Lument Finance Trust, Inc. (LFT) Earnings Call Transcript & Summary

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.

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 James Flynn, our CEO, James Briggs, our CFO, [ Greg Calvert ], our President, and [ Zach Halpern ], our Portfolio Manager. Last evening, we filed our Form 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 James 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. Thank you. Such forward-looking statements are subject to various risks and uncertainties that could cause actual results that 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 factor 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. Our 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 James Flynn. Please go ahead.

Thank you, [ Andrew ]. Good morning, everyone. Welcome to the Lument Finance Trust 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 non-performing 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 remains soft, we are beginning to see an acceleration in resolution activity, including both negotiated sales and other paths, monetized or stabilized challenge 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 non-securitized assets when in 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 accreted to earnings. We are 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 9th, 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 10th 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 or 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 non-performing 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, enhanced shareholder value. We recognize there is still work to do and the timing of certain NPL and REO resolutions remain subject to sub-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 James Briggs, who will provide details regarding our financial results.

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. The 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. A few Q2 P&L items I'd like to highlight. Your 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 balance, loan portfolio balance quarter over quarter as we chose to build liquidity during the quarter rather than reinvest principal repayment 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 31st. The weighted average coupon of our loan portfolio declined to 704 basis points compared to 709 basis points in the prior quarter. 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. The difference between reported GAAP net loss and distributable loss during the quarter was primarily attributable during the $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 and risk-rated 5 loans. As of June 30th, we had 6 loans 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. In 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 31st, 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. $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 31st 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 191. As of June 30, a portion of our loan and REO portfolio were pledged to warehouse facilities that provided financing and 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. The 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 on March 31st. I will now turn the call over to [ Greg Halbert ] to provide details on the company's investment activity and portfolio performance during the quarter. Greg?

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 30th, 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 at 1-month SOFR, and 91.7% of the portfolio was collateralized by multifamily properties. As of June 30th, approximately 81% of the loans in our portfolio were risk-rated at 3 or better, compared to 77% as of March 31st. Our weighted average risk rating quarter over quarter remains stable at 3.1. Within 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 31st, and for which we received payoff proceeds consistent with March 31st net carrying values. As of June 30th, we had 6 risk-rated 5 loans with an average rate of $98 million, or approximately 10% of the unpaid principal balance of our quarter-end investment portfolio. 4 of these loans with an aggregate UPB of $62 million were also risk-graded as of the prior quarter due to either maturity or monetary default. 2 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 a 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 $15.7 million loan associated with that property had been risk-graded a 5 as of March 31st. When it went to quarter end, we foreclosed on a multi-family property in Dallas, Texas. This property had a $21.9 million mortgage loan associated with it and was risk-rated 5 as of June 30th. 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 James Flynn for his closing remarks and questions.

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 challenge assets, redeploying capital efficiently, and moving the company toward a fully invested higher earning portfolio in 2027. Important 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 Instructions] Your first question is from [ Steven ]. Your line is now open.

Yes, hello. Morning. I've been a shareholder for many, many years and I see the book value declining, you know, 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 size 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 earn money. Everything costs money these days. But 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. That's...

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, you know, 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, continue to do so as we move forward.

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

So that's a fair question, certainly a consideration of our board and the management and discussions with the board. The one, 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, is very, very... 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, you know, 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 a board.

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.

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

Okay. I appreciate you answering my questions. As I said, I've been a shareholder prior to when you raised money if you were a REITs 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 is the most significant. You know, hopefully, you know, you can 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. That's why I bought the stock. So hopefully you guys can turn it around or make a decision to sell, you know, look out for the shareholders and you know, instead of having the increase in expenses, that's sort of like an insult to me as a shareholder. You know, everybody has to suffer. The stock is down, but I think the employees, the management should take some responsibility. The best responsibility is 1 word, money. That's all the questions I have. I appreciate the time that I had here. I appreciate your answers. I hope you look out for the shareholders. That's my concern. Thank you very much.

Thank you. We appreciate both your questions and your time as an investor.

Your next question is from [ Lee Zulch ] from [ UberCap ]. Your line is now open.

Good morning. Is the 12/15/25 stock repurchase program still in effect? Is the $10 million there to buy common shares?

I will defer to James 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, I think the underlying question is, the technical question on whether that agreement is...

That is still open. Yes.

Your next question is from [ John Power ] from [ Redwood Fund ]. Your line is now open.

Good morning. Thank you for your time. 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?

So, any discussion around stock repurchases or other alternatives also has to reflect a 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. So any thoughts on how to close that gap? I mean, there are several, right? So certainly, you know, you mentioned stock repurchase would certainly help. The primary way for us to improve book value is to work through assets, get them resolved off our books and redeployed efficiently. Today we have roughly $1 billion of assets outstanding, including non-performing loans, should be closer to $1.4 billion. That's a significant drag on earnings, not to mention that, you know, 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, you know, it should point out, you know, 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 trading price of our shares relative to book value.

Okay, thank you. And we appreciate you holding these calls and talking to shareholders and investors. Thank you.

Your next question is from Greg Bennett.

Hey, good morning. 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 it this is 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?

That would generally be correct, maybe into early 2023, but that is generally the time, 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.

So when we're looking at these in the maturity date, there's some that I'll see that the closing date was '21, 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, shouldn't there be an asterisk next to that tells us that you actually did a loan extension that we can identify maybe these were the weaker loans. Yes. The maturity date, does the maturity date include a loan extension or is that what the original term was?

So, it would be what the current maturity date is in the supplemental, and if I... 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 and the supplemental would be listed as the current maturity date. So we can provide that data in future supplementals to be clear. 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 5 years.

Okay. I don't know if anyone's back or... Okay, go ahead.