Good morning and thank you for joining the Lument Finance Trust Third 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 floor over to Andrew Tsang 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 third quarter 2023 financial results. With me on the call today are James Flynn, CEO; James Briggs, CFO; and James Henson, President; and Zachary Halpern, Senior Director of Portfolio Management. Yesterday on Monday, November 13, we filed our 10-Q with the SEC and issued a press release to provide details on our third 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, The Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. When used in this conference call, words outlook, value indicate, believes, will, anticipates, expects, intends 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 financial information presented in accordance with GAAP. Reconciliations of these non-GAAP financial measures is the most comparable measures compared to in accordance with GAAP can be accessed through our filings with the SEC at www.sec.gov. For the third quarter, we reported GAAP net income of $0.10 per share, while distributable earnings were $0.11 per share. In October, we paid a dividend of $0.07 per share with respect to the third quarter which represented approximately a 17% quarter-over-quarter increase. I will now turn over the call to Jim Flynn. Please go ahead.

Thank you, Andrew. Good morning, everyone. Welcome to the Lument Finance Trust earnings call for the third quarter of 2023. We appreciate everyone joining today. The macroeconomic environment continues to be a challenging one. A mild recession beginning in the first half of 2024 remains a possible outcome as higher for longer rate environment seems to be the consensus economic forecast. Given the surprising resiliency of the labor market, consumption continues to outpace incomes and government spending and interest cost concerns. As we await the impact of the recent and dramatic monetary policy tightening to fully work its way through the system, we are also faced with heightened geopolitical uncertainty, further modeling the near-term outlook. Given the interest rate volatility, multifamily and other commercial real estate property types continue to trade thinly. Overall, U.S. commercial real estate investment sales volume was down greater than 50% year-over-year in Q3. Despite deceleration of rent growth and widening of year-over-year cap rates, multifamily continues to be the preferred sector and is supported by strong fundamentals. While deliveries are elevated in certain markets this year and next, muted new construction starts suggest limited supply in the medium term, which is supportive of higher asset values as we move forward. Demand for multifamily continues to be driven by historic homeownership affordability gap with prices of single-family homes remaining high and residential mortgage rates currently north of 7%. Given these positive signs in the long-term, LFT remains committed to its investment roots in seeking middle-market multifamily investment opportunities that are accretive to the earnings and long-term shareholder value. The CRE CLO market continues to see significant dysfunction with only two managed CRE CLO transactions priced during the third quarter and year-to-date. Issuance volumes through October are down 66% year-over-year from an already depressed prior year. Given…

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 4 through 7 of the presentation, you will find key updates and an earnings summary for the quarter. For the third quarter of ‘23, we reported net income to common stockholders of approximately $5.2 million or $0.10 per share. There are a few items I’d like to highlight with regard to third quarter P&L. Our Q3 net interest income was $9.5 million compared to $7.5 million in Q2 and primarily as a result of the growth of our loan portfolio facilitated through the execution of the LMF 2023-1 financing transaction in July. SOFR increased 23 basis points during the quarter from 5 spot, 9% to 5.32%, driving an increase in the interest income on our portfolio in excess of the increase in the cost of our floating rate liabilities. Exit fees and other prepayment-related income were relatively flat sequentially despite payoffs being higher than prior quarter due to a larger portion of the multifamily payoffs this quarter being refinanced with agency debt provided by an affiliate of the manager. Note that in such situations, a portion of the manager’s expense reimbursements are waived pursuant to the terms of the management agreement. Our total operating expenses were $2.4 million during Q3 versus $4.4 million in Q2. This quarter-over-quarter decrease was driven primarily by the $1.7 million or $0.03 per share of deal costs we expensed in Q2 and which have been incurred in pursuit of executing a broadly marketed CRE CLO securitization transaction which we ultimately abandoned in Q2 in lieu of the more attractive LMF 2023-1 private financing transaction. For Q3, we reported distributable earnings of approximately $6 million or $0.11 per share. The primary difference between reported net income and distributable earnings was the approximate $800,000 net increase to CECL general reserves in the quarter, primarily due to the increase in the overall size of the floating rate loan portfolio as well as changes in the macroeconomic forecast in the period. As a non-cash unrealized item, these charges are adjusted out for purposes of calculating distributable earnings. We did not take any asset-specific provisions in Q3. As of September 30, the company’s total equity was approximately $241 million. Total common book value was approximately $180 million or $3.46 per share, up $0.03 per share from Q2. We ended the third quarter with an unrestricted cash balance of $43 million. We also had an additional $30 million of aggregate reinvestment capacity through our two secured financings. 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?

Pardon me, this is the conference operator. Mr. Henson, is it possible your microphone is on mute?

Yes, thank you. Thank you, Jim Briggs and thank you. I will now provide a brief summary of our recent activity within our investment portfolio. During the third quarter, we experienced a net $341 million increase in our loan portfolio after accounting for $111 million of loan payoffs. The $111 million of loan payoffs experienced during the quarter represent approximately 33% – a 33% annualized payoff rate, which is relatively in-line with the long-term historical averages and our short-term expectations. Of the $452 million of loan investments acquired or funded during the quarter, 99% were collateralized by multifamily properties. Loans acquired during the quarter from an affiliate of the manager were acquired at an aggregate discount to par of $7.1 million. As of September 30, our portfolio consisted of 87 floating rate loans with an aggregate unpaid principal balance of approximately $1.4 billion of which 93% was collateralized by multifamily properties. 100% of our portfolio rate – floating rate portfolio is indexed to 1-month safer. Our investment portfolio performed well. We ended the third quarter with 75% of the portfolio risk rated a 3 or better, and we have maintained a weighted average risk rating of 3.4% quarter-over-quarter. Several offsetting factors impacted the average risk rating for the quarter. On one hand, the average risk rating would have shifted toward improvement during the quarter due to the company acquiring four new 2-rated loan investments with an aggregate unpaid principal balance of $64 million and two existing loan investments totaling $31 million of unpaid principal balance moving to a two rating during the quarter due to improved property performance metrics. In addition, several assets migrated from a 3 to a 4 rating and two loan assets migrated from a 4 to 5 rating. We had three loan investments each collateralized by multifamily property, which were rated a 5 for the third quarter. These loans with an aggregate unpaid principal balance of $69 million are currently considered collateral dependent due to the actual or expected monetary default. One of these three loans we have discussed in prior quarters, and we continue to pursue all available revenues with regard to that loan. After conducting our analysis of the underlying collateral, we have concluded – we have not recorded any specific reserves with respect to these investments. We continue to proactively monitor the health of our portfolio, and we rely on the depth and breadth of our manager capabilities to drive positive asset management outcomes while protecting shareholder value. With that, I will pass it back to Jim Flynn for some closing remarks.

Thank you, Jim Henson. Appreciate everyone’s time and interest. I want to open the call up for questions. I know there’s a few already in the queue.

[Operator Instructions] Our first question today comes from Stephen Laws from Raymond James. Please go ahead with your question.

Hi, good morning.

Hi, Stephen.

Hey, good morning, guys. Start with the three multifamily loans. Can you give us some details kind of where the – you’ve talked about one before, but where are they located? Are they with the same borrower or different sponsors there? And what’s the time line and kind of resolving that and recycling capital into performing investments?

So I’ll let Zach Halpern talk on the details. They’re all different sponsors, all different locations and in different stages of underperformance. But as Jim pointed out, we still feel comfortable that we’re going to be repaid on the collateral, but we’re working with the borrower. They all have different issues. And so I’ll let Zack give you the high level of kind of generally where they are. But one is primarily a partnership with few. One is behind this business plan and one is had significant issues at the physical property and is working through proceeds on insurance, etcetera. Zack, do you want to go ahead and give a high level?

Sure. So the assets that we’ve been talking about for the last three quarters is in Ohio. Yes, there’s another asset in Virginia as the one that’s in partnership dispute and then there is an asset in Florida, that’s behind on its business plan. When we consider all three assets and look at them and has sought information on that and site visits, etcetera we find that with the exception of the first asset, which had some we’re pursuing legal revenues done and also to not spec off. The other two while there is some monitory issues that the loan is – appears to be lower than the value at present and leaves the borrower/sponsors with incentives to secure these and work towards the resolution and therefore, we’re not expecting losses at present.

So on the – and you had asked, Stephen, on the – one, there are payments being made. There – in a variety of ways, paying down principal, paying interest rate, those kinds of things. The time line is, as you know, there’s some uncertainty to it all, but we’re certainly expecting these to be resolved in the next couple of quarters is kind of how I’m looking at it, at least one or two of them and maybe all three. But for better or worse, things sometimes seem to take longer. For example, the partnership that dispute is really – it’s impacting us as a lender, but it’s an issue between the two owners and they have to settle their own dispute and then I think we would be ready to move forward, likely through a sale or whatever that you decide to do. So we’re pursuing our remedies to push them to get to their conclusion. So some – that’s an example of just working through the legal process. But hopefully, a first half of ‘24 events, but it could be longer.

Sure. And it sounds like it’s a unique issues at each asset, not anything that’s?

Correct. It’s not a – the other thing is that – these two assets are within the securitization whose reinvestment period is ending. And so there is not too much we can do near-term anyway, even if you pay off to redeploy capital, like it’s – we’re going to have to deal with that securitization in probably late 2024. So it’s not like we’re losing investment capacity.

Understood. And then did they go on non-accrual at end of quarter? Were they in interest income for the full 3Q? Or did some of them only contribute for partial or none of the quarter?

We reversed out when we put it in an accrual around $300,000. As Jim mentioned, we talk in our filing about them being on a cash basis. So we are seeing some payments there, which will reflect in income as we get it. It was around $300,000 of income that got reversed in the quarter.

Okay. Helpful. Great, appreciate the time this morning, thank you.

Our next question comes from Steve Delaney from JMP Securities. Please go ahead with your question.

Thanks, well, good morning, Jim, Jim and Jim. Jim Flynn, the portfolio at $1.3 billion, about 4.5% debt to equity. Do you consider Lument’s portfolio to be fully invested currently based on your capital base? Thanks.

Yes. Thanks, Steve. Good to hear from you. We have – the answer is yes, it’s around $1.4 billion is the total capacity, give or take. Obviously, we want some cash. We have a couple of assets that we’ve discussed. But generally speaking, it’s upwards of 1 3 and close to 1 4. We’re obviously where we have – as loans work themselves out and things like that, we’ve generally kind of made the decision to maintain the liquidity, the elevated liquidity for obvious reasons. But that’s the kind of max of our portfolio today. As we’ve discussed many times, obviously, you want to think about growth. But right now, it’s really focused on our portfolio, asset quality working with sponsors, making sure that we’re positioned to take advantage of the market as it improves down the road here.

That’s helpful. I mean we really are in the market, it would seem would emphasize quality over quantity at this point, just kind of wait and see. So the net interest income that you had $9.5 million, it was, I think, $7.5 million in the prior quarter. I realize repayments, you get acceleration. Is there anything in that $9.5 million that you would point out to be materially large one-time accrual of revenue that you had on – either discount or deferred fees that you had on the books?

Jim, you want to go ahead?

Yes. No, I wouldn’t say there’s anything one-timer in there. As we talked about, the economics around prepayment and fees there. We’re relatively flat quarter-on-quarter. Some of that is coming through a reduction in expense reimbursements, but I don’t consider there going to be anything material in there, Steve.

Okay. Great. And just one final point. The $7.1 million that you pointed out, discount specifically to LMF 2023-1. Should we look at that – I don’t know if there’s – those loans were already originated, but would a 3-year average life, would that be a reasonable approach to accreting that money into the net interest income?

Yes, I think that’s reasonable, Steve.

Okay. Well, great quarter and good job on the big financing, and we look forward to fourth quarter. Thank you very much.

Thanks Steve.

Our next question comes from Matthew Erdner from JonesTrading. Please go ahead.

Hey. Good morning guys. Thanks for taking the question. So, could you just talk a little bit about what the opportunities you are seeing out there currently? I know you guys focus on multifamily, but can I just get an idea of what you guys are looking at, at the moment and just the health of the pipeline?

Sure. Well, look, I mean the opportunities are less than they have been in the prior quarters as we have discussed, just in terms of transaction volume being so significantly down. So, assets aren’t trading in. So, that opportunity has significantly declined. But so has – so have lenders and lenders that are either can or willing to make new loans. So, when we have seen assets come in, we are looking at generally speaking, more conservative looking underwriting, lower leverage high-quality sponsors. It does have an impact. I think with rates being so high, spreads have kind of stabilized around 4%, but you have seen a lot of pressure on that – I am sorry, spreads before, but I think you have seen a lot of pressure on that to be lower when you have gone with very low leverage bridge loans and kind of pushing things down towards 3% for those high-quality loans. I think you will see lenders probably take a look at those deals and trade a little spread for risk or low risk. In terms of some of the things we have talked about in the past around subordinate debt opportunities around mezz financing, preferred equity, etcetera. There is a lot of market chatter around those particular products. There is a lot of lenders and people looking to participate in that market, including us, both at LFT and in our broader platform. The reality is that there is not a tremendous amount of deals that, that works for today, given where the rates are expected to be for that product in the teens, mid-teens even. And it’s hard to replace your prior debt capital if you are kind of refinancing something with a mid-single digit with the 2x on preferred. And so there is just…

Got it. Thank you. That’s good color there. I appreciate that. And then on the recent CLO, I don’t know if you mentioned it or not, but is there a reinvestment period? And then if there is, when does that expire? And how much of it is open at the moment? Thanks.

It’s 2 years. And to be clear, I may have said CLO, but it’s a financing transaction. It’s not technically a CLO, just to clarify, but it is a very similar structure, and it has a 2-year reinvestment period.

Thank you.

[Operator Instructions] Our next question comes from Christopher Nolan from Ladenburg Thalmann. Please go ahead with your question.

Jim Briggs, just a clarification. Were there any non-recurring expense items in the quarter?

No, nothing unusual or one-timer, as I pointed out, we did have the big one-timer last quarter for that deal cost for a widely distributed public CLO that we expensed in Q2, but nothing I would consider one-time in the current quarter.

Great. And then I guess, for just the panel in general, any change in non-accruals in the fourth quarter to-date?

Nothing to-date.

Yes, no.

And then finally, on looking through the deck and looking at the LTVs, which are roughly 75%, 80% or so, what sort of rent haircut are you applying when you evaluate those LTVs?

I don’t think it’s – I mean when we are looking at the assets, it’s – each one is an individual evaluation, meaning basically, it’s going to be a view of what are the in-place rents. Most markets today have either somewhere in plus maybe two or three at the max to minus the same level, but some markets and submarkets are slightly different. But in general, we would be looking at in-place rents, particularly if there are – a lot of these assets are still renovating and are still moving through their business plans, albeit obviously, with whatever changes market conditions have wanted. And so there is real time data on what does it look like for renting new units today.

But we are certainly…

You are using the stated rent, right?

We are often doing rent rolls, right. So, it’s – this is real information. I think that perhaps it’s helpful to make a distinction between evaluating something like that CMBS bond in which you are looking at a type of data provided by the servicer versus looking at multifamily loans the way we are looking at it, which is asset management data, rent rolls, information that’s coming directly from the borrower that’s not necessarily been passed through beta, etcetera. So, it’s a lot more boots on the ground than you might see versus working at CMBS…

And then – and I guess just FYI sort of [ph] in a portfolio for rent stabilized apartment buildings in New York City with 218 rent-stabilized units. And when you talk to bankers in this space, at least in New York City, they give a haircut to their reported rent roll of 25%, simply because what your reported rent is could be different than what the actual rent is, like if you get one month free or something like that. And if you are using what the stated rent roll is, doesn’t that sort of over inflate the value of the property on an LTV basis?

So, let me just address that specifically. So, when we look at rents, we are taking into account the leases, the concessions, right. We are not saying someone is giving two months free and then charging, we are using what the real rent is, right. So, concessions and things like that are not. But just also for context, we have seen or we will see by the end of this month, every asset in our portfolio within the last since June or July, the summer. So, over four months, we have gone out and visited every asset with someone from our team and visiting with the sponsor. So, to Zach’s point, just these are transitional assets, right, that had a business plan. They are not stabilized assets where a servicer pay someone to go out every 2 years to look at the asset, right. We are in contact with our sponsors on a regular basis, weekly, monthly, quarterly, whatever is appropriate for the given asset and are physically out there seeing them. So, there is a little bit more engagement there. And real-time access to financial information than receiving a – to the point of is it a large portfolio where you are receiving information secondhand and you are making some assumptions. We don’t have to make those assumptions because we have the real data. There is not a…

Yes. I would layer on top of that. A couple of things, right. One is the LTVs that are reported on the earnings supplemental are LTVs at a time of origination, which is not there. But the underwriting that is done in evaluating these assets is layering on all the nuances. We are not simply taking what the borrower gives us is as our underwriting, any nuance whether it be free rent for a month or two months or issues on stabilization or issues on occupancy. That’s all put into our underwriting and analysis as we are evaluating these loans, both at underwriting and an ongoing basis.

Okay. Thank you.

Ladies and gentlemen, with that, we will close today’s question-and-answer session as well as today’s presentation. We thank everyone for joining today’s conference call. You may now disconnect your lines.