Lument Finance Trust(LFT) - 2025 Q2 - Quarterly Report

PART I Financial Statements The company's total assets decreased to $998.4 million as of June 30, 2025, from $1.13 billion at December 31, 2024, with net income for Q2 2025 at $3.7 million, down from $4.6 million in Q2 2024, and H1 2025 net income at $3.2 million, a significant drop from $11.6 million in the prior year period Consolidated Balance Sheets Total assets decreased from $1.13 billion at year-end 2024 to $998.4 million as of June 30, 2025, driven by a decrease in commercial mortgage loans held-for-investment from $1.05 billion to $905.4 million, while total liabilities also decreased from $890.7 million to $766.9 million, and total equity saw a slight reduction from $237.9 million to $231.5 million Consolidated Balance Sheet Highlights (in thousands) | Account | June 30, 2025 (unaudited) | December 31, 2024 | | :--- | :--- | :--- | | Assets | | | | Cash and cash equivalents | $59,404 | $69,173 | | Commercial mortgage loans held-for-investment, net | $905,420 | $1,048,803 | | Real estate owned, held-for-investment, net | $23,818 | $0 | | Total Assets | $998,387 | $1,128,594 | | Liabilities | | | | Collateralized loan obligations and secured financings, net | $709,863 | $828,390 | | Total Liabilities | $766,931 | $890,695 | | Total Equity | $231,456 | $237,899 | - The company's consolidated balance sheets include significant assets and liabilities from consolidated variable interest entities (VIEs) As of June 30, 2025, assets of consolidated VIEs totaled $934.1 million and liabilities totaled $712.8 million[10] Consolidated Statements of Operations For the second quarter of 2025, net interest income was $7.0 million, down from $9.5 million in Q2 2024, with net income attributable to common stockholders at $2.5 million, or $0.05 per share, compared to $3.4 million, or $0.07 per share, in the prior-year quarter, and for the six-month period, net income attributable to common stockholders was $0.8 million, a sharp decline from $9.2 million year-over-year Quarterly Performance Comparison (in thousands, except per share data) | Metric | Q2 2025 | Q2 2024 | | :--- | :--- | :--- | | Net Interest Income | $6,961 | $9,523 | | Provision for credit losses, net | ($95) | ($1,400) | | Net Income | $3,691 | $4,598 | | Net Income Attributable to Common Stockholders | $2,506 | $3,413 | | Basic and Diluted EPS | $0.05 | $0.07 | Six-Month Performance Comparison (in thousands, except per share data) | Metric | H1 2025 | H1 2024 | | :--- | :--- | :--- | | Net Interest Income | $14,695 | $22,515 | | Provision for credit losses, net | ($5,792) | ($3,177) | | Net Income | $3,168 | $11,579 | | Net Income Attributable to Common Stockholders | $798 | $9,209 | | Basic and Diluted EPS | $0.02 | $0.18 | Consolidated Statements of Changes in Equity Total equity decreased from $237.9 million at the end of 2024 to $231.5 million at June 30, 2025, primarily driven by common and preferred stock dividends totaling $9.7 million, partially offset by net income of $3.2 million and minor common stock issuances - For the six months ended June 30, 2025, total equity decreased by approximately $6.4 million Key activities included net income of $3.2 million, offset by common stock dividends of $7.3 million and preferred stock dividends of $2.4 million[16] Consolidated Statements of Cash Flows For the six months ended June 30, 2025, net cash provided by operating activities was $7.7 million, net cash provided by investing activities was $116.0 million, and net cash used in financing activities was $134.5 million, resulting in a net decrease in cash of $10.8 million Six-Month Cash Flow Summary (in thousands) | Activity | Six Months Ended June 30, 2025 | Six Months Ended June 30, 2024 | | :--- | :--- | :--- | | Net Cash Provided by Operating Activities | $7,705 | $14,571 | | Net Cash Provided by Investing Activities | $115,958 | $162,272 | | Net Cash (Used in) Financing Activities | ($134,480) | ($161,768) | | Net (Decrease) Increase in Cash | ($10,816) | $15,075 | - A significant non-cash investing activity was the transfer of a senior loan to Real Estate Owned (REO) valued at $23.96 million during the first six months of 2025[20] Notes to Unaudited Consolidated Financial Statements The notes provide detailed explanations of the company's accounting policies and financial activities, including the structure of its commercial mortgage loan portfolio, the use of Collateralized Loan Obligations (CLOs) as VIEs for financing, management fee structures, and the methodology for calculating the allowance for credit losses under CECL NOTE 3 - COMMERCIAL MORTGAGE LOANS HELD-FOR-INVESTMENT The commercial mortgage loan portfolio, consisting entirely of senior secured floating-rate loans, decreased to a carrying value of $905.4 million as of June 30, 2025, from $1.05 billion at year-end 2024, with the allowance for credit losses increasing to $14.3 million from $11.3 million, and the portfolio's average risk rating remaining stable at 3.5, heavily concentrated in multifamily properties (90.6%) and geographically focused in the South (36.3%) and Southwest (32.8%) Loan Portfolio Characteristics | Metric | June 30, 2025 | December 31, 2024 | | :--- | :--- | :--- | | Unpaid Principal Balance | $924.2M | $1,065.6M | | Carrying Value (net of allowance) | $905.4M | $1,048.8M | | Loan Count | 56 | 65 | | Weighted Average Coupon | 7.9% | 8.1% | | Allowance for Credit Losses | $14.3M | $11.3M | Loan Portfolio Risk Rating (by Outstanding Principal) | Risk Rating | June 30, 2025 | December 31, 2024 | | :--- | :--- | :--- | | 2 (Low Risk) | $80.4M | $57.8M | | 3 (Moderate Risk) | $495.5M | $616.6M | | 4 (High Risk) | $224.2M | $292.8M | | 5 (Default Risk) | $124.1M | $98.3M | | Total | $924.2M | $1,065.6M | - As of June 30, 2025, there were eight loans with a risk rating of '5' (Default Risk) totaling $124.1 million in principal, an increase from six loans totaling $98.3 million at year-end 2024 Several loans were placed on non-accrual status or required specific allowances for credit losses due to monetary or maturity defaults[70][71][78] - The allowance for credit losses on loans held-for-investment increased from $11.3 million at the beginning of the period to $14.3 million at the end of June 2025, after a provision of $5.8 million and charge-offs of $2.9 million[75] NOTE 4 - USE OF SPECIAL PURPOSE ENTITIES AND VARIABLE INTEREST ENTITIES The company utilizes two primary Variable Interest Entities (VIEs) for financing, the 2021-FL1 CLO and the LMF 2023-1 Financing, which LFT consolidates, holding $934.1 million in assets and $712.8 million in liabilities as of June 30, 2025, with all collateralization and coverage tests met Consolidated VIE Assets and Liabilities (June 30, 2025) | Account | Amount (in millions) | | :--- | :--- | | Assets | | | Loans held for investment, net | $902.9 | | Real estate owned, net | $23.8 | | Total VIE Assets | $934.1 | | Liabilities | | | Collateralized loan obligations and secured financings | $709.9 | | Total VIE Liabilities | $712.8 | - The 2021-FL1 CLO's reinvestment period expired in December 2023, meaning principal proceeds now reduce the outstanding debt The LMF 2023-1 Financing has a reinvestment period through July 2025[97][98] NOTE 5 - REAL ESTATE OWNED As of June 30, 2025, the company held two multifamily properties as Real Estate Owned (REO) with a net book value of $23.8 million, acquired during the first half of 2025 through foreclosure on defaulted bridge loans within its consolidated CLO and financing vehicles, with a weighted average occupancy of approximately 73.5% - During the first six months of 2025, the company foreclosed on two multifamily bridge loans, resulting in the acquisition of REO assets One had a net carrying value of $13.0 million (net of $2.4 million CECL reserves) and the other had a net carrying value of $11.0 million (net of $0.5 million CECL reserves)[104][105] NOTE 7 - SECURED TERM LOAN The company has a $47.75 million Secured Term Loan maturing in February 2026, with its interest rate subject to step-ups, increasing to 7.50% on February 24, 2025, and to 7.85% on June 23, 2025, secured by substantially all assets of the credit parties and in compliance with all financial covenants as of June 30, 2025 Secured Term Loan Details | Metric | Value | | :--- | :--- | | Outstanding Balance (June 30, 2025) | $47.75M | | Maturity Date | February 14, 2026 | | Interest Rate (as of June 23, 2025) | 7.85% | NOTE 10 - RELATED PARTY TRANSACTIONS The company is externally managed by Lument Investment Management (Lument IM), to whom it paid management fees of $2.2 million and incentive fees of $0.7 million for the six months ended June 30, 2025, with the Manager waiving $453,222 in incentive fees for this period, and also reimbursing the Manager for certain operating expenses totaling $0.9 million for the first half of 2025 Fees Paid to Manager (Six Months Ended June 30) | Fee Type | 2025 | 2024 | | :--- | :--- | :--- | | Management Fees | $2,214,753 | $2,209,196 | | Incentive Fees (incurred) | $654,309 | $2,171,752 | | Reimbursable Expenses | $899,421 | $875,074 | - The Manager agreed to waive $453,222 in incentive fees that would have otherwise been incurred for the six months ended June 30, 2025[129] NOTE 13 - EQUITY As of June 30, 2025, the company had 52.3 million common shares and 2.4 million Series A Preferred shares outstanding, with $9.4 million remaining authorized under its $10 million stock repurchase program, and declared common dividends of $0.14 per share and preferred dividends of $0.98438 per share during the first six months of 2025, also issuing 31,837 shares under an Independent Directors Stock-for-Fees Program Dividends Declared (H1 2025) | Stock Type | Total Dividend Amount | Per Share | | :--- | :--- | :--- | | Common Stock | $7,326,421 | $0.14 | | Series A Preferred Stock | $2,362,500 | $0.98438 | - The company has a stock repurchase program with $9.4 million remaining authorized as of June 30, 2025 No repurchases have been made since January 2016[150] NOTE 16 - SUBSEQUENT EVENTS In August 2025, subsequent to the reporting period, the company acquired a multifamily property in San Antonio, TX, through foreclosure, where the associated loan, held in the 2021-FL1 CLO, had a risk rating of '5' and an outstanding principal balance of $26.6 million as of June 30, 2025 - In August 2025, the company foreclosed on a multifamily property in San Antonio, TX The loan had an outstanding principal of $26.6 million and was risk-rated '5'[166] Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses the challenging market environment characterized by high interest rates and slowing economic growth, which has increased credit risk in the portfolio, leading to a significant year-over-year decrease in net income due to lower net interest income and higher credit loss provisions on several risk-rated '5' multifamily loans, with the loan portfolio decreasing to $0.9 billion, financed primarily by $0.7 billion in non-mark-to-market CLOs, and key performance metrics for Q2 2025 including a net income of $0.05 per share and Distributable Earnings of $0.05 per share, with a declared dividend of $0.06 per share, and book value per common share declining to $3.27 Recent Developments and Market Conditions The market continues to face volatility from high inflation and interest rates, slowing economic growth, and geopolitical uncertainty, with elevated Federal Reserve rates posing challenges to commercial real estate values and borrower performance, although partially mitigated by interest rate caps on 75% of performing loans - Market volatility is driven by high inflation, elevated interest rates, and slowing economic growth, which adversely impacts the real estate industry and the company's borrowers[178] - The Federal Reserve has held the federal funds target range at 4.25% to 4.50% through July 2025 The prolonged period of elevated rates may adversely affect borrowers and strain the operating cash flows of collateral properties[179][182][183] Second Quarter 2025 Summary For the second quarter of 2025, the company reported net income attributable to common stockholders of $2.5 million, or $0.05 per share, and Distributable Earnings of $2.8 million, or $0.05 per share, declared a common dividend of $0.06 per share, saw book value per common share stand at $3.27, and experienced $63.4 million in loan payoffs while funding $3.6 million in new loan participations Q2 2025 Key Metrics | Metric | Value | | :--- | :--- | | Net Income per Share | $0.05 | | Distributable Earnings per Share | $0.05 | | Common Dividend per Share | $0.06 | | Book Value per Share | $3.27 | Key Financial Measures and Indicators The company uses Earnings per Share, Dividends Declared, Distributable Earnings, and Book Value per Share as key indicators, with Q2 2025 Distributable Earnings at $2.8 million ($0.05/share), reconciled from GAAP net income by excluding non-cash items, and book value per common share decreasing to $3.27 from $3.40 at the end of 2024, impacted by a CECL allowance of $0.27 per share Reconciliation of Net Income to Distributable Earnings (Q2 2025) | Item | Amount (in thousands) | | :--- | :--- | | Net income attributable to common stockholders | $2,506 | | Unrealized loss on MSRs | $36 | | Unrealized provision for credit losses | $95 | | Depreciation of REO | $139 | | Adjustment for income taxes | ($4) | | Distributable Earnings | $2,772 | Book Value Per Share Calculation | Item | June 30, 2025 | December 31, 2024 | | :--- | :--- | :--- | | Total stockholders' equity | $231.4M | $237.8M | | Less: Preferred stock | ($60.0M) | ($60.0M) | | Total common stockholders' equity | $171.4M | $177.8M | | Book value per share | $3.27 | $3.40 | Results of Operations Comparing Q2 2025 to Q1 2025, net income increased from a loss of $1.7 million to a gain of $2.5 million, primarily due to a significantly lower provision for credit losses in Q2, while net interest income decreased slightly from $7.7 million to $7.0 million due to a smaller loan portfolio, and on a year-over-year basis for the six-month period, net income fell sharply from $9.2 million in H1 2024 to $0.8 million in H1 2025, driven by a $7.8 million decrease in net interest income and a $2.6 million increase in other expenses - The increase in net income from Q1 2025 to Q2 2025 was mainly driven by a decrease in the provision for credit losses, from a $5.7 million provision in Q1 to a $0.1 million provision in Q2[255][254] - The decrease in net income for the six months ended June 30, 2025 compared to the same period in 2024 was primarily due to a $7.8 million reduction in net interest income and a $2.6 million increase in total other expense, largely from higher credit loss provisions[268] Liquidity and Capital Resources The company's primary liquidity sources are cash flow from operations, proceeds from stock issuance, and debt facilities, with unrestricted cash at $59.4 million as of June 30, 2025, and a total debt-to-equity ratio of 3.3:1 on a GAAP basis, facing heightened risk of using unrestricted cash to purchase defaulted assets out of its CLOs to satisfy coverage tests, though management believes current liquidity is sufficient for short-term needs, with long-term requirements dependent on additional financing - Unrestricted cash and cash equivalents decreased to $59.4 million at June 30, 2025, from $69.2 million at December 31, 2024[282] - The company's total debt to equity ratio was 3.3:1 as of June 30, 2025 The ratio of recourse debt to equity was much lower at 0.2:1[283][284] - There is a heightened possibility that the Company may need to use unrestricted cash to purchase defaulted mortgage assets out of its CLO structures to ensure compliance with interest and overcollateralization coverage tests[280] Quantitative and Qualitative Disclosures about Market Risks The company has indicated that this item is not applicable for this reporting period - Not applicable[299] Controls and Procedures Management, including the CEO and CFO, evaluated the company's disclosure controls and procedures and concluded they were effective as of June 30, 2025, with no material changes in internal control over financial reporting during the most recently completed fiscal quarter - The principal executive officer and principal financial officer concluded that the company's disclosure controls and procedures were effective as of June 30, 2025[301] - No changes occurred during the quarter that have materially affected, or are reasonably likely to materially affect, the company's internal control over financial reporting[302] PART II - Other Information Legal Proceedings The company is not involved in any material legal proceedings as of the reporting date - As of the report date, the company is not subject to any legal proceedings that it considers to be material[303] Risk Factors There have been no material changes to the company's risk factors since the Annual Report on Form 10-K for the year ended December 31, 2025, with risks disclosed in the Q1 2025 10-Q incorporated by reference - No material changes to risk factors have occurred since the company's Annual Report on Form 10-K for the year ended December 31, 2025[304] Unregistered Sales of Equity Securities and Use of Proceeds There were no unregistered sales of equity securities during the period - None[305] Defaults Upon Senior Securities There were no defaults upon senior securities during the period - None[306] Other Information During the quarter ended June 30, 2025, no directors or officers adopted or terminated a Rule 10b5-1 trading arrangement or a non-Rule 10b5-1 trading arrangement - No directors or officers adopted or terminated a Rule 10b5-1 trading arrangement during the quarter[308] Exhibits This section lists the exhibits filed with the report, including CEO and CFO certifications and XBRL data files - The exhibits filed with the report include certifications from the CEO and CFO pursuant to Sarbanes-Oxley Sections 302 and 906, as well as XBRL Interactive Data Files[312]