our portfolio consisted of 65 floating rate loans with an aggregate unpaid principal balance of approximately $1.1 billion. 100% of the portfolio was indexed to one month SOFR and 92% of the portfolio was collateralized by multifamily properties. As of the end of the fourth quarter, our portfolio had a weighted average floating note rate of SOFR plus 358 basis points and an unamortized aggregate purchase discount of $3.5 million. The weighted average remaining term of our book as of quarter end was approximately 26 months assuming all available extensions are exercised by our borrowers. The CRE-CLO securitization transaction we issued in 2021 provided effective leverage of 75% to our loan assets and a weighted average cost of funds of SOFR plus 171 basis points. The LMF financing, completed in 2023, provided the portfolio with effective leverage of 83% at a weighted average cost of funds of SOFR plus 314 basis points. On a combined basis, the two securitizations provided our portfolio with effective leverage of 78% and a weighted average cost of funds of SOFR plus 226 basis points as of quarter end. As of December 31st, approximately 64% of the loans in our portfolio were risk-rated a three or better, compared to 60% at the end of the prior quarter. Our weighted average risk rating remained relatively unchanged, improving modestly to 3.5 versus 3.6 at the end of Q3. We had six loan assets risk rated a five with an aggregate principal amount of $98 million, or approximately 9% of the unpaid principal balance of our investment portfolio. One was a $15 million loan collateralized by two multifamily properties in Philadelphia, Pennsylvania. This loan asset was risk-rated five due to monetary default. During Q4, the company recognized approximately $432,000 of cash received from the borrower as a reduction in our carrying basis of this loan. Another five risk-rated asset was a $32 million loan collateralized by a multifamily property in Dallas, Texas that was in technical default. Both of those loans were also risk-rated five at the end of the third quarter. The third five risk-rated asset was a $20 million loan collateralized by property in Orlando, Florida that was in monetary default. The fourth five risk-rated asset was a $15 million loan collateralized by a multifamily property in San Antonio, Texas that was in technical default. The fifth risk-rated loan was a $6 million loan collateralized by two multifamily properties in the Orlando, Florida MSA that was in monetary default. And the sixth risk-rated asset was a $10.5 million loan collateralized by a multifamily property in Colorado Springs that was in monetary default. During the fourth quarter, we were successful in achieving positive outcomes on two of the four loans that were five rated as of September 30th. These included a $20 million loan collateralized by multifamily properties in Augusta, Georgia, and a $17 million loan collateralized by a multifamily property in Brooklyn, New York. We received full recovery of principle on both of these investments, thanks to the diligent efforts of our manager's asset management team. There were no existing specific reserves on these two resolved assets. We continue to work closely with borrowers on the six five-rated assets that were outstanding at the end of the year.

With that, I will pass it back to Jim Flynn for closing remarks and questions. Thank you, Jim.

I would like to take the opportunity to thank Jim Henson for his dedication, sage advice, and support of the LFT platform. We wish Jim the best in his retirement. And I'd also like to welcome Greg Calvert as our new president. Being part of a large organization with a well-capitalized parent, as we are, gives us the opportunity to have a deep bench of experienced professionals. Greg has had a more than 30-year career in real estate, primarily on the investment and credit side, and he will be a great addition to our team in 2025. Lastly, I want to thank all of our guests. We appreciate your time and your interest in our platform. I look forward to hearing from you. And with that, I'll ask the operator to open the call to any questions.

Thank you. And ladies and gentlemen, we will now begin the question and answer session. To ask a question, you may press the store followed by the number one on your cell phone keypad. If you're using a speakerphone, please pick up your handset before pressing any keys. To withdraw your question, please press star followed by the number two. Once again, please press star one to join the queue. Your first question comes from the line of Stephen Laws with Raymond James. Please go ahead.

Hi, good morning. I appreciate the comments and prepared remarks. I wanted to touch on the 21 CLO. You know, how does that, given it's paid down, how does that currently compare from a blended financing cost to current market conditions for a new CLO? And, you know, around your comments, I know you're considering, you know, some financing lines and other options. But as you look to the, you know, maybe doing another securitization or deal later this year, is that a, you know, would you collapse the FL1 from 21 and roll the collateral in? Kind of how do you think about managing the financing side of the balance sheet through the year?

Yeah, so obviously we are, you know, we're looking at all of those things. We are, you know, looking to basically refinance the portfolio as we move forward here in the coming quarters. FL1 today is about 75% advance at a cost of 171 over SOFR. The cost is significant. still attractive, but the leverage obviously is lower. We've seen deals going off kind of in the mid to high 80s on an advance rate. So in terms of how we're looking at the portfolio, as we said, we are working with some of our partners to consider some alternatives that give us a little more flexibility in the short term around dealing with some of these assets that we're working through with existing borrowers or potentially new borrowers and do expect to move forward with one or more of those types of financing arrangements as we move through the year.

Great. And then here we are almost into the Q1. Can you give us an update on originations and repayments year-to-date and You know, how do we think about when leverage is going to trough? I assume you need a new financing facility in place before we see it turn up. But is that a 2Q event with leverage troughing?

Sorry, the Q2 event for what specific event?

Well, I guess the first question, year-to-date originations. I mean, we're almost at the end of Q1. So can you talk about portfolio, you know, how much is runoff repayments versus originations in Q1? Got it.

So on the origination side, I mean, we've had very... LFT has had very few, right, because we don't have any capacity at FL1. And at LMF, it's been minimal. We've had about $25 million of payoffs there and do expect more in the coming quarters here. On the origination side... You know, again, just broadly at the parent level in terms of what we're seeing, you know, we've got somewhere around $400 or $500 million that we've originated since, call it October-ish. The beginning of 2024 was pretty light across the industry. It's picked up significantly. While it's not back to the levels it was even – forgetting about P, kind of normal level that I would say it's not quite there, but we are seeing significant opportunity and we are making those loans. We have them on the manager's balance sheet. So opportunity is there and we feel good about that. And in our book, we've continued to manage it. We have a very experienced management team, both in special and REO and We've been able to get to a positive resolution in LFT's book and across most of the parents' book, wherever we've needed to. The biggest challenge we have and have had, or one of the biggest challenges, is just the timing of those things. One, not controllable by us, and two, just take a bit longer than you'd like, which is why we're moving toward or evaluating financing options that give us flexibility with that in mind.

Great. Appreciate the comments this morning. Thank you.

And your next question comes from the line of Steve Delaney with Citizens Bank.

Please go ahead.

Hey, good morning, everyone. Thank you for taking the question. Obviously, a little activity in terms of downgrades with the new five risk ratings. And it looks like you did boost your specific reserves. First, let me make sure I have the numbers right. On the five-rated loans, am I correct that specific reserves, and I assume they're on the five-rated loans, was $3.7 million as of year-end 2024? Is that the correct level?

Yeah, that's right, Steve.

Okay. And so, look, these are – you've got, what, fixed loans, 98 million, you know, so 15 million or so average loan size, it would seem. As we're – you know, everything runs nicely through GAAP, but then as we're modeling for this year and trying to come up with distributable EPS, can you give us some sense of, like, from your – where you sit internally, your expectations of timing of resolutions? Are you going to get after it? Well, first quarter is already done, and we're not talking about anything. Well, yes, of course, you're reporting on 4Q. Is it going to be more back-end weighted in 2025 in terms of the resolutions as we want to try to start loading some realized losses into our distributable earnings estimates? I guess I'm just trying to get a sense. I know you can't be specific, but how we should sort of look at 2025 with respect to those realized losses. Thanks.

Thank you, Steve. Look, obviously, it's a difficult question to answer, as you know, given where we are. Yeah, no, given where we are, I mean, would I wait toward the back end versus, say, the second quarter or early third? I would because, you know, from a modeling and prudent perspective, and that's how we're thinking about it, we're similarly to you in how we manage the book and the portfolio. Um, that being said, uh, and, and what we've seen, and I think this is a little bit, uh, related to the market, right? We've seen things starting to loosen up where people are wanting to get to resolutions, um, whether, and I mean, sponsors in particular, whether those resolutions are them wanting to walk away and just doing it or whether they think there's actually opportunity for them to, um, continue to create value at these assets. The timeline of getting those done is difficult. And in some cases, you know, if we have a borrower that is not negotiating with us or not in a way to, you know, discussing a real resolution, you know, we've had to move toward foreclosure and other you know, uh, remedies in order to either bring them to the table or from our perspective to say, okay, let's bring someone to the table who would. Um, so I still, we still have, you know, we have had assets that have had reserves or we've resolved them and gotten paid back in full, including default interest and other fees and expenses. I suspect that will be the case for some of our assets here. Uh, but we also have assets that have been challenged and in a greater way than we anticipated. I do think that we are, you know, relative to the market, our book is still fairly healthy. We have not modified loans with sponsors through PICs and AB structures and other types of tools that we've seen in the market. We do think there's opportunity for us to bring in new sponsors into some of our deals, perhaps offering them seller financing or other opportunities or other structures that could make it a more attractive asset to a new sponsor who wants to take over the asset. Time is a big one, right? So a new sponsor will want to say, how much time do I have? Because the further out that horizon goes, the more likely they're being attractive assets. So in terms of resolutions and to the first part of your question, I would put it back weighted. In terms of our team and our discussions, we are kind of on a daily basis trying to, either with the existing sponsor group or a new sponsor, trying to put these assets in a place that says, okay, these are now performing assets, finish the business plan, Rent growth is expected, as I mentioned earlier, in almost all markets. There is still some absorption issues in certain markets that we need to manage through over the coming 12 months. But, you know, we're hopeful that we can continue to have positive resolutions as we have in the past.

Thanks. That's helpful context for the way you view it, and I hear you loud and clear. Just a quick follow-up. your loan portfolio is about $1.1 billion on roughly $240 million of capital. Jim Flynn, you talked about, you know, a new kind of state-of-the-art CLO. As you look at, apart from this credit resolution issue we were talking about earlier, but just looking at the portfolio in more of a macro sense, is there, with a new improved financing structure, let's just say mid- 2025, you know, CLO, I assume. Do you see potential for expanding the portfolio slightly with the existing capital base with some improved financing structure?

The answer is, I mean, the short answer is yes.

I think that, you know, we've during this now, it's been a couple of years, we've maintained higher liquidity than we have in the past, in the historical past, for a good reason. We are de-levering today through the FL1 payoff. And in a normalized market, and as we get through resolving these assets in a positive way, I do think Again, using that match term financing like a CLO and understanding the size of this entity that we're slightly under levered compared to historical norms and assuming that we are comfortable with our liquidity position, comfortable that we've resolved the assets that we want to make sure that we get through, I think that there's a reasonable expectation that the portfolio would grow a bit. And even on the resolutions, a lot of what I'm talking about is liquidity, right? We can't control when we need the liquidity and we might need liquidity for three assets over one quarter. And if we only needed it for one, we would think about it differently. So there really is a drag from maintaining that flexibility and that we hope to go away or at least decrease over the coming quarters.

Thank you both for the additional color this morning.

Thank you.

And once again, if you would like to ask a question, simply press store followed by the number one on your telephone keypad. Your next question comes from the line of Christopher Nolan with Lattenburg-Talman. Please go ahead.

Hi. On a question of loan loss provision expenses, what's the correlation between your risk rating and provision charges?

On the specific reserves there, Chris, you know, as is policy, when we specifically evaluate those, we're looking at the fair value of the underlying collateral. So, fives we look at individually. In terms of the general pool for the portfolio, you know, the risk ratings are going to bring with it a higher probability of default. as you scale up, you know, from threes to fours. And as I mentioned, the fives are specifically evaluated. So it's also dependent upon, you know, underlying, you know, loan metrics. That's going to drive risk rating, but it's also going to be driving probability at default in the model that we and others use for the general pool.

Great. Thank you.

Please. But to be clear, for the fives, we're looking at the underlying cloud.

Okay, understood. And then in the early market comments, talking about the stability of multifamily cap rates, does the changing market expectation in terms of rate cuts sort of start derailing refinancing and negotiations for any portfolio companies or so? simply, you know, is that really affecting it at all, or is really the financing all about the cash flow of the property?

Yeah.

Look, obviously, any cut in the short-term rates helps current sponsors. I don't think that 25 or 50 basis point cut this year is having a huge impact or will have a huge impact in how people think or act psychologically, I think it's probably a good thing. And again, one thing to remember, if we're cutting rates, the reason for the cuts, I mean, just broadly speaking, is either because inflation is completely in check or there's some concern about the health of the economy and whether we're headed toward a recession. So neither, you know, especially the latter is not exactly a positive event. But when you also consider multifamily historically, you know, multifamily still performs pretty well in those times of the market. People are buying homes less, they stay in their apartments, they rent more. So, you know, there's kind of an odd dynamic there with the economy versus performance in multifamily. I think the bigger driver is that the 10-year has stayed in the relatively low fours here for a few months. Most expectations for the year-end 10-year have come down a bit over the last quarter and a half. Some are still up towards five, but consensus is more in the four to four and a half range. And I think that is the big driver. You have a lot of... Capital that wants to be deployed, some international, I mean, large checks that want to get back into the U.S. market that have sat on the sideline. That's going to drive some value appreciation, in my opinion, and also just transaction volume going up. So there's a lot of positives there. As you know, deliveries in most markets, not every single market, but in most markets have peaked. And we'll continue to run off, and so there's a bit of an absorption issue, but there's still long-term a supply-demand imbalance in most markets. That's why we're currently seeing rent growth in almost all major metros, and where we're not seeing rent growth, there's still projections for rent growth as we move throughout the year. You have a lot of – all of those signs, I think, for sponsors and people that are either – managing an existing asset or thinking about getting back to the market are a bit more bullish and real than maybe they've been in the past year or two.

Okay.

Thank you. Thank you. And I'm showing no further questions at this time.

I would like to turn it back to James Flynn for closing remarks.

Just appreciate everyone joining and the interest in the platform and look forward to speaking to you all again Next quarter. Take care.

Thank you. And ladies and gentlemen, this concludes today's conference call. Thank you all for joining. You may now disconnect.