Lument Finance Trust - Earnings Call - Q1 2025

Executive Summary

• Q1 2025 distributable EPS was $0.08, below Wall Street’s $0.09 consensus; GAAP EPS was a loss of $0.03, driven primarily by a $5.7M increase in the allowance for credit losses, while net interest income fell to $7.7M on lower SOFR and deliberate delevering.
• Credit reserves increased as 7 loans were risk-rated 5 (11% of UPB), taking specific reserves to $11.1M; management emphasized proactive workouts, including foreclosure and potential REO strategies to maximize recovery.
• Liquidity remained strong ($63.5–$64M cash) and management expects to close a new secured financing “in the coming months,” positioning LFT to pursue an H2 2025 CRE CLO issuance; leverage declined q/q to 3.6x.
• Dividend was maintained at $0.08 per common share (and $0.49219 on Series A preferred), signaling confidence in distributable earnings and REIT payout continuity.
• Near-term stock narrative hinges on execution of new secured financing, CLO window timing, and progress resolving 5-rated credits; management’s tone was cautiously optimistic on origination opportunities and capital markets appetite.

What Went Well and What Went Wrong

What Went Well

• Maintained dividend: Declared $0.08 common dividend for Q1 2025; preferred dividend $0.49219, in line with prior quarter.
• Financing visibility improving: Management expects to close new secured financing in “coming months,” and sees attractive conditions to re-enter CRE CLO market in H2 2025.
• Active asset management: Positive resolutions on two previously 5-rated assets, resumed debt service, and readiness to deploy foreclosure/REO or sponsor transitions to preserve value.
  • “We expect to leverage our experienced asset management team to maximize recovery through modifications, foreclosure, and potential REO operation”.

What Went Wrong

• Earnings headwinds: GAAP net loss of $1.7M (-$0.03 EPS) as distributable EPS fell to $0.08; net interest income declined to $7.7M due to lower SOFR and deleveraging, with lower exit fees vs Q4.
• Credit deterioration: 7 loans risk-rated 5 (UPB ~$108M) with specific reserves increased to $11.1M; sponsors’ capital constraints and delayed reinvestment accelerating property performance deterioration.
• Payoff-driven reinvestment lag: Q1 payoffs ($54.7–$55M) were modest vs Q4 ($144M), pressuring exit fee income and portfolio scale until new secured capacity is in place.

Transcript

Operator (participant)

Good morning, and thank you for joining the Lument Finance Trust First Quarter 2025 Earnings Call. Today's call is being recorded and will be made available via webcast on the company's website. I would now like to turn the call over to Andrew Tsang with Investor Relations at Lument Investment Management. Please go ahead.

Andrew Tsang (Managing Director)

Good morning, everyone. Thank you for joining our call to discuss Lument Finance Trust's first quarter 2025 financial results. With me on the call today are Jim Flynn, our CEO; Jim Briggs, our CFO; Greg Calvert, our President; and Zachary Halpern, our Managing Director of Portfolio Management. On Monday, May 12th, we filed our 10-Q 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 and 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 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 measures will be discussed on this conference call. Presentation of this information is not intended to be considered in isolation, nor is it a substitute 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 SEC.

For the first quarter of 2025, we reported a GAAP net loss of $0.03 per share and distributable earnings of $0.08 per share of common stock. In March, we declared a quarterly dividend of $0.08 per common share. Respected first quarter in line with the prior quarter. I will now turn over the call to Jim Flynn. Please go ahead.

Jim Flynn (CEO)

Thank you, Andrew. Good morning, everyone. Welcome to the Lument Finance Trust Earnings Call for the first quarter of 2025. We appreciate all of you joining us today. Before we begin with the market update, I would like to officially welcome Greg Calvert as our new President and newest member of our management team. I've personally worked with Greg for almost 20 years. He has extensive experience in multifamily credit and nearly a 30-year tenure at Lument and its predecessor entities, making him an exceptional addition to our leadership team. Welcome, Greg. Turning to the economy and market, despite ongoing uncertainty related to the pace and direction of interest rate policy, the broader U.S. economy has continued to show somewhat surprising resilience. The labor market remains tight.

Consumer spending has held up much better than anticipated, and inflation, while easing from the peak, continues to be a focus for the Fed and, frankly, for investors and the economy. However, the topic of the day continues to be trade and tariffs. Any developments, whether real or projected, have had significant impact on markets and sentiment, as we saw yesterday and also are seeing this morning in pre-market. As we move through 2025, we are mindful of the potential for volatility for this and all economic issues, but we do remain cautiously optimistic that good opportunities for investment will be present in 2025. Stability in monetary policy would provide a constructive backdrop for the returning health of the commercial real estate finance market. The multifamily sector continues to demonstrate relative resilience amid evolving market dynamics. While low-rent growth remains muted, occupancy rates remain robust.

On the supply side, multifamily construction starts have decelerated due to several contributing factors, including scarcity of attractive financing and increased construction costs. Looking ahead, the combination of steady demand, limited new supply, and the challenges faced by potential homebuyers due to mortgage rates suggests a favorable environment for multifamily investments over the medium to long term. As a result of improving conditions, we have seen greater financing origination opportunities, I'll be a choppy, over the past 45 days. The capital markets appear to continue to be engaged relatively significantly. Throughout this environment, active asset management has been and continues to be our priority. We take a proactive approach to monitoring borrower performance, market trends, and collateral values. Our team is in constant dialogue with our borrowers, ensuring that we can identify issues early and respond strategically in order to maximize recovery values, including foreclosure and REO strategies where prudent.

As we have mentioned previously, we have executed several successful loan modifications and extensions that preserve value and enhance our downside protection. We remain committed to preserving capital and maximizing risk-adjusted returns across this cycle. Our credit risk ratings have remained largely stable quarter-over-quarter, and the sequential increases to our specific reserves are in line with our expectations for the portfolio performance. Given our focus on optimizing recovery from our existing investments, we have appropriately managed liquidity to maintain flexibility, holding a considerable amount of unrestricted cash on our balance sheet rather than deploying it into new loan assets. We have also elected to use principal repayments received on assets held within the LMF financing structure to partially pay down outstanding liabilities.

This voluntary partial delevering of the portfolio provides us with additional cushion in meeting various collateralization and interest rate coverage covenants within that structure, which we believe is an acceptable trade-off as we continue to resolve the more challenged credits and seek to put more favorable secured financing in place later this year. We are currently reviewing options for a new secured financing for that portfolio, and we expect to close in the coming months. We expect the new financing will provide us with adequate flexibility to manage our season's credits while putting us in a favorable position to viably access the CRECLO market as a returning issuer. Following a lull in new deals post the Trump administration's April 2, 2018 tariff announcements, there's been a flurry of new CRECLO deals over the past several weeks, which has been encouraging and demonstrates a functioning capital market.

Pending market conditions, we would anticipate a new issuance in the second half of 2025. 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, prudently manage our liquidity, optimize capital deployment on a levered basis, and manage our challenged assets 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?

Jim Briggs (CFO)

Thanks, Jim. Good morning, everyone. Last evening, we filed our quarterly report on Form 10-Q and provided a supplemental investor presentation on our website, which we will be referencing during our remarks. The 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 first quarter of 2025, we reported a net loss to common stockholders of approximately $1.7 million or $0.03 per share. We also reported distributable earnings of approximately $4 million or $0.08 per share. Two items I'd like to highlight with regards to the Q1 P&L. Our Q1 net interest income was $7.7 million, a decline from $9.4 million recorded in Q4 of 2024.

The weighted average coupon and average outstanding UPB of the portfolio declined sequentially, largely due to declines in the SOFR benchmark rate and the deleveraging of our secured financings. Exit fees were also lower, as payoffs during Q1 totaled $55 million as compared to $144 million in Q4. The company recognized approximately $700,000 of exit fees during Q1 compared to approximately $1.1 million in the prior quarter. Our total operating expenses, including fees to manager, were largely flat quarter on quarter, as we recognized expenses of $2.6 million in Q1 versus $2.8 million in Q4. Approximately $450,000 of incentive fee that would have otherwise been incurred by the company as it relates to Q1 was waived by the manager. The primary difference between reported net income and distributable earnings was a $5.7 million net increase in our allowance for credit losses.

As of March 31, we had seven loans risk-rated at five, including three assets newly downgraded to five in Q1. All seven loans are collateralized; six of the loans are collateralized by multifamily assets, one by seniors. Greg will provide a bit more detail in his remarks. We evaluated these seven five-rated loans individually to determine whether asset-specific reserves for credit losses were necessary. After analysis of the underlying collateral, we increased our specific reserves to $11.1 million as of March 31, an increase of $7.3 million versus the prior quarter. Our general reserve for credit losses decreased by $1.6 million during the period, primarily driven by payoffs of performing loans, loan modifications, and the move of certain assets to specific evaluation. We ended the first quarter with an unrestricted cash balance of $64 million, and our investment capacity through our two secured financings was fully deployed.

The CRECLO securitization transaction we issued in 2021 provided effective leverage of 75% to our loan assets at a weighted average cost of funds of SOFR plus 173 basis points. The LMF financing completed in 2023 provided the portfolio with effective leverage of 81% 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 77% and a weighted average cost of funds of SOFR plus 225 basis points as of quarter end. The company's total equity at the end of the quarter was approximately $232 million. Total book value of common stock was approximately $172 million or $3.29 per share, decreasing sequentially from $3.40 as of December 31, driven primarily by the increase in the allowance for credit losses.

I will now turn the call over to Greg Calvert to provide details on the company's investment activity and portfolio performance during the quarter. Greg?

Greg Calvert (President)

Thank you, Jim. During the first quarter, LFT experienced a modest $55 million of loan payoffs. As referenced in Jim Flynn's earlier remarks, approximately $31 million of these payoffs were within LMF. Although these principal repayments were eligible for reinvestment into new loan assets, after much deliberation and with the understanding that the portfolio is currently in a transitory phase as we work to line up new secured financing sources, our team made the prudent executive decision to intentionally partially pay down a portion of the LMF bonds in order to provide us additional cushion in satisfying the over-collateralization test as required by the LMF indenture. As of March 31, our portfolio consisted of 61 floating rate note loans with an aggregate unpaid principal balance of approximately $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 first quarter, our portfolio had a weighted average note floating rate of SOFR plus 355 basis points and an unamortized aggregate purchase discount of $3 million. The weighted average remaining term of our book as of quarter end was approximately 40 months, assuming all available extensions are executed by our borrowers. As of March 31, approximately 60% of the loans in our portfolio were risk-rated at three or better, compared to 64% in the prior quarter. Our weighted average risk rating quarter on quarter remained flat at 3.5. We had seven loan assets risk-rated five, with an aggregate principal amount of approximately $108 million, or approximately 11% 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 Q1, the company recognized approximately $300,000 of cash received from the borrower as a reduction in our carrying basis of this loan. Another five risk-rated asset was a $20 million loan collateralized by multifamily property in Orlando, Florida that was in monetary default. During Q1, the company recognized approximately $400,000 in interest from this loan. A third five risk-rated asset was a $15 million loan collateralized by a multifamily property in San Antonio, Texas, that was in technical default. This asset was foreclosed on within the 2021 FL1 CLO structure subsequent to quarter end. The fourth five risk-rated asset was a $10.5 million loan collateralized by a multifamily property in Colorado Springs, Colorado that was in monetary default. The fifth five risk-rated asset was an $11.5 million loan collateralized by a multifamily property in Houston, Texas, that was in monetary default.

The sixth five risk-rated asset was a $24.5 million loan collateralized by a multifamily property in Clarkson, Georgia, that was in monetary default. Finally, the seventh five risk-rated asset was a $12 million loan collateralized by a multifamily property in Saline, Michigan, that was in monetary default. During the first quarter, we were successful in achieving positive outcomes on two of the six assets that were five risk-rated as of December 31. These included a $32 million loan collateralized by a multifamily property in Dallas, Texas, and a $6 million loan collateralized by a multifamily property in Orlando, Florida. In one of these cases, our loan was assumed, and approximately $2 million of our loan principal was paid down by the new borrower sponsor. In the other case, we provided a three-month forbearance and agreed to extend the loan until November.

Monthly debt service payments on our loan have since resumed as anticipated. We had not previously recorded any specific reserves on either of these two resolved assets. We diligently continue to engage with our loan borrowers and seek constructive resolutions with respect to our more challenged credit. We expect to proactively explore all strategies available to us, and we remain confident that the deep experience of our asset management team and broad capabilities of our manager and its affiliates will allow us to take advantage in whatever steps are necessary to preserve and recover recovery value. We expect to leverage our experienced asset management team to maximize recovery through modifications, foreclosure, and potential REO operation. As we move through these resolutions, we may provide non-market financing to experienced sponsors to maximize expectations for repayment. I will pass it back to Jim Flynn for closing remarks and questions.

Jim Flynn (CEO)

Thank you, Greg. I'd like to thank everyone for joining and appreciate your time and interest in the platform. I look forward to answering some questions, and we'll ask the operators to open the line.

Operator (participant)

Thank you. Ladies and gentlemen, we will now begin the question and answer session. Should you have a question, please press star followed by one on your touch-tone phone. You will hear a prompt that your hand has been raised. Should you wish to decline your hand from the queue, please press star followed by two. If you're using a speakerphone, please lift the handset before pressing any keys. One moment for your first question. Your first question comes from Jason Weaver with JonesTrading. Please go ahead.

Jason Weaver (Managing Director and Analyst)

Hi, guys. Good morning, and thanks for taking my question. First, can you talk about what you're seeing? Can you characterize the pipeline today? As well as a follow-up, is there a level of net originations that you need to see through the rest of the year to maintain the current dividend capacity?

Jim Flynn (CEO)

The second question, frankly, is related more to payoffs. I would not put it at we have assets that we could put into that have been recently originated at Lument and continue to originate. We will have assets to deploy into LFT when there is capacity. I am not really concerned at an origination level. Now, if volatility kind of continued in the way that we have seen over the past 45-60 days, that would likely reduce the opportunities from where we think they will be. I do not think it dries up like we have seen in various points over the last couple of years. From an origination standpoint, I think we are in pretty good shape. Whether we need a couple hundred million or $500 million, I think we will be able to have the assets to replenish LFT as needed.

In terms of the types of opportunities we're seeing on the origination side, continue to see there's attractive assets on the lease-up level, new construction, newer assets. Those are certainly most desirable. From a credit standpoint, they tend to be priced tighter, as we've seen relatively high competition for those assets. I would say a modest slowdown in recapping and bridge-to-bridge type of deals that we've seen a little bit more of over the last couple of quarters. That largely tracks with kind of what we've seen in our own portfolio. There's some, for the right sponsor in the right market, you can achieve a premium there. Definitely seen a little slowdown in that side. On the construction and lease-up, continue to see those opportunities. As I stated in my remarks, deliveries have been on the decline, relative decline.

Over time, those opportunities will start to decrease. I do think we'll see some turnover in the wall of maturities that we've been talking about now for two or three years, where we're going to see some resolutions and, I think, opportunities for reinvestment into assets by new sponsors.

Jason Weaver (Managing Director and Analyst)

All right. Thank you for that, Keller.

Operator (participant)

Your next question comes from Steve Delaney with Citizens JMP. Please go ahead.

Steve Delaney (Analyst)

Good morning, Jim and team, and nice to meet you, Greg. Interested in your comments about financing. Now, you mentioned, obviously, looking at the CLO market, which has been your sort of traditional vehicle for your semi-permanent financing on the portfolio. I picked up in your tone, Jim, that there are other financing options out there, whether it's private credit, whether it's banks, that might give you a more custom or flexible interim type of facility. Am I on the right track there that there might be something to do before you do your next CLO?

Jim Flynn (CEO)

Yeah. I think, yes, there are definitely opportunities in the market, really both from banks and private credit. Obviously, the bank providers are more closely structured, like traditional warehouses, with some different terms, like duration and some flexibility on how long assets can stand the line, those types of things, which make them more attractive than a traditional kind of repo. We are definitely looking at both, as you say, potentially as an interim step and likely something that we would want to keep permanently to maintain flexibility if we can achieve the right flexibility there. The CLO market broadly still remains the most attractive financing, in our opinion, for floating-rate multifamily assets. Occasionally, we have seen the capital markets being disrupted either through lack of or no availability on the investor side or gapping on the bond spreads. Today, we have seen continued interest.

I know you've seen several deals here in the market in the last couple of weeks that, in our opinion, have either priced kind of in line with where we might expect or, in some cases, talks of maybe even better than we expected. That suggests that there's a lot of capital on the sideline looking to get into the deploy into the CLO space. It's hard to replace a permanent vehicle like a CLO securitization. That will continue to be our primary focus. I do think there are a lot of, or not think. There are a lot of providers that are offering alternatives and flexibility. Look, this is a derivative of the market continuing to extend loans, business plans taking longer, new sponsors stepping into older deals.

Those types of things have provided an opportunity to lenders on the back-leverage side to offer some competing financing to the traditional securitization market.

Steve Delaney (Analyst)

Understood. Appreciate those comments. Just as far as your problem loans that are under asset management, seven loans, $180 million, can you comment if there's any, those things take, each one is a different story, right? Different borrower. As far as, and you may have new fabricated loans or by the end of the year. It's a fluid process. Is the market such, and your relationship with these borrowers, do you anticipate any near-term resolutions, say, between now and the next three to six months? Do you think some of these will be resolved and go away, or is it more a matter of just incremental increases in the fabricated bucket until we see a larger turnaround in the market?

Jim Flynn (CEO)

I would answer that. I would say, one, there's certainly a possibility of, and personally, I do see the potential there to be resolutions in the next three to six months. As we've seen over the past several quarters, we've continued to have those. Do I think that that is a real possibility? Yes, I do. However, as you know, the market has been, it's been choppy, and sponsorship is really a key. The common theme that we've seen among assets, obviously, business plans didn't pan out the way that people thought. That's clear. In many cases, due to what happened with the timing of acquisitions and expectations around rental growth, not achieving those, even if there was some positive growth.

What we have seen in these assets that we are talking about here, even in prior quarters, is typically a sponsor just basically coming to the conclusion, either voluntarily or often involuntarily, that they do not have the capital to improve the asset in a way that is the most ideal situation. When that happens, the lack of investment into these assets, particularly those of older vintage, deterioration happens quickly. The way that we envision potential outcomes in those situations is for us to gain control of the asset, either directly or bringing in a new sponsor that is a known quantity of ours, potentially providing incremental capital, maybe non-market financing to a quality sponsor, which would allow for the asset to go from where it is today in this deteriorating kind of property condition and general performance to something that has a greater value.

That's really the strategy here. In terms of, as you know, our portfolio has generally been declining as we deleverage and maintain liquidity. What I'll call the legacy portfolio, the number of opportunities for problem assets continues to decline as we work through those that are struggling. Whether it's this quarter or very soon, we feel like you can see the shift in the market where you're going to start to see, I think, not just at LFT, but more broadly, a lot more resolutions to some of these assets that have remained outstanding for longer than lenders or sponsors anticipated.

Steve Delaney (Analyst)

Got it. Interesting. I appreciate those insights into market conditions that we can't observe from our seat. Thank you, Jim.

Jim Flynn (CEO)

Thanks, Steve.

Operator (participant)

As a reminder, if you'd like to ask a question, please press star one. Your next question comes from Christopher Nolan with Ladenburg Thalmann. Please go ahead.

Christopher Nolan (SVP and Analyst)

Hi. Thank you. Following up on Steve's questions on the rise in non-accruals, is this a cash flow issue for the sponsors where the property is simply not generating enough AFFO to cover the interest?

Jim Flynn (CEO)

It is a cash flow, broadly speaking, meaning I think it's true at the asset, but it's also true in the sponsor kind of investing in the property. That cycle, I won't—and that's not universal, but as a broad comment, that's a bad cycle because as you don't reinvest in the asset, your cash flow deteriorates even further. Your operations decline further. That is the challenge that many of these sponsors face. As a lender, we have a very experienced and seasoned team around workout resolutions and also REO management. If we don't control the asset, we continue to see that decline if there's not reinvestment going into the property. It is some combination of cash flow and management. I won't say it's a chicken and egg exactly, but there's certainly a correlation there.

Obviously, if the assets were generating significantly more cash flow, the management would likely be better. Or certainly, if it were not, it would be certainly mass.

Christopher Nolan (SVP and Analyst)

Okay. On the March 20th call that you guys had for the fourth quarter, you used terms like strong sponsors, fundamentals remain strong, constrained supply, robust demand, resilient rent trends. Given the rise of non-accruals, it doesn't sound like that's the case. Am I wrong or what?

Jim Flynn (CEO)

I think that is true in the market. I think on average, it is true in our portfolio. On a couple of these assets, we've had sponsors not follow through on some of their stated goals and intentions at the asset. As I said, in evaluating these deals, if sponsors decide that they're going to not continue to support the asset in the way that they have historically, that deterioration can happen very quickly. On a couple of these, we think that's part of the issue. We also feel that while the value is today and the reserves are appropriate, we are looking at scenarios that we think should have been better managed by a sponsor. We think that we or someone else could do a better job.

Christopher Nolan (SVP and Analyst)

Okay. Thank you.

Operator (participant)

There are no further questions at this time. I would like to turn the call over to Jim Flynn for closing remarks.

Jim Flynn (CEO)

I just want to thank everyone for continuing support of LFT and joining us today. We look forward to speaking again next quarter. Thank you all.

Operator (participant)

Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. You may now disconnect.