Lument Finance Trust, Inc. Q3 FY2025 earnings call

• The economy has remained resilient with shifting monetary policy and geopolitical uncertainty. The Fed funds cut was a cautionary positive for multifamily lending. - Multifamily sector fundamentals are constructive with modest and stable rent growth, strong occupancy, and slowing new supply. - CRE CLO market has healthy liquidity with year-to-date issuance over $25 billion. - Focus on active asset management, engaging with borrowers for resolutions, modifications, extensions, and REO strategies. - Maintained conservative liquidity posture with ample unrestricted cash, loan payoffs totaling ~$49 million used to reduce securitization liabilities. - Entered new repurchase agreement with JPMorgan providing up to $450 million in aggregate advances. - Near-term focus on active asset management, resolving legacy positions, and executing financing strategy; intent to redeploy capital into core lending strategy for middle-market multifamily.

The loan portfolio consists of 51 floating rate loans with an aggregate unpaid principal balance of approximately $840 million. 90% of the portfolio is collateralized by multifamily properties, with a weighted average floating rate of SOFR plus 355 basis points. On a weighted average basis, portfolio credit ratings were relatively stable quarter over quarter. There are seven loan assets risk-rated five with an aggregate principal amount of approximately $86.4 million (10% of the unpaid principal balance). REO comprises four multifamily properties with a weighted average occupancy rate of approximately 73.5%. Revenue contribution details aren't explicitly broken down by distinct product segments beyond the loan portfolio and REO aspects.

• Intends to redeploy capital into a core lending strategy focused on middle-market multifamily. - Outlook for potential return to securitization market as a repeat issuer subject to market and pricing conditions. - Focus on driving value through active asset management, resolving legacy positions, and executing financing strategy.

• Geopolitical volatility and fast-moving trade and tariff policy shifts in the US. - Economic drag from recent federal government shutdown and uncertainty about future negotiations. - Potential market conditions affecting securitization and financing opportunities. - Uncertainty regarding further changes in risk ratings of portfolio assets due to market fluctuations.

Q: On the risk ratings, do you guys feel that you've addressed the bulk of the issues in the portfolio at this point? Or are you kind of going through things and we could see some further downgrades coming forward?

A: I think we have a good handle on the portfolio. We know what 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. 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. And if conditions continue in each of the markets as they stand today, there's no expectation that there would be further change.

Q: 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?

A: The new financing certainly gives us more flexibility to add assets, having a little 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. So, yeah, certainly, we hope that things remain and that gives us an opportunity to put more assets on the books in the coming quarters.

Q: 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. But could you describe if there's any conflict?

A: No. There's no change in the relationship between Orix and Lument. The acquisition of Hilco is—they are an asset-backed lender. Their business model does not really overlap with LFT in any material way with the first mortgage bridge lending business. So I don't 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. And so 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. 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.

Q: 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?

A: Once it's REO, meaning we foreclose and we own it, any increase in value would go to the shareholders of LFT. So the LFT corporate.

Q: On the new financing, with JPMorgan, it said something about SOFR Plus to be determined. And I guess I was trying to understand—you mentioned on the call that you're planning on redeeming the 2021 CLO. I think that's what you said. And I think that's SOFR plus $1.75. Am I correct?

A: The 2021? Correct. 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.

Q: Why would you pay that off versus the 2023 unless, I guess, it's still in the investment period?

A: The strategy is for us to reenter the securitization market. The size of FL1 provides us a better opportunity to enter that in a meaningful way. It's an order of operations. We've been working toward the refinance of our portfolio that includes FL1, that includes LMS, that includes our term loan. So this is the 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. 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 eighties.

Q: Can you use the JPMorgan line to retire that debt? Or not?

A: I mean, indirectly, we can in the sense that it provides—the JPMorgan line provides us with leverage and liquidity that is fungible. Meaning we can pay off the term loan with it or reinvest or otherwise. 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. 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. So that decision has not been made yet.