Good afternoon. And thank you for joining the Lument Finance Trust Second Quarter 2024 Earnings Call. Today it's 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 at Lument Investment Management. Please go ahead.

Good afternoon, everyone. Thank you for joining our call to discuss Lument Finance Trust's second 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 Monday, August the 12th, we filed our 10-Q with the SEC and issued a press release to provide details on our second 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. Such forward-looking statements are subject to various risks and uncertainties that could cause actual results to differ materially from the forward-looking statements. These risks and uncertainties are discussed in the company's reports filed with the SEC, in particular, the Risk Factors section of our Form 10-K. 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 that we discuss on this conference call. A presentation of this information is not intended to be considered in isolation nor as a substitute to 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 2024, we reported GAAP net income of $0.07 and distributable earnings of $0.09 per share of common stock respectively. In June, we also declared a dividend of $0.08 per share with respect to Q2, which represented a 14% increase over the first quarter dividend of $0.07 per share of common stock. I will now turn the call over to Jim Flynn. Please go ahead.

Thank you, Andrew. And good day, everyone. Welcome to the Lument Finance Trust earnings call for the second quarter of 2024. We appreciate everyone joining today. Through the first half of 2024, the US economy largely outperformed consensus expectations. However, the CPI measured in June showed a declining rate of growth in the consumer price index and August jobs reports were weaker than expected. As a result, the market seems to have renewed confidence that the Fed will start its easing cycle in September, as reflected in the 10-year treasury remaining below 400 basis points since the beginning of August. While such easing will likely be beneficial to a number of sectors, including commercial real estate, we expect to proceed cautiously as the economy remains at elevated risk of recession. While the economic data has generally outperformed, commercial real estate has suffered due to a high rate and inflationary environment. Improvements in the rate environment and the bottoming of property values should translate into a thawing of capital markets and an uneven recovery of transaction flow in the commercial real estate sector. Despite the modest softening of multifamily fundamentals impacted by a large supply of newly constructed units coming online over the last six months, we believe that multifamily, and particularly middle-market multifamily, will continue to remain a strong-performing asset class in the long term. We firmly believe that LFT has differentiated itself from its peer group through its deliberate focus on middle-market multifamily credit, which has enabled the company to deliver a sustainable, stable dividend to our shareholders and preserve shareholder capital during this challenging part of the cycle. Our expertise in the origination, underwriting, and active asset management of multifamily mortgage investments has been and we expect will remain central to the company's identity for the foreseeable future. Coupled with the strong sponsorship from the broader Lument and ORIX platforms, we believe that LFT represents a truly unique value proposition in the public markets today. In an environment where others have found it challenging to sustain stable dividend levels, we are proud to have been able to benefit our shareholders and raise the common dividend in June by $0.01, which represents a 14% sequential increase over Q1. Approximately a year ago, we closed the LMF secured financing transaction, which provided the company with additional investment capacity and extended our runway for future reinvestment. By the end of 2023, we were successful in fully deploying our capital into strong predominantly multifamily credits. Since that time, we've been focused on actively managing our loan investment portfolio. Although we experienced a slight decline in our weighted average risk rating to 3.6, as compared to 3.5 as of March 31st, we believe our investments have continued to perform well on a relative basis, thanks to our heavy focus on multifamily, which has generally outperformed other CRE asset classes, our prudent upfront underwriting, and our active approach to asset management. We continue to maintain a strong liquidity position, ending the quarter with approximately $65 million of unrestricted cash on our balance sheet. The persistence of elevated short-term rates has allowed us to generate attractive returns on our cash balances while we continue to intentionally take a defensive cash position to provide us with flexibility in managing the more challenging credits in our portfolio. As discussed on prior earnings calls, our loan portfolio is financed with long-dated secured financings that are not subject to mark-to-market or margin costs. The LMF financing transaction has a reinvestment period that continues into July 2025 and we intend to reinvest capital into new loan investments as liquidity becomes available through repayments of existing collateral. On the other hand, the reinvestment period of our 2021 CLO ended in December 2023, and we are actively exploring alternatives to recapitalize this structure. As of quarter-end, the cost of funds for FL1 was swaps plus 161 and the effective advanced rate was approximately 80%, which we believe will represent attractive terms relative to other secured financing options currently available in the market. We have observed that the issuance of new CRE CLO transactions remains muted with just one managed vehicle pricing in the market last quarter and just three since the start of the year. With that, I'd like to turn the call over to Jim Briggs, who will provide us details on our financial results. Jim?

Thanks, Jim. Good afternoon, everyone. Yesterday, we filed our quarterly report on Form 10-Q and provided a supplemental investor presentation on our website, which we'll 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 earnings summary for the quarter. For the second quarter of 2024, we reported net income to common stockholders of approximately $3.4 million or $0.07 per share. We also reported distributable earnings of approximately $4.8 million or $0.09 per share. There are a few items I'd like to highlight regarding the activity during the period. Our Q2 net interest income was $9.5 million compared to $13 million in Q1 of '24. The sequential decrease was primarily attributable to the company recognizing in the prior quarter approximately $3 million of one-time past-due income related to the resolution of two defaulted loans, one collateralized by an office property located in Columbus, Ohio, in which we reduced our carrying value to zero, and another collateralized by multifamily property located at Virginia Beach, Virginia, which was modified and brought current through Q1 and remains performing and risk-rated for. One component of the sequential variance in net interest income was also a result of average outstanding loan portfolio size decreasing versus the prior quarter as we received approximately $98 million of principal payoffs within the FL1 securitization, which is no longer within its reinvestment period. Aggregate payoffs and paydowns during Q2 totaled $98 million as mentioned, as compared to $97 million in the prior quarter with exit and other fees similarly comparable quarter-on-quarter. Total operating expenses were $3.5 million in Q2 versus $4.3 million in Q1. The majority of the decrease in expenses was driven primarily by a lower sequential accrual of incentive fees due to our manager, which are payable on a quarterly basis equal to 20% of the excess of core earnings, as defined in the management agreement, over an 8% per annum return threshold. Other general operating expenses were largely in line quarter-over-quarter. The approximately $1.4 million difference between reported net income and distributable earnings to common was attributable to an increase in our allowance for credit losses. As of June 30th, we had four loans risk-weighted to 5. One was a $17 million loan collateralized by multifamily property imported in Brooklyn, New York, and was risk-rated at 5 due to maturity default. Another was a $20 million loan collateralized by two multifamily properties in Augusta, Georgia that was risk-rated 5 due to monetary default. Third was a $15 million loan collateralized by two multifamily properties in Philadelphia, Pennsylvania, which was risk-rated 5 due to monetary default. All three of these loans have been placed on non-accrual status, with cash received on the Philadelphia property to be recognized on a cost recovery basis. The fourth 5-risk weighted asset was a $32 million loan collateralized by a multifamily property in Dallas, Texas, that was in technical default. We evaluated these four 5-risk rated loans individually to determine whether asset-specific reserves or credit losses were necessary. After an analysis of the underlying collateral, we recorded a specific allowance in Q2 of approximately $900,000. The general CECL reserve increased by approximately $500,000 during the period, driven primarily by changes in the macroeconomic forecast as well as moderate risk rating migration in the portfolio. The company's total equity at the end of the quarter was approximately $242 million. The total book value of common stock was approximately $182 million or $3.48 per share, largely flat from $3.50 per share as of March 31st. We ended the second quarter with an unrestricted cash balance of $65 million, and our investment capacity through our two secured financings was effectively fully deployed. I will now turn the call over to Jim Henson to provide details on the company's investment activity and portfolio performance during the quarter. Jim?

Thank you, Jim. Good afternoon, everyone. I will now share a brief summary of the recent activity in our investment portfolio. During the second quarter, LFT experienced $98 million of loan payoffs, a portion of these payoffs related to the defaulted loans discussed by Jim just a few moments ago. We did not acquire or fund any new loan assets during the period. As of June 30th, our portfolio consists of 78 floating rate loans with an aggregate unpaid principal balance of approximately $1.2 billion. 100% of the portfolio was indexed to one month SOFR and 93% of the portfolio is collateralized by multifamily properties. While we endeavor to actively manage the maturity risk within our portfolios, it is worth noting that we had the foresight at the time of loan origination to include extension features within our loan investment documents. As a result, the weighted average remaining term of our book is approximately 30 months if all available extensions were to be exercised by our loan borrowers. As of the end of the second quarter, our portfolio had a weighted average floating note rate of SOFR plus 359 basis points and an unamortized aggregate purchase discount of $5.6 million. As mentioned earlier, our secured financing remained attractive. The quarter ended with FL1, our CRE CLO transaction, providing effective leverage of 79.5% at a weighted average cost of funds of SOFR plus 1.61. The LMF financing provided the portfolio with effective leverage of 82.2% at a weighted average cost of SOFR plus 314 basis points. On a combined basis, at the end of the quarter, our two securitizations provided our portfolio with effective leverage of 80.4% and a weighted average cost of funds of SOFR plus 212 basis points. As of June 30, approximately 63% of the loans in our portfolio were risk-rated three or better, down from 77% in the prior quarter. Our weighted average risk rating was 3.6, a slight deterioration from 3.5 sequentially. While both loan assets that had been risk-rated 5 as of March 31 were fully resolved during the second quarter, our aggregate loan exposure on the four newly risk-rated 5 loans was approximately $84 million at the end of the second quarter, up from an aggregate $38 million at the end of the first quarter. As Jim Briggs outlined earlier, we evaluated the four 5-rated loans individually to determine whether asset-specific reserves for credit losses were necessary. After an analysis of the underlying collateral, we recorded the specific allowance of approximately $900,000 in the second quarter. We expect to continue to rely on the expertise of our talented asset management team to actively resolve these 5-rated loan assets, protecting our investors' capital and maximizing value for our shareholders. I will now pass it back to Jim Flynn for closing remarks and questions.

Thank you, Jim and Jim. I appreciate everyone joining, and we'll open the call to questions.

Thank you. Ladies and gentlemen, we will now begin the question-and-answer session. Your first question comes from the line of Crispin Love of Piper Sandler.

Just first off on credit quality, you have had pretty stable credit for several quarters now but did see some degradation here in the second quarter related to some non-performers migration, rated 5 loans, and then the allowance bill that you discussed. Can you just discuss the credit outlook as we stand today? Do you believe that we've reached a peak stress in multifamily credit during this cycle and just your intermediate-term outlook just given the environment and how you look at the portfolio?

It's been challenging to predict the market accurately over the last six quarters, but there is a sense that we might be approaching the peak stress period. We're beginning to see potential rate reductions, particularly long-term, as tenure rates decline and expectations for SOFR cuts rise, which will benefit floating rate borrowers and enhance the credit quality of our portfolio in a vacuum. However, this occurs alongside other economic indicators that aren’t particularly positive. That said, when looking at the multifamily sector's performance over various cycles, it has remained strong, and the supply-demand situation in the country isn't improving and may be worsening. This provides some stability even during economic stress. Regarding our portfolio, we have observed more stress recently, and we are actively managing these situations. We are confident in our ability to address these issues, although we do have to navigate them carefully. Historically, we’ve resolved elevated risk assets and remain optimistic. We did set aside a reserve for one asset, in line with our historical approach to valuing our portfolio. We are committed to resolving this issue without incurring a loss, or at least minimizing the loss, deeming it appropriate to take that reserve. For our other assets, our capable team is continually managing them, communicating with sponsors, and developing strategies to enhance asset performance. As previously mentioned, we can provide operational expertise as needed. While we are experiencing elevated stress currently, we remain confident in our portfolio’s quality, though we will need to address some of the tougher assets moving forward.

And then just on deployment for the second quarter, didn't add any new investments, but I think you had nearly $100 million of payoffs. So what's keeping you from being more active here? Is it a concerted effort as you focus on asset management on the current portfolio, or are there also a lack of opportunities out there? And how would you expect kind of the opportunity landscape to change as rates do come down in the coming months?

So first on the capacity standpoint. So as I mentioned at the end of my remarks, the larger CLO, the 2001 CLO is through its reinvestment period. And so that securitization is deleveraging. It's still an attractive financing swap, SOFR plus 161 and 80% leverage even with those payoffs. We do intend to continue to evaluate options there as we move through the next few quarters. But that's part of the reason, right, that capacity is just really deleveraging. On the LMF transaction, we've generally remained fully deployed, with some timing as that asset pays off. And we've kept for the size of our entity a relatively high cash position, in large part just to ensure that when needed we can offensively manage the portfolio with our sponsors. In terms of the market, we are seeing more opportunities today than what we've seen over the last handful of quarters of high-quality deals. There’s a competitive environment; it’s not the volume that you would like to see, but it's starting to appear. There’s anecdotal evidence out there, and on some of the calls from the peer group you’ve heard of the competitive environment for acquisitions. The thing that's really slowed this market down has been the lack of assets changing hands. There's a very active buyer community out there, and there does seem to be some loosening on the seller side for folks to exchange assets, and that will help find good deals for the bridge market. The other tailwind on the transaction side is these deliveries, particularly in the Sunbelt of all those construction assets coming online or at least coming through the construction period and maybe need a lease-up period, and that provides some opportunity in the bridge space. So I do think that we're going to continue to see transaction opportunities increase over the coming quarters. It may be a little slower than we'd like to see, but it will at least be going forward, which is a welcome change to where it's been.

Your next question comes from the line of Matthew Erdner of JonesTrading.

Could you talk about the timing of the payoffs this quarter and kind of what led to the sequential decline in commercial loan income?

Jim and Zach, if you would like to continue.

Zach, you want to touch just timing? I mean, I think it was just sort of normal course…

Well, the payoffs kind of came towards the beginning of the quarter rather than the end, which led to it kind of being $5 million less than the prior quarter…

Yes, I mean, when I look at sort of low and balance of the REIT by month, really similar around 1.3 at March 31, 1.3 April 30th and then a drop-off to 1.25 May 31 and 1.2 June 30th. So I don't know, I think it sequentially moved down pretty steadily throughout.

And then, yes, as a follow-up, what are you guys seeing within your portfolio in the secondary and tertiary markets, given the two Augusta multifamilies, the default, and then they kind of move to non-accrual there? And then also, following up on that, how are you guys working through these loans once they defaulted? Are you looking to get more equity in the deal or are you guys making the borrowers kind of list the property on the market, just how are you guys working through the process and going after these loans?

In terms of secondary and tertiary markets, I wouldn't identify specific issues. The challenges we face are largely unique, such as upcoming maturities and the necessity for interest rate caps, which have prompted negotiations with borrowers. Regarding the management of assets in the event of defaults, our asset management team is actively engaging with our sponsors. This includes bringing them back to the negotiation table, which may involve cash contributions, negotiating recourse, reviewing business plans, seeking lower interest rate caps to facilitate debt service prepayment, or encouraging them to refinance elsewhere. All these options are on the table; initiating foreclosure is also a possibility if necessary, although we hope to avoid that. We remain active and proactive in addressing these costs.

Your next question comes from the line of Steve Delaney of Citizens JMP.

We noticed that you don't at this point have any REO real estate owned on your balance sheet. There is an investment-related receivable for about $33 million. Could you tell us what that asset represents?

When we've gotten borrower proceeds, but it's past the remittance date from servicing, so it's cash sitting with them that we haven't received from servicing yet, we'll put it as an investment-related receivable. So there's no risk to the borrower there. We just haven't received the cash from our servicer yet.

From the servicer, okay. So it could be a mixture of principal interest, all of that…

We'll continue to accrue interest on our books, but we'll account for that as a pay down from the borrower, which means it won't be reflected in the loan balance. Instead, it will appear as an investment-related receivable until we actually collect the cash. You can consider that as good money; we just haven't deposited it yet. This is in reference to the $33 million related to an FL1 asset. That amount will be used to pay down bonds once we receive the cash.

It sounds like you are experiencing some maturity defaults and some business plans are not working out. However, the disclosure in the quarterly report regarding the four new 5-rated loans was exceptional. We usually do not receive that level of detail and it really helps us understand the situation, so thank you for that. It seems there will be a workout or resolution with those loans. Do you anticipate, as Jim Flynn mentioned, that we are in a challenging market that may worsen before improving? Are you concerned that any of those four loans might lead to you having to take back a property in the next year? I realize that this is a hypothetical question, but I'm curious about how much this is on your mind and whether you think it is likely that you will have some real estate owned on your books at some point.

The way I would answer that is obviously our strong desire is to not have any REO. And in most cases, and as you know, Lument and its broader sponsorship we have a $51 billion servicing book, we're seeing a lot of activity in assets across the country outside of just what we have here at LFT. When we've had good borrowers who have done the right thing and worked with us and are still capable of managing their assets and improving operations, we've been able to work with them to find resolution to what we hope are short-term issues, whether it's valuation, cash flow, or both. Where we've discussed REO broadly or foreclosure broadly as a platform, not just LFT, is where we don't have cooperative borrowers. And in the overwhelming majority of those cases, it's not something that ends up having to come to fruition. And so I would like to think that that will be the case here. But we do have a very seasoned, capable, and sizable group that manages our special servicing and in particular REO for LFT and for Lument as a whole. And what we've shown is that we're more than capable operators but more importantly with our sponsors, say, hey, we're here to help and work with you, but we're not going to go down the path of using default as kind of a negotiating technique. I remember several quarters ago, I think Ivan Kaufman at Arbor mentioned that he saw borrowers kind of strategically defaulting or trying to use that as a negotiation tactic. It may have been four or five quarters ago, and I think that largely went away. But I will say that I think with this most recent decline in the 10 year and the rate cuts on the horizon in the very near term and probably fairly extensive over the next 18 months, I feel like I've seen a little bit of that from some borrowers trying to see if they can take advantage of that. We feel very confident in our ability to manage the borrowers and manage the assets. So our goal is to not have any REO. But if we were to have REO, it would mean that we've done the math on what's the highest value to our shareholders and concluded that that's the action we can take and we're capable of doing so, but obviously the goal is to not have that happen.

Your next question comes from the line of Stephen Laws of Raymond James.

Just one quick one on the three new non-accruals and covered a good bit. But can you let us know when those went on non-accrual or asked other way, how much interest income did they contribute to the second quarter?

Yes, Stephen, two of those were classified as non-accrual last quarter, so we have two new ones. The new ones are the Philadelphia loan that I mentioned, which will be on a cost recovery basis, and the Dallas loan that is in technical default. We ended last quarter with the other two. We are receiving cash payments for a couple of them, and the impact for non-accrual in the current quarter was approximately $200,000. It's challenging to predict whether we will continue receiving cash payments for those in non-accrual. However, for the current quarter, we are expecting a shortfall of a couple of hundred thousand for non-accrual.

Switching over to the financing side, there was another competitor that completed a CLO recently, and the market is active. Can you discuss what conditions you would like to see to promote growth? Do you have a financing facility with the parent company that you could utilize to pool assets before a deal? Would you consider obtaining a mortgage REIT level bank line to facilitate pooling loans or making new investments? How do you view the possibility of executing another deal for growth? I understand the CLO remains appealing, but it is likely to continue to de-lever. I’m interested in your perspective on how you might manage the balance sheet to price a new deal within the next six to twelve months.

Let me just say one thing. Since we took over management of this vehicle, when Hunt took it over and then since ORIX acquired Hunt and we became Lument. We've continued to originate bridge assets on our corporate balance sheet outside of LFT and we'll continue to do so. LFT is a vehicle that has the first look and where we always look to place assets, but obviously has full capacity, we continue to originate. For all of our securitizations, these two plus the others we've done, historically, at least some if not the majority of the assets included in those securitizations were assets that were pooled on the corporate balance sheet. And when the REIT LFT had a high capacity, would be transferred as part of that securitization to the REIT. So from that standpoint, we'll continue to operate that way, we operate that way today and nothing about that will change. And I'll let Zach handle the capital markets aspect there.

From the capital market perspective, we are actively exploring options now that FL1 has dipped below an 80% advanced rate. These options may include entirely new securitizations or a combination of warehouse financing with a smaller securitization, depending on the current market conditions. We are having active discussions internally about these possibilities.

And then I guess to follow up with that, I mean around timing, it sounds like it depends a lot on repayments. So can you give us an outlook over the back half of the year of what your repayment expectations are? I've been running about $90 million a quarter. Is that level likely to continue or do you expect more or less than that over the back half of the year?

I think that's a good estimation at the moment. Just over the near term in the next month or two, it looks like another $70 to $80 million, so it's right in that range. It's possible that it accelerates as maturities are upcoming, but tough to say…

Your next question comes from the line of Christopher Nolan of Ladenburg Thalmann.

The loan to value ratios on your 10-Q, are those at the time of origination of the loan?

Yes.

And then if I'm looking at the table correctly, it looks like a lot of the loans were originated in 2021 and into 2022. So it looks like a fair number of your loans sort of predate the Fed tightening cycle. Is that a correct view of that?

Yes.

And so on that basis, is it fair to say that the loan to value ratio is now significantly higher than what's shown in the Q?

It depends. Keep in mind these are all transitional properties with business plans. And so when you do a bridge loan, you have the as-is valuation and you also receive a stabilized valuation from the appraiser assuming that the business plan has been executed. And so as an example, as the valuation was 75 and the stabilized valuation was 65, you’d assume that if the borrower executed their business plan and market conditions did not change, the asset would then be 65 LTV to your point on underlying market movements, the LTV could be higher. So it's a kind of convoluted way of saying it depends on how all the borrower executed their business plan, both in terms of market movements and sub-market movements.

I guess just a logical follow-up to that is to sort of dovetail into your earlier comments that sounds like a lot of these borrowers are upside down on their loans potentially?

I would say that their equity has been affected. It's possible that their expected loan-to-value ratios when they entered the deals are higher than they anticipated. However, their equity has been impacted, no doubt about that, which is likely true for most assets, but that doesn't necessarily mean the loan is upside down. The reality is that these owners invested capital into the deals and haven’t yet seen the full value they expected. This situation is why we’ve observed many multifamily deals being held, as there is a belief that holding onto these assets will allow them to realize that value over the next couple of years, even if it's not the full value today. I don't think this trend will change significantly, but with the recent decline in rates, we might see an increase in transactions and more people seeking current financing options. That's the current state of affairs.

And Jim Briggs, so were there any non-recurring items in earnings? Not for this quarter. There was a big impact from the non-recurring from last quarter. So if you were looking sequentially, as I spoke to, interest income or net interest income has come down pretty significantly from last quarter, but we had a bunch of one-timers last quarter for catch up on a couple of resolutions that we spoke about last quarter. So outside of that, no. I do speak to the operating expenses coming down. If you recall, the incentive fee that we accrued last quarter was about $1.3 million, it was around $700,000 for this quarter. So that came down; I'd expect that $700,000 as it's trailing 12-month CALC that takes into account payments over those 12 months, but that'll come down. So you can maybe look at that as a bit of a one-timer on the expense side that will come down for the next quarter or two before it normalizes.

There are no further questions at this time. I would like to turn the call back over to our speakers for final closing remarks. Please go ahead.

I just want to thank everyone for joining today. We look forward to speaking again next quarter. Thanks all.

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