Good morning and thank you for joining the Lument Finance Trust Third Quarter 2021 Earnings Call. All participants will be in listen-only mode. [Operator Instructions]. After today's presentation there will be an opportunity to ask questions. [Operator Instructions]. 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 Charles Duddy with Investor Relations at Lument Investment Management. Please go ahead.

Thank you, Gary, and good morning everyone. Thank you for joining our call to discuss Lument Finance Trust third quarter 2021 financial results. With me on the call today are James Flynn, CEO; Michael Larsen, President; James Briggs, CFO; and Precilla Torres, Head of Real Estate Investment Strategies. On Tuesday, we filed our 10-Q with the SEC and issued a press release, which provided 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, I would 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 Act of 1934. When used in this conference words such as outlook, evaluate, 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 are discussed in the company's reports filed with the SEC, including its reports on Form 8-K, 10-Q and 10-K and in particular the Risk Factors section of our Form 10-K. Additionally, many of these risks and uncertainties are currently amplified by and will continue to be amplified by or in the future maybe amplified by the COVID pandemic. 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 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 at sec.gov. With that, I will turn the call over to James Flynn. Please go ahead.

Thank you, Charlie. Good morning, everyone. Welcome to the Lument Finance Trust earnings call for the third quarter of 2021. 2021 has been a very busy year and an important year for Lument Finance Trust. During the year, we executed several significant capital transactions that allowed us to grow our capital and institutional investor base. At the same time, we've made significant incremental investments, observed continued strong performance in our portfolio and generally positive performance. These were all accomplished in an environment marked with uncertain economic considerations, interest rates, unemployment, asset values, all exacerbated by the impact of such variables like COVID-19 and also the political and social unrest, particularly related to COVID-19. While the lending market continues to be competitive, the breadth of Lument's platform and its strength in multifamily, in particular, continue to provide us with compelling and large investment opportunities. During Q3, we invested over $300 million in new floating rate bridge loans, showing our ability to quickly deploy substantial amounts of recently raised capital. Our expansive origination capabilities of the manager have driven this strong deal flow and based on the current pipeline, we expect to be fully deployed ahead of schedule by the end of the year. As we continue to grow, we also expect to identify other investment opportunities in commercial real estate, and to invest a portion of our capital in investment such as preferred equity, mezz loans, and other high-yield CRE instruments. It's important to acknowledge that our focus in multifamily bridge lending and the strength of our credit and asset management platform has allowed our portfolio to continue to perform well. As of the end of the quarter, September 30, our loan portfolio was again 100% performing, no impairments, no loan defaults, and no loans subject to forbearance. Similar to previous…

Thank you, Jim, and good morning, everyone. On Tuesday 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. The supplemental investor presentation has been uploaded to the webcast as well for your reference. On Page 5, 6, and 7 of the presentation, you'll find key updates and an earnings summary for the quarter. For the third quarter of 2021, we reported net income to common stockholders of approximately $1.2 million or $0.05 per share. There were two primary distributable earnings adjustments for the quarter. The first of these was an approximately 150,000 non-cash hyper amortization of purchase price premiums, and two loans acquired into our recent CLO, which prepaid during the quarter and caused a non-recurring decrease in interest income during the quarter. The other non-distributable item experienced during Q3 was a $60,000 unrealized loss on mortgage servicing rights, which was driven by higher realized prepayment speeds in our legacy residential MSR portfolio. I'd like to note that as of quarter-end, the current value of our legacy MSR asset was less than $700,000. And therefore we do not believe that any future changes in the value of this asset should be a meaningful driver of earnings. After these adjustments for the third quarter of 2021, we reported distributed earnings of $1.4 million or $0.06 per share, which represents a decrease relative to Q2's distributable earnings of $2.8 million or $0.11 per share. As Jim alluded to in his opening remarks, the primary driver of this decline was a cash drag as we work to deploy the proceeds from our recent capital raising transactions. The risk continues to exist in the short-term for some drag on net income to common stockholders, as we complete…

Thank you, Jim, and good morning, everyone. I will start by touching on recent investment activity. The last several months have been very active for us from an investment standpoint. During Q3 we acquired 15 new investments from our manager with a totaled UPB of $309 million. All these acquisitions were secured by multifamily assets. And these acquisitions had a weighted average spread to LIBOR of 339 basis points, a weighted average LIBOR for 16 basis points, and weighted average LTV of 75.7%. We've been seeing a significant increase in bridge lending opportunities particularly within the multifamily space, which we expect to continue due to high-levels of acquisition activity in the market. During the quarter, we experienced $117 million in loan payoffs and at quarter end our total loan portfolio had an outstanding principal balance of $803 million. The portfolio consisted of 53 loans with an average loan size of $15 million which provides for a significant asset diversity. Our portfolio has a weighted average spread to LIBOR of 346 basis points, 98% of loans in our portfolio have a LIBOR floor above the current spot LIBOR rate with a weighted average floor of 83 basis points. Due to the general strength in the economic recovery, the high-level of acquisition activity in the multifamily sector, and robust level of CRE CLO issuance, competition in bridge lending space continues to be fierce. We have seen some stabilization in spreads, LIBOR floors have come down significantly over the last year and we are seeing pressure on exit fees as well. Our overall loan portfolio at quarter end was 89% multifamily that does represent an increase from 85% multifamily as of Q2. The second highest asset type concentration is self-storage, which represents 7% of our portfolio. As mentioned on previous calls, we believe…

Thanks Mike. I appreciate the update. I appreciate you all joining. As we've mentioned on the call, we've really begun to make progress on our business claim, we're very excited about our ability to raise capital and deploy it quickly. We look forward to talking to you more about our ongoing plans at LFT; we look forward to updating you on our progress. And we appreciate your time today. And with that, I will turn it over to questions.

We will now begin the question-and-answer session. [Operator Instructions]. Our first question is from Stephen Laws with Raymond James. Please go ahead.

I am doing great, thanks. Hopefully you are all doing well. Appreciate the color on the prepared remarks on the ramp and the color on G&A that was helpful. Wanted to touch on repay fees, you gave the contribution on exit fees and the net interest income, how should we -- what kind of repayment expectations do you expect in the coming quarters so we can kind of make sure we have the exit fee contribution reflected correctly on the top-line?

Yes, so we have had obviously in 2021 in general, we've seen, you have seen fairly elevated prepayment fees, in large part driven by valuations, right business plans are being executed more quickly and/or partially, and that sales are occurring. So we do anticipate the fourth quarter having elevated -- elevating payoffs, similar to what we've seen in the past couple of quarters, obviously, it will depend on the timing of actual payoffs. So I think you can use kind of the most recent, the most recent quarters as a general guide for what we continue to expect, obviously, the portfolio has grown as well. So that's a good thing. And then the other positive there for the platform generally is we've really seen a tremendous amount of volume coming in on the front-end. And in some ways, capacity is our -- capital is our limitation. So, in some ways, we don't love to see payoffs, but it certainly provides us more opportunity to do more business as well.

Great, appreciate the color on that. Follow-up, you mentioned looking at some preferred and mezz investments. Can you talk about a little more detail on that, sourcing maybe how much capital you're willing to allocate there, and then what type of coupons you're seeing and will you put any leverage on those assets, and if so type of leveraging you are going to use?

Right. So there's a pretty wide band there in terms of opportunity. We have fairly limited capital outside of the CLO today. But we do have some and we'd like to use a portion of that to earn something. On to your question that well not a commitment so to speak. But I think the idea would be to do so on a leverage [ph] basis, there'll be structural leverage in the asset itself, whether it's a, b-loan or preferred equity or mezz loan. We have looked at opportunities in -- on Lument to sponsor, continues to seek out opportunities in the construction lending space. So that's an opportunity for carving out a b-loan or mezz position that could potentially be an asset there. That again has been focused in multifamily. We've looked at self-storage. We've looked at some hospitality more, because the opportunity set today as opposed to just a general thesis. On the preferred and mezz space, we do provide preferred and mezz behind Fannie and Freddie loans. We have looked at it behind other CRE fixed -- long-term fixed investments. There is a challenge, right? If you look at where debit yields are, where cap rates are, the return profile on those investments is not really better than a levered first position, and in many cases I think for some -- perhaps on the construction side or some of these other structured finance trades, there's an opportunity, but I do see as rates continue to rise or continue to I think just normal course rising as we've seen in the market here, you'll see a natural increase in that band of available capital. I think when you look at the risk/return profile for preferred and mezz today is, it's a bit of a tough sell, unless you believe kind of debt yields and cap rates are going to stay extraordinarily low for a long period of time. So if you look at the market in general, I think you haven't seen a tremendous amount of need for it, right? There has been a lot of equity capital available to sponsors. And there is a lot of first lien capital available sponsors at reasonably high leverage. So it's not that we haven't seen any, we've taken a couple swings at some deals. But there is just I think the pipeline in general is kind of toward the narrow and where it would be historically. I will ask maybe Precilla, I don't know if you want to add anything there. But that would be our -- my high-level comments there.

I agree with everything you said, Jim. But to Jim's point, though, I want to emphasize is that because of a number of direct relationships we have -- we made -- we are able to explore and evaluate opportunities that provide some of these off-market type yields, and we will continue to focus on those as avenues for these types of opportunities.

Right, appreciate the comments from both of you and certainly nice having the source ability and flexibility to pursue those when appropriate. Thank you.

The next question is from Steve Delaney with JMP Securities. Please go ahead.

Thanks. Jim, appreciate the -- Jim Briggs appreciate the detail on the expense items. I think a drop in distributable was certainly expected we were at $0.07 against your $0.06 so a penny -- penny is really no big deal. One thing you didn't mention, or I didn't hear it, you had an existing CLO and then you did the larger $1 billion CLO. Within that transaction, was there any write-off of deferred issuance costs related to the prior CLO that was paid off in full? I assume there probably was, but I didn't hear that in your commentary.

Okay, thanks, Steve. Yes, there was -- the refinance was last quarter. So the loss on extinguishment of debt that you see in our nine month numbers was the acceleration of those deferred financing costs. So it was an EPS to distributable rec item for last quarter, behind for this quarter. And you'll see it in our year-to-date results. And yes, they were -- it was approximately $1.7 million.

Yes, those are big items for sure. And Mike Larsen, $800 million portfolio absent new capital of any -- some type what would you say the peak size of the portfolio? I guess I'm saying how much capacity do you have on a net basis to grow that $800 million? Thanks.

First, if you look at our business, the primary source of financing, our portfolio today is a billion dollar CLO. So you're looking at a billion dollars a little over a billion dollars, based on our current capital base for the peak portfolio. And as we discussed, we think there's real opportunity to grow the scale of LFT and continue to consider ways to grow our capital base, as we move into next year so that we can increase the scale and efficiency of LFT.

So you think maybe a couple quarters to kind of fully utilize the capacity within the CLO?

As mentioned, we expect to fully deploy the CLO before the end of this year.

Oh, by the end of the year. Okay, very good. Jim Flynn, a lot of effort on the capitalization side recently obviously, with the preferred and the new supersize CLO. I'm just trying to take a next steps, I think you're about a little over $216 million of total capitalization. We consider the term loan to be [indiscernible] that capital we put it in there in terms of -- from a portfolio perspective. And my question is, it would seem depressed is great and that it's there for a long-term. There's no short-term put, but 8% is expensive money, which shorter-term unsecured notes four, five, six year notes would that make sense as a next step in your ability -- your capitalization goals in trying to grow that base?

Yes. So there's a couple of thoughts on that. Obviously, from a market standpoint, the debt markets in particular have continued to really look attractive for issuer, whether that's the CLO space, or the corporate space. And pretty much since we've done our every, I mean, and this isn't unique to LFT, but every kind of debt capital raise that someone has done over the past probably couple of years, over the passage of time, that deal is could have been better, right? If you waited, but you can't sure, as we all know. So would today it would be great to replace all of our more expensive capital with that cheaper capital that's available today. So the answer is yes that would be better. There are considerations for if you think about our term loan, prepayment penalties and things of that nature, but we are looking at that on a regular basis. So there's an inflection point where it makes sense to say, hey, we should be looking at replacing this source of capital, because it's accretive to do so even if you have to pay fees. We're not quite there. But if you run the math and look at it, we're pretty close to be honest with you. So that's one thing. So clearly, you're spot on in terms of evaluating what's available in the market and does it make sense to replace your existing capital. And then, as we've talked about on other calls, and really since we took over as manager, one of the keys to growing this platform was to prove out the business plan, to get some new investors into the stock to increase the book value from the 50s and 60s to a point where you can actually think about raising common equity. We think we've done that, where we look at common, we look at preferred, and we look at our overall leverage. So to my earlier statement about capital being our constraining factor at this point, our path is set on growth. And we have tremendous amount of production and deal flow that can be made available to this platform and to this -- to develop these balance sheet into shareholders. And we're working with all of our banking teams and advisers on a least weekly basis talking about opportunities to okay, we've -- we did a preferred we increased a term loan. We did the CLO. We're going to be deployed ahead of schedule so kind of what's next. And there's you mentioned one outlet, but there's many across the capital stack from common all the way to senior security. We're kind of evaluating all of it. And I expect us to continue to be active on a go-forward basis and thinking about ways to raise more capital.

Great, well, it's worth you've gotten stock up to a little bit over 90% of book. So congratulations on that. Thanks for your comments.

Thanks, Steve.

The next question is from Christopher Nolan with Ladenburg Thalmann. Please go ahead.

Hi, Jim Briggs on the follow-up on the loss of extinguishment of debt, was that a 3Q item or a 2Q item, I seem to recall this last quarter?

That's correct, Chris. It was last quarter. It was recorded at the time we gained the two existing CLOs and closed the $1 billion CLO, so last quarter item number is around $1.7 million.

Great and I appreciate the detail you gave on all the expenses. Just clarification, why was the interest expense up so much this quarter versus last quarter?

We've got a full-quarter of the CLO, right. So we refinanced our two existing CLOs put on the $1 billion CLO and the associated debt there. So this was our first full-quarter of interest expense on the CLO debt.

Okay. [Indiscernible].

$2 billion, just to be clear, say you raised the preferred, you raised the term loan and you raised the billion of CLOs, so the CLOs roughly 600 odd million and now you're a billion, so this will be the first full-quarter with the billion dollar CLO, that $800 million plus of CLO notes.

Okay. Just want to make sure is there anything else in there. And I guess for Precilla, deductions in your LTVs unless you deals were done 72% plus the cash coverage ratio for many of your borrowers?

So, what I can share with respect to our most recent financial statements received from our clients, the weighted average debt service coverage of the portfolio in LFT is about 1.5 times. So it's very healthy and as we originate assets, we are generally very cognizant of the -- if you won't go in depth yield and debt service coverage of our assets that are going in and we seek to have a balance. Obviously, from time to time we do some very strong lease-up transactions, which at the lower end of -- going in debt yield or debt service coverage, but on a portfolio basis, we are certainly cognizant of that in our originations.

Fair. And your observation in terms of rent stabilization laws, are they proliferating in your markets, they're pretty common in larger markets, but don't know how they are in the Southeast and Midwest?

So to your point on the focus of our program, as historically been demonstrated is in the more middle markets, middle market sector, also in the middle of the country kinds of thing. So we found not to be generally in the markets, which have more stringent rent stabilization laws, which typically are in the East and West Coast. So, I'd say the substantial component of our portfolio historically is not impacted by that.

[Operator Instructions]. The next question is from Matthew Howlett with Nomura. Please, go ahead.

Hey, guys, thanks for taking my question. Just you talked about the board meeting on the dividend and we look at distribution also running ahead of this quarter's earnings, but is it to sort of reconcile get to a run rate number is it as easy as sort of saying, you have $44 million of cash in the quarter and $149 million of restricted cash, putting that most of that to work at 4% gets you sort of $0.07 per share quarterly increase from 3Q. I mean, it's as simple as just saying the cash isn't working, here is the EPS impact and this is our sort of quarterly run rate earnings?

So I think you'd have to -- you should look at those two buckets of cash slightly differently, right, the 140 have restricted is what's available inside of the CLO. So when that cash is deployed, I guess, based on what you're saying, you're already paying interest. So yes, right. That is a fair statement to, the ROI of that money is more but the incremental is the ones you put in, and the $40 million, look we'll keep, we won't deploy a 100% of our capital even if we were to put loans on the balance sheet where the high yield or otherwise. But I think 50% to 60% of that or slightly more I think your assumption is a fair one of the $40 million.

Got it. And you said by the end of the year, so maybe the fourth quarter, you don't get the full benefit all of it from day one. But is that, I guess, where I've gotten this is the board sort of look at the run rate, when they look at the dividend; they look at the run rate?

Yes, I think -- yes we do expect the CLO to be fully deployed, and I would expect a reasonable, I would expect half of that other capital to have been put to work at some point, this quarter or early next of the $40 million.

Got it. Okay, great, I will definitely take that into account. And I don't know if you spoke about it recently, but if could just give us sort of the update on the merger, I know it was two years ago, Lument and ORIX and just sort of give us an update on the manager and how that's going, and where does LFT sit in on longer-term plans?

Sure. So in terms of the merger, we're fully integrated the platform, the Lument platform, the sponsors platform we're fully integrated. There is no real silos or parts of the overall company that have not been integrated. So all of our lending products, investment products that fall under the Lument brand are operating seamlessly with singular leadership and under one brand, one set of credit metrics, and those types of things. So that's gone very well. I think the team did a tremendous job of getting us there, particularly given that we really haven't been back to the office until recently till this quarter since March of 2020. So that was a heavy lift, but happy and proud to say that, that's gone extremely well and really has been relatively seamless. And in terms of where -- how LFT fits in, if you look at our business model as a sponsor, we've got this mortgage banking lending business, we've got our servicing book, fee-based businesses, we're growing our advisory business and investment sales and M&A, transaction-based, fee-based businesses, and then we have our capital intensive business, primarily the bridge lending business and the high-yield those considerations are kind of in between, right, they're still capital intensive, but on a larger scale than first lean bridge loans. This is the perfect vehicle for that outlet. It's got -- this market in LFT have an investor base that are looking for stable cash flow, stable dividend. The expectation is, you do good lending, you do good assets, you manage your dividend to the market and you're generally rewarded with a better -- a good investor base and happy investors. And so I think the managing of those two business models is really perfect as probably an extreme word, but they fit very well together, right, you have seamless management, you have investor bases that kind of choose the hierarchy team kind of valuation of a fee-based business. And then you have the fixed income dividend yield investor that's looking at LFT. So, in terms of how it fits in, I think it's kind of the right vehicle for us to pair with the rest of our platform and, we really expect it to continue to grow and be a significant component of our strategy going forward.

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

Thank you, and thanks all for the questions. Great call today from the attendees. Appreciate all that feedback. We hope to be in touch with all of you soon. And look forward to speaking during the quarter and on our next investor call. Thanks all for joining. Take care.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.