Lument (LFT) Q1 2026 Earnings Call Transcript

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DATE

May 15, 2026

CALL PARTICIPANTS

• Chief Executive Officer — James Flynn
• Chief Financial Officer — James Briggs
• President — Greg Calvert
• Portfolio Manager — Zach Halpern

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RISKS

• Specific reserves increased by $550,000 on seven legacy loan positions, reflecting "revised expectations and prevailing market conditions," coupled with a $1.4 million unrealized impairment expense on REO assets held for sale.
• CEO Flynn cautioned that the recovery across commercial real estate remains uneven, highlighting performance differentiation by asset quality, location, and sponsorship.
• 77% of the portfolio was risk-rated at three or better, down from 83% in the prior quarter. Seven loans representing 10% of UPB were risk-rated at the highest risk level (five).

TAKEAWAYS

• GAAP net loss -- $1 million, or $0.02 per share, directly reported for the quarter.
• Distributable earnings -- $1.1 million, or $0.02 per share, for the same period.
• Quarterly dividend -- $0.04 per share declared, unchanged from the prior quarter.
• Net interest income -- $5.7 million, a sequential increase from $5.4 million in the prior quarter.
• Total operating expenses -- $3.7 million, slightly down from $3.8 million in the previous quarter, with lower 'other operating expenses' offset by higher reimbursable expenses.
• Portfolio size -- Unpaid principal balance of $1.1 billion in fifty-seven floating rate loans at quarter-end; portfolio was "materially flat quarter-over-quarter" with 93% collateralized by multifamily properties.
• Allowances & credit losses -- $550,000 increase in specific reserves; general allowance decreased by $1.3 million, with $2.4 million charged off to a specific allowance after transfer of an asset to REO.
• REO portfolio -- Four multifamily properties with $57 million aggregate carry value and 72% weighted average occupancy rate as of quarter-end.
• San Antonio REO sale -- Asset sold in early May for net proceeds of $12.4 million; no second-quarter P&L impact from this transaction.
• Book value -- Common stock book value was $156 million, or $2.97 per share, down from $3.03 per share at prior quarter-end.
• Cash position -- Unrestricted cash at $21 million at period-end, with "substantially fully deployed" FL3 CRE CLO.
• Loan portfolio risk -- 77% of loans risk-rated at three or better; seven loans classified as risk-rated five, totaling $108 million, or about 10% of the portfolio's unpaid principal balance.
• Asset acquisitions -- $47 million principal payoffs reinvested into two new multifamily loans and a $1 million loan participation during the quarter.
• Weighted average spread -- Portfolio's weighted average floating rate spread was 331 basis points over SOFR, with a weighted average coupon of 709 basis points, both slightly declining from prior quarter levels.
• Loan foreclosure -- One multifamily loan in Colorado Springs foreclosed during the period, with $8.2 million net carry value after $4.2 million in reserves.
• Financing arrangements -- FL3 CLO had an 88% advance rate; repurchase facility advance rate was 69% at SOFR plus 200 basis points; bank facility advance rate was 53% at SOFR plus 350 basis points.
• Dividend coverage & securitization -- CEO Flynn said, "the biggest driver of returning to a fully covered and higher dividend ... is to be able to deploy our capital in an efficient way ... use the capital that's not currently invested in the securitization to put that into a securitization."
• REO asset management approach -- CEO Flynn explained, "the path of action is ... are we able to improve this asset in any meaningful way over ... six months or less ... without too much capital," emphasizing asset-specific exit strategies.

SUMMARY

Lument Finance Trust (NYSE:LFT) reported a sequential improvement in net interest income, but book value declined and loan portfolio risk dynamics shifted, with an increase in asset-specific reserves and impairments. Management highlighted strategic refinancing of warehouse facilities and extension of secured corporate loan maturity to 2030, aiming to optimize balance sheet flexibility and liquidity deployment. The REO portfolio remained a focal point, as asset sales and targeted asset management continued to drive capital recovery and shape management’s approach to future asset resolutions.

• The sale of the San Antonio REO property was finalized after quarter end for $12.4 million in net proceeds. Management confirmed there will be "no Q2 P&L related to that REO sale."
• Asset acquisitions matched principal repayments, with $48 million of new loan assets reflecting disciplined redeployment amid sector-wide financing selectivity.
• Loan foreclosures, including a Colorado Springs multifamily asset and a subsequent Arlington, Texas property, continued to test asset recovery priorities. Credit performance remained relatively stable as described by management.
• CEO Flynn stated that making progress on resolving legacy assets and thoughtfully redeploying investable capital into attractive new loan asset opportunities remains a top priority as portfolio repositioning continues.

INDUSTRY GLOSSARY

• CRE CLO: Commercial real estate collateralized loan obligation, a securitization backed by a diversified pool of CRE loans, often used to finance transitional properties.
• Risk-rated five: Highest internal risk category in LFT's underwriting, indicating significant probability of loss or default event.
• REO: Real estate owned; property acquired by the lender following foreclosure, awaiting resolution or sale.
• SOFR: Secured Overnight Financing Rate; benchmark interest rate for dollar-denominated derivatives and loans, replacing LIBOR.
• FL3: Refers to LFT's third floating rate CRE CLO issuance, representing a key financing structure in their capital stack.
• Advance rate: The percentage of asset value or loan principal that can be financed via a lending facility, with the remainder covered by equity or retained capital.

Full Conference Call Transcript

Jim Flynn, our CEO; Jim Briggs, our CFO; Greg Calvert, our President; and Zach Halpern, our Portfolio Manager. This morning, we 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. We intend to file our 10-Q with the SEC this afternoon after market close. 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 aerially from those contained in the forward-looking statements. These risks and uncertainties are discussed in the company's reports filed with the SEC and in particular, the Risk Factors 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 also undertakes no obligation to update any of these forward-looking statements. Further, certain non-GAAP financial measures will be discussed on this conference call.

A presentation of this information is not intended to be considered in isolation or as a substitute for the financial information presented in accordance with GAAP. A 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 2026, we reported a GAAP net loss of $0.02 and [indiscernible] earnings of $0.02 per share of common stock. In March, we declared a quarterly dividend of $0.04 per common share with respect to the first quarter in line with the prior quarterly dividend. I will now turn the call over to Jim Flynn. Please go ahead.

James Flynn: Thank you, Andrew. Good afternoon, everyone. Welcome to the Lument Finance Trust Earnings Call for the First Quarter of 2026. We appreciate everyone joining us today. Looking at the market economic conditions in the U.S. continuing to remain fundamentally stable, although uncertainty continues to outweigh momentum. And while the Fed reserve has shifted toward a more accommodative stance, the pace and extensive any future rate cuts remain data dependent, including inflation, labor, market conditions and broader financial stability. Geopolitical uncertainty continues to weigh on investment environment. reinforcing a cautious approach to capital allocation. Within multifamily, operating fundamentals are gradually stabilizing as the sectors move through the later stages of an elevated supply cycle.

Construction starts have declined sharply, setting the stage for a meaningful reduction in new supply through '26 and '27. Rent growth remains modest at the national level, but improving performance in supply-constrained markets. There is some continued pressure in high delivery regions to continue to work through. long-term demand drivers for rental housing remain intact, affordability constraints, limited for-sale inventory and elevated single-family mortgage rates continue to support rent or demand. Longer-term interest rates remain essential constraint. Although short-term rates have declined from peak levels, elevated long-term rates continue to anchor cap rates, pressure asset values and limit access to attractively priced permanent financing. As a result, financing conditions have become more functional, but still remain selective.

With the across securitization markets, warehouse facilities and select balance sheet lenders has improved, supporting refinancing activity for well-capitalized assets with strong sponsors. The CRE CLO market remain a critical source of liquidity with issuance continuing into 2026 amid strong investor demand for floating rate exposure. In the asset management side, Portfolio management continues to be a central focus of our strategy. We were closely engaged with borrowers across the portfolio and are actively managing our REO portfolio to protect shareholders' capital and long-term values. During the quarter, overall portfolio credit performance remained relatively stable. We continue to take a disciplined approach to reserve management, increasing reserves on certain legacy positions to reflect revised expectations and prevailing market conditions.

In terms of activity and liquidity, we continue to execute on our intended financing strategy, as discussed on the prior quarter's call, this past February, we redeemed the remaining debt outstanding under [ LMF-2023-1 ] and refinanced the collateral through our warehouse facilities, as well as amended our secured corporate loan, extending the maturity to 2030 and upsizing to $50 million. We have been carefully managing equity and are selectively redeploying invested capital within [indiscernible]. During Q1, we generated $47 million of aggregate payoffs and used reinvestment principal proceeds to acquire 2 new multifamily loan assets for $47 million and a $1 million minority participated participation related to an existing loan asset.

We ended the quarter with unrestricted cash of approximately $21 million Combined with our available warehouse capacity and ability to reinvest FL3 capital over the course of its 30-month reinvestment period, we believe our liquidity position remains appropriate to support portfolio management, asset resolution and select capital deployment. Our priorities remain making progress on resolving legacy assets and thoughtfully redeploying investable capital into attractive new loan asset opportunities. While credit markets become more constructive, the recovery across commercial real estate remains uneven. Performance differentiation by asset quality, location, sponsorship and capital structure continues to widen underlying the importance of selectivity.

In this environment, we remain cautious and deliberate in deploying capital, emphasizing strong underwriting, protective structures compelling risk-adjusted returns and strong sponsors. With that, I'd like to turn the call over to Jim Briggs, who will provide details on our financial results.

James Briggs: Thank you, Jim. Thanks, Jim. Good afternoon, everyone. This morning, we provided a supplemental investor presentation on our website, which we'll be referring to during our remarks. The supplemental investor presentation has been uploaded to the webcast as well for your reference. On Pages 4 through 7 of the presentation, you will find key updates in your earnings summary for the quarter. Today, after market closes, we intend to file our quarterly report with the SEC on Form 10-Q. For the first quarter of 2026, we reported net loss to common stockholders of $1 million or $0.02 per share. We reported distributable earnings of $1.1 million or $0.02 per share.

There are a few Q1 P&L items I'd like to highlight. Our Q1 net interest income was $5.7 million, a sequential improvement from $5.4 million recorded in Q4, this was largely driven by improved leverage and cost of funds through the FL3 CRE CLO, redemption mid-quarter of our LMF financing, which had a weighted average cost of funds at year-end of [ SOFR plus 331 ] and utilization of our other facilities.

On the other hand, weighted average coupon of our loan portfolio declined to 709 basis points compared to 717 basis points in the prior quarter. due to payoffs of higher spread loans relative to newly acquired assets as well as a decline in the SOFR benchmark rate during the period. Given the active management of reinvestment capacity within FL3 ending outstanding [ UPB ] of the total portfolio remained materially flat quarter-over-quarter at $1.1 billion. Our total operating expenses, including fees to our manager, were slightly lower quarter-on-quarter at $3.7 million versus $3.8 million in Q4.

Within these expenses, other operating expenses were lower sequentially, primarily due to discontinued deal costs we recorded in Q4, this was partially offset by reimbursable expenses being slightly higher this past quarter due to fewer waived exit fees on loan payoffs. As a reminder, when one of our loan asset pays off via an agency refinancing, provided by an affiliate of our manager, the borrowers exit fees wave pursuant to the terms of our management agreement and the company receives a credit against expenses reimbursable to our manager equal to 50% of the wave exit fee.

Difference between reported GAAP net loss and distributable earnings during the quarter was primarily attributable to $1.3 million unrealized impairment expense on REO assets held for sale, a $1.2 million loss on extinguishment of debt relating to the remaining unamortized deferred financing costs associated with the LMF financing structure that was redeemed in February, and $732,000 net release of provision for credit losses as well as $305,000 of depreciation on REO. As of March 31, we had 7 loans [indiscernible] 5, all of these loans are collateralized by multifamily assets. Greg will provide a bit more detail in his remarks.

With respect to our allowance for credit losses, we evaluated these 7 risk-weighted 5 loans individually to determine whether asset-specific reserves were necessary. After an analysis of the underlying collateral, we recorded a provision for specific reserves of approximately $550,000. This increase in specific reserves was offset by a $1.3 million decrease in our general allowance primarily driven by changes to the macroeconomic forecast. After factoring in $2.4 million charge-off to a specific allowance for an asset that transferred to REO, our specific reserves at 3/31 amounted to $15.8 million or approximately 15% of the associated loan UPB of specifically evaluated assets.

During the period, we also remeasured the fair value of the San Antonio and Houston REO properties classified as held for sale and recorded a $1.4 million unrealized impairment expense on those 2 properties. We will be noting in our subsequent events in the 10-Q that we completed the sale of the San Antonio property at the beginning of May for net proceeds of $12.4 million. There will be no Q2 P&L related to that REO sale.

At quarter end, we were substantially fully invested in our FL3 CLO, an approximate 88% advance rate and the cost of funds of [ SOFR plus ] period-end financing of performing and nonperforming and REO assets on the repurchase facility was at a weighted average advance rate of 69% and a weighted average cost of [ SOFR plus 200 ] period had financing of nonperforming an REO on our bank facility was at a weighted average advance rate of approximately 53% and a cost of [ SOFR plus 350 ]. We ended Q1 with an unrestricted cash balance of $21 million and FL3 was substantially fully deployed.

At the end of the quarter was approximately $216 million Total book value of common stock was approximately $156 million or $2.97 per share, decreasing sequentially from $3.03 at December 31. 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?

Greg Calvert: Thank you, Jim. During the first quarter, LFT acquired or funded $48 million of loan assets, effectively redeploying approximately the same amount of aggregate principal loan repayments received during the period. As of March 31, our total loan portfolio consisted of 57 floating rate loans with an aggregate unpaid principal balance of approximately $1.1 billion, a weighted average floated rate of 331 basis points over SOFR and an unamortized aggregate purchase discount of $1.3 million. The weighted average remaining term of our book as of quarter end was approximately 19 months, assuming all available extensions are exercised by our borrowers. 100% of the portfolio was indexed to 1-month SOFR and 93% of the portfolio is collateralized by multifamily properties.

As of March 31, approximately 77% of the loans in our portfolio were risk rated at 3 or better. compared to 83% as of December 31. Our weighted average risk rating quarter-over-quarter improved to 3.1% from 3.2%, primarily driven by 1 risk rated 5 loan asset as we'll discuss in a moment. This loan was being transferred to REO during the period. As of March 31, we had 7 risk-weighted 5 loans with an aggregate principal amount of approximately $108 million or approximately 10% of the unpaid principal balance of our quarter end investment portfolio. These loans were also risk-weighted 5 as of the prior quarter.

They included [indiscernible] loans in maturity default with an aggregate UPB of $51 million collateralized by multifamily properties in Philadelphia, Pennsylvania, Arlington, Texas, Deter Park, Texas. and also 4 loans in monetary default with an aggregate UPB of $57 million collateralized by multifamily properties in Tampa, Florida, Des Moines, Iowa, [indiscernible] Florida and Salati, Michigan. During Q1, the company foreclosed on 1 loan asset collateralized by a multifamily property located in Colorado Springs. This asset had an aggregate net carry value of $8.2 million, net of specific reserves of $4.2 million. As of quarter end, the REO portfolio in total consisted of 4 multifamily properties with an aggregate carry value of $57 million and a weighted average occupancy rate, 72%.

As Jim noted previously, we completed the sale of a San Antonio REO property at the beginning of May. Additionally, we note in our filing that subsequent to quarter end in Arlington, Texas defaulted loan asset was foreclosed on. That asset had a net carry value of $18.2 million, net of specific reserves of $3.6 million, achieving positive asset resolution and massing recovery values remains our priority. And with that, I will pass it back to Jim Flynn for closing remarks and questions.

James Flynn: Thank you, Greg. I appreciate everyone joining us today and the continued support and partnership. I appreciate all of you attending today and would now like to open the call to questions.

Operator: [Operator Instructions] Your first question comes from Jason Weber with Jones Trading.

Unknown Analyst: This is [indiscernible] Alvar here filling in for Jason Weber. How are you guys thinking about the dividend sustainability and what kind of combination of redeployment SOFR environment or credit normalization would be needed to recover the current dividend on a run rate basis?

James Flynn: So the first -- the answer to the first question is, our expectations are to ensure that our annual earnings are covering our annual dividend -- and so we do look at the transition and have been as we move from underdeployed for much of 2025 and even going back a little bit further, deleveraging in our 2 CLOs and managing liquidity for some of the troubled assets, which, as you heard today, we're working through those and pretty good fashion, maintaining value, but certainly taking a little bit more time in order to do so. So that transition, we're hopeful to see the ability to execute a new securitization transaction at some point in the relative near future?

It is dependent on some of the resolutions that we have planned occurring at the asset level. And so the biggest driver of returning to a fully covered and higher dividend that we've seen in the past is to be able to deploy our capital in an efficient way. And that requires us to be able to use the capital markets to be able to use the capital that's not currently invested in the securitization to put that into a securitization. So that is the biggest trigger for coverage in my opinion, and how we're anticipating doing that in the coming quarters. In terms of silver, it's -- obviously, that has an impact on earnings.

But again, the bigger impact is the leverage you can get in the securitization finding appropriate deals with good spreads or decent spreads and having a capital markets environment that is healthy on the liability side, which it continues to be as of today and we expect it to in the future.

So we certainly are talking to the Board and looking at our projections and looking at our midterm view over the next several quarters and long-term view over the next several years. and ensuring that our expectations and the projections are to be able to cover -- fully cover a dividend and obviously, hopefully, as we continue to resolve the portfolio and reinvest it to be able to eventually grow the dividend.

Operator: [Operator Instructions] There are no further questions at this time. I will now turn the call over to James for closing remarks. I'm sorry, there's a question from Lee Zulch with Overcap.

Lee Zulch: Very positive news on the San Antonio property. Can you provide a little color on the other REO properties? What characteristics did San Antonio have that it's sold, these other ones? Is there issues that just how did that work out and how the ones going forward? How do you see them being sold in the future?

James Flynn: Sure. Let me answer that from a little bit more of a macro level. And then Greg and Zach can give you maybe a little more color on those. But from a macro level, the path of action is it's somewhat simple. So the first is we have a -- with the support of the sponsor for LFT, a much larger organization, we have a very sophisticated group of asset managers of REO experts and people who can run and manage property within the manager. And when we're looking at an asset, the first question is, are we able to improve this asset in any meaningful way over a, call it, 6 months or last period without too much capital.

And if the answer is yes, then we're going to hold the asset for those couple of quarters, maybe 2 or 3 quarters improve on the low-hanging fruit that's been typically neglected by the existing sponsor and then market the asset for sale at the appropriate kind of market timing, that's another piece of it. So typically, we're not going to -- the winter is like the worst time to trying to be renting and things like that. So we have to take that into account.

The second longer-term view is if we invest capital, can we have a return -- an appropriate return on capital for the investors that incremental capital and return a greater value to the current shareholders because our team has a view in that market and that asset that it is far undervalued and has been poorly managed. And with some limited reinvestment, we can really improve the bottom line for the shareholders. In that case, we might hold a bit longer, so a year plus. And then for those assets where we feel that they're really struggling. It's a difficult market. And the best course of action is to resolve it and get out of it as quickly as possible.

So it's really asset and market specific, which would, frankly, answer the question at hand here. But maybe Greg and Zach, you can add a little more color on those couple of deals.

Greg Calvert: Well, I think you did a good job, Jim, of the macro approach. The only thing I will add is, and Jim was alluding to this our business on the REO and the disposition and asset management in the micro business. It's driven by the specific assets at the specific locations and the market fundamentals that we're up against at the time. The spring is a good time to dispose of assets, right, at the leasing season. So many of them we're looking at now, we've kind of plotted out when our best exit would be. Back to the market specifics.

We have a pretty broad broker network and investor network in these markets. rise in interest rates, puts downward pressure on our exit abilities, but we've overall seen real general interest in our multifamily assets that we're bringing to market. I'll stop there for now.

Operator: [Operator Instructions] There are no further questions at this time. I will now turn the call over to James for closing remarks.

James Flynn: Thank you, operator, and thank you all for joining and expressing interest in the platform. We appreciate your investment. Look forward to speaking to you in the coming quarters.

Operator: Ladies and gentlemen, this concludes your conference call for today. We thank you for participating and ask that you please disconnect your lines.

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