Q3 2025 Lument Finance Trust Inc Earnings Call
Speaker #1: I would now like to turn the call over to Andrew Tsang with Investor Relations at Lument Investment Management. Please go ahead.
Speaker #2: 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 Zack Halpern, our managing director of portfolio management.
Speaker #2: 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.
Speaker #2: 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.
Speaker #2: 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 Form 10-K and Form 10-Qs.
Speaker #2: It is not possible to particular the risk factors sections of our identify all such risks unless there is a caution not to place undue reliance on these forward-looking statements.
Speaker #2: 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 as a substitute for the financial information presented in accordance with GAAP.
Speaker #2: 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.
Speaker #2: For the third quarter of 2025, we reported a GAAP net income of 1 cent per share of common stock. In share and distributable earnings of 2 cents per September, we declared a quarterly dividend of 4 cents for common share with respect to the third quarter.
Speaker #2: I will now turn the call over to Jim Flynn. Please go ahead.
Speaker #3: Thank you, Andrew. Good morning, everyone. earnings call for the third quarter of 2025. We appreciate Welcome to the Lument Finance Trust everyone joining us today.
Speaker #3: at where the market Starting out, just taking a look resilient through this period of shifting monetary policy and geopolitical and uncertainty. On October 29th, the Fed funds cut the Fed funds rate by 25 basis points to a range of 375 to 4%.
Speaker #3: But 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.
Speaker #3: 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.
Speaker #3: 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.
Speaker #3: All conditions that support balance and potential rent recovery over the medium and long term. Affordableity challenges in the single-family market among many other factors also continue to sustain demand and credit quality at the asset multifamily level.
Speaker #3: recent Fed funds We view the 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.
Speaker #3: Meanwhile, the CRE CLO market continues to remain open for issuers. Year-to-date issuance now exceeds 25 billion, investor confidence. This reflecting a healthy level of liquidity and rebound compared to the prior year of 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.
Speaker #3: On the asset management side, we are actively managing the portfolio. Our team is closely engaged with our resolutions through modifications, extensions, and REO borrowers, proactively seeking positive strategies where appropriate.
Speaker #3: Weighted average basis, the portfolio credit ratings were 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.
Speaker #3: and financing standpoint, The liquidity 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.
Speaker #3: 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.
Speaker #3: Last week, we entered into a new repurchase agreement with J.P. Morgan, providing the company with up to 450 million in aggregate place, last week's holders of advances.
Speaker #3: 2021 CRE CLO were notified that the company intends to redeem securities issued by our the associated notes in preferred shares later With this warehouse capacity now in this month. J.P.M.
Speaker #3: 2021 CRE CLO were notified that the company intends to redeem securities issued by our the associated notes in preferred shares later With this warehouse capacity now in this month.
Speaker #3: facility was a critical step in repositioning our existing portfolio and, subject to market conditions, enabling us to take advantage of Closing the new financing opportunities.
Speaker #3: 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.
Speaker #3: We believe this disciplined approach will position the company well as the market stabilizes and new opportunities emerge. Our managers' origination in asset management expertise remains a key differentiator, and we are confident that our focus prudence and lasting shareholder value.
Speaker #3: With flexibility will translate into that, I'd like to turn the call over to Jim Briggs, who will provide details on our financial results. Jim?
Speaker #4: Thanks, Jim. Good morning, everyone. Last night, we filed our quarterly report on Form 10Q and provided a supplemental investor presentation on our website which we will be referencing during our remarks.
Speaker #4: investor presentation has been uploaded to the webcast as well for your reference on pages 4 The supplemental through 7 of the presentation. You'll find key updates and an earnings summary for the quarter.
Speaker #4: For the third quarter of '25, we reported net income to common stockholders of approximately $700,000 or one penny per share. We also reported distributable earnings of approximately $1,00,0 or 2 cents per share.
Speaker #4: regards to the Q3 P&L. Our Q3 net interest income was 5.1 There are a few items I'd like to highlight with million. A decline from 7 million recorded in Q2.
Speaker #4: The weighted average coupon of our loan portfolio remained relatively flat sequentially. The average outstanding UPV of the portfolio declined due to principal loan repayments we used to pay down a portion of our secured financings.
Speaker #4: 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.
Speaker #4: 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 Our total Q2.
Speaker #4: The reduction was primarily attributable to less fees paid sequentially. Primary difference between reported net income and distributable earnings was to our manager $345,000 of depreciation on real estate owned.
Speaker #4: As of September 30th, we have 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.
Speaker #4: With we evaluated these seven risk-rated five loans individually to determine whether assets specific reserves were necessary. After analysis of the underlying collateral, we recorded a provision for credit losses of approximately $900,000.
Speaker #4: We also charged off approximately respect to our allowance for credit losses, quarters against the allowance for an asset that Q3. Our general allowance for credit went REO in 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.
Speaker #4: 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.
Speaker #4: 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 so far plus $179 basis points.
Speaker #4: The 2023 LMF financing provided the portfolio with effective leverage of 77% at a weighted average cost of funds of so far 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 so far plus 230.
Speaker #4: As of quarter end, as Jim previously mentioned, noteholders in our 2021 CRE redeem the associated notes in preferred shares later this month. The CLO were notified that we intend to was approximately $230 million.
Speaker #4: 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.
Speaker #4: Greg?
Speaker #5: Thank you, Jim. During the third quarter, LFT experienced 49 million dollars of loan payoffs. As of September 30th, 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 so far plus $355 basis points, and an unamortized aggregate purchase discount of 1.9 million.
Speaker #5: 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.
Speaker #5: $100% of the portfolio was indexed to one month so far, and 90% of the portfolio was properties. As of September 30th, approximately 46% of the collateralized by multifamily a 3 or better compared to 63% the prior quarter.
Speaker #5: Our weighted average risk rating quarter over quarter remained flat at 3.5. During the period, we transitioned two loans with an aggregate UPV of 44.1 million from a 5 rating as of June 30th to a 4 or better rating as of September 30th.
Speaker #5: September 30th, we had seven loan As of 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.
Speaker #5: Of these, 4 were risk-rated 5 in the prior quarter, and these included an $11.9 million loan collateralized by a multifamily property in Salante, 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, 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.
Speaker #5: 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, a $17 million loan collateralized by two multifamily properties in Tallahassee, Florida.
Speaker #5: 5 risk-rated loans, one was in maturity default, and the other two were in monetary default as of quarter Of these three end. As of September 30th, our REO comprised of four multifamily properties.
Speaker #5: 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%.
Speaker #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.
Speaker #5: Jim?
Speaker #6: Thank you,
Speaker #6: Greg: I'd like to thank our guests for joining the call to questions. I look forward to hearing from you and, at this point, I would like to open.
Speaker #6: you. Thank you.
Speaker #7: 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.
Speaker #7: You will hear a prompt set your hand has 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.
Speaker #7: One moment, being raised. Please, for your first "should you wish to decline" question. Your question comes from Chris Muller with Citizens Capital Market. Please go ahead.
Speaker #8: Hey, guys. Thanks for taking the questions. So 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
Speaker #8: forward? So I think we
Speaker #1: have a good handle on the portfolio knowing where all of the assets are and feel very comfortable with where the risk ratings are today.
Speaker #1: Obviously, subject to market conditions or things changing, that could change. But from our standpoint and from our active management of all of these assets, we feel that we've identified all of the known issues.
Speaker #1: And if conditions kind of continue and 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.
Speaker #1: But we certainly feel like we've done a deep dive in the portfolio across the
Speaker #1: board. Got it.
Speaker #8: And then 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
Speaker #8: financing? Yeah.
Speaker #1: 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.
Speaker #1: We'll 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.
Speaker #1: So yeah, certainly we hope that things remain in that gives us an opportunity to put more assets on the books in the coming quarters.
Speaker #8: Got it. And if I could just squeeze one more in, is there anything you guys can share on timing for expectations for REO sales?
Speaker #8: And can you just remind me, is there any financing against that REO, or is it held on
Speaker #8: levered? So
Speaker #1: So 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.
Speaker #1: On levered, we do have flexibility to put some financing against the value of those assets. Through debt providers and facilities, both that we entered into a JP and/or potential other providers.
Speaker #1: So 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.
Speaker #1: So—excuse me—typically, in these situations, when you've had deterioration in your taking an asset back, there's some very regular upgrades and improvements in management that usually need to occur in the three to six months period, at a minimum.
Speaker #1: And then go forward from there is more of a value judgment. And 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 so that the timing for the REOs is very asset-specific.
Speaker #1: 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.
Speaker #1: But 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.
Speaker #1: And those might be a bit longer-term holds. And that's where we would look to some of our providers to give us some leverage against those on a value basis.
Speaker #1: Relatively low leverage, lower than a traditional new loan, for sure.
Speaker #8: Got it. That's all very, very helpful. I appreciate you guys taking the
Speaker #1: Great.
Speaker #7: As a questions. reminder. As a reminder, if you wish to ask a question, please press star one. Your next question comes from Greg Bennett, investor.
Speaker #7: Please go ahead,
Speaker #7: Greg. Good
Speaker #9: Good morning. Could you, is there any change in your relationship with your sponsor or USA? I understand they acquired a company called Hilco. And Hilco, I think, does lending asset-backed lending.
Speaker #9: Could you describe if there's any conflict?
Speaker #8: Yeah, I can.
Speaker #8: I can speak to Yeah. that. First, no, there's no change in the relationship between Oryx and Lumen. The acquisition of Hilco is they are an asset-backed lender.
Speaker #8: Their business model does not really overlap in any material way with LFT. And the first mortgage-fridge lending business, so I don't think there's a major conflict there.
Speaker #8: They do have some asset-backed real estate lending and, of course, their parent Oryx is a large lender. And so in terms of expanding the overall footprint of our real estate lending business across the parent company, Lumen, and LFT, I do expect that to continue to expand.
Speaker #8: Which is a positive for LFT and for the whole company. But I don't think there's any reason to think that the Hilco acquisition would have a material impact and certainly not a negative impact on LFT.
Speaker #9: Okay. Second question. On real estate-owned, if you actually, 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?
Speaker #8: Yeah. So 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.
Speaker #8: 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's where we would use the other credit facilities to put leverage on those.
Speaker #8: And then answering your question, once it's REO, meaning we foreclosed and we own it, any increase in value would go to the shareholders of LFT.
Speaker #8: Go to LFT corporate.
Speaker #9: Okay. On the new financing with JP Morgan, 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.
Speaker #9: I think that's what you said. And I think, yeah. And I think that's SOFR plus 175, am I
Speaker #9: correct? The 2021. You can
Speaker #8: correct me if that's where it's been deleveraging, so it changes kind of every time a loan pays off, the cost changes because it goes to
Speaker #8: pay down the debt. Yeah.
Speaker #9: At Jim and 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.
Speaker #8: Yeah. I guess why would you pay that off versus the 2023, unless I guess it's still on the investment period, which is SOFR plus 355?
Speaker #8: You're paying off the less expensive. So the strategy is for us to reenter the securitization market. We are the size of the FL1 provides us a better opportunity to enter that in a meaningful way.
Speaker #8: mean, we've been working It's an order of operations. I toward we've been working toward the refinance of our portfolio. That includes FL1. That includes LMS.
Speaker #8: That includes our term loans. So this is a first step that unlocks close to 170 million of equity at FL1 that can be redeployed in a different vehicle.
Speaker #8: Whereas LMF is under 70 million. So there's significantly more capital trapped in FL1. And to give you a context of the securitization market, leverage in that market today is in the high 80s.
Speaker #9: And you're in the 70s. Is that correct?
Speaker #8: That's correct.
Speaker #9: So is the cost of funds from the new agreement with JP Morgan, it's SOFR plus we don't know what?
Speaker #8: It's that it's dependent on the asset. So that's why it's a there's not a set spread. It's an asset-by-asset look. But it's in the broadly speaking, the high 100s to the low 200s over, depending on the asset.
Speaker #9: Okay. So can you use you have a term loan, I think, coming due in '26, a corporate debt matures in 2026. Can you use the JP Morgan line to retire that debt to or not?
Speaker #8: I mean, indirectly, we can in the sense that it provides the JP Morgan line provides us with leverage and liquidity that is fungible. Meaning we can pay off the term loan with it or reinvest or otherwise.
Speaker #8: So 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.
Speaker #8: And as far as the term loan goes, we have not 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.
Speaker #8: So we haven't that decision has not been made yet.
Speaker #9: Okay. Thank you very much. Appreciate it.
Speaker #8: Great. As there are no more
Speaker #1: questions, I will pass back to James Flynn for any closing
Speaker #1: remarks. Okay.
Speaker #8: Thank you. 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.
Speaker #8: Thanks all for joining.