Lument Finance Trust - Earnings Call - Q3 2025

Executive Summary

• Q3 2025 results were subdued: GAAP net income was $0.7 million ($0.01 EPS), and distributable earnings were $1.0 million ($0.02 per share), with net interest income down sequentially as portfolio UPB declined and non‑accrual reversals weighed on interest revenue.
• The quarter’s miss versus Street was material: consensus EPS $0.075 vs. actual $0.02; consensus revenue ~$8.32 million vs. actual ~$5.13 million. Coverage was thin (two estimates), but the gap reflects lower net interest income and non‑accrual dynamics. Values retrieved from S&P Global [GetEstimates].
• Strategic financing pivot: LFT entered a new uncommitted $450 million master repurchase facility with JPMorgan (SOFR+ asset‑level spread, initial maturity Nov 2028, two 1‑year extensions), enabling intent to redeem the 2021 CRE CLO and reposition the portfolio for future securitizations at higher leverage (market “high‑80s”).
• Credit and asset management remained the focus: 7 loans risk‑rated “5” (~$86.4 million or ~10% UPB); REO portfolio at four multifamily properties (73.5% occupancy). Book value per common share declined modestly to $3.25; common dividend was lowered to $0.04 for Q3.
• Potential stock reaction catalysts: execution of CLO redemption and redeployment under the JPM facility, progress on REO dispositions, and stabilization of net interest income as term SOFR drifts lower and borrower cash flows improve.

What Went Well and What Went Wrong

What Went Well

• New warehouse capacity secured: LFT closed a $450 million uncommitted master repurchase agreement with JPMorgan, enhancing liquidity and portfolio flexibility; management intends to redeem the 2021 CRE CLO to unlock equity and reposition for securitization at higher leverage.
• Portfolio payoffs reduced liabilities: ~$49 million of loan payoffs were applied primarily to reduce secured financings, supporting conservative liquidity posture (~$56 million cash) and a slight leverage ratio decline to 3.2x.
• Multifamily concentration and financing match: ~89.6% of the $822 million loan portfolio is multifamily, financed largely via non‑mark‑to‑market CLO structures, mitigating margin call risk and aligning with constructive sector fundamentals per management.

Quote: “Closing the J.P. Morgan facility was a critical step in repositioning our existing portfolio and subject to market conditions, enabling us to take advantage of new financing opportunities.” — CEO Jim Flynn.

What Went Wrong

• Earnings undershot expectations: Net interest income fell to $5.1 million (from $7.0 million in Q2) and distributable EPS declined to $0.02; consensus EPS $0.075 and revenue ~$8.32 million were not met as average UPB declined and ~$0.8 million of accrued interest reversal/non‑accrual impacted NII [GetEstimates].
• Credit headwinds persisted: Seven loans were rated “5” (~$86.4 million UPB), with monetary/maturity defaults noted across several markets; REO occupancy at 73.5% indicates operational work still ahead to maximize recoveries.
• Dividend cut signals earnings pressure: Common dividend reduced to $0.04 (from $0.06-$0.08 in prior quarters), consistent with lower distributable earnings and portfolio deleveraging effects on net interest income.

Transcript

Operator (participant)

Good morning, and thank you for joining the Lument Finance Trust Third 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, Corporate Development)

Good morning, everyone. Thank you for joining our call to discuss Lument Finance Trust's third quarter 2025 financial results. With me on the call today are Jim Flynn, our CEO, Jim Briggs, our CFO, Greg Calvert, our President, and Zach Halpern, our Managing Director of Portfolio Management. On Wednesday, November the 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 meanings 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 factor sections of our Form 10-K and Form 10-Qs. 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 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 third quarter of 2025, we reported a GAAP net income of $0.01 per share and distributable earnings of $0.02 per share of common stock. In September, we declared a quarterly dividend of $0.04 per common share with respect to the third quarter. I will now turn the call over 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 third quarter of 2025. We appreciate everyone joining us today. Starting out, just taking a look at where the market stands, the economy has remained resilient through this period of shifting monetary policy and geopolitical uncertainty. On October 29, the Fed funds cut the Fed funds rate by 25 basis points to a range of 3.75%-4%. At the same meeting, the Fed made clear that additional cuts remain far from a foregone conclusion, leaving lingering uncertainty in the near term, punctuated by the ongoing geopolitical volatility and the fast-moving trade and tariff policy shifts in the U.S. Additionally, we now are dealing with the economic drag from the recent federal government shutdown and uncertainty about the future negotiations as we look to reopen the government, hopefully in the coming days.

In the multifamily sector, fundamentals remain constructive. Rent growth is modest and stable. Occupancy remains strong. New supply, as we've discussed on past calls, is slowing meaningfully. All conditions that support balance and potential rent recovery over the medium and long term. Affordability challenges in the single-family market, among many other factors, also continue to sustain multifamily demand and credit quality at the asset level. Review the recent Fed funds cut. As a cautionary positive development for multifamily lending, as lower short-term index rates should, in general, help improve our borrowers' ability to meet their outstanding debt obligations as they work towards completion of their business plans. Meanwhile, the CRE CLO market continues to remain open for issuers. Year-to-date issuance now exceeds $25 billion, reflecting a healthy level of liquidity and investor confidence.

This rebound compared to the prior year supports our outlook for the company's potential to return to the securitization market as a repeat issuer in the future, subject to market and pricing conditions, of course. On the asset management side, we remain focused on actively managing the portfolio. Our team is closely engaged with our borrowers, proactively seeking positive resolutions through modifications, extensions, and REO strategies where appropriate. On a weighted average basis, the portfolio credit ratings are relatively stable quarter over quarter, and reserves remain consistent with reasonable expectations. We continue to prioritize capital preservation and disciplined risk management across every position. From a liquidity and financing standpoint, we continue to maintain a conservative liquidity posture this quarter, holding ample unrestricted cash to preserve flexibility while resolving legacy credits and working towards refinancing of the portfolio.

Loan payoffs totaled approximately $49 million, and those proceeds were primarily used to reduce securitization liabilities. As we've alluded to in prior quarters, the company has been very focused on putting new portfolio financing in place that provides us with flexibility to more effectively manage our capital as we work through legacy credit challenges. Last week, we entered into a new repurchase agreement with JPMorgan, providing the company with up to $450 million in aggregate advances. With this warehouse capacity now in place, last week, holders of securities issued by our 2021 CRE CLO were notified that the company intends to redeem the associated notes and preferred shares later this month. Closing the JPM facility was a critical step in repositioning our existing portfolio and subject to market conditions, enabling us to take advantage of new financing opportunities.

Our near-term focus is clear, driving value through active asset management, resolving legacy positions efficiently, and executing our financing strategy. Looking ahead, we intend to redeploy capital into our core lending strategy focused on middle-market multifamily. We believe this disciplined approach will position the company well as the market stabilizes and new opportunities emerge. Our manager's origination and asset management expertise remain a key differentiator, and we are confident that our focus, prudence, and flexibility will translate into lasting shareholder value. 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 night, 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 an earnings summary for the quarter. For the third quarter of 2025, we reported net income to common stockholders of approximately $700,000 or $0.01 per share. We also reported distributable earnings of approximately $1 million or $0.02 per share. There are a few items I'd like to highlight with regards to the Q3 P&L. Our Q3 net interest income was $5.1 million, a decline from $7 million recorded in Q2. Weighted average coupon of our loan portfolio remained relatively flat sequentially.

The average outstanding UPB of the portfolio declined, and principal loan repayments were used to pay down a portion of our secured financings, contributing significantly to the reduction in net interest income for the period. Additionally, the reversal of certain accrued interest and the non-recording of interest on non-accrual loans contributed approximately $800,000 to the decrease. Our total operating expenses, including fees to our manager, were down slightly quarter on quarter as we recognized expenses of $3.1 million in Q3 versus $3.2 million in Q2. The reduction was primarily attributable to less fees paid to our manager sequentially. The primary difference between reported net income and distributable earnings is primarily attributable to $345,000 of depreciation on real estate owned. As of September 30, we had seven loans risk-rated of five. All of these loans are collateralized by multifamily assets.

Greg will provide a bit more detail in his remarks on those loans. With respect to our allowance for credit losses, we evaluated the seven risk-rated five loans individually to determine whether asset-specific reserves were necessary. After analysis of the underlying collateral, we recorded a provision for credit losses of approximately $900,000. We also charged off approximately $200,000 of reserves recorded in prior quarters against the allowance for an asset that went REO in Q3. Our general allowance for credit losses decreased to $5.7 million from $6.6 million in Q2, with the decrease driven primarily by a decrease in portfolio balance, largely offsetting the specific reserve increase. We ended the second quarter with an unrestricted cash balance of $56 million, and our investment capacity through our two secured financings was fully deployed.

The CRE CLO securitization transaction we issued in 2021 provided effective leverage of 72% to our loan assets at a weighted average cost of funds of SOFR plus 179 basis points. The 2023 LMF financing provided the portfolio with effective leverage of 77% at a weighted average cost of funds of SOFR plus 325. On a combined basis, the two securitizations provided our portfolio with effective leverage of 74% and a weighted average cost of funds of SOFR plus 230 as of quarter end. As Jim previously mentioned, noteholders in our 2021 CRE CLO were notified that we intend to redeem the associated notes and preferred shares later this month. The company's total equity at the end of the quarter was approximately $230 million. The total book value of common stock was approximately $170 million or $3.25 per share, decreasing sequentially from $3.27 a share as of June 30th.

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 third quarter, LFT experienced $49 million of loan payoffs. As of September 30, our total loan portfolio consisted of 51 floating-rate loans with an aggregate unpaid principal balance of approximately $840 million, a weighted average floating rate of SOFR plus 355 basis points, and an unamortized aggregate purchase discount of $1.9 million. The weighted average remaining term of our book as of quarter end was approximately 16 months, assuming all available extensions are exercised by our borrowers. 100% of the portfolio was indexed to one-month SOFR, and 90% of the portfolio was collateralized by multifamily properties. As of September 30, approximately 46% of the loans in our portfolio were risk-rated at a 3 or better compared to 63% this prior quarter. Our weighted average risk rating quarter over quarter remained flat at 3.5.

During the period, we transitioned two loans with an aggregate UPB of $44.1 million from a 5 rating as of June 30th to a 4 or better rating as of September 30th. As of September 30th, we had seven loan assets risk-rated 5 with an aggregate principal amount of approximately $86.4 million or approximately 10% of the unpaid principal balance of our quarter-end investment portfolio. Of these, four were risk-rated 5 in the prior quarter, and these included an $11.9 million loan collateralized by a multifamily property in Saline, Michigan, a $10.3 million loan collateralized by a multifamily property in Colorado Springs, a $13.7 million loan collateralized by a multifamily property in Cedar Park, Texas, and an $8.2 million loan collateralized by a multifamily property in Des Moines, Iowa. All of these loans risk-rated 5 were in monetary default as of quarter end.

The other three loan assets that were risk-rated 5 this quarter included a $10.3 million loan collateralized by a multifamily property in Clearfield, Utah, a $15 million loan collateralized by two multifamily properties in Philadelphia, Pennsylvania, and a $17 million loan collateralized by two multifamily properties in Tallahassee, Florida. Of these three 5 risk-rated loans, one was in mature default, and the other two were in monetary default as of quarter end. As of September 30th, our REO comprised of four multifamily properties. Three of these properties are located in San Antonio, and one is located in Houston. As of quarter end, these properties had a weighted average occupancy rate of approximately 73.5%. Achieving positive asset management outcomes and maximizing our recovery values remains our priority. With that, I will pass it back to Jim Flynn for his closing remarks and questions. Jim.

Jim Flynn (CEO)

Thank you, Greg. I'd like to thank our guests for joining, and at this point, I would like to open the call to questions. Look forward to hearing from you.

Operator (participant)

Thank you. Ladies and gentlemen, we will now begin the question-and-answer session. Should you have a question, please press the star followed by the 1 on your touch-tone phone. You will hear a prompt that your hand has been raised. Should you wish to decline from the polling process, please press the star followed by the 2. If you're using a speakerphone, please lift the handset before pressing any keys. One moment, please, for your first question. Your question comes from Chris Muller with Citizens Capital Market. Please go ahead.

Chris Muller (Director Equity Research)

Hey, guys. Thanks for taking the questions. I guess on the risk ratings, do you guys feel that you've identified the bulk of the issues in the portfolio at this point, or are you still kind of going through things and we could see some further downgrades coming forward?

Jim Flynn (CEO)

I think we have a good handle on the portfolio, know where all of the assets are, and feel very comfortable with where the risk ratings are today. Obviously, subject to market conditions or things changing, that could change. From our standpoint and from our active management of all of these assets, we feel that we've identified all of the known issues. If conditions kind of continue in each of the markets as they stand today, there's no expectation that there would be further change. As we all know, and we look around at the market and things that are going on, obviously, any kind of market conditions are subject to change, but we certainly feel like we've done a deep dive in the portfolio across the board.

Chris Muller (Director Equity Research)

Got it. Maybe on the flip side of that, how are you guys thinking about portfolio growth in the coming quarters? Is the primary focus going to be on asset management, or could we see some new loans coming on, especially given the new financing?

Jim Flynn (CEO)

Yeah. Look, I think the new financing certainly gives us more flexibility to add assets. Having a little more—we're having more clarity and certainty around where we feel the portfolio stands will provide us with certainly more of an opportunity to look to add to the portfolio. We've been certainly very focused on asset management and cash preservation and liquidity to make sure that we positioned ourselves for, frankly, where we feel we are today. Yeah, certainly, we hope that things remain, and that gives us an opportunity to put more assets on the books in the coming quarters.

Chris Muller (Director Equity Research)

Got it. If I could just squeeze one more in, is there anything you guys can share on timing for expectations for REO sales? Can you just remind me, is there any financing against that REO, or is it held on levered?

Jim Flynn (CEO)

Today, the REO—I'll answer the second part first. Today, we've consistently held the REO that we have. This is also true at the manager on levered. We do have flexibility to put some financing against the value of those assets through debt providers and facilities, both that we enter into at JP and/or potential other providers. To the extent we are planning to hold an asset, and in most cases, our REO sales are wholly dependent on our view of the overall credit of the asset. Typically, in these situations, when you've had deterioration and you're taking an asset back, there are some very regular upgrades and improvement in management that usually needs to occur in the three- to six-month period at a minimum, and then go forward from there is more of a value judgment.

Because of the team we have in place and the size and scope of the sponsor for LFT, we've typically decided it's better to at least perform those actions on behalf of the LFT shareholders and perhaps then some to create more value. The timing for the REOs is very asset-specific. We may dispose of some quickly in that kind of three to six-month period as we just kind of clean up the asset, make sure it's as occupied as it can, and then perhaps sell. Typically, our REO team that, as their job manages assets, takes a look at these and feels like there's some pretty good opportunity for improvement and value, and those might be a bit longer-term holds. That's where we would look to some of our providers to give us some leverage against those on a value basis.

Relatively low levered, lower than a traditional new loan, for sure.

Chris Muller (Director Equity Research)

Got it. That's all very, very helpful. I appreciate you guys taking the questions.

Operator (participant)

As a reminder, if you wish to ask a question, please press star one. Your next question comes from Greg Bennett at Investor. Please go ahead, Greg.

Good morning. Is there any change in your relationship with your sponsor, ORIX USA? I understand they acquired a company called Hilco, and Hilco, I think, does lending, asset-backed lending. Could you describe if there's any conflict?

Jim Flynn (CEO)

Yeah. I can speak to that. First, no, there's no change in the relationship between ORIX and Lument. The acquisition of Hilco, they are an asset-backed lender. Their business model does not really overlap in any material way with LFT and the first mortgage bridge lending business. I do not think there's a major conflict there. They do have some asset-backed real estate lending, and of course, their parent ORIX is a large lender. In terms of expanding the overall footprint of our real estate lending business across the parent company, Lument, and LFT, I do expect that to continue to expand, which is a positive for LFT and for the whole company. I do not think there's any reason to think that the Hilco acquisition would have a material impact and certainly not a negative impact on LFT.

Okay. Second question. On real estate owned, if the value of that real estate owned actually increases over what the amount that is owed and you sell it, do we reap the benefit of that, or does some of that go back to the previous owner or lender?

Yeah. Let me clarify one thing on the REO that to the extent that those are currently held in the securitization, they technically still have leverage against them in the pooled concept. I know I said earlier, but looking forward, as an example, when we call FL1 or if we were to call our second securitization and bring those on balance sheet, that is where we would use the other credit facilities to put leverage on those. Answering your question, once it is REO, meaning we foreclosed and we own it, any increase in value would go to the shareholders of LFT, go to LFT corporate.

Okay. On the new financing with JPMorgan, it said something about SOFR plus to be determined. I guess I was trying to understand, you mentioned in the call that you're planning on redeeming the 2021 CLO. I think that's what you said.

Yes.

Greg Flynn (Analyst)

Yeah. I think that's SOFR plus 175, am I correct? The 2021.

Jim Flynn (CEO)

Correct me if that's where it's been delevering, so it changes kind of every time a loan pays off, the cost changes because it goes to pay down the debt.

Jim Briggs (CFO)

Yeah. As Jim mentioned during the remarks, it's at SOFR plus 179, and the important thing to note there, it's at a leverage of 72% as well.

Yeah. I guess why would you pay that off versus the 2023, unless I guess it's still in the investment period, which is SOFR plus 355? You're paying off the less expensive.

Jim Flynn (CEO)

The strategy is for us to re-enter the securitization market. The size of the FL1 provides us a better opportunity to enter that in a meaningful way. It is an order of operations. I mean, we have been working toward the refinance of our portfolio. That includes FL1, that includes LMF, that includes our term loans. This is a first step that unlocks close to $170 million of equity at FL1 that can be redeployed in a different vehicle, whereas LMF is under $70 million. There is significantly more capital trapped in FL1. To give you a context of the securitization market, leverage in that market today is in the high 80s.

You're in the 70s. Is that correct?

That's correct.

Is the cost of funds from a new agreement with JPMorgan, it's SOFR plus, we don't know what?

It's dependent on the asset. That's why there's not a set spread. It's an asset-by-asset look. It's in the, broadly speaking, the high 100s to the low 200s over, depending on the asset.

Okay. Can you use, you have a term loan, I think, coming due in 2026, a corporate debt matures in 2026. Can you use the JPMorgan line to retire that debt or not?

I mean, indirectly, we can in the sense that the J.PMorgan line provides us with leverage and liquidity that is fungible, meaning we can pay off the term loan with it or reinvest or otherwise. The direct answer is no, not directly. The indirect answer is yes. The purpose of this vehicle is to provide us with flexibility and liquidity across the platform. As far as the term loan goes, we are talking to our term loan provider, and we're still discussing the potential to either pay that off, partially pay that off, or refinance that term loan. That decision has not been made yet.

Okay. Thank you very much. Appreciate it.

Great.

Operator (participant)

As there are no more questions, I will pass back to James Flynn for any closing remarks.

Jim Flynn (CEO)

Okay. I want to thank everyone for joining us. We are certainly excited about the progress we've made here. Look forward to the upcoming quarter and speaking to you again soon. Thanks all for joining.

Operator (participant)

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