Lument Finance (LFT) Q2 2026 Earnings Call Transcript

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DATE

Friday, Aug. 14, 2026 at 8:30 a.m. ET

CALL PARTICIPANTS

• CEO - Jim Flynn
• CFO - Jim Briggs
• President - Greg Calvert
• Portfolio Manager - Zach Halpern
• Investor Relations - Andrew Tsang

TAKEAWAYS

• GAAP Net Loss -- $9.2 million, or $0.18 per share, reflecting an $8.6 million net provision for credit losses and realized losses on resolved assets.
• Distributable Loss -- $5.3 million, or $0.10 per share, excluding the impact of non-cash credit loss provisions but including $5.1 million in realized losses from resolved assets.
• Net Interest Income -- $4.5 million, representing a sequential decline from $5.7 million in the first quarter, driven by a lower average performing loan portfolio balance.
• Portfolio Unpaid Principal Balance -- $1 billion as of June 30, down from $1.13 billion at the end of the previous quarter because the company chose to build liquidity rather than reinvest repayments.
• Weighted Average Coupon -- 704 basis points, compared to 709 basis points in the prior quarter, due to the payoff of higher spread loans and a slight decline in average SOFR rates.
• Operating Expenses -- $3.9 million, an increase from $3.7 million in the previous quarter, primarily due to higher resource allocation in reimbursable expenses.
• Net Provision for Credit Losses -- $8.6 million, driven primarily by specific reserves assigned to loans with a risk rating of five.
• Specific Reserves -- $7.4 million at quarter end, representing approximately 18% of the unpaid principal balance for specifically evaluated assets.
• Realized Losses -- $5.1 million, associated with the resolution of three assets, including discounted payoffs on two loans previously rated as risk rating five.
• Real Estate Owned Sale -- $12.1 million from the sale of one property in San Antonio, which resulted in a small GAAP gain.
• Unrestricted Cash -- $29 million at quarter end, providing liquidity for asset resolution activities and potential capital deployment.
• Common Stock Book Value -- $2.76 per share, a decrease from $2.97 per share as of March 31, reflecting credit loss provisions and realized losses during the period.
• Loan Acquisitions -- $91 million across four loans, offset by $184 million in loan payoffs during the quarter.
• Risk Rating 5 Loans -- $98 million in unpaid principal balance across six loans, representing 10% of the total investment portfolio at quarter end.
• Multifamily Exposure -- 91.7% of the total loan portfolio, which consisted of 51 floating rate loans as of June 30.
• REO Assets -- $61.6 million aggregate carrying value across four multifamily properties, with a weighted average occupancy rate of approximately 67%.
• Common Stock Dividend -- $0.04 per share, declared in June and remaining consistent with the prior quarterly distribution.
• CLO Capital Deployment -- Substantially fully deployed at an 88% advance rate and a cost of funds of SOFR plus 1.91.
• Foreclosure Activity -- Transfer of one multifamily property in Arlington, Texas, to REO during the period, with a second Dallas foreclosure completed subsequent to quarter end.

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RISKS

• Flynn warned that elevated long-term interest rates continue to pressure transaction activity and real estate valuations across the commercial real estate sector.

SUMMARY

Management reported a strategic focus on resolving legacy assets within the multifamily sector while maintaining liquidity on the balance sheet. The company is implementing a 1-for-10 reverse stock split to maintain compliance with New York Stock Exchange listing requirements and reduce technical pressure on the share price. Management stated that improving fundamentals in the multifamily sector, including contracting supply and modest rent growth, are beginning to support resolution activity for challenged investments. The company aims to redeploy capital from resolved assets into multifamily loans to improve the overall earnings profile by 2027.

• Reverse Stock Split: Management reported that the Board of Directors approved a 1-for-10 reverse stock split to be effective at the close of business on Sept. 9, 2026.
• Market Conditions: CEO Flynn noted that multifamily fundamentals are improving as the sector moves beyond peak supply levels.
• Resolution Strategy: CEO Flynn stated, "While the market for certain legacy assets remain soft, we are beginning to see an acceleration in resolution activity, including both negotiated sales and other paths to monetize or stabilize challenged positions."
• Asset Management: The company intentionally held cash from nonsecuritized loan payoffs during the quarter to support ongoing portfolio management and asset resolution.
• Future Reinvestment: Management reported an objective to fully deploy available capital by 2027 to drive improved earnings and shareholder value.
• Sponsor Challenges: CEO Flynn indicated that most troubled loans relate to sponsors who have run out of capital after acquiring assets at peak valuations in 2021 and 2022.

INDUSTRY GLOSSARY

• CLO: Collateralized Loan Obligation, a type of securitization where multiple loans are pooled and used as collateral for different tranches of debt.
• CUSIP: A unique nine-character identification number assigned to stocks and bonds in the U.S. and Canada.
• REIT: Real Estate Investment Trust, a company that owns, operates, or finances income-producing real estate.
• REO: Real Estate Owned, a class of property owned by a lender after an unsuccessful sale at a foreclosure auction.
• SOFR: Secured Overnight Financing Rate, a broad measure of the cost of borrowing cash overnight collateralized by Treasury securities.
• UPB: Unpaid Principal Balance, the portion of a loan that has not yet been repaid by the borrower.

Full Conference Call Transcript

Operator: Good morning, and thank you for joining the Lument Finance Trust Second 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 Tsang with Investor Relations at Lument Investment Management. Please go ahead.

Andrew Tsang: Good morning, everyone. Thank you for joining our call to discuss Lument Finance Trust's Second Quarter 2026 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 Portfolio Manager. Last evening, 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 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 the forward-looking statements. These results and uncertainties are discussed in the company's reports filed with the SEC, in particular, the Risk Factors section 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. 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. 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 second quarter of 2026, we reported a GAAP net loss of $0.18 and distributable loss of $0.10 per share of common stock. In June, we had declared a quarterly dividend of $0.04 per share with respect to the second quarter, in line with the prior quarterly dividend. I'll now turn the call over to Jim Flynn. Please go ahead.

James Flynn: Thank you, Andrew. Good morning, everyone. Welcome to the Lument Finance Trust's earnings call for the second quarter of 2026. We appreciate you joining us today. We also wanted to express our appreciation to our investors for their patience, support and continued engagement as we work through issues in the legacy portfolio. We recognize the challenges that the company has faced, and we remain focused every day on improving outcomes for our shareholders. Looking at the economic and market conditions in the country today, conditions remain generally stable. There is continued uncertainty around monetary policy weighing on investment activity.

Recent economic data has increased uncertainty regarding the path of the Fed, including whether short-term rates may remain elevated for longer than previously expected. Long-term rates also remain elevated, continuing to pressure transaction activity and real estate valuations. Within multifamily, fundamentals continue to improve as the sector moves beyond peak supply levels. Rent growth remains modest, long-term demand drivers, including housing affordability challenges, continue to support the multifamily rental sector. Capital markets remain active with liquidity available across warehouse securitization and institutional lending channels strong through the first half of this year.

The CRE CLO market continues to be an important source of financing for multifamily mortgage assets and investor demand for floating rate credit remains relatively strong, particularly for repeat issuers with proven track records. Active asset management remains our highest priority. We continue to work closely with borrowers and operating partners to maximize outcomes across both performing and nonperforming investments. We continue to proactively evaluate resolution strategies for legacy assets while maintaining a disciplined approach to credit. While the market for certain legacy assets remain soft, we are beginning to see an acceleration in resolution activity, including both negotiated sales and other paths to monetize or stabilize challenged positions.

We continue to work tirelessly to resolve these assets in a manner that protects value, improves liquidity and positions the company to reinvest capital efficiently. On the portfolio side, during the quarter, we were intentional about managing liquidity on our balance sheet to support ongoing portfolio management efforts while selectively redeploying CLO capital when available. We generally held on to cash from nonsecuritized asset loan payoffs. Our financing profile remains well positioned following the refinancing initiatives completed earlier this year. We believe our current liquidity position remains appropriate to support asset resolution activities, portfolio management and selective capital deployment opportunities.

As capital becomes available through resolutions and repayments, our objective is to redeploy it efficiently into investments that meet our credit standards and are expected to be accretive to earnings. We're being disciplined on timing and asset selection, but we are also focused on ensuring that the company's capital is put back to work as efficiently and quickly as possible. Our Board of Directors recently approved a 10-for-1 reverse stock split of our common stock after having determined that such actions were in the best interest of the company and its stockholders, providing flexibility to maintain compliance with the applicable New York Stock Exchange listing requirements and support an efficient public market for the company's common stock.

The reverse stock split is expected to become effective at the close of business on Wednesday, September 9, and the company's common stock is expected to begin trading on a split-adjusted basis on the New York Stock Exchange at the opening of trading on Thursday, September 10, under the existing ticker symbol LFT. The reverse stock split will affect all stockholders uniformly and will not alter any stockholders' percentage ownership interest in the company, except with respect to treatment of fractional shares, which will be paid out in cash. We have also posted for our investors a reverse stock split FAQ document on our website.

We believe the reverse stock split is an important step toward reducing technical pressure on the public stock price and supporting a more orderly market for our shares. While this action does not change the underlying economics of the company, we believe it helps address one of the external pressures on the stock and allows investors to focus more clearly on the value of the portfolio, our asset resolution progress and our earnings trajectory. Our priorities remain unchanged. We are committed to resolving legacy assets, protecting book value and thoughtfully redeploying capital into high-quality multifamily investments. We appreciate the continued patience and support of our investors and capital partners as we execute on this plan.

While we recognize the resolution of our nonperforming and REO assets remains challenging, we are seeing improving momentum in deal resolutions and sales activity. As those resolutions occur, we intend to reinvest capital efficiently and on a disciplined basis. We remain committed to fully deploying our capital in 2027, which we believe will be an important driver of improved earnings and over time, enhance shareholder value. We recognize there is still work to do and the timing of certain MPL and REO resolutions remain subject to market conditions. That said, we believe the company has the support of its capital partners, a clear path to redeployment and the platform capabilities necessary to move forward constructively.

With that, I'd like to turn the call over to Jim Briggs, who will provide details regarding our financial results. Jim?

James Briggs: Thanks, Jim. Good morning. Last night, we filed our quarterly report on Form 10-Q and 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. For the second quarter of 2026, we reported net loss to common stockholders of $9.2 million or $0.18 per share. We reported a distributable loss of $5.3 million or $0.10 per share. There are a few Q2 P&L items I'd like to highlight.

Our Q2 net interest income was $4.5 million, a sequential decline from $5.7 million recorded in Q1. This was primarily driven by a lower average performing loan portfolio balance quarter-over-quarter as we chose to build liquidity during the quarter rather than reinvest principal repayments from loans held outside of CLO. The ending outstanding UPB of the total portfolio was approximately $1 billion compared to $1.13 billion as of March 31. The weighted average coupon of our loan portfolio declined to 704 basis points compared to 709 basis points in the prior quarter due to payoffs of higher spread loans relative to newly acquired assets as well as a slight decline in the average SOFR rate during the period.

Although we had greater payoffs compared to Q1, our exit fee income was relatively flat to prior quarter and recognition of extension fee income was down by about $300,000 quarter-over-quarter. Our total operating expenses, including fees to our manager, were higher quarter-on-quarter at $3.9 million versus $3.7 million. Primary driver was higher reimbursable expenses compared to Q1, driven primarily by resource allocation. Difference between reported GAAP net loss and distributable loss during the quarter was primarily attributable to an $8.6 million net provision for credit losses recorded in the period, $5.1 million of realized losses on mortgage loans and REO included in distributable and $390,000 of depreciation on REO.

The $8.6 million in net provision for credit losses recorded during the quarter, which is excluded from distributable earnings was driven primarily by specific reserves on a risk-rated 5 loans. As of June 30, we had 6 loans rated risk-rated 5, all collateralized by multifamily assets. Greg will provide a bit more detail in his remarks. We evaluated our risk-rated 5 loans individually to determine whether asset-specific reserves were necessary. During the quarter, we recorded specific provisions related to 2 loans downgraded to a 5 risk rating in the quarter and 3 loans that were already risk-rated 5 at March 31, including 1 property that was foreclosed upon and transferred to REO during the period.

Specific reserves totaled $7.4 million at quarter end, representing approximately 18% of the associated UPB of specifically evaluated assets. The $5.1 million in realized losses included in distributable earnings related to 3 assets that were fully resolved in the quarter. These included discounted payoffs on 2 previous 5 risk-rated loans, 1 in Philadelphia and 1 in Des Moines, with proceeds generally consistent with their March 31 net carrying values. In addition, we sold 1 REO property in San Antonio for $12.1 million and recognized a small GAAP gain on that sale. The realized losses reflected in distributable earnings this period were primarily attributable to prior period reserves and impairments recorded on those assets.

At quarter end, our CLO's capital was substantially fully deployed at an 88% advance rate and a cost of funds of SOFR plus 1.91. As of June 30, a portion of our loan and REO portfolio were pledged to warehouse facilities that provided financing at an effective advance rate of 68% and a weighted average cost of funds of SOFR plus 209. We ended Q2 with an unrestricted cash balance of $29 million and FL3 was substantially fully deployed. Company's total book equity at the end of the quarter was approximately $205 million. The total book value of common stock was approximately $145 million or $2.76 per share, decreasing sequentially from $2.97 a share at March 31.

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: Thank you, Jim. During the second quarter, LFT acquired or funded 4 loans with an aggregate UPB of $91 million and experienced $184 million of loan payoffs. As of June 30, our total loan portfolio consisted of 51 floating rate loans with an aggregate unpaid principal balance of approximately $1 billion, a weighted average floating rate of 330 basis points over SOFR and an unamortized aggregate purchase discount of approximately $800,000. 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 1-month SOFR and 91.7% of the portfolio was collateralized by multifamily properties.

As of June 30, approximately 81% of the loans in our portfolio were risk rated at 3 or better compared to 77% at March 31. Our weighted average risk rating quarter-over-quarter remained stable at 3.1. During the quarter, we had several positive asset resolutions, including the resolutions of the 2 loan assets Jim mentioned in his remarks, which had been risk-rated 5 as of March 31 and for which we received payoff proceeds consistent with March 31 net carrying values. As of June 30, we had 6 risk-rated 5 loans with an aggregate principal amount of $98 million or approximately 10% of the unpaid principal balance of our quarter end investment portfolio.

Four of these loans with an aggregate UPB of $62 million were also risk-rated 5 as of the prior quarter due to either maturity or monetary default. Two of these loans with an aggregate UPB of $36 million were downgraded to a 5 risk rating for the first time due to monetary default. As of quarter end, the REO portfolio in total consisted of 4 multifamily properties with an aggregate carrying value of approximately $61.6 million and a weighted average occupancy rate of approximately 67%. During the period, we completed the sale of 1 San Antonio REO asset with a carrying value of $12.2 million. We also foreclosed on a multifamily property in Arlington, Texas.

The $16.7 million loan associated with that property had been risk-rated of 5 as of March 31. Subsequent to quarter end, we foreclosed on a multifamily property in Dallas, Texas. This property had a $21.9 million mortgage loan associated with it and was risk-rated 5 as of 6/30. 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 that there is still more work to be done on behalf of our shareholders. With that, I'll pass it back to Jim Flynn for his closing remarks and questions.

James Flynn: Thanks, Greg. I'd like to thank everyone for joining us today and for your continued partnership and support. We recognize and appreciate the patience of our investors as we work through our legacy assets and reposition the company for improved earnings. We remain focused on resolving those challenged assets, redeploying capital efficiently and moving the company toward a fully invested higher earning portfolio in 2027. Importantly, we continue to have the support of our capital partners as we move forward, and we believe the actions we are taking today position LFT to create value for our shareholders over time. With that, I'll ask the operator to open the call for questions.

Operator: [Operator Instructions] Your first question is from [indiscernible].

Unknown Attendee: I've been a shareholder for many, many years, and I see the book value declining considerably along with the stock price, which is what I'm concerned about. And your dividend, which I bought many years ago, has declined also significantly. I see what you're paying now. And my question is, I don't know how you're going to continue to pay that. And a very simple question I have, it's just a sign of scale. I don't think there's any company that's smaller than your company as far as assets and market cap in this particular space. There's another company I own, Cherry Hill, which recently made a merger with MITT. And my question is, I see your expenses going up.

I don't blame you. Inflation is there, people got to burn money. Everything costs money these days. But do you see an opportunity to merge with another company because of the scale just doesn't make sense or just sell the assets since you said the book value is $2.70.

James Flynn: Thank you for the question. Thank you for your time as a shareholder. We appreciate that support. I think that you've certainly identified a challenge, which we've discussed in the past, is our size and compared to many of the larger competitors in the space, that is accurate. It's also one of the reasons our portfolio probably on average has distressed assets in the same relative percentages as the peer set. Our challenge is our size, and so we've held liquidity on our books and not redeploy that capital. So that's further suppressed earnings in addition to losses that have been taken on underperforming loans. So that's one of the drivers, as you point out.

And as we move through these assets and redeploy capital, we should be able to improve earnings as we move forward. In terms of evaluating potential M&A opportunities or other strategic alternatives, that is something that we continue to do with our bankers, with anyone that has discussions with us, with our Board. All of those options are evaluated as they come up. Unfortunately, over the past couple of years, we've been unable to execute on any of those that were discussed. And to the extent something came forward, we certainly would discuss that with the Board and take any alternatives that could create shareholder value seriously, and we'll continue to do so as we move forward.

Unknown Attendee: The other question is how about just wrapping up and selling the assets at $2.75 before they get any lower?

James Flynn: So that's a fair question, certainly a consideration of our Board and the management and discussions with the Board. The one caveat I would say is if you take a look at the market, the market for selling portfolios of assets of this type, particularly some of the older vintage multifamily assets, if we were to attempt to sell that into the market, it might be difficult to sell the entire portfolio at those recoverable values. But as you point out, I think to the extent there is a strategic investor or someone that we were able to find, it would be something we would have to consider as a management team and the Board.

Unknown Attendee: The concern I have is the book value, not just of you, but of many of these companies in the space that they are overinflated. The book value should be what you should be able to receive, in my opinion.

James Flynn: Well, we believe that our book value does represent what we will receive on these assets.

Unknown Attendee: Okay. Listen, I've taken enough of your time. I appreciate you answering my questions. As I said, I've been a shareholder prior to when you raised money through a REIT's offering. So you can see how long I go back. And this has been the most disappointing REIT that I have. I have a significant portfolio of REITs, and this has been the most significant. Hopefully, you could turn this around. I remember when I bought this, everybody said you were conservative and that this would be a very, very good management company. And that's why I bought the stock.

So hopefully, you guys can turn it around or make a decision to look out for the shareholders instead of having the increase in expenses. That's sort of like an insult to me as a shareholder. Everybody has to suffer. The stock is down, but I think the employees -- the management should take some responsibility and the best responsibility is one word, money. So that's all the questions I have. I appreciate the time that I had here, and I appreciate your answers. And again, I hope you look out for the shareholders. That's my concern. Thank you very much.

James Flynn: We appreciate both your questions and your time as an investor.

Operator: Your next question is from Lee Zulch from OVERCAP.

Lee Zulch: Is the 12/15/'25 stock repurchase program still in effect? Is the $10 million there to buy common shares?

James Flynn: I will defer to Jim Briggs on the timing of that agreement. But in general, the question around repurchasing shares and other strategic alternatives are all on the table in discussions with our Board to answer it. I think the underlying question is, the technical question on whether that agreement is...

James Briggs: That is still open. Yes.

Operator: Your next question is from John [indiscernible].

Unknown Analyst: So if the stock buyback plan is still open and your stock is trading for 25% of NAV, why hasn't the board and management actually made any stock repurchases in the open market?

James Flynn: So any discussion around stock repurchases or other alternatives also have to reflect the full view of liquidity and maintain liquidity to make sure that we can resolve underperforming assets. But certainly, our current stock price does not reflect what we believe is the fair value of our assets, and it is something that we will continue to discuss with the board around whether we take any action in that regard.

Unknown Analyst: So any thoughts on how to close that gap?

James Flynn: I mean, there are several, right? So certainly, you mentioned stock repurchase would certainly help. The primary way for us to improve book value is to work through assets and get them resolved off our books and redeployed efficiently. Today, we have roughly $1 billion of assets outstanding, including nonperforming loans. We should be closer to $1.4 billion. That's a significant drag on earnings, not to mention that a portion of those assets are some $300 million, including REO are inefficiently financed or not financed at all. That is the biggest drag on our earnings.

And so working through these assets, I should point out, having 3 resolutions last quarter, we expect to have several more here over the next quarter or 2 and really move through that legacy portfolio, which will allow us to move forward with redeploying that capital efficiently. That's the biggest drag. But along the way, we're going to continue to see if there are certain other potential opportunities to enhance the book value or the trading price of our shares relative to book value.

Unknown Analyst: Okay. And we appreciate you holding these calls and talking to shareholders and investors.

Operator: Your next question is from [ Greg Bennett ].

Unknown Attendee: On your supplemental data, when you have a closing date for a loan and then you have a maturity date, you look at some of these loans that were done in '21, let's say, I take this as the problem portfolio. Am I correct that most of these problem loans are the ones that were done in '21 and '22? Would that be correct?

James Flynn: That would generally be correct, maybe into early '23, but that is generally the, kind of across the industry and our portfolio, the time of the most challenged assets, typically valuation issues, meaning they were overvalued to begin with.

Unknown Attendee: So when we're looking at these and the maturity date, there are some that I'll see that the closing date was '21, but they will have an -- how many of these have an extension, I guess, what I'm trying to get at. You take a loan that was done in '21 and you see that the maturity date is '27 now, that would have been a 6-year loan. That maturity date, should there be an asterisk next to that, that tells us that you actually did a loan extension that we can -- we could identify maybe these were the weaker loans. Does the maturity date include a loan extension? Or is that what the original term was?

James Flynn: So it would be what the current maturity date is in the supplemental. And I'll ask the team to step in if I say anything wrong. But most of our bridge loans have a total maturity of 5 years, usually 3 years initial term with 2, 1-year extensions. Occasionally, it's 2 with 3, 1-year extensions. And the outside maturity date is listed as that 5-year period. But for any loan that has gone through a modification with an extended maturity date, the maturity date in the supplemental would be listed as the current maturity date. So we can provide that data in future supplementals to be clear.

But for loans that were done in '21 that have a maturity date of '27, that would be an extension because we don't have any loans that have an initial maturity beyond 6 years -- I mean, beyond 5 years. I don't know if [indiscernible] is back or -- okay, go ahead.

Unknown Attendee: Go ahead, finish.

James Flynn: Well, I was just going to say, I suspect that someone doesn't have the data right at their fingertips, but we can certainly provide that in the future. But if anyone else on the team has that, meaning the number of extensions. Some of them extend it for more too, right? At the end of the 3 years and then they get an initial period because of some agreement that they've reached with us on an extension, typically a pay down.

Unknown Attendee: Yes. So the problem loans have to do with just the management of a property that has finished its remodeling or its construction that they're just not managed well? Or is it because they're still using the loan to put capital renovation in the property?

James Flynn: So any troubled loan, we're generally no longer advancing on in terms of the last question. In terms of management, it's a bit of a mixed bag. Certainly, in some cases, it's due to management. Most often, it's because sponsors have themselves run out of capital. These are not their only properties or only loans, and they just no longer have the capital to commit to the assets that they have, whether in our portfolio or others. And what happens when sponsors no longer invest capital, even minor things is, properties deteriorate, which make it harder to rent new units. And so I think the answer to your question is, in many cases, it is bad management.

It's not necessarily that sponsors don't know how to do it or what to do. It's that they no longer have the resources as they've held on to these assets for an extended period waiting for the market to turn better, the submarket that they're in, thinking places like Houston or San Antonio and those types of city markets that have struggled. And so they just kind of run out of money and resources. It doesn't mean they don't know -- in many cases, it doesn't mean that they don't know what they're doing. It just means that they no longer have capital. And that's a challenging environment where you've had cap rates expand, you've had increases in interest rates.

And so that sponsor doesn't have capital to put into the asset. We are trying to work with them to exit the asset, hopefully at our loan proceeds. But at this point, in many cases, as we've seen below loan proceeds, and that process is, frankly, a challenging one with some sponsors who are unwilling to cut their losses, so to speak, and move on. That's something that has accelerated a bit here in 2026, moving toward a resolution, but that is the biggest problem that sponsors acquired assets at valuation levels that have since declined meaningfully, their expenses have gone up and their resources have been drained.

Unknown Attendee: Going forward, when you do commit to loans, I mean, obviously, there's a lack of confidence based on the stock price. So I'm wondering from a management point of view or from ORIX sponsor, if there's some way of -- well, first of all, the commitment going forward that maybe you only invest in 2 rated loans to try to improve, I guess, what the quality of the portfolio is. I don't know if that would matter or not. And then the other thing is -- go ahead.

James Flynn: Well, I would just say we've certainly evaluated investment criteria and have considered sponsor strength as one of the key components here in terms of common themes among struggling assets. Again, I think the portfolio for multifamily assets across the entire industry, not just LFT's portfolio, has seen significant struggles in assets that were acquired during that period of -- identified in the '21 to '23 period. They were acquired at a time of lower interest rates, lower expenses and lower cap rates. All 3 of those things have moved meaningfully against those owners.

And so we've taken a particularly closer look and identify stronger sponsors on newer assets, those with deeper pockets, more capital, more experience and those that have not necessarily grown as significantly as many investors -- many sponsors did during that period. So that is certainly something that we have done. And if you look at our portfolio that's been invested since that period, it's performed quite well.

Unknown Attendee: One thought I have, and I don't know if this is available or not, but part of the reason for investing in your company had to have been the relationship with Lument and then the parent company ORIX. And I don't know, I mean, this would be self-serving, but since the insiders own roughly -- if you think about it, the insiders own roughly 45% of this company, the publicly traded company with ORIX, I guess, the largest shareholder.

If there's some way from a -- to build investor confidence back in the price of ORIX or the sponsor, basically, I don't know how you would do it, but taking back these assets for like a preferred stock in the company and allow the parent company to work this out. I mean we -- they're the ones who put these loans on. I mean they were the ones that -- you didn't buy these from a broker. I mean, part of the appeal of investing in this is that you weren't relying on third parties to bring you these deals. These were all underwritten and done in-house by the parent company, which we pay a management fee.

That might be a crazy idea, but the idea -- closing the discount is not going to happen until we see the tide turning. And the way to turn the tide faster would be to, I think, to eliminate the lack of confidence that investors -- we're a small group now. And with the reverse split, we're going to be even smaller. So is that possible to do that?

James Flynn: Well, is it possible? I'm sure it's possible. But in terms of looking at the portfolio and finding ways for -- whether through our parent or other investors to find ways to -- basically, what I would say is to kind of box that risk or move that risk of those -- what is now a shrinking part of the portfolio, but still having a meaningful impact on earnings, both again, as I said, in losses and from effectively and efficiently deploying capital.

What you described minus the -- I won't say, "Oh, the parent is committing to doing anything like that," but the idea of trying to box that risk into a portfolio of loans that could be set aside and work through is something that we certainly have been and are evaluating. To the extent we can figure something out that's accretive to the shareholders, we certainly would like to do so, and we'll explore that opportunity as we move forward here. So I think your question and your thought is a good one, and there are opportunities we're looking at with investors about ways that we could possibly do that or something like that.

Unknown Attendee: Yes. In your comments, you framed that the outlook is starting to look more positive for some of these problem loans. But I mean, I see the San Antonio property paid off $11 million, whatever. But -- so you have that. So now you're down to what, $50 million of real estate owned. I mean, I don't know if -- I don't have a sense necessarily that real estate owned or problem assets is necessarily getting better. Is that -- you indicated...

James Flynn: So what's happening -- what's starting to turn, again, we're looking at markets that have been -- that have not seen good news for several years that we're seeing occupancy increasing, vacancy declining, absorption increasing, limited supply contracting or being limited, right? So those dynamics are starting to happen in markets that haven't seen that for years. And so to clarify maybe my remarks, what we're starting to see is some positive momentum in markets that have struggled for years in rental growth, occupancy, vacancy and deal momentum, right? We're starting to see a few deals get done. What we've seen for a couple of years now is assets go under contract or at least initial LOIs for sale.

These are performing and nonperforming, and those sales fall through for whatever reason, usually something in diligence comes up or the market just moves against and the buyer walks away. What we've seen in a couple of instances, including this quarter is that we got to a resolution. It's not positive relative to the original loan amount, but it's positive to move the asset off our books to recapture that liquidity and to be able to redeploy it into performing assets. So to be clear, it's more about resolving, right? Having these assets continue to remain on the books and linger is a drag at any value.

So optimistic is the wrong word, but there are signs in these markets that we could see some deal momentum. I would also offer that we're not the only lender that are trying to sell or dispose of assets in these markets. And so that has put some pressure on going back quarters now. But even as we go forward, we'll continue to see other lenders kind of having the same experience, which means we might see some struggling or distressed assets coming to market from several lenders in the same places. That would be the only caveat. But to be clear, I'm not suggesting that these are complete turnaround stories.

It's just relative to where we are, we're starting to see some aspects change.

Unknown Attendee: Okay. One other comment for trying to build the investor confidence. Is there any way of these loans that are underwritten by the parent? Is there any provision in there going forward? These aren't bought from brokers, you guys are underwriting it where the trust has a put provision that, a, if we don't like the way this is turning out, we do have the ability to put some of these loans back to the parent. I mean, that would be something that...

James Flynn: I mean the loans are underwritten by Lument. It was owned by ORIX, and we underwrite the loans, obviously. I don't think that, that is a market provision. I don't -- having a put right back to the manager when a loan goes bad would be a challenge to get our parent or probably any parent to agree to. But certainly evaluating when assets have gone bad, how we can revise underwriting standards or look at assets differently, we'll continue to do. And as I said earlier, we will continue to explore all opportunities and options to speedily move these resolutions off the balance sheet with the help of existing and/or new investors.

But we have not found an opportunity to date that has been something that we feel would be accretive to shareholder value. Hopefully, we can do so here in the coming quarters, but we haven't been able to as of yet.

Unknown Attendee: Okay. One other question. Distributable loss, I don't think -- I'm not familiar with that term. What does that mean to a shareholder in the company? The terminology distributable loss, it sounds like free cash flow, but this is -- that's something when you get your year-end taxes, 1099 that, that's considered a loss. Do you know that for individual investors what that might mean?

James Flynn: So the distributable loss in -- I'm not a tax expert, but distributable loss is a GAAP concept and it's not a tax concept.

Unknown Attendee: Okay. That's fine. Hopefully -- I guess I'm getting off this call, and I'm not sensing that necessarily the tide is necessarily turning, but I guess we'll see in the next couple of quarters.

James Flynn: Yes. Really appreciate your support.

Operator: Your next question is from Martin Brody.

Unknown Attendee: On the last call, I asked many questions that I was going to ask. I'm a long-suffering shareholder, too. I go back to several name changes, [indiscernible] I think it was originally. So in the middle of June, June 15, the quarter was almost over, and you declared a second quarter dividend of $0.04, which thrilled me at the time, but it sort of misled me a little bit because I was assuming that you were paying $0.04, then at least you had some positive income on earnings available for distribution.

Can you tell me why you did that when the -- as I said, the quarter was almost over, so you clearly knew the state of income expenses at that point.

James Flynn: So whenever we discuss the dividend, we share with our Board and discuss with the Board the current projections for the quarter and for the year and for, frankly, the future. Based on the projections at the time, we felt that $0.04 dividend was appropriate for the quarter based on where we expected things to be. A few of the resolutions resulted in bigger losses upon ultimate sale or payoff than we were expecting. And as we go through the dividend discussion in our next quarter with the Board, we'll evaluate the current projections for this quarter and for the next several quarters and go through the same discussion we do each quarter.

It's a quarterly discussion based on not just that quarter, but the year anticipated and expected returns.

Unknown Attendee: Okay. Next question is, this is probably impossible, but you have an outside manager of which you pay a considerable fee to, and I understand that, but that is taking a larger and larger percentage of income. Is it possible to internalize management?

James Flynn: I'm sorry, is it possible for -- can you -- I missed the last part.

Unknown Attendee: Internalize management.

James Flynn: To lower the fee -- internalize.

Unknown Attendee: Both, actually. Thanks for bringing that up. Lower the fee and internalize management. Both ways would save money, of course.

James Flynn: Yes. Well, I don't think that, that is likely. But what I would point out, I think internalizing management would actually increase fees. There's a cap on reimbursable fees and expenses that a standalone public company of this size would likely go beyond. But there's currently no plans to internalize the manager.

Unknown Attendee: I'm not quite sure. It would -- seems like a fairly simple business, but maybe I'm wrong. One last question has to do with stock trade. so at the end of June, I think it was the day before they went ex dividend, there was a 5 million share print at the end of the day, which is, as you know, massive. And in fact, a year ago, approximately at the same time, there was also 5 million share print. And I was surprised that there was no reporting of this. Can you shed any light on that? I'm sure you're aware of it.

James Briggs: Yes. I can answer that, Jim. LFT a year ago -- a little over a year ago at this point, as you point out, there was a big print at the end of June. LFT had been added to the FTSE Russell 3000. So what you saw a year ago and change and what you saw this past June was the effects of any activity from that rebalancing and index funds that were indexing to the Russell 3000 that we were in. So, yes, that explains that big print June of '25 when LFT was added. And when LFT was pulled out, that became effective at the close of business on that day that showed a big print.

So there was a lot of activity that day as well.

Unknown Attendee: Okay, great. That answers that question. I had no idea they were removed.

Operator: There are no further questions at this time. Please proceed with the closing remarks.

James Flynn: I want to thank our investors for joining today, again, for your patience. I appreciate the questions and feedback and support, and we'll continue to work to improve the earnings profile and increase our -- with intent to increase our trading price relative to book value. Thank you all. We'll speak next quarter.

Operator: Ladies and gentlemen, the conference has now ended. Thank you all for joining. You may now disconnect your lines.

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