Good morning and thank you for joining the Lument Finance Trust Fourth 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 fourth quarter 2022 financial results. With me on the call today are James Flynn, CEO; Michael Larsen, President; and James Briggs, CFO. On Thursday, we filed our 10-K with the SEC and issued a press release, which provided details on our fourth 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 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 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 statements. Furthermore, certain non-GAAP financial measures will be discussed on this call. 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 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. Good morning, everyone. Welcome to the Lument Finance Trust earnings call for the fourth quarter of 2022 and thank you for joining. I’d like to first begin by addressing the economic environment. Obviously, more news today that we are all paying attention to. But the multifamily market has continued to experience a transition as lenders and investors react to the higher interest rates, the economic uncertainties, the capital markets, and overall volatility. Investment activity has declined relative to 12 months ago as buyers and sellers work to reassess financing costs to find a new normal for levels of asset valuations and financing structures. We have seen just anecdotally 17% year-over-year decline in transaction volume on the investment sales side quarter-over-quarter. But if you go back to the fourth quarter, you saw almost 70% decline. So you have seen obviously a significant decline in just market activity. However, despite the lending recessionary indicators increasing and potential negative impacts of the ongoing banking crisis, the employment market remains relatively strong and supportive of continued rent growth for many multifamily assets, although we do see a slower rate than we have seen over the previous 2 years. And while the margin may be spinning, we do continue to expect rents to generally outpace expenses in most of our markets and believe the credit quality of the middle-market workforce housing asset remains attractive. That middle-market housing supply-demand dynamics, demographics and long-term rent growth trends do create and continue to create an attractive investment opportunity for shareholders over the long-term. Our multifamily investment portfolio has performed well. While we did book an additional unrealized loss reserve against our sole office loan this quarter, which we ultimately realized last month and which we will discuss later during the call, the remainder of our book…

Thank you, Jim and good morning everyone. On Thursday evening, we filed our Annual Report on Form 10-K 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. For the fourth quarter of ‘22, we reported net income to common stockholders of approximately $880,000 or $0.02 per share. We also reported distributable earnings of approximately $3.3 million or $0.06 per share. This compares favorably to the distributable earnings of $1.7 million or $0.03 per share in the prior quarter. There are a few items I’d like to highlight with regards to our Q4 P&L. Beginning with net interest income, our Q4 net interest income was $6.9 million compared to $5.5 million in Q3 of ‘22, which represents a significant 26% increase quarter-over-quarter. This increase was primarily driven by higher LIBOR and SOFR rates. During Q4, LIBOR averaged 3.88% versus an average of 2.46% during Q3. Short-term interest rates continue to increase, which we expect will continue to benefit LFT’s earnings profile over the coming quarters. During Q4, we experienced $45 million of loan payoffs, which represents an increase relative to $34 million of loan payoffs during Q3. The $45 million of payoffs experienced during the quarter represents a 17% annualized payoff rate. While this payoff rate is below our long-term historical averages, we expect to continue experiencing similar payoff speeds over the coming quarters due to persistent interest rate volatility and economic uncertainty. Primary difference between our distributable and reported net income during Q4 was a $2.4 million provision for loan loss. In Q4 of this year, we…

Thank you, Jim, and good morning, everyone. As Jim Flynn touched on earlier, the broader economic conditions, which have continued to be volatile and uncertain, have driven a decline in new acquisition activity. And it also expressed the number of bridge loan opportunities that support the current in-place cost of financing that exists in the market. At the same time, we have seen and expect payoff speeds to temper in the near-term, reducing our capacity for new investments relative to previous quarters and years. We anticipate that trend to continue throughout 2023, while interest rate increases moderate in the general real estate markets reset to new higher interest rate environment. During Q4, LFT directly originated five new investments with a total unpaid principal balance of $75.6 million. Four of these new investments were supported by senior housing assets and one was secured by a multifamily asset. The new loans acquired this previous period were indexed to 30-day terms SOFR and had a weighted average spread of 398 basis points. That level represents a meaningful increase relative to the current portfolio weighted average spread of 343 basis points. New acquisitions had a weighted average index rate floor of 82 basis points, also an increase relative to our average of our portfolio of 37 basis points. The acquired loans had a weighted average LTV at origination of 55%, which is, we believe, attractive leverage point and is below our portfolio average LTV of 71.5%. As mentioned, we experienced $45 million of loan payoffs during the quarter and at quarter end, our total loan portfolio announcing principal balance of $1.1 billion. That’s a 3% increase in portfolio size quarter-over-quarter and a 7% increase relative to the fourth quarter of 2021. The portfolio consists of 71 loans with an average loan size of $15…

Thanks Mike. Well, we look forward to continuing to update on our progress. Obviously, things are changing on a daily basis and look forward to some more stability in the market. And – but with that, I’d like to open it up to questions from the participants.

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

Hi, good morning. I guess Jim Briggs, I’ll start, I appreciate all the color on the office loans. That answered a lot of my questions from the modeling. So I appreciate that. Then with the CECL implementation, I just want to make sure I’m clear there. The $3 million to $4 million impact, will that run through the income statement and then be added back in Q1 or only any change versus that January 1 adjustment that would run through the income statement?

Stephen, it will be just a change from that number. So we’re anticipating our opening adjustment to equity retain earnings with no P&L impact will be within that range. And then it will be any change from that in the quarter because of moves in the portfolio, moves in the economic forecast and other factors that go into the calculation.

Great. That makes sense. I just wanted to make sure I always understand that correctly. To move maybe to the originations, four loans, I think, in investments from healthcare. Can you talk about what you’re seeing there that makes it attractive relative to multifamily? Was this just a unique quarter and maybe too small a sample size to read anything into another deck? Obviously, clearly states multifamily will remain the primary focus. And then maybe as a follow-up on the new investment activity, LIBOR floors most were under 100 bps and a little surprised that low. Are you not focused on that, more focused on maybe the 55% LTV metric you put out or can you talk about the things you are pushing for in new loans and kind of how you prioritize those things?

Sure. I mean I will take first on the seniors housing piece of it. Just a couple of points there. We have discussed in the past – our manager is one of the largest providers of financing in the seniors housing and healthcare space. And so we do see significant opportunities in that space. Although we are focused on multifamily investments, we recently did see some attractive opportunities, as you said, lower leverage and made those investments last quarter. There – the dynamics of healthcare properties tend to have much higher debt yields and dynamics that support bridge financing in this market. And these assets, we thought were a good opportunity for us to continue to grow the portfolio despite the decline in transaction activity that we see. We don’t expect a significant increase in seniors housing and expect our continued focus to be on multifamily.

Great. And one last one, if I might. Any seasonality expenses to think about Q1 filing or the CLO that you are looking to get done and the modeling?

I had a little bit trouble. Can you repeat that question?

Sure. Any seasonality we need to think about with expenses in Q1 related to year-end SEC filings or auditing or potentially with the CLO deal that’s in the market that we should include in our model from an operating expense standpoint?

Jim Briggs, you can speak to the audit. I don’t believe anything that’s different than what we have seen in past years.

No, I think that’s correct.

Alright. Appreciate the color this morning.

[Operator Instructions] Our next question comes from Jason Stewart from JonesTrading. Please go ahead.

Good morning guys. Thank you. On the multi side, what kind of transition rates are you seeing from Class A to B to C? If you can talk to that and maybe how that impacts your portfolio?

When you say transition rates, you mean available investment opportunities?

Well, I am looking at – for color on the underlying resident movement. So, who is going from Class A to B to C? Does that improve occupancy, physical, etcetera?

Yes. I think – I mean look, you obviously have to be – you have to look at each market and micro market. In general historically, we found that there is less volatility in occupancy at the – what we have largely described as workforce housing, which B, C and even if you flip into the affordable space, there is – the primary reason for that is the supply-demand demographics or balance is far out of whack. And so I don’t know that we are there yet to fully identify a trend, but typically in a time of distress, whether it’s recessionary or just kind of economic downturn that you are more likely to see more people looking for more affordable housing than where they currently live than going the other way. So, I do – I would continue to expect. And you also have – we do have new builds coming online in certain markets, and they are going to be newer and nicer. And so they will probably or, in many cases, will lease up, but that maybe to the detriment of the comp set in the area. But in general, the occupancy levels at the mid and lower-level apartments, which is obviously the majority of where we operate is generally improves or remains more stable is probably a better word in times of distress.

Yes. I would expect that, too. Okay. That’s helpful. And then how would you characterize the takeout financing for transitional projects right now? I mean any it does for any case seems to be a little bit illiquid. How would you characterize the ability to get out of a project?

I think that – what you just said is true of the agencies. They certainly are – we have certainly seen an uptick of a lot of folks looking at more deals. And I think – and there is also, again very recent history, past couple of months, more interest expectation on borrower sides coming in with cash to put long-term financing on. The banking crisis, that’s ongoing. And the impact on community banks and regionals, I think is only going to further exacerbate that problem that you described around takeout financing. I think from our standpoint and what we have seen, in general, you look at the trends in the space, you look at the long-term prognosis for multifamily and it’s still, from our perspective, a long-term attractive asset and I think owners feel the same way. Certainly a naturally optimistic group that there is a bit more acceptance of trying to perhaps accepting that they may need to give up some of their equity or potential equity gains in order to get lock in reasonable and attractive long-term financing. And that can be in the form of cash in if they are well capitalized or able to raise capital fairly easy. It can also be in the meeting at the common level. I think we have seen a significant uptick in the interest for preferred equity and/or mezz throughout the industry. We have seen deals getting done, but I know that there is just a lot more borrowers that are looking to bring in a new partner, execute the business plan and hold the asset, maybe longer than they originally planned, but with new equity and longer term debt. I do think we are going to need to see a lot of that for most bridge loans. An 80 or 85 – even an 80 LTV bridge loan is not going to get an 80 LTV 10-year loan. And so there is value protection there, but they are going to need cash infusion in either the form of common or some other subordinate capital. The good news is, from a borrower standpoint is there is a lot of that capital that’s either out there being raised or lenders and others expressing interest to do so.

Got it. That’s helpful. Thank you.

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

And I just want to thank everyone for joining. I know it’s another hectic morning. We will continue to be in touch and look forward to speaking to you all again soon. Thank you.

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