Lument Finance Trust, Inc. - Q3 2026 Earnings and Investor Call - LUMENT FINANCE TRUST INC

Good morning, and thank you for joining the Lument Finance Trust 3rd Quarter 2026 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 Tan with Investor Relations at Lument Investments Management. Please go ahead. Good morning everyone. Thank you for joing our call to discuss Lument Financial Trust 3rd Quarter 2027 Financial Results. With me on the call today are Jim Flynn, our CEO, Jim Briggs, our CFO, Craig Calvert, our President, and Zach Halpern, our Portfolio Manager. Last night, we issued a press release to provide details on our recent financial results and provided a supplemental earnings presentation, which can be found on our website. This morning, we filed our 10-Q with the SEC. 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-lookings statements. These risks and uncertaincies are discussed in the company's reports filed with the SEC, in particular, risk factors sections of our Form 10-K and Form 10Qs. It's 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 as 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 the GAAP can be accessed through our filings with the SEC. For the third quarter of 2026, we reported a GAAP net loss of $2.57 and distributable loss of 13 cents per share of common stock. On September 9th, the company effected a 10-for-1 reverse split of its common stock. All per-common share amounts discussed today, including for prior periods, have been adjusted if necessary to reflect the reverse common stock split. I'll now turn the call over to Jim Flynn. Please go ahead. Thank you, Andrew. Good morning, everyone. for joining us for Lumen Finance Trust's third quarter earnings call. We appreciate the continued support and engagement from our investors as we work through the remaining challenges in the legacy portfolio. Our focus remains on resolving those assets, preserving value, and positioning the company to deliver improved results for shareholders. Looking at the market, the economy has continued to remain resilient, although persistent inflation and renewed uncertainty around interest rates do influence the commercial real estate markets. Following a 25 basis point increase in September, the Fed has maintained the Fed funds rate in the 375.4% range. We do expect to see a 25 and maybe as much as a 50 basis point increase coming in December and or the first quarter of 2027. While the path of monetary policy continues to remain uncertain, rates are likely to remain elevated and important considerations for borrowers and commercial real estate valuations. More recently, the results of this month's midterm elections point to a divided federal government beginning in January. And while we do not expect the outcome to materially change multifamily fundamentals in the near term we will continue to monitor its potential implications for fiscal policy interest rates and housing policy nationally in multi-family performance continues to vary by market and asset flowing new supplies should provide a more constructive backdrop over time although elevated borrowing costs continue to pressure refinancing economics for transitional properties CRE CLL capital markets remain open and continue to provide financing capacity for the sector, although investor spreads have modestly widened on recent issuances amid broader market uncertainty. I should note this is true for really all fixed products across any asset class. We believe the reinvestment capacity available in our current CRE-CLL remains an important source of flexibility as we resolve our legacy assets and selectively redeploy capital on the asset management side which you'll hear much more about from greg and jim working through the remaining legacy assets continues to be our central focus for the company we are actively pursuing the most appropriate resolution strategy for each asset with an emphasis on balancing the desire to protect recovery values with accelerating asset resolution so we can redeploy our best sold capital into performing assets with appropriate risk-adjusted returns. While conditions for certain challenge assets remain difficult, resolution activity has begun to improve and we are pursuing a range of alternatives across the portfolio and are encouraged by the progress we are making for monetizing these positions and and returning capital to productive use. We continue to manage our unrestricted liquidity and CLL reinvestment capacity carefully and ended the quarter with approximately $27 million of cash on balance sheet. As we work through our remaining legacy assets, preserving liquidity remains a top priority. As a result, in September, following extensive discussions with our board, we determined that suspending the common dividend for Q3 was a prudent step to preserve operating flexibility. As we generate liquidity through repayments and asset resolutions, we expect our emphasis will increasingly shift toward redeployment of capital into opportunities that are creative to shareholder value. Looking ahead, our strategy is straightforward. Dissolve the remaining legacy assets, preserve shareholder capital, and redeploy available liquidity into high-quality multifamily investments. Although the timing of individual NPL and REO resolutions will continue to depend on asset and market-specific conditions, we are a third by the recent pace of resolution activity and believe we are making meaningful progress toward reducing these exposures. As capital is released, our next priority is putting it back to work efficiently, which we expect will be important to rebuilding the company's earnings capacity. We appreciate the patience of our investors as we continue to navigate the challenges of our legacy investment portfolio, and we believe we have financing flexibility, support of our capital partners, and platform capabilities to execute on that strategy. With that, I'd like to turn the call over to Jim Briggs, who will provide details regarding our financial results. Thanks, Jim. Good morning. This morning, we filed our quarterly report on Form 10-Q, and last night provided a supplemental investor presentation on our website, which we'll be referring to during our remarks. Supplemental investor presentation has been uploaded to the webcast as well for your reference. On pages 4 through 7 of the presentation, you'll find key updates and an earnings summary for the quarter. The third quarter of 2026 reported a net loss attributable to common stockholders of $13.5 million, or $2.57 per share. We've reported a distributable loss of $700,000, or 13 cents per share. Note that all per share amounts reflected the 10-for-1 reverse stock split completed on September 9th. There are a few 2-3 P&L items I'd like to now highlight. That interest income was 4.6 million, modestly higher than 4.5 million in the second quarter. The outstanding UPB of the total portfolio was approximately 980 million compared to 1 billion as of June 30. The weighted average coupon of our loan portfolio increased to 706 basis points compared to 697 basis points in the prior quarter, largely due to the increase in the SOFA rate during the period. We had fewer EXIT FEES DURING THE PERIOD DUE TO LOWER SEQUENTIAL PAYOFFS, OFFSETTING OUR EXTENSION FEE INCOME WAS HIGHER QUARTER-OVER-QUARTER. TOTAL OPERATING EXPENSES WERE $4 MILLION, APPROXIMATELY IN LINE WITH $3.9 MILLION IN THE SECOND QUARter. THE INCREASE WAS DRIVEN PRIMARILY BY APPROxIMATLEY $500,000 INCREAMENTALLY HIGH EXPENSE RELATING TO NON-PERFORMING LOANS, INCLUDING PROTECTIVE ADVANCES THAT HAVE BEEN EXPенсED AS INCURRED. IT WAS PARTIALLY OFFSAT by lower expense reimbursements for a manager during the period. The difference between reported gap net loss and distributable earnings for the quarter was primarily attributable to an 8.6 million provision for credit losses recorded in the period, 3.9 million of REO impairment charges, and 318,000 of depreciation on REO. The 8.7 million provision for credit loss is recorded during the quarter. which is excluded from distributable earnings, was driven primarily by several factors. Our general CECL reserve increased $2.8 million in the quarter to a September 30 balance of $6.6 million, with the increase primarily driven by an increase in high-risk loans, as well as changes in macroeconomic assumptions employed during determining the company's model-based general Reserve. We charged approximately $5.9 million to our specific reserve. We evaluated our risk-rated five loans individually to determine whether asset-specific reserves were necessary. The $5,900,000 provision is primarily related to two loans that had been risk-graded five as June 30th and that continue to be risk-grade five as September 30th, reflective of moves in collateral values on those assets. During the period, we also charged off $2.8 million of specific allowance related to one loan that we foreclosed on during the period. As a result, our specific allowance for credit losses increased to $20.5 million compared to $17.4 million as of June 30th. As of September 30th, we had four REO assets classified as held for sale with an aggregate carrying value of $49.8 million, including two REO assets with an aggregate carrying volume of $24.1 million that were reclassified from held for use during the quarter, and one asset that was foreclosed on in the quarter that was classified as held for sale. During the quarter, we recorded an impairment expense onto these held for sale REO Assets totaling $3.9 million after considering the current fair value of the properties, which was primarily based on recent sale offers. At quarter end, our CLO's capital was substantially fully deployed at an 88% advance rate and the cost of funds of SOFR plus 191. As of 9.30, a portion of our warehouse facilities that provided financing at an effective advance rate of 68% and weighted average cost of SOVR plus 203. As of nine 30, we had an unrestricted cash balance of $27 million and our FL3 CLO was substantially fully deployed. The company's total book equity at the end of the quarter was approximately $191 million. Total book value of common stock was approximately 131 million or $24.97 per share, decreasing sequentially from $27.57 per share as of June 30th on a reverse split adjusted basis. We'll now turn the call over to Greg Calvert to provide details on the company's investment activity and portfolio performance during the quarter. Greg? Thank you, Jim. During the third quarter, LFT acquired or funded four loans with an aggregate UPBA of $67 million and experienced $79 million of loan payoff. As of September 30th, our total loan portfolio consisted of 51 floating rate loans with an aggregate unpaid principal balance of approximately $981 million, a weighted average floating rate of 326 basis points over SOFR, and an unamortized aggregate purchase discount of approximately $440,000. The weighted average remaining term of our book as of quarter end was approximately 18 months, assuming all available extensions are exercised by our borrowers. 100% of the portfolio was indexed to one-month SOFR, and 93% of the portfolio is collateralized by multifamily properties. As of September 30th, approximately 70% of loans in our portfolio were risk-graded at 3 or better, compared to 81% as of June 30th. Our weighted average risk rating quarter-over-quarter increased to 3.2 from 3.1 sequentially. As of September 30th, we had six five-rated risk-rated loans with an aggregate principal amount of $94 million, or approximately 10% of the unpaid principal balance of our quarter and investment portfolio. Five of these loans with a aggregate UPB of $76 million were also risk-graded five as of the prior quarter due to either maturity or monetary default. All of these loans are non-accrual status. One of these loans with an UPB of $18 million was downgraded to a five-risk rating this quarter due to a maturity default. However, the borrower's current uninterest payments and no specific allowance for credit losses was recorded on this asset for this period. As of the quarter end, our REO portfolio in total consisted of five multifamily properties with an aggregate carry value of $77 million and a weighted average occupancy rate of approximately 67%. As Jim Briggs mentioned, four of these assets with an aggregate carry value of $49.8 million are classified as held for sale, and we are actively working on their disposition. We have been very active in seeking positive asset resolutions and maximizing recovery values and are pleased with the significant progress we have made so far, yet we understand there is still more work to be done on behalf of our shareholders. With that, I'll pass it back to Jim Flynn for closing remarks and questions. Thank you. Thank you, Greg and Jim. Now I'd like to open the call for any questions. 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 one on your touch-down phone. you wish to cancel your request, please press the star followed by the two. If you are using a speakerphone, please lift your handset before pressing any keys. Once again, that is star one, should you wish, to ask a question. And your first question is from Jason Weaver from Jones Trading. Your line is now open. Hey, good morning. This is Val and Alvar filling in for Jason Wever. thank you for taking my questions here um so starting with uh so you have seven loans that were extended in 3q mostly by about three months and four of those dates have passed uh how many were extended again in october and november and what were the pay downs or fees there um also you mentioned on the last call flagging modified maturities in the supplemental is that that's still coming there. Sure, thank you. Thank you for the question. Greg or Zach, do you have the specifics on those five? Maybe give you a minute. Apologies. Can you just repeat quickly the context of the five that you're trying to get some information on uh so the the seven loans that were extended totaling about 180 million um but mostly by the the three months um and four of those dates had already passed do you know how many of those were extended again in october and november and what those paydowns or fees were yeah give me a second to And the second part of your question was, I'm sorry to say that again, was there a second piece besides? Yeah. Yeah. So I just, on the last call, you guys mentioned flagging the modified maturities and the supplemental. So I was just curious if that was still coming or part of the plan in the future. Yeah, Jim and Andrew, I don't think that's in the supplemental or is it? It is not. I wouldn't believe it. It is in the current supplemental and we'll work to get that in there. Okay. Gotcha. And the first question, I would say that – I'm just trying to look through some appear and try to aggregate it's not the way that we we don't necessarily aggregate data in that fashion uh largely there were some temporary extensions that occurred in q2 uh that were transitioned to more permanent solutions via um longer extensions And in Q3, those involved capture of fees, et cetera, but I'm sort of forward-looking a little bit right now into Q3 which I don't necessarily want to do too much of, so. The answer is some of those have not been papered formally for whatever the final resolution is. That is true. So those we shouldn't talk about, but yeah. Okay. Got it. Thank you. And then what distributable earnings level and resolution milestones would the board need to see the reinstate the common dividend, and is the preferred coverage at any risk? And I guess touched on it a little bit, but. Yeah, I mean, there's not a, obviously, we revisit that question with the board during all of our meetings. You know, the current trend on earnings is negative, you know, certainly in part with some of these challenged assets, but also because we are significantly underdeployed relative to, you know, historical norms both in terms of leverage and assets. So I would, while there's not a number, the key drivers of that discussion are how quickly or how many more of these assets which we've identified that we do expect meaningful progress here in the coming couple of quarters on moving those off the balance sheet. It's really about maintaining liquidity and flexibility to resolve those assets. Once that is at a place that we feel comfortable with and the board feels comfortable with, then turn to what are the, you know, distributable earnings as a result as we go forward and then make the decision on the dividend. So it's, you Know, we do believe that when we are able to resolve these assets, you know, return the capital back to the company and redeploy it efficiently into the market that our earnings will improve. But it's really a, it's not so much a number of what the earnings is as it is, you maintaining liquidity and flexibility to get through these resolutions. Obviously, we would, our preference is to do so as soon as possible. We are, as I mentioned in the first part of the call, we are making significant progress and we do see, you know, transactions in the space in general across the industry in terms of lenders being able to sell non-performing loans or non- Performing Assets or REO at a higher pace today than we've seen over the last year plus. So while from a value standpoint, that's obviously lenders resolving assets that have generated losses, which no one is happy about, But from a getting through this period and getting through legacy portfolios, that's a positive sign. So, you know, I would, if I was looking at this, I würde monitor the watch list and, you know, the number of loans as they, of the, you know, highest risk loans moving off the books as the key driver of that discussion. All right. I appreciate it. Thank you. Thank you once again. That is star one. Did you wish to ask a question? And your next question is from Ward Bloom from UBS. Good morning. I know we're in a tough environment, and I think the results, though they're disappointing, show a lot of hard work and effort to accomplish. I noticed, if I got it right, you've got 12 loans that matured from September 30th to today, and those may or may not be part of this legacy group that you talk about. But I wonder, and this may have been partially covered in the last question, how many of them paid off or extended? That's my first part of the question. And second part is, you know, you're talking at a 30,000 foot level about, you know, properties and so forth. It seems like 10% of the portfolio is non-performing. And I wondered if you could give some specific property color on some of those non-performance so we get a sense of, you know, where you are in terms of the hands-on basis and what we should expect going forward. We had about almost a 10% decline in book value from the largely markdowns in the last quarter, and I expect with the number of the five-rated loans, we'll see perhaps some more of that coming at us. I don't know, when we exhaust this, quote, legacy period, you know, that's really an interesting question that you could also cover and give us some, you know, view as to when we get past that and when we gets to more, quote normal times. So there's a lot of questions. I'm sorry. Yeah, that's okay. I'll do the best I can. And Zachary, Jim, feel free to jump in at your leisure. But so the question around the assets, I mean, without getting into kind of specifics by name, you know, I'll give some thought. We have five REO assets. Those are all, all, or at least four of the five, you know, we're actively pursuing sales on those assets. And there's progress being made there. So our objective is to move those off the books as soon as possible. And we hope that and, you feel that we'll be able to do that. But obviously, the market has has proved uh challenging today and and for for quite a while um getting buyers and sellers to agree on prices has been a um even in the performing space forget about non-performing but it's been a very difficult uh environment across our entire lending portfolio lumen to sponsor not just lft um retraining on price has been a very normal, you know, business practice across the entire multifamily space and respectively the entire, excuse me, real estate space. So we're working through those as quickly as we can. To give you an example of some of the other assets and what we've dealt with in in several instances um you know when when borrower some borrowers have been you know good actors who got extended overextended and and couldn't support their assets any longer and can manage them um and have been cooperative others have done quite the opposite um and we've had several instances of you know moving toward a foreclosure so that we can pursue uh a sale moving off our books when we have borrowers file for bankruptcy and really all that does is cost money and delay the process uh but nonetheless it's it's it's done um and we have a few of those so you know part of part of the issue of um resolving the legacy portfolio is is gaining control of the asset um and depending on the jurisdiction that is not always easy um or at least it's it's time consuming um so when you get to you know the the last part of your question which is when are we going to be through kind of the call it legacy portfolio or legacy issues um there's not a great answer i can give you we certainly hope that over the coming you know in 27 we hope to be significantly moving toward being through that but it's very dependent upon uh you know what happens in the market and how difficult it is to gain control so it's not it's a great answer for you because i can't you know unfortunately i can t i can give it to you i would say that if you asked that question a year ago, I would think that we would be further along as not just LST, but as a market and resolving what is the challenged assets that exist in large part because of the run up in values and subsequent run up in race and inflation that has kind of been at the epicenter of what's happened in the multifamily space in real estate across the mark. So I know that's not as specific an answer as you probably want, but that's kind of where we are. And I hope that next quarter and each quarter after that, you'll see progress and be able to track that and make a, you know, have an informed view of how quickly we're moving. Our goal, certainly, and I said this earlier, too, is to really accelerate this process. You know, we don't think things are going to get materially better by waiting. um and so we really just want to move as quickly as we can to to move these assets off the books um in a in a reasonable manner and then move forward with with reinvesting and redeploying that capital well you didn't really touch on the first question uh you know and and let me ask you to be specific. There were 12 loans that were scheduled to mature between September 30th and today. And I wonder if they paid off or how many went into extensions or, you know, give us some color on current events. Hey, Zach. I appreciate the questions. They're all really good questions. You are asking some good questions about current quarter activity that I don't know that we're – I haven't been given clearance to talk about. But what I'd say is, you know, to Jim's point, there are multiple assets on the REO side available out for sale right now. We don't want to name them specifically because we don't want to disrupt sales processes, etc. We are working to resolve those assets over the near term. Of the newer vintage loans, and so you can compare note dates to maturities, we don' t have any issues in the newer of vintage loans at present that are not being resolved. Okay, you didn't touch on the last questioner's inquiry about preferred dividends. Are you comfortable that company, you know, expects to continue those dividends? I mean, we and the board have made the decision to continue to pay that dividend this quarter. That's a quarterly decision. We can't talk about future dividend policy on the call. That's certainly a board decision, but obviously we made that decision this quarter and have taken into account all the things that we've talked about. So I think you can, yeah, it's a fully informed decision when we when we made the decision to continue that dividend and uh the comment was earlier made on your part that you're looking to you know do things that are accretive to shareholder value the obvious question for many of us shareholders is you have a buyback authorization in place that you've never used and the stock's trading at you know less than 20 percent of uh nav and i wonder at what point you think it's accretive to shareholder value to exercise some of those buy-in rights sure i mean i think mathematically there's it's it secretive today right that's not that's a That's a very simple answer and it's an appropriate question and it is an appropriate discussion. The only thing I would say is that is – that among any other kind of redeployment, reinvestment decision is a perfectly appropriate question for management and the board and it was one that we've evaluated and will continue to evaluate. now our focus is on preserving liquidity resolving the assets so that we are able to actually make those decisions um whether it's buying that stock or or reinvesting into assets or or any other use of capital um so it's it's certainly something that we have discussed um but again our focus is on ensuring that we are able to resolve and move through the existing issues in the portfolio before we make any decisions around reinvesting or redeploying capital in that way. So it's a fair and appropriate question. It's one that's certainly on our radar, but we are maintaining liquidity to get through the issues that we're managing through in the book. Thank you very much. Thank you. Your next question is from Greg Bennett. Your line is now open. A suggestion. Going forward, everybody wants to know what the status of the loans that have matured You know, in the fourth quarter, next time we do this, you know, why don't we have one of the board of directors or whatever, give you authorization to let us know what the status is. Of those loans that have matured, how many of those are – we can go back in the public material, I guess, but how many of those loans That have matureed in the fourth quarter are – I'm going to call them legacy, vintage, and how much of them are part of the newer loans? Thank you. I don't have the answer to the tip of my tongue about how many, but if they matured in the fourth quarter of 26, then they would be certainly of an older vintage. Your question or you're asked around providing some, providing color on loans that mature quarter is is there we will we will provide an update on those on that information certainly in many cases on the exist on the existing they're in the process of of a resolution that has not been signed so they're a maturity default but they are uh moving toward an exit but but it's we can provide more specific detail going forward on that that might correct all of these none of these were a payoff these are all problems that um you're working on an extension or sale that none of them paid off on the date that they were supposed to i don't i i don t believe that any of them paid off but they're not all problems meaning they're not no some of them are just working through refinancing with other lenders or in some cases in some pieces us or going to agency they're not all problems um but they are i would say go ahead i'm sorry i looking at it in general uh the if if they miss their maturity date then they did not it's clear they did not pay off but the the group of loans that i'm looking at is is there are a mix of extensions for performing loans. There are some in here that needed extensions to finalize a payoff with another lender and others with a sale, and a handful of them are working through workout situations. I hope that gives some color, but we certainly will provide more detail next quarter. Yeah, that would be a good idea. Or, my gosh, I don't know if your board will allow you to, I mean, it sounds to me like the last few calls, it's always good news is possibly coming or resolutions are possibly coming, but we have to wait until each quarter end. Possibly, if good news is coming and you resolve these, maybe you can come out with an update in between the quarters, possibly. But maybe if your board could consider that. Thanks for the hard work. Appreciate it. I appreciate that feedback, and we will discuss that, but we certainly will provide more specific info, at least at the portfolio level, on maturities. I'll make one other suggestion. Why don't you just liquidate the company or sell the company to somebody else? The discount and the book value, Mr. Market doesn't believe we're going to – who knows what the discount is to the NAV, what's justified and what's not justified. Your investors have no idea. Thank you. We appreciate the call. Thank you once again. That is star one. Should you wish to ask a question? It seems there are no further questions. Please proceed with the closing remarks. Thank you all for joining today. We appreciate the feedback. We know that times have been challenging. We will continue to provide as much info as we can at the end of each quarter and review what we can or are able to do inter-quarter as well. I look forward to speaking again next quarter. Thank you. Thank you, ladies and gentlemen. The conference has now ended. Thank you all for joining me now. Disconnect your lines.