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Good morning and thank you for joining the Lument Finance Trust Second Quarter 2023 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 [Indiscernible] with Investor Relations at Lument Investment Management. Please go ahead.

Thank you and good morning, 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 James Flynn, CEO; and James Briggs, CFO; James Henson, President; and

Thank you, Andrew. Good morning everyone. Welcome to the Lument Finance Trust earnings call for the second quarter of 2023. We appreciate you all joining us today. Start with the market. With respect to the overall multifamily market, during the first half of this year, we observed decrease in demand and slight rise in vacancy rates, resulting in some modest rent growth of approximately 1% across the portfolio. It's important to note that that's a national trend and doesn't apply uniformly to all metro areas. Some cities, we've seen flat or negative rent growth, some of the bigger gainers over the years, Vegas, San Francisco, Phoenix; others, we've seen, rent growth of right around 2% on historic averages. We've seen that in Boston, San Diego, Knoxville cities like that. so, there's certainly a -- as is typically need to pay attention to all of the markets, specifically. Despite lingering economic uncertainty, over the long-term, we do remain optimistic that the multifamily sector will manage to navigate through these hurdles and continue to be a well-performing asset class in the commercial real estate. The multifamily economic backdrop remains constructive, positive job growth, elevated single family prices and affordability in many locations across the country, and obviously favorable, supply/demand demographics. Our cautious outlook for the multifamily lending environment in the second half of 2023 remains unchanged. While investment sales activity remains depressed, we are seeing some stability in rent conditions and positive albeit slowing, net operating income growth. We view these signs of increasing stability and asset valuations that we project will translate into greater activity over the remainder of 2023 and into 2024. Believe the credit profile of the middle market housing continues to be supported by favorable supply/demand dynamics, demographics, and long-term rent growth trends, creating an attractive investment opportunity for LFTC shareholders. With respect to the asset financing market, the CRE/CLO securities and market experienced significant limitations in Q2 as it has for quite some time. Access to the market and its attractive pricing and terms were largely unavailable. And as a result, we pivoted, from looking at a public transaction to executing a private, collateralized financing transaction, which closed on July 12th. The collateralized CRE financing transaction was secured by approximately $386 million of first-lien floating rate multifamily mortgage assets. In connection with this transaction, which shares similar match term non-recourse non-mark-to-market features of the CRE/CLO, approximately $270 million of investment-grade-rated senior secured floating rate loan was provided by a private lender and approximately $47 million of investment-grade-rated notes were issued and sold to an affiliate of LFT's manager. The outstanding liabilities of this financing transaction have an initial weighted average spread of 314 basis points over 30-day terms SOFR, excluding fees and transaction costs. The initial collateral pool consisted of 25 first lien floating rate mortgage loans secured by 32 multifamily properties located across the United States. The weighted average spread of the initial collateral was approximately 365 basis points over 30-day term SOFR. The majority of the collateral was acquired from an affiliate of the manager at an aggregate discount to par of approximately 1.5%, which we estimate works out to an effective spread on the initial collateral pool north of 425 basis points. All the mortgage assets were originated by an affiliate of our manager. This financing transaction provides for a 24-month reinvestment period that allows principal proceeds from repayments of the mortgage assets, be reinvested in qualifying replacement mortgage assets, subject to certain conditions. Despite disruptions in accessing the traditional CRE/CLO market, we were able to successfully pivot and execute the private maintenance transaction structure that significantly increases our levered investment capacity at attractive economic terms. We are cognizant of the need to maintain a strong liquidity position as we potentially enter the challenging part of the market cycle, both to opportunistically deploy capital into new investments and to drive positive outcomes on underperforming assets in the portfolio. The company is well-positioned to manage through the changing market conditions as all of our secure financing is matched term and non-mark-to-market, including the collateralized financing transaction we closed subsequent to the end of this quarter. Further, the company does not have any corporate debt maturities until February of 2026. With that, I'd like to turn the call over to Jim Briggs who will provide us details on our financial results. Jim?

Thank you, Jim and good morning everyone. Last evening, we filed our quarterly report on Form 10-Q and provided a supplemental investor presentation on our website, which we will be referencing during our remarks. Supplemental investor presentation has been uploaded to the webcast as well for your reference. On pages four through seven of the presentation, you will find key updates and an earnings summary for the quarter. For the second quarter of 2023, we reported net income to common stockholders of approximately $1.4 million or $0.03 per share. There are a few items I'd like to highlight with regard to the Q2 P&L. Our Q2 net interest income was $7.5 million compared to $8.2 million in Q1 of 2023. This decline occurred primarily because our investable capital was intentionally held a significant undeployed liquidity during the period in anticipation of the execution of a collateralized financing transaction, which we ultimately closed in mid-July. Unrestricted cash balance throughout Q2 was in excess of $95 million. June 30 pro forma unrestricted cash giving effect to our July 12th financing transaction was approximately $40 million. Increased earnings rates on our cash balances helped mitigate some of the impact of cash drag. However, this was more than offset by the increase in incurred interest expense related to our CLO liabilities as SOFR rose 22 basis points during the quarter from 4.87% to 5.09%. Exit fee and other pre-payment-related income was also down by approximately $400,000 sequentially. Our total expenses were $4.4 million during Q2 versus $2.7 million in Q1. This quarter-over-quarter increase was driven primarily by $1.7 million or $0.03 ¢ per share of deal costs we incurred in pursuit of executing a CRE/CLO securitization transaction that Jen mentioned us pivoting from. Given volatility in the capital markets and significant execution risk, we determined to terminate this transaction before it went to market and instead pursue the transaction closed in July. For Q2, we reported distributable earnings of approximately $1.9 million or $0.04 per share. The primary difference between reported net income and distributable earnings was the approximately $550,000 increase to CECL general reserves in quarter, primarily due to changes in the macroeconomic forecast. As a non-cash unrealized items, these charges are adjusted out for purpose of calculating distributable earnings. Excluding the previously mentioned $0.03 per share of costs expensed in Q2 relating to the abandoned public CRE/CLO transaction, distributable earnings for Q2 would have been $0.07 per share. As of June 30th, the company's total book equity was approximately $239 million. Total common book value was approximately a $179 million or $3.43 per share. I will now turn the call over to James Henson who'll provide details on the company's investment activity during the quarter and portfolio performance.

Thank you, Jim Briggs. I will provide a brief summary of our portfolio activity, during the second quarter. During the second quarter, we experienced $72 million of loan payoffs, which included the loan on our sole retail collateralized asset. This represents an increase relative to the $52 million of loan payoffs experienced during the first quarter. The $72 million of payoffs experienced during the second quarter represented a 28% annualized payoff rate. While this payoff rate is below our long-term historical average, we expect we will continue experiencing similar payoff speeds over the coming quarters due to persistent interest rate volatility and economic uncertainty. During that period, we acquired approximately $73 million of loans from an affiliate of our manager. 75% of these acquisitions were collateralized by multifamily properties and the remaining 25% were collateralized by health care-related properties. As of June 30, our portfolio consisted of 66 floating rate loans with an aggregate unpaid principal balance of approximately $1 billion. Approximately 89% of the portfolio was collateralized by multifamily properties located across the country. Approximately 74% of the portfolio was indexed to LIBOR as of June 30th. On July 6th, we successfully transitioned all of these loans to SOFR, and our portfolio is now 100% indexed to SOFR. Our investment portfolio performed well during the second quarter. While we have experienced some modest risk migration, from 3.2% -- an average of 3.2 in the prior quarter to an average of 3.4 in this period, only one multifamily loan remains rated a 5. We have not recorded any specific allowance on this loan, which remains a monetary default and for which we are pursuing all available remedies. During the period, we had no additional loans in the portfolio rated as a 5. As Jim Flynn described earlier, after the quarter end, we acquired an additional 25% -- 25 floating rate mortgage assets in connection with the execution of a $386 million collateralized financing transaction, which closed on July 12th. All of these loans were collateralized by multifamily properties. Slide 17 in our supplement provides further detail relating to the 25 loans and the initial collateral pool for that financing. Slide 23 in the supplement provides a pro forma capital structure for the company giving effect to the July 12th transaction. As discussed earlier on the call, we expect to continue to rely on the depth and breadth of our manager's active asset management capabilities to mitigate risk within our portfolio and to protect shareholder value. With that, I will pass it back to Jim Flynn for some closing remarks.

Thank you, Mr. Henson. We look forward to updating everyone on our progress. We appreciate time and interest, and happy to open the call up to questions.

We will now begin the question-and-answer session. [Operator Instructions] The first question comes from Crispin Love of Piper Sandler. Please go ahead.

Thanks. Good morning, everyone. Appreciate you taking my questions. First one, just looking at the weighted average term -- remaining term of your portfolio about 15 months or so. Just given the macro and rate environment here in multifamily, I'm curious how you expect maturities to be handled for many of these loans that may mature over the next several quarters? Would you expect some extensions here, any infusions of cash, or does otherwise, how would you expect maturities to be handled?

Thanks for the question. I think there's a little bit of a blend. We've actually seen across our broader platform some higher payoffs, frankly, than we would might have expected a quarter ago or two. So, we actually do expect a reasonable amount of payoff coming here over the next couple of quarters as you point out. We also expect to have, some loans extend with, pay downs and other terms changing on the lenders' behalf to get those executions. And it's going to be a mix, but we're -- in all of the borrowers that we've been speaking with, we've generally had constructive and positive conversations where we expect their plan is to either move forward with a sale and -- which will get paid off or, have plans to refinance at lower leverage.

All right. Thanks. Appreciate the color there.

Sorry, not refinance -- excuse me.

Yes. Yes. Okay. And, Jim, I think you may have mentioned that in the prepared remarks, but I might have missed it, at quarter end, your cash balance was just under $99 million. The pro forma cash balance, inclusive of LMF 2023-1. Did you say that was $40 million and is a similar balance -- excuse me, $40 million 4-0?

That's $40 million. That's correct.

4-0, that's right, Crispin.

Perfect. That's what I thought. Okay, thanks. And then just if I could sneak one more in, how close were you to completing that abandoned CLO transaction? And can you just explain the kind of key reasons of going with the private transaction, pricing, anything else at play? And then just any detail on that $1.7 million, how that was -- what was spent?

So, I would say we were very close. The reasons why we were not able to get that transaction done are SVB, Signature Bank, CS. But we were very close to getting a -- launching a public deal or potentially even placing it in direct accounts when all of the banking noise and crisis kind of really blew up. I mean we were ready to go. I mean it was days weeks and -- but we did continue to explore. We had kind of -- we have been dual tracking, looking at different ways. We've talked in the past about looking at private transactions. So, we had known -- the capital markets have been so volatile and they opened and closed infrequently and for short periods that we had we had been anticipating a little bit of both. At that time, we thought we had a window to get the trade done or banker stuff. So, as well, slowed very quickly. And we continued to see if we would get another window, but the shoes got dropping there on the banking side. And spreads -- even if you could get one done, spreads -- we weren't -- we probably would not have been able to do a dynamic or reinvest -- have a reinvestment period. So, things kind of moved against us pretty quickly and we pivoted back to the private transaction and just kind of went full steam ahead to get that done right around that time. So, unfortunately, we were closed. Yes, it was, again, a static deal. I think at the time, I would expect price maybe would have been a little bit better. But as soon as the market changed, it was either worse or not even achievable at all.

All right. All make sense. Appreciate the color there. Thanks.

The next question comes from Stephen Laws of Raymond James. Please go ahead.

Hi, good morning.

Good morning.

Yes, congratulations on the private deal in July, I know it's financing something you guys have been looking at for a number of quarters now. So, I know you were happy to see the deal executed. As I think about it -- on your last point about it being a managed collateral pool, the reinvestment period still open in your first CLO as well, obviously, through year end. Can you talk about how accretive turn any turnover is? What are your typical spreads you're seeing on maturing loans that are paying off versus where that can be redeployed?

Yes. I think, it's obviously a little bit better. We've had -- most of the loans paying off would have three handles on them, mid to high 3s. I think new loans I think that 4 to 4.50, 4.25 is kind of been where loans that are getting done or that are trading have been have been kind of in that range. So, there'd be -- there should be a modest pickup, I would expect kind of lower leverage that we've seen in the market as well, but it's not -- it'll be -- there'll be a modest pickup. But it's -- 25 to 50 basis points would be probably my guess on average, depends on the expense payoff.

Great. And then just I want to make sure we've still got just the one 5 rated loan that didn't change. But it looks like 4 rated loans dropped from 12 to 10. I think I'm guessing maybe one was the retail loan that I think you mentioned in your prepared remarks, but maybe wrong on that. So, can you talk about what you're seeing in that 4 bucket, any trends, either geographic, or you're mostly multi. So, any geographic trends? Is there any correlation or response for concentration among those?

No. I'll actually introduce,

Sure. Yes. Got it.

Hey, Stephen. This is

Yes. Go ahead,

Yes, I was just going to jump in quickly on risk ratings. I don't think we're seeing any, super negative, geographic trends or anything super specific there. As you know, implicit in these risk ratings or explicit really is the debt service and interest rates and as SOFR ticking up, or just seeing a little bit of downward migration in debt service coverage. And so I think that's really what you're seeing with selected here. It's not geographic-specific or sponsor-specific at present?

Great. Appreciate the comments this morning.

Thanks Stephen.

The next question comes from Matthew Erdner of Jones Trading. Please go ahead.

Hey guys. Thanks for taking the question. So, you mentioned single reinvestment. The first one expires at the end of this year, I believe. How much do you have left there to reinvest?

So, it's full today, but we do expect to have a couple of payoffs here in the next couple of months. So, it depends on whether those happen in time, but we could see a reasonably a reasonably high number. We've got assets in our Q that we're reviewing that we can move in there. We're trying to push people to -- if they're going to pay off to get it done as quickly as possible so that we're able to put new assets into that securitization. I will say, in general, even though we've seen elevated payoffs, they've almost all taken longer than originally projected by the owners. So, but we are very actively managing and engaging with sponsors to -- not just on payoffs, but obviously, that's a critical component right now, but just in general. And so we have a pretty good figure on the pulse, but sometimes buyers and sellers, some of it's out of our control. So, I do expect to see some meaningful payoff here before the end of the year that we are optimistic we'll be able to put new deals in, in time, but it's all the time of game. After that, it will be just de-levering the pool.

Okay. Thank you. And then as a follow-up to that, now that loans are ramped, is there a plan to kind of address and possibly increase the dividend, especially with that $1.7 million charge being a onetime thing.

Look, obviously, as we said, we do talk about the dividend with the Board every quarter. We'll continue to do that this quarter, where we are hopeful that based on our pro forma look at our earnings that we're hopeful to see earnings growth. And obviously, we'll talk to the Board about how they want to reflect that on the dividend.

Thanks for taking the questions.

[Operator Instructions] The next question comes from Christopher Nolan of Ladenburg Thalmann. Please go ahead.

Hi. For the new financing, how much do you expect us to add to EPS in 2024?

Jim Briggs, do you want to provide some detail?

Yes, I mean, we've generally not guided from that perspective. I think you can look at the transaction, both the leverage, the cost and the effective spread that Jim is talking about there and make some estimates.

Great. And then on a follow-up on that, I think Jim Flynn mentioned vessel spread of 425 bps, if I heard correctly?

For the financing that we just completed, we acquired those loans at a discount, and we equate that to approximately 425 we're just north.

Okay, which is above the -- Q says 365 spreads.

365 is the stated nominal spread the spread equivalent with discounted fees is what we're estimated to be about 425.

Yes. I mean, Chris, we mentioned just a follow-up on that point, that we acquired the loans from an affiliate manager, of the majority of our balloons at a discount to par of 1.5% or $5.9 million which is driving that effective yield north of -- effective spread north of 4.25 that Jim has mentioned.

Okay. And then is it fair to say the advance rate on the new financing is slightly below the -- I get 82%, but I just want to make sure I'm in the ballpark.

That's right.

Final question on provisions. Given the new financing, what's the loan loss provision policy on that is what's driving incremental provisions? Is it the rating on the debt? Is it debt service coverage? Or a little color on that would be appreciated.

Yes. As I mentioned in my remarks, most of the change we saw in the quarter is primarily being driven by changes in the macroeconomic forecast, right? CECL requires you to have a reasonable and supportable forecast period, which we consider to be a year. So that forecast has just gotten a little bit more negative. The risk rating migration was pretty modest for this quarter. So, it's primarily changes in the macro forecast. Different quarter could give a different answer but this quarter was primarily the macro forecast.

Okay, thanks Jim. Thanks guys.

Thank you.

This concludes our question-and-answer session. I would like to turn the conference back over to James Flynn for closing remarks.

I just want to thank everyone for joining expressing interest. We're happy and pleased with getting the transaction done, and look forward to speaking to you all next quarter. Thank you.