Good morning and thank you for joining the Lument Finance Trust First Quarter 2022 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 Charles Duddy 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 first quarter 2022 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 Monday, we filed our 10-Q with the SEC and issued a press release, which provided details on our first 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 Exchange 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 and uncertainties 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-19 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 www.sec.gov. I will now turn the call over to James Flynn. Please go ahead.

Thank you Charlie. Good morning everyone. Welcome to the Lument Finance Trust's earnings call for the first quarter of 2022. Thank you for joining. During Q1, continue to observe very strong performance in our investment portfolio, we are continuing to make significant incremental investments to grow the asset base in LFT. First I'd like to begin by recapping our Q1 equity capital rates which we discussed in detail on our year-end earnings call. Every 20 seconds LFT closed on the transferable rights offering which resulted in the company raising approximately 83.5 million of gross common equity proceeds. This is an important transaction that provides LFT with growth capital required to meet our objectives of achieving appropriate operating scale and expanding our capacity to make investments in target assets. We believe this raise enables the company to improve operating expense efficiencies, and anticipate that the general and administrative expenses as a percentage of stockholder’s equity will decrease as a result of the offering. We also expected the offering will increase the liquidity and trading volume of our common stock. Finally, I'd note that the transaction demonstrated a strong alignment of interests between LFT and external manager at Lument. Portfolio of the manager exercises over subscription privilege and made a total investment of $40 million in the transaction. With this recent capital raise in mind I would describe our overall investment performance in Q1 of 2022 as in line with expectations as we began to deploy the new capital. Adjusting with our existing strategy and expertise we acquired 14 multifamily assets from an affiliate of our manager and as a result we increased the size of the investment portfolio by approximately 76 million or 7.5% during the quarter. In order to continue growing the portfolio on a leveraged basis to fully deploy…

Thank you Jim and good morning everyone. On Monday 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 Pages 4 through 8 of the presentation you will find key updates and an earnings summary for the quarter. The first quarter of 2022 we reported net income to common stockholders of approximately $1.8 million or $0.05 per share. We also reported distributable earnings of approximately $1.7 million or $0.05 per share. This represents a decline versus Q4 2021’s distributable EPS of $2.6 million or $0.11 per share. There are few primary drivers of the quarter-over-quarter decline in distributable EPS, the first of these is share count. As mentioned by Jim in his opening remarks on February 22nd we closed on a transferable rights offering. As a result of this transaction the company's total equity inclusive to both common and preferred increased by approximately 80 million quarter-over-quarter from approximately 169 million as of year-end to 249 million as of March 31st. The offering cost our total shares issued in outstanding to increase from 24.9 million shares as of December 31st to 52.2 million shares as of March 31st. Our weighted average share count during Q1 based on the February 22nd issuance date was 36.4 million shares. We see increase in share count contributed $0.02 per share of the EPS decline. Next I would like to touch on exit fees which we have highlighted on prior calls. LFTs loans are typically structured with exit fees which are recognized as interest income when the loan pays off and the fees collected in cash, therefore the timing of loan payoffs and associated…

Thank you, Jim and good morning everyone. We continue to experience a robust level of origination activity in the start of this year and the LFT portfolio continues to grow. During the first quarter as mentioned earlier, we acquired 14 new investments from our manager with a total principal balance of 185 million. All of these acquisitions were secured by multifamily assets. 119 million of these new loans are indexed one month LIBOR, and the remaining 66 million of loans were indexed the 30-day term SOFR. The first quarter acquisitions had a weighted average spread to the index of the applicable index of 340 basis points, and a weighted average index rate floor of nine basis points, and the acquired loans had a weighted average loan to value at origination of 75%. We experienced 109 million of loan payoffs during the quarter, and at quarter-end, our total loan portfolio outstanding principal balance was 1.08 billion, that represents a 7.5% increase in portfolio size quarter-over-quarter, and over a 100% increase relative to the first quarter of last year. The portfolio consisted of 71 loans with an average loan size of 15 million. Portfolio at quarter-end was 94% multifamily despite increase from 92% multifamily as of the year end 2021. Our second highest asset type concentration is self-storage, which represents 3% of the portfolio. And our exposure to retail and office continues to remain very low at 3% total principal balance on a combined basis. We continue to believe the middle market workforce housing multifamily asset class is the best real estate asset class for investment today. Despite rising rates in the current inflationary environment, we believe that the supply demand dynamics, demographics, and strong rent growth trends in this space continue to support multifamily assets and create an attractive investment opportunity…

Thanks, Mike. As I mentioned, certainly we've seen, market volatility and changes. But we still remain confident in the business plan and are excited about LFTs. Future, we like the asset class that we participate in. We believe we're well positioned to progress in this market. And we look forward to updating you all in the future, and future quarters. And with that, we'd like to open the call to questions.

[Operator Instructions]. Our first question comes from Crispin Love with Piper Sandler. Please go ahead.

Thank you. Good morning. So you made some comments on the CRE Clos in your opening remarks and mentioned 40 to 50 bips of widening in the market. And I think on the last call, you mentioned 30 to 40 bips of widening so that 40 to 50 bips sets was about 10 or so more bips of widening. I just want to make sure I have that right and then relatedly to that, how confident are you that you think you will be able to complete a CRE CLO in the coming months given the market volatility we're facing right now?

Sure, so the answer to the first one is as you described it, in terms of the widening is, yes, it's incremental to our prior call, or the statements on our prior call. And in fact, there's a deal in the market and we know, there's several others that are expected to come to market over the next 60 days or so. So, we have seen that widening and when you look at the Fed funds rate rises, or increases, it's not terribly surprising, but obviously it is disruptive to the market, at least in the short-term. What is less transparent to you know, the market and investors are individual spreads on assets as that's going on. And obviously, that doesn't get reset, those don't get reset at one time, like a CLO that’ a issue, right. Assets originated over a period of months and if you look at the deals that have hit the market, you look at our portfolio, and you bifurcate deals by month, without even dissecting the credit characteristics or risk parameters, you'd see generally a steady increase on a monthly basis, probably going back, certainly for the year and probably going back maybe a little bit further. And so, there is a dual process here of rates going up on both sides, which is obviously healthy and critical for the market to continue to function. In terms of the CRE CLO, our conversations with our partners and bankers and those in the markets, there's still a ton of liquidity and cash interested in this type of security and rated securities. So at this moment, based on those conversations, I feel fairly confident that the market will remain healthy and open. As we said, pricing and price discovery will continue to be something that we'll have to monitor, but I certainly -- all signs point towards the market being open. And again, the nature of our assets, the short-term nature of the assets and those liabilities and the floating rate nature allow us to take advantage of those increasing spreads as we originate new product. And, by example, assets that we pay off, that are in our current book, I mentioned earlier, but I do expect that all things being relatively equal meaning credit, that price will be higher on new assets. And, this is not a phenomenon, but a characteristic that I think all financial firms and particularly those that are on the CRE debt side are, we're all kind of facing the same challenges. In terms of the speed at which this is happening, I think, on the other side, having kind of a stable market that will hopefully level off over the rest of this year is long run healthy for our ability to move forward finance assets, advance our assets and offer financing to our borrower clients. Did I answer that fully?

Yeah, that was great. Thank you for the color there. And another one for me, so just how would you characterize your poor earnings power right now with how the portfolio stands, at least right now. I know, the first quarter is a little bit of an anomaly here, given the rights offering and likely the cash drag for a portion of the course, I'm curious how 2Q and then even beyond 2Q looks to earnings power, compared to the current dividend? And I know, it can be a tough question, because it's okay, it is either absent a precede CLO or kind of post pre CLO?

Yeah, I think so -- look, I think you said it, right. It's a little difficult. But if you assume some relative stability, and I don't mean no increases, right, we know that there are priced in and anticipated increases in short-term rates for the rest of this year, and maybe beyond. We've seen it on the asset level of deals coming in, and we see that we're pricing deals wider on the asset side. And there seems to be a general receptiveness in the market, to both of those trends. And, obviously, if those are, if those trends continue in a relatively proportionate and stable manner, the earnings are -- we feel pretty confident in our ability to deliver core earnings that deliver that market return. It's not all costs go up, right, we also have a mismatch in a positive way, meaning our assets are greater than our liabilities in terms of short-term rates or short-term rates go up, that over time should be a benefit to a financial entity like LFT. So, in terms of how we feel about it, I think, we're certainly cautiously optimistic, but we feel that without significant incremental disruption in the market, a Ukraine type of events that we have some reasonable stability, moving forward with how people are looking towards the rest of the year on a consensus basis, that, we'll be able to deliver that market and competitive return similar to our peers.

Thank you. I appreciate it. Thanks for taking my questions this morning.

Thank you.

Next question is from Stephen Laws with Raymond James. Please go ahead.

Hi, good morning. You covered a lot in the prepared remarks and the last question, so I appreciate everything you've provided so far. Mike, I guess I had a question on a couple of different loans, looks like two of the loans number two and nine, so through your top 10 look to mature in the next coming months and your only retail exposure supposed to mature in July. Curious to get your thoughts around that, you expect those to pay off, do you expect extension just so you know Will we see any extension fees or other fees tied to those, any thoughts on those three loans?

Sure, I will let Precilla or Charlie you can identify those and give thoughts in a second. But broadly speaking, you mentioned the retail assets, it's pretty, pretty, relatively small percentage exposure. Both of those assets are performing assets that we feel very good about us and assets. So I don't know, we have an answer on the sponsors plans there on, I am just pulling up the loans here. Precilla, if you have it in front of you, and you can speak…

Yeah, it is in page 13, and a supplement.

Got it, so number [Multiple Speakers] we expect to pay off for sure their moving forward? Number two --…

Jimmy, if I may, I'll just say that generally these loans are very well credit protected, based on various data points, whether they be VOV or potential purchase offers, and certainly from a refi perspective. Again, as Jim said, we cannot comment on specific borrower plans but we have currently no concerns on the credit of those assets. And therefore, if we were to assess prepayment ability, I'd say it would be high.

Right, appreciate the comment.

It does, it does. Yeah, it does raise a just, anecdotally, I guess a little bit, if you look at the -- and this is reflected in pay off rates, but if you look at the last couple of years, probably few years, business plans, particularly in the floating rate space where the doing some work as quickly as you can and sell the asset, that was the majority that was a shift from the middle of the last decade, toward you know, 2017-2018 because of the market was extraordinarily hot, values were going up, the housing shortage was real. And these are people taking advantage of value. So, I think, prior to Precilla's point for some of our sponsors who may have planned to exit and they may have executed their plan they may be doing exactly where they thought they were going to be. There's been some increase in value for performance as well. But they may be considering a hold versus a sell more than maybe what they thought they were going to when they went into the asset. And I'll say I'm somewhat speculating, but, that's kind of my view, because they have to put that money to work again. And so some sponsors may be looking at moving to staying in the bridge loan, maybe a bit longer, moving to a fixed rate financing, and holding the asset rather than selling it. So there is some, call it price discovery or kind of modification to business plans that I do think is happening in the market. I don't think it's a -- I don't think it's a negative, I think it's a function of people executing and thinking, well I might as well keep the current asset I have rather than buy another one with -- at a price I don't like or in a market I don't like. So, I do think we're going to see a bit more of that, but we feel very good in our portfolio. I mean, the one characteristic that just isn't changing is, the multifamily market and then particularly the assets we plan. There is still just a real shortage across the country. Again, we've saw this in the past or specific markets or sub markets that might have -- might not be there. But, the housing shortage is real and rising rates probably impacts the residential market or arguably more than the multifamily market, I don't know affordability basis. So the reality is that there's just an enormous need there and I think even with some of the concerns I mentioned earlier that the market is still pretty healthy. And, rents are continuing to increase. While I may expect them to increase at a lower rate even with inflation concerns because of those shortages, I do expect to see a balance and likely a rents pace or outpace expenses, even with some of the concerns outlined.

Right. So, so I guess as a follow up, Jim, I know in your prepared remarks, you talked about exit fees, 0.5 million this quarter and 1.5 million before. What do you expect that normalized number to be, is it $1 million right in the middle or is one of these more indicative of a typical quarter or is it seasonal 1Q always been like?

It is, it is a little bit seasonal, although I think it'd be unfair to maybe say that that's where it's going to end up. I think, the first quarter sorry, I have that. One of my colleagues, we were just looking at this, historically, I think we've said 30% to 40%. I think we saw that elevated probably in the last year plus and it's I think, started to move toward that rate in the first quarter. And I think that's probably a more realistic, average long-term 30% to 40% annually.

Great, thanks for the comments this morning.

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

Thanks. Good morning, everyone. I would like to start with your FL3 that I believe was reworked second quarter of last year, is that reinvestment period, is it two years or two and a half years, just trying to find out when that's going to close? [Multiple Speakers]. Two and a half? Okay, great.

November of 2023, I believe. Yeah, reinvestment.

That's a nice, nice run rate. Okay. Great, nice runway, I guess, for you there. And just observation, I think in my model, we've got that with a weighted average spread of about like 143 basis points, something of that ballpark. The Arbor deal last week was weighted average plus 235. So I understand and agree with your comments about plus 40 or 50. But you know, if we look back a year or two… [Multiple Speakers]. Oh, yeah. No, well, no. Arbor was 235 all end, last Friday. Last week, still. But in any event, that's good that you've got that ramp. And it sounds like your preference is to consider another CLO as watching the market. And when things maybe tighten up a little bit, I'm not hearing that if you were at capacity in FL3 that you necessarily would go out to repo bank lines, whatever, and build sort of an additional small portfolio with non-CLO financing. Am I correct in that that would be, I know, you're not going to say you would never do something like that but it would be your -- is it -- would it be your objective to grow the portfolio overall beyond FL3 when you could see the potential for an additional CLO financing? Thanks.

Thanks, Steven. And obviously, we're watching the Arbor [ph] deal very closely. There's a couple in the market now and there is couple more coming. Look, I think so as you said, I'm not ever going to say -- we're not going to say oh, we would never do that. But certainly our preference is to use CLO financing, right. It's -- yes, it's when you price it you're accepting the market pricing at that time for a period of at least 24 months before you would really consider refinancing. But you're locking in financing, you still have -- and one thing we haven't seen much pressure on from bond investors is the leverage is very attractive. It's stable, it's not mark to market. So that completely eliminates some of the largest challenges with rebuild warehouse financing. And, you're able to in the current structures with the two and a half or longer reinvestment periods, you're able to replace assets as we see the market go up. So I look at the pricing on the Arbor deal. Little surprising that it was -- there was not a little tighter, but it was kind of within a reasonable range of where we were expecting. I do think that Arbor, us, anyone that's in this space if they were putting newly originated assets in that vehicle from today forward, it's still a great vehicle. And so, the assets -- our current assets are catching up in line with the financing. But you still have to finance your existing book. So yes, we want and expect to use the CRE CLO market. We still think it's the best way to finance these types of assets. We think the bond investors seem to agree because there's still a strong appetite for the bonds here. Excuse me, and we like the overall risk. So overall, until somebody tells -- shows a better alternative that has all of the characteristics not mark-to-market, not non-recourse, good leverage, and kind of fixed spread for term with reinvestment rights, I think it's the best source of financing. And, if markets are working, your assets and liabilities should move in a correlated direction that continue that trend?

Yeah, no question from our perspective as analysts that we agree with you. We think it's by far the preferred. So getting away from leverage and just one quick follow-up if I may, your thoughts on over a period of time, a small capital allocation given your multifamily expertise to either press equity or mez loans or multifamily? And I'll leave it at that. Thank you.

Sure. And look, we've thought -- appreciate that question, Steven and all of them. But we've talked about that for those of you that have been on these calls, we've talked about that for quite a few quarters now. We would like to have an allocation toward those assets. They're -- at the asset level have obviously some leverage in them, but they're unlevered. So it serves a purpose of for the corporate entity to have somewhat of a lower overall leverage ratio. And historically, or at least, since we've been talking about it, I mean those options have not been terribly attractive from a return standpoint for LFT. yields have been really compressed in our opinion and liquidity was great in the market, high leverage was available from a lot of institutions, some peers, a lot of debt funds and private vehicles, etc. So, borrowers didn't really need to turn to that as much as they've maybe had historically and just commercial real estate more broadly. I think with the raising, and that's a -- it is a function of how low interest rates have been, right. It's hard to price in a senior, a mez, a pref without even touching those out when your rates are in the low single digits. There's just not a lot of room to have that. Construction was probably the one area where there continue to be demand for that mez or pref fees at a high level. With rates rising, I expect that to provide opportunities to see more of those assets. And I think we have a focus on it, we've got some folks really looking at it, we think the yields are starting to make more sense. So, whether that happens in the next quarter or two is going to be a function of the market, or over time, but it is something that we've had on our radar for quite some time.

Thanks for the comments.

The next question is from Jason Stewart with Jones Trading. Please go ahead.

Hey, this is Matthew Erdner on for Jason. I had a quick question again about the exit fees, given that rates have gone up and the environment has kind of changed, but there's still a lot of competition. Are you guys still able to get the same exit fees on current loans right now that you would have been a year ago?

On average, yes. I mean, we've seen -- so our typical loans we're still trying to get a point exit. There have been instances where we've taken a lower fee for a variety of reasons, usually competitive. But in general, we've really tried to stick to that one point exit fee threshold. There was a lot of pressure put on over the last year. I think maybe it will wane a little bit because just in general, there's a little bit less or fewer competitors out there. But in general, I'd say we've been able to maintain that with some exceptions.

Got you. Thanks. And then a follow-up would be, do you know the multiple that you guys have on the MSR and is that still a strategy that you guys believe in going forward?

It is. It's not a go forward strategy for us. That's an old legacy asset from prior to when we took over management. The multiple, Charles, you might know off the top of your head, but it's... [Multiple Speakers].

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

Hi. In your comments earlier, you mentioned that the capital raise was to achieve scale. Do you believe you have enough equity capital now to achieve the scale that you need to compete?

Yeah. Broadly speaking, though, I think we still -- if you look at the size of some of our peers and we don't have to be the biggest, but I do think there's reasonable room for growth in order to fully achieve that operating scale, both in terms of expenses and asset diversification size, etc. So we have bigger and broader plans to continue to grow over the coming years.

Okay. And then given that, would you consider another dilutive equity raise?

I mean, what I'd say is it was a very long discussion with our Advisors and our Board to get to the point where we did have the rights offering, which was what we thought was in the best interest of the existing shareholders. Obviously, I don't think I can give you a direct answer that says would we or would we not do something in the future like that. But I think you can assume that we're going to do everything we can to benefit our shareholder base. It would only make a decision that we thought was in the long term best interest for the shareholders.

And any consideration in giving a management fee waiver to support the dividend?

It's not something we've discussed with the Board, but like I said, any decisions like that that we've made would be made in consultation with our management team here and our Board.

Alright, thank you.

[Operator Instructions]. Our next question comes from Matthew Howlett with B. Riley. Please go ahead.

Hey, guys. Thinking in a sense of how large the CLO would be if you do pursue that route and then if you get coupons above, let's just say LIBOR plus 400, are we still talking about a low mid teen return on the equity given maybe still a 200 basis points spread inside that CLO?

Yeah. So in terms of the return profile at that level, I think right now low teens is what we're pushing for. I'd like to see it move up. I think it can with asset spreads, but that's our goal and our bogey. In terms of the size, depending on whether we utilize all of the capital and also the advanced rate. But just kind of looking at where the deals are now and expectations, it'd be likely somewhere in the 500 to 600 range.

Okay, got you. And then when I think about the dividend and I think about the core earnings power of the company, I guess the first question is would you consider refinancing that term loan, that high cost term loan you have? Second, we talk about ROEs being similar to peers. Put your core EPS run rate in the 8% to 10% sort of range and we're talking about 10% ROE, can we expect over time the dividend to get up to that range if you hit your targets?

Yeah. I mean I think -- look, I think that our certain -- value relative to book has declined, obviously with the market and during 2022. So our hope is to grow the overall yield on a market yield basis. That's obviously reflective of the stock price. So there's a push pull there and we typically are measuring against book internally in terms of what we're able to deliver. But as you've described it, I think that that makes sense. I'm sorry, I lost my train of thought. The other piece part of your question.

On the term loan, on that percentage?

The term loan is I think we said this, it's got some protections that are built in for the lender in terms of lockout and or prepayment fees. So the cost has been fairly high to refinance it at this point. I mentioned, I think on our prior call or another call where we've worked with that lender, they've modified that and worked with us because they like the risk profile. They understand where it was on a relative to market and we're continuing to monitor that and measure the timing. The prepayment penalty is obviously declining over time, but it's something that we evaluate regularly and are hoping to be able to refinance that in some form or another over the next several quarters or a little bit beyond that. But obviously market dependent and negotiations with our current lender and things like that.

Do you think the market is around 5% to 6% today, I'm just curious where you think the term loan market is today for your caliber?

I mean, that's probably right. It's a little bit with the volatility, it might be a little bit -- we are actively talking to folks or regularly talking to folks about how low of a cost that we need in order to make the prepayment make sense. If it's at the very low end or lower from where you're talking, you start to say maybe that does work. But I think realistically it's got to be a few quarters out but I think that's about where the market is. Things have moved so quickly in the capital markets, it's hard to put your thumb on it, I guess right now but that is the number about where it's been in recent past.

Okay, well that would be substantial -- obviously to get it done up there could be substantial savings and any more thoughts on the preferred market or it's just this point in time just want to focus on the CLO?

Right now I want to focus on the CLO and I want to get that done. You mentioned the term loan. That's something we want to continue to explore. But certainly as we grow we really want to look at the equity markets, common and preferred. But obviously depending on the cost of what that preferred looks like we're going to need to evaluate.

Thanks a lot.

Thank you.

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

I just want to thank everyone, a lot of good questions. Obviously please follow-up with me or the team here. Appreciate the support and continued interest and look forward to speaking to you over the coming quarters. Have a good day.

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