Good morning, and thank you for joining the Lument Finance Trust Fourth Quarter 2023 Earnings Call. Today's call is being recorded and will be made available via webcast on the company's website. And I would like to turn the call over to Andrew Tsang with Investor Relations at Lument Investment Management. Please go ahead, sir.

Thank you, and good morning, everyone. Thank you for joining our call to discuss Lument Finance Trust's Fourth Quarter 2023 Financial Results. With me on the call today are Jim Flynn, our CEO; Jim Briggs, our CFO; Jim Henson, our President; and Zachary Halpern, our Managing Director of Portfolio Management. On Friday, March 15th, we filed our 10-K with the SEC and issued a press release to provide details on our fourth quarter 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. When used in this conference call, words like outlook, evaluate, indicate, believe, will, anticipate, expect, intend, and other similar expressions are intended to identify forward-looking statements. 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 risks and uncertainties are discussed in the company's reports filed with the SEC, including its reports on Forms 8-K, 10-Q and 10-K, and in particular, the Risk Factors section of our Form 10-K. It is not possible to predict or identify all such risks. Listeners are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date hereof. The company undertakes no obligation to update any of these forward-looking statements. Furthermore, 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 nor as a substitute for the financial information presented in accordance with GAAP. Reconciliations of these non-GAAP financial measures are the most comparable measures prepared in accordance with GAAP. These can be accessed through our filings with the SEC at www.sec.gov. For the fourth quarter and fiscal year 2023, we reported GAAP net income of $0.07 per share and $0.29 per share of common stock, respectively. For the fourth quarter and fiscal year 2023, we reported distributable earnings of $0.10 and $0.26 per share of common stock, respectively. This past December, we also declared a dividend of $0.07 per share with respect to the fourth quarter, bringing our cumulative declared dividends for the year to $0.26 per share. I will now turn the call over to Jim Flynn. Please go ahead.

Thank you, Andrew. Good morning, everyone. Welcome to the Lument Finance Trust earnings call for the fourth quarter of 2023. We appreciate everyone joining us this morning. I'll start with the macro perspective. We're viewing 2024 with cautious optimism. Consensus expectation is that further hikes are now behind us and most economists believe the soft landing is more probable in 2024 than just six months ago. The U.S. economy has remained resilient, with unemployment rates remaining below 4%. Inflation, albeit a bit moving up and down, is moving closer to the Fed's target rate of 2%, with all the most recently available data. That being said, the risk of recession remains elevated as geopolitical uncertainty persists and as we see how the Fed's current policy, which operates on a lag, fully plays out across the economic landscape. The multifamily market has its own set of opportunities and challenges. In the short term, the property sales market continues to be primarily driven by sellers, significantly limiting acquisition financing opportunities. In addition, the multifamily market is expected to experience slowed NOI growth resulting from the softening of supply-demand dynamics, and higher property operating costs, including labor, insurance, and maintenance, in addition to the impact of the higher rates we've had across the industry. Despite the challenges, multifamily remains a favored asset class among investors given its strong historical performance and constructive long-term fundamentals. The lower short-term rate environment in the latter half of 2024 did contribute to improved asset performance in our portfolio and perhaps the narrowing of the current average spread between property buyers and sellers, positively impacting valuations and, in turn, debt proceeds. Further, we expect to see significant refinance opportunities on the horizon as projections in the industry are estimating well over $300 billion of multifamily loans expected to reach initial maturity by the end of 2025, and over $650 billion of multifamily loans are expected to mature within the next three years. As previously discussed on last quarter's call, the company had a busy and successful year, closing at $386 million secured financing in July and increased our levered investment capacity to approximately $1.4 billion. During the fourth quarter, we experienced $43 million of loan payoffs and acquired or funded an additional $77 million of loan assets. As of year-end, our capital was effectively fully deployed with approximately 94% of our loan portfolio collateralized by multifamily assets and more than 75% of the portfolio risk-rated three, which is moderate risk or better. We had only two assets identified as risk-rated five and recorded no asset-specific reserves during that period, with five being the highest risk. The company continued to maintain attractive long-dated liabilities relying primarily on two secured financing structures to leverage its investment portfolio. The reinvestment period of the 2021 CRE CLO transaction ended this past December, with an 83% effective advance rate and a weighted average cost of SOFR plus 155 basis points. Even as the transaction begins to deleverage, we expect the structure to continue to provide an attractive cost of capital relative to current securitization or warehousing alternatives in the market. We do, however, expect to explore and carefully consider refinance opportunities for that CLO over the coming quarters. With deep experience and expertise in multifamily lending, LFT remains committed to its existing investment strategy. We believe the company provides its shareholders with a unique value proposition among comparable mortgage REITs, given our deliberate focus on middle market multifamily credit, our success in active asset management, and strong partnerships from the broader ORIX platform. The company has been able to maintain a stable dividend, better-than-average credit performance within its investment portfolio, and a superior dividend yield relative to many of its peers. With that, I'd like to turn the call over to Jim Briggs, who will provide details on our financial results. Jim?

Good morning, everyone. Last Friday evening, we filed our Annual Report on Form 10-K and provided a supplemental investor presentation on our website, which we will be referencing 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 and our earnings summary for the quarter. For the fourth quarter of 2023, we reported net income to common stockholders of approximately $3.8 million or $0.07 per share. We also reported distributable earnings of approximately $5.2 million or $0.10 per share. There are a few items I'd like to highlight with regard to the Q4 P&L. Our Q4 net interest income was $9.1 million compared to $9.5 million in Q3. While Q4 net interest income benefited from a full quarter's worth of levered earnings from the LMF 2023-1 financing transaction that closed in July, a sequential net decline was primarily driven by fewer payoffs during the period, which resulted in lower exit fees. Payoffs and paydowns during Q4 totaled $43 million, as compared to $111 million in the prior quarter. Associated Q4 exit fees of $210,000 were down approximately 57% from the prior quarter. Reduced Q4 payoffs also impacted our total operating expenses as well. As a reminder, when one of our loans are paid off in agency refinancing, provided by an affiliate of our manager, the borrower exit fee is waived pursuant to the terms of our management agreement. In that instance, we do, however, receive a credit to expenses reimbursable to our manager of 50% of the waived exit fee. Total operating expenses were $2.7 million in Q4 versus $2.4 million in Q3. The majority of that expense increase is driven by lower waived exit fees and lower associated credit to expenses driven by overall lower payoffs relative to Q3. Outside of that, operating expenses were largely flat quarter-on-quarter. The primary difference between reported net income and distributable earnings was the approximate $1.4 million net increase in our allowance for credit losses, all with respect to our general reserves. The primary driver of that general reserve increase was a modest uptick in average risk rating from 3.4 to 3.5, changes in the macroeconomic forecast, and relative cautiousness in our estimate modeling as it relates to CRE pricing during this period, where there has been very little transaction activity. We evaluate our 5-rated loans individually to determine whether asset-specific reserves for credit losses are necessary and determined that none were necessary as of December 31, 2023. In that context, I'd like to note some subsequent events related to the two 5-rated loans we had at year-end. With respect to the 5-rated loan on a multifamily property in Columbus, Ohio, that has been nonaccrual with collections accounted for on a cost recovery basis. We received proceeds related to the loan in both Q4 and Q1. Our carrying value in the loan was reduced to $8.9 million as of year-end from $12.8 million at the end of Q3, and with the $13.5 million in proceeds received in Q1, our carrying value in the asset will be reduced to zero. After taking into consideration certain legal and other costs being recoverable, we expect the net of the Q1 proceeds received to result in a gain of approximately $1.9 million in Q1. With respect to the $36.8 million 5-rated loan on a multifamily property in Virginia Beach, Virginia, that was on nonaccrual as of December 31 due to monetary default, we entered into a loan modification with the borrower that among other things resulted in a $3.6 million principal pay down and all past dues being brought current, which will result in interest of approximately $500,000 that was unpaid as of year-end being recognized in Q1. As of year-end, the company's total equity was approximately $241 million. Total common book value was approximately $181 million or $3.46 per share, flat versus the prior quarter. We ended the fourth quarter with an unrestricted cash balance of $51 million, and our investment capacity through our two secured financings was effectively fully utilized. I will now turn the call over to Jim Henson to provide details on the company's investment activity during the quarter and portfolio performance. Jim?

Thank you, Jim Briggs. I will now provide a brief summary of recent activity within our investment portfolio. During the fourth quarter, we experienced a $34 million net increase in our loan portfolio after accounting for $43 million of loan payoffs and pay downs for the period. For the full year, we experienced a $388 million net increase in our loan portfolio after accounting for $271 million of loan payoffs for the period. The growth of the portfolio was driven primarily by our success in executing the LMF transaction in July as well as our managers' diligent efforts to redeploy capital through reinvestment features in our secured financing vehicles. Of the $77 million of loan investments acquired or funded during Q4, approximately 70% were collateralized by multifamily properties. Of these $660 million of loan investments acquired or funded during the full year, approximately 95% were collateralized by multifamily properties. As of year-end, our portfolio consisted of 88 floating rate loans with an aggregate unpaid principal balance of approximately $1.4 billion, with 94% of the portfolio collateralized by multifamily properties. 100% of our floating rate portfolio is indexed to one-month SOFR. Our investment portfolio continued to perform well during the fourth quarter as we ended the period with a little more than 75% of our portfolio risk-rated A3 or better and experienced only a modest quarter-over-quarter increase in the weighted average risk rating going from 3.4 to 3.5, primarily driven by a migration of some of our risk-weighted two assets to a risk rating of three. On a positive note, our 5-rated aggregate loan exposure decreased from three to two loan assets during the quarter. As previously stated, as we previously rated five loans with an unpaid principal balance of $19.6 million, we brought current interest payments and restored them to accrual status during the fourth quarter. Jim touched on the two 5-rated loans that remained as of December 31, 2023 and were evaluated for specific reserves. As noted, based on proceeds received on the Columbus, Ohio loan, we have no remaining asset on the books coming out of Q1. With respect to the modification on the $36.8 million 5-rated loan collateralized by a multifamily property in Virginia Beach, Virginia, the modification of the loan increased the note rate to SOFR plus 400 basis points from SOFR plus 327 basis points, in addition to a principal pay down and restoration of all past due interest escrows and reserves. The stated maturity of that loan has been amended to April 5, 2024, with the ability for the borrower to extend under certain conditions to May 3, 2024. Very positive developments and indicative of success in active asset management, as Jim Flynn mentioned in his opening remarks. Despite the potential for further issues with specific loans, we remain confident in our ability to proactively manage repayments and achieve positive asset management outcomes within our portfolio, particularly in light of successful results in recent months. With that, I will pass it back to Jim Flynn for some closing remarks.

Thank you, Jim, and thanks again to all of our guests on the call. We appreciate your time and your interest. I'd like to open the call up to questions.

Thank you, sir. Your first question will be from Crispin Love at Piper Sandler. Please go ahead.

Thanks, good morning. Appreciate you taking my questions. So just first on the two 5-rated loans, I just want to make sure I got it right. Do you expect the gain in the Columbus loan based on kind of where you're holding it right now in the first quarter; first, is that accurate? And then can you just go over the first quarter impact you expect on the Virginia Beach loan?

Sure. So this is Jim Briggs here. Thanks, Crispin. Yes, so on the Columbus loan, we have been accounting for that on a cost recovery basis. As we receive proceeds, we've just been bringing the asset balance down. As I mentioned in my remarks, we did some of that in Q4 with some proceeds that we received and then we brought that asset value down to zero. It will be brought down to zero in Q1, and we're expecting based on those proceeds received of $13.5 million to book a gain of $1.9 million in Q1. For the...

I'm not Jim, just to clarify, the gain is due to recovering all of the deferred interest since it went on nonaccrual.

Yes. That's effectively what that $1.9 million is, as Jim mentioned. So that $1.9 million will be booked in Q1 very likely for the reason just described in the interest income line. And for the Virginia Beach loan, that had been on nonaccrual. The $500,000 debt we mentioned is what was unpaid and not accrued as of December 31, which has now been brought current, and the out-of-period impact. Q4 interest coming into Q1 will be about $500,000.

Okay, thanks. That's helpful. And then just on multifamily bridge more generally, we've seen stress across the industry and some of your competitors' portfolios on balance sheets as well as pre-CLOs. But can you just discuss how kind of your performance is trending across the whole portfolio and what characteristics, if any, in your portfolio make Lument kind of different from some of the multifamily bridge peers that are experiencing more stress?

Sure. We're primarily focused on multifamily, which is an advantage for us. While a significant portion of our portfolio was created toward the end of the peak cycle, we also have long-term assets that were established earlier, and their valuations and business plans were set before the peak. Both of these factors play a role in our stability. A key element that has supported us is our experienced asset management team, which has effectively managed and resolved issues with assets. This expertise has allowed us to collaborate closely with our sponsors to find solutions and to respond rapidly when challenges arise. Our solid reputation encourages sponsors to work proactively with us. We've encountered few issues within the broader platform related to negotiation difficulties with sponsors, and when they occur, we are quick to address them. This has often led to sponsors presenting legitimate plans for exit or requesting additional time or relief, and we usually find a way to accommodate their needs. We partner with high-quality sponsors, and while some may face liquidity challenges, we can assist those who have a plan and a good management strategy. Our successful track record for LFT reflects this. We will maintain our focus on asset management through regular communication and site visits, ensuring we act promptly when any asset shows signs of struggle. Proactive asset management is the key reason our portfolio can perform well even in a challenging environment.

Perfect, that's helpful. And then just one last quick one from me, so you had $20 million of self-storage payoffs in the quarter. Anything to call out there because perhaps pretty sizable in that portfolio. Was that just a loan maturity or anything else at play there?

Yes, they were older assets, so it's not surprising. Eventually, we were able to secure permanent financing and move those assets out of the portfolio. I don’t think there’s anything particularly noteworthy. In fact, I believe those assets are probably around three years old, if I’m not mistaken, so they've been around for a while.

I can jump in on that one. This one is Zach. Yes, that asset sold well above our loan basis. A quick resolution there.

Okay, great, thank you. Appreciate you taking my questions.

Thank you. Next question will be from Steve Delaney at Citizens JMP. Please go ahead.

Thanks, hey good morning everyone. And well, congratulations on a really solid quarter in a challenging environment that we have. So look, I know this is early; you hiked the dividend back in the third quarter, but very solid coverage here, and we're hearing of some nice recoveries here in the first quarter. Jim Flynn, what do you think would be in your mind, and I guess, more importantly, the Board, what do you want to see to have the confidence to make any further increase in the dividend during 2024? Thank you.

Thanks, Steve. Good to hear from you. So there's a number of things here. Obviously, we're talking to the Board. We feel good about our liquidity position relative to our size, including those recoveries, as you noted. We feel confident in the earnings. So there's a lot of positives there. I would say, in discussions with the Board, we're looking at the broader market, and what we'd like to see is how the next quarter or two goes in terms of what the macroeconomic environment looks like. Are we going to continue to see improvement or, more importantly, stability? That's really what I would say the focus is, do we have stability? The capital markets have been a bit spotty. We'd like to see some more transactions than we are working to that end and looking at our own refinance activity and what we could do at the corporate level and what we might be. So all of those things, as we expect them to play out, or hope our view, or base view would be that things do continue on the trajectory. And as we get clarity on those issues, I think that will help guide the dividend discussion with the Board. But I would say from a corporate standpoint, taking a look at the market as a whole, having some concern about some of the maturity issues, maybe less so on the multifamily side, certainly there's a lot coming up. I think a lot of loans will extend. Just what kind of stress the market sees, what kind of stress we see from some of our peers, perhaps in some of the other asset classes, and ensuring that we're in a position to manage any of those issues or any macroeconomic stress that comes up. If things continue on the base path that we are projecting, then we're going to be looking at maybe using some of that incremental cash to make new investments. There are ample opportunities to diversify a little bit from bridge loans in the multifamily space, whether that's some of the alternative capital available out there, whether that's looking at participating in some construction activity in the areas that are seeing for which will be almost everywhere, no deliveries over the next after 2025. So there are some opportunities there; we could make some new investments as well. But right now, we think that it's prudent to maintain our liquidity position and ensure that the market continues to move in the right direction. If it does, I think we'll be continuing to discuss with the Board.

That's a very helpful overview, Jim. And it looks like you guys do have a lot of optionality moving forward, especially if we do, in fact, see lower rates sometime here in the next couple of quarters. Thank you all for the comments. Nice job.

Thanks, Steve.

Thank you. Next question will be from Matthew Erdner at JonesTrading. Please go ahead.

Hey, good morning guys. Thanks for taking the question. Do you know what percentage of the loan portfolio extends or is fully extended through 2024 because the average weighted term is 13 months, so just what's your expectation for payoffs this year?

So there are very few, and Zach, you can pull that one. Very few are at the extended maturity in 2024, fully extended, I mean. We're still anticipating about 30% payoffs, which is, frankly, a bit high, I think, relative to where the market is, but that is a function of the portfolio being more seasoned than it's been over the past several years, as we've seen fewer payoffs. So we've seen loans move further down their business plan. I think that you've seen a lot more activity of kind of the neutral or modest cash in refinancing or per financing in the market overall. And so we think we're going to be at that number, 30% was kind of a normal number from 2016, 2017 through 2020, plus some years even higher. So we do think we're going to end up in around that percentage. But again, I think the reason is less about in the past, it was kind of assets being flipped into a new sale or a new owner because values were going so much higher so quickly. I would say here we're in an environment where a lot of owners are either looking to sell and recover some equity or to a cash-in refi because their relative optimism on significant rate drops has become muted. So there's a little bit more of a settling into the current environment. Zach Halpern, I don't know if you have...

Yes. I can jump in with a little context there. We do have one asset that is near its final maturity. This is an asset that we previously addressed on the call. I assume that you guys have asked us to review CRE CLO data and such. And as you review those, you would see that that asset has received a substantial pay down. We expect that asset to refinance near term. Aside from that, we don't have any assets that had their final maturity in 2024. Keep in mind that this is past initial maturities and upcoming maturities. There are also extension fees if the borrowers choose to extend, which Lument Finance Trust will benefit from that as well.

Awesome, thank you guys.

Thank you. Next question will be from Stephen Laws at Raymond James. Please go ahead.

Hi, thanks for taking my questions. This is Clare Halotel on for Stephen Laws. First, could you please talk about your new investment pipeline and the overall competitive landscape and what were credit spreads on the new investments this quarter, and how do you see credit spreads on new investments trending over the course of this year? Thanks.

Yes, I'll let Zach give some color on the specifics of that. Look, we've certainly seen an uptick in the recent months of assets under review. Credit spreads have been pretty wide, but they've stayed roughly in the 300s, depending on the location, maybe you get something closer to 400. I don't expect significant movement there. I think that's probably about where we end up. You've seen some lower spreads for lower-levered high-quality sponsors, but that's kind of where it's been. So I do see, I think there's a pickup for a couple of reasons. One, we have seen some sellers needing to get out of their assets, and so it's created some transaction momentum. We're still significantly below any normal environment; forget about just 2021. We've also seen these recap financing options where bridge loans, whether ours or, in more cases, from other lenders, are coming in with capital to complete a business plan at what are now the current levels or new levels. So we have seen anecdotally some new opportunities. We're not near the point where I would say it's robust like it was a few years ago, but encouraging. Zach, do you want to add a little to that?

Sure. I mean, if I understood, speaking generalizations and multifamily spreads, I would say, in 2023 perhaps the wide to multifamily bridge was somewhere around 425 over SOFR. I think, as Jim Flynn alluded to, spreads have trended tighter. I think we've all seen the graphs of multifamily acquisition activity on the property side, and we know that, that remains substantially muted, which has caused now a lot of supply and still enough lenders to keep the demand for loans escalated. I think that we settle into this sort of spread range here. Keep in mind that things like warehouse lines, CRE CLOs spreads have also tightened in sympathy. And so, economics are still in line despite tighter spreads.

Great, thank you. And then my last question is just given the positive resolutions of the two 5-rated loans since year-end, how do you think about your CECL reserve? Do you think there will be a reserve release in Q1? Thanks.

Yes. I mean, yes, I mean you're going to have a couple of things there. Jim talked about what is the macroeconomic environment that we're going to see, right. So we have a one-year forecast period there. And the reserve will be driven by what we see there. I think from the positive resolutions, our feeling is there'll be some stability in our risk ratings, so that shouldn't be a driver. I think it's going to be driven more by the macroeconomic environment and what your views are of that and what reality ends up being.

Did you have any further questions?

No, that’s it. Thank you.

Thank you. Your next question will be from Chris Nolan at Ladenburg Thalmann. Please go ahead.

Hi, given your comments in terms of landlords having narrower operating margins, can you give any color in terms of where the interest coverage is for your portfolio in the fourth quarter, where it is compared to where it might have been in previous quarters?

Let me address that. It's important to note that most of our loans have interest rate caps, which means borrowers have options to guard against rising rates on the majority of their financing. When comparing the fourth quarter to the third quarter, interest coverage has remained relatively stable. SOFR has shown consistent behavior. If we focus on debt yield, a simpler metric, it has also been fairly stable. These loans are primarily transitional bridge loans. So while margins are tighter, all factors considered, these loans are advancing towards the goals outlined in their business plans, leading to increased rents and potentially higher occupancy rates as these units are leased after renovations. Therefore, I wouldn't characterize our performance as showing systematic stress from quarter to quarter, although, like any portfolio, we do see varied issues arise from time to time.

This is Jim Briggs. I'll just add on to that. Zach mentioned interest rate caps. We disclosed in our MD&A at 12/31, 97.7% of performing loans had interest rate caps and the weighted average strike was 2.5%.

Okay. And then...

Yes, go ahead.

No, no, please go ahead, I was going to go to another question, but go ahead.

Zach makes a valid point that many of these assets have gone through a challenging period due to rising rates, which followed increases in other costs. Several of them are still in the early stages of their business plans. It is important to look at each asset individually, as some are continuing to generate units and bring in new tenants. A significant portion of the portfolio is still making positive progress in terms of debt yield and coverage, although most are not advancing at the original pace of their business plans. This doesn’t imply a lack of success; rather, the increase in net operating income has been less than expected. From a business perspective, the investments aimed at boosting net operating income still benefit us as lenders and the sponsors. It's a complex question when considering the entire portfolio since each asset needs to be evaluated separately to see if its performance is declining, which is generally not the case. The focus should be on how they are implementing their business plans.

Right. Okay. Turning to capital management. Your stock is trading roughly 63% of your book value in considerations in terms of buybacks, and if not, at what point would you consider buybacks?

We do have discussions about buybacks with the Board. There isn't a set level at which we automatically decide to proceed. We believe our stock is undervalued, especially compared to our peers and the anticipated recovery of our portfolio. However, we face challenges regarding buybacks. Being undersized and under scale already limits our growth, so we need to consider how buybacks would affect our long-term stock price. Additionally, we want to explore ways to grow our common equity base. These factors create a balance we have to navigate. There’s no specific target, such as doing a buyback at 50% of book value, but the topic of our stock's trading position is something management and the Board discuss every quarter.

Well, on the point, your stock has really taken a nosedive ever since you did the rights offering a couple of years ago. And I'm just trying to think in terms of under scale, I totally get that. But at some point, it makes more sense just to buy back your stock as opposed to investing in and doing multifamily loans?

I think that certainly, the Board and we have to respect those alternatives and options and will continue to do so.

Okay, that’s it from me. Thank you.

Thank you. And at this time, Mr. Flynn, we have no other questions registered. Please proceed.

Okay. I want to thank you all for your time today and interest and look forward to speaking again next quarter. Thank you all.

Thank you, sir. Ladies and gentlemen, this does indeed conclude your conference call for today. Once again, thank you for attending. And at this time, we do ask that you please disconnect your lines. Enjoy the rest of your day.