UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

☒			QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2022

OR

☐			TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from ________ to ____________ 

Commission File No. 001-35845 

LUMENT FINANCE TRUST, INC.

(Exact name of registrant as specified in its charter) 

Maryland						45-4966519
(State or other jurisdiction of incorporation or organization)						(I.R.S. Employer Identification Number)

230 Park Avenue, 20th Floor, New York, New York						10169
(Address of principal executive offices)						(Zip code)

Registrant's Telephone Number, including area code (212) 317-5700

Securities Registered Pursuant to Section 12(b) of the Act:

Title of Each Class:

Trading Symbol(s)

Name of Exchange on Which Registered:

Common Stock, par value $0.01 per share

LFT

New York Stock Exchange

7.875% Series A Cumulative Redeemable Preferred Stock, par value $0.01 per share

LFTPrA

New York Stock Exchange

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days: Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See definitions of “large accelerated filer,” “accelerated filer,” "smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act.  

Large accelerated filer ☐			Accelerated Filer ☐
Non-accelerated Filer ☒			Smaller reporting company ☒
			Emerging growth company ☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

Class						Outstanding at November 7, 2022
Common stock, $0.01 par value						52,231,152

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LUMENT FINANCE TRUST, INC.

 

INDEX

 

PART I - Financial Information
Item 1.			Financial Statements
			Consolidated Balance Sheets as of September 30, 2022 (unaudited) and December 31, 2021			1
			Consolidated Statements of Operations for the three and nine months ended September 30, 2022 (unaudited) and September 30, 2021 (unaudited)			2
			Consolidated Statement of Changes in Equity for the three and nine months ended September 30, 2022 (unaudited) and September 30, 2021 (unaudited)			3
			Consolidated Statements of Cash Flows for the nine months ended September 30, 2022 (unaudited) and September 30, 2021 (unaudited)			5
			Notes to Unaudited Consolidated Financial Statements			6
Item 2.			Management’s Discussion and Analysis of Financial Condition and Results of Operations			22
Item 3.			Quantitative and Qualitative Disclosures about Market Risks			37
Item 4.			Controls and Procedures			38
PART II - Other Information						38
Item 1.			Legal Proceedings			38
Item 1A.			Risk Factors			38
Item 2.			Unregistered Sales of Equity Securities and Use of Proceeds			38
Item 3.			Defaults Upon Senior Securities			38
Item 4.			Mine Safety Disclosures			38
Item 5.			Other Information			38
Item 6.			Exhibits			39
Signatures						40

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PART I - FINANCIAL INFORMATION

Item 1. Financial Statements 

LUMENT FINANCE TRUST, INC. AND SUBSIDIARIES

Consolidated Balance Sheets

						September 30, 2022(1)						December 31, 2021(1)
						(unaudited)
ASSETS
Cash and cash equivalents						$	48,485,316					$	14,749,046
Restricted cash						28,222,095						3,530,006
Commercial mortgage loans held-for-investment, at amortized cost						1,045,953,691						1,001,825,294
Allowance for loan losses						(1,872,937)						—
Commercial mortgage loans held-for-investment, net of allowance for loan losses						1,044,080,754						1,001,825,294
Mortgage servicing rights, at fair value						817,907						551,997
Accrued interest receivable						4,259,025						3,977,752
Investment related receivable						601,972						22,400,000
Other assets						2,199,881						1,889,258
Total assets						$	1,128,666,950					$	1,048,923,353
LIABILITIES AND EQUITY
LIABILITIES:
Collateralized loan obligations, net						828,673,313						826,782,543
Secured term loan, net						46,908,234						46,845,502
Accrued interest payable						1,662,145						704,055
Dividends payable						4,135,161						3,242,809
Fees and expenses payable to Manager						1,648,799						1,825,142
Other accounts payable and accrued expenses						372,789						147,802
Total liabilities						883,400,441						879,547,853
COMMITMENTS AND CONTINGENCIES (NOTES 10 & 11)
EQUITY:
Preferred Stock: par value $0.01 per share; 50,000,000 shares authorized; 7.875% Series A Cumulative Redeemable, $60,000,000 aggregate liquidation preference, 2,400,000 shares issued and outstanding at September 30, 2022 and December 31, 2021, respectively						57,254,935						57,254,935
Common Stock: par value $0.01 per share; 450,000,000 shares authorized, 52,231,152 and 24,947,883 shares issued and outstanding, at September 30, 2022 and December 31, 2021, respectively						522,252						249,434
Additional paid-in capital						314,609,303						233,833,749
Cumulative distributions to stockholders						(156,405,599)						(143,449,310)
Accumulated earnings						29,186,118						21,387,192
Total stockholders' equity						245,167,009						169,276,000
Noncontrolling interests						$	99,500					$	99,500
Total equity						$	245,266,509					$	169,375,500
Total liabilities and equity						$	1,128,666,950					$	1,048,923,353

(1)     Our consolidated balance sheets include assets and liabilities of consolidated variable interest entities ("VIEs") as the Company was the primary beneficiary of these VIEs. As of September 30, 2022 and December 31, 2021, assets of consolidated VIEs totaled $1,004,040,687 and $1,003,896,995, respectively and the liabilities of consolidated VIEs totaled $830,248,911 and $827,390,435 respectively. See Note 4 for further discussion.

The accompanying notes are an integral part of these unaudited consolidated financial statements.

1

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LUMENT FINANCE TRUST, INC. AND SUBSIDIARIES

Consolidated Statements of Operations

(unaudited)

						Three Months Ended September 30, 2022						Three Months Ended September 30, 2021						Nine Months Ended September 30, 2022						Nine Months Ended September 30, 2021
Revenues:
Interest income:
Commercial mortgage loans held-for-investment						$	14,743,563					$	9,465,332					$	37,386,399					$	25,163,428
Cash and cash equivalents						4,969						5,724						14,736						22,802
Interest expense:
Collateralized loan obligations						(8,317,893)						(3,891,089)						(17,607,021)						(8,288,278)
Secured term loan						(947,509)						(846,988)						(2,807,362)						(2,393,216)
Net interest income						5,483,130						4,732,979						16,986,752						14,504,736
Other (loss) income:
Provision for loan losses						(1,521,023)						—						(1,872,937)						—
Unrealized gain (loss) on mortgage servicing rights						37,312						(59,776)						265,910						(300,666)
Loss on extinguishment of debt						—						—						—						(1,663,926)
Servicing income, net						62,451						106,392						185,685						326,314
Total other (loss) income						(1,421,260)						46,616						(1,421,342)						(1,638,278)
Expenses:
Management and incentive fees						1,096,144						807,967						3,111,413						2,254,431
General and administrative expenses						851,528						935,817						2,664,680						2,136,144
Operating expenses reimbursable to Manager						555,307						511,117						1,594,662						1,320,170
Other operating expenses						83,574						91,378						237,572						174,185
Compensation expense						73,016						50,991						178,797						149,617
Total expenses						2,659,569						2,397,270						7,787,124						6,034,547
Net income before provision for income taxes						1,402,301						2,382,325						7,778,286						6,831,911
Benefit from (provision for) income taxes						97,974						(7,857)						20,640						31,442
Net income						1,500,275						2,374,468						7,798,926						6,863,353
Dividends accrued to preferred stockholders						(1,185,042)						(1,198,167)						(3,555,042)						(1,927,542)
Net income attributable to common stockholders						$	315,233					$	1,176,301					$	4,243,884					$	4,935,811
Earnings per share:
Net income attributable to common stockholders (basic and diluted)						$	315,233					$	1,176,301					$	4,243,884					$	4,935,811
Weighted average number of shares of common stock outstanding						52,231,152						24,947,883						47,031,833						24,945,130
Basic and diluted income per share						$	0.01					$	0.05					$	0.09					$	0.20
Dividends declared per share of common stock						$	0.06					$	0.09					$	0.18					$	0.27

The accompanying notes are an integral part of these unaudited consolidated financial statements.

2

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LUMENT FINANCE TRUST, INC. AND SUBSIDIARIES

Consolidated Statement of Changes in Equity

(unaudited)

						Preferred Stock												Common Stock												Additional Paid-in Capital						Cumulative Distributions to Stockholders						Accumulated Earnings						Total Stockholders' Equity						Noncontrolling interests						Total Equity
						Shares						Value						Shares						Par Value
Balance at December 31, 2021						2,400,000						$	57,254,935					24,947,883						$	249,434					$	233,833,749					$	(143,449,310)					$	21,387,192					$	169,276,000					$	99,500					$	169,375,500
Issuance of common stock						—						—						27,277,269						272,773						83,195,670						—						—						$	83,468,443					—						$	83,468,443
Cost of issuing common stock						—						—						—						—						(2,404,070)						—						—						$	(2,404,070)					—						$	(2,404,070)
Restricted stock compensation expense						—						—						—						—						4,638						—						—						$	4,638					—						$	4,638
Net income						—						—						—						—						—						—						2,954,799						$	2,954,799					—						$	2,954,799
Common stock dividends						—						—						—						—						—						(3,133,509)						—						$	(3,133,509)					—						$	(3,133,509)
Preferred stock dividends						—						—						—						—						—						(1,184,958)						—						(1,184,958)						—						$	(1,184,958)
Balance at March 31, 2022						2,400,000						57,254,935						52,225,152						$	522,207					$	314,629,987					$	(147,767,777)					$	24,341,991					$	248,981,343					$	99,500					$	249,080,843
Issuance of common stock						—						—						6,000						45						18,765						—						—						$	18,810					—						$	18,810
Cost of issuing common stock						—						—						—						—						(14,196)						—						—						$	(14,196)					—						$	(14,196)
Restricted stock compensation expense						—						—						—						—						(14,334)						—						—						$	(14,334)					—						$	(14,334)
Net income						—						—						—						—						—						—						3,343,852						$	3,343,852					—						$	3,343,852
Common stock dividends						—						—						—						—						—						(3,133,869)						—						$	(3,133,869)					—						$	(3,133,869)
Preferred stock dividends						—						—						—						—						—						(1,185,042)						—						$	(1,185,042)					—						$	(1,185,042)
Balance at June 30, 2022						2,400,000						57,254,935						52,231,152						522,252						314,620,222						(152,086,688)						27,685,843						247,996,564						99,500						248,096,064
Issuance of common stock, net						—						—						—						—						—						—						—						$	—					—						$	—
Cost of issuing common stock						—						—						—						—						(14,352)						—						—						$	(14,352)					—						$	(14,352)
Restricted stock compensation expense						—						—						—						—						3,433						—						—						$	3,433					—						$	3,433
Net income																		—						—						—						—						1,500,275						$	1,500,275					—						$	1,500,275
Common dividends declared						—						—						—						—						—						(3,133,869)						—						$	(3,133,869)					—						$	(3,133,869)
Preferred dividends declared						—						—						—						—						—						(1,185,042)						—						$	(1,185,042)					—						$	(1,185,042)
Balance at September 30, 2022						2,400,000						57,254,935						52,231,152						522,252						314,609,303						(156,405,599)						29,186,118						245,167,009						99,500						245,266,509

 

The accompanying notes are an integral part of these unaudited consolidated financial statements.

3

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LUMENT FINANCE TRUST, INC. AND SUBSIDIARIES

Consolidated Statement of Changes in Equity

(unaudited)

						Preferred Stock												Common Stock												Additional Paid-in Capital						Cumulative Distributions to Stockholders						Accumulated Earnings						Total Stockholders' Equity						Noncontrolling interests						Total Equity
						Shares						Value						Shares						Value
Balance at December 31, 2020						—						—						24,943,383						249,389						233,850,271						(131,355,978)						10,859,970						113,603,652						99,500						113,703,152
Restricted stock compensation expense						—						—						—						—						2,885						—						—						2,885						—						2,885
Net income						—						—						—						—						—						—						2,808,643						2,808,643						—						2,808,643
Common stock dividends						—						—						—						—						—						(2,244,904)						—						(2,244,904)						—						(2,244,904)
Preferred stock dividends						—						—						—						—						—						(3,708)						—						(3,708)						—						(3,708)
Balance at March 31, 2021						—						—						24,943,383						249,389						233,853,156						(133,604,590)						13,668,613						114,166,568						99,500						114,266,068
Issuance of common stock						—						—						4,500						45						11,655						—						—						$	11,700					—						$	11,700
Issuance of preferred stock, net						2,400,000						57,258,435						—						—						—						—						—						$	57,258,435					—						$	57,258,435
Restricted stock compensation expense						—						—						—						—						(8,459)						—						—						$	(8,459)					—						$	(8,459)
Net income						—						—						—						—						—						—						1,680,242						$	1,680,242					—						$	1,680,242
Common stock dividends						—						—						—						—						—						(2,245,309)						—						$	(2,245,309)					—						$	(2,245,309)
Preferred stock dividends						—						—						—						—						—						(725,667)						—						$	(725,667)					—						$	(725,667)
Balance at June 30, 2021						2,400,000						57,258,435						24,947,883						249,434						233,856,352						(136,575,566)						15,348,855						170,137,510						99,500						170,237,010
Issuance of common stock						—						—						—						—						—						—						—						$	—					—						$	—
Cost of issuing common stock						—						—						—						—						(11,201)						—						—						$	(11,201)					—						$	(11,201)
Restricted stock compensation expense						—						—						—						—						4,741						—						—						$	4,741					—						$	4,741
Net income						—						—						—						—						—						—						2,374,468						$	2,374,468					—						$	2,374,468
Common dividends declared						—						—						—						—						—						(2,245,310)						—						$	(2,245,310)					—						$	(2,245,310)
Preferred dividends declared						—						—						—						—						—						(1,198,166)						—						$	(1,198,166)					—						$	(1,198,166)
Balance at September 30, 2021						2,400,000						57,258,435						24,947,883						249,434						233,849,892						(140,019,042)						17,723,323						169,062,042						99,500						169,161,542

The accompanying notes are an integral part of these unaudited consolidated financial statements.

4

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LUMENT FINANCE TRUST, INC. AND SUBSIDIARIES

Consolidated Statements of Cash Flows

(unaudited)

						Nine Months Ended September 30, 2022						Nine Months Ended September 30, 2021
Cash flows from operating activities:
Net income						$	7,798,926					$	6,863,353
Adjustments to reconcile net income to net cash provided by operating activities:
Accretion of commercial mortgage loans held-for-investment discounts						(125,098)						(24,773)
Amortization of commercial mortgage loans held-for-investment premiums						55,804						361,227
Accretion of collateralized loan obligations discounts						—						207,767
Amortization of deferred offering costs						(100,219)						(11,201)
Amortization of deferred financing costs						2,072,877						1,260,660
Provision for loan losses						1,872,937						—
Loss on extinguishment of debt						—						1,663,926
Unrealized (gain) loss on mortgage servicing rights						(265,910)						300,666
Restricted stock compensation expense						12,547						10,867
Net change in:
Accrued interest receivable						(281,273)						(1,067,059)
Other assets						(310,623)						(371,732)
Accrued interest payable						958,090						216,110
Fees and expenses payable to Manager						(176,343)						472,199
Other accounts payable and accrued expenses						224,987						2,043,121
Net cash provided by operating activities						11,736,702						11,925,131
Cash flows from investing activities:
Purchase of commercial mortgage loans held-for-investment						(269,596,827)						(647,459,391)
Principal payments from commercial mortgage loans held-for-investment						247,335,751						391,394,015
Investment related receivable						—						(48,890,010)
Net cash (used in) investing activities						(22,261,076)						(304,955,386)
Cash flows from financing activities:
Proceeds from issuance of common stock						81,136,045						—
Net proceeds from issuance of preferred stock						—						57,258,435
Proceeds from collateralized loan obligation						—						833,750,000
Proceeds from credit facility						—						7,500,000
Payment of collateralized loan obligations						—						(465,316,126)
Payment of deferred financing costs						(119,375)						(8,731,741)
Dividends paid on common stock						(8,512,687)						(7,732,853)
Dividends paid on preferred stock						(3,551,250)						(926,249)
Net cash provided by financing activities						68,952,733						415,801,466
Net increase in cash, cash equivalents and restricted cash						58,428,359						122,771,211
Cash, cash equivalents and restricted cash, beginning of period						18,279,052						69,375,356
Cash, cash equivalents and restricted cash, end of period						$	76,707,411					$	192,146,567
Supplemental disclosure of cash flow information
Cash paid for interest						$	17,383,416					$	8,996,957
Non-cash investing and financing activities information
Dividends declared but not paid at end of period						$	4,135,161					$	3,443,476

The accompanying notes are an integral part of these unaudited consolidated financial statements.

5

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LUMENT FINANCE TRUST, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

September 30, 2022

NOTE 1 – ORGANIZATION AND BUSINESS OPERATIONS

Lument Finance Trust, Inc. (together with its consolidated subsidiaries, the "Company") is a Maryland corporation that focuses primarily on investing in, financing and managing a portfolio of commercial real estate ("CRE") debt investments. The Company is externally managed by OREC Investment Management, LLC, doing business as Lument Investment Management (the "Manager" or "Lument IM"). The Company's common stock is listed on the NYSE under the symbol "LFT."

The Company was incorporated on March 28, 2012 and commenced operations on May 16, 2012. The Company began trading as a publicly traded company on March 22, 2013.

The Company has elected to be taxed as a real estate investment trust ("REIT") and to comply with Sections 856 through 859 of the Internal Revenue Code of 1986, as amended (the "Code"). Accordingly, the Company generally will not be subject to U.S. federal income tax to the extent of its distributions to stockholders and as long as certain asset, income and share ownership tests are met.

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation

The unaudited consolidated financial statements and related notes have been prepared in accordance with GAAP for interim financial reporting and the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, certain information and note disclosures normally included in the financial statements prepared under GAAP have been condensed or omitted. In the opinion of management, all adjustments considered necessary for a fair presentation of the Company’s financial position, results of operations and cash flows have been included and are of a normal and recurring nature. The operating results presented for interim periods are not necessarily indicative of the results that may be expected for any other interim period or for the entire year. These consolidated financial statements should be read in conjunction with the Company’s financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2021, which was filed with the Securities and Exchange Commission (“SEC”) on March 15, 2022.

Principles of Consolidation

The accompanying consolidated financial statements of the Company include the accounts of the Company and all subsidiaries which it controls (i) through voting or similar rights or (ii) by means other than voting rights if the Company is the primary beneficiary of a variable interest entity ("VIE"). Entities which the Company does not control and entities which are VIEs in which the Company is not the primary beneficiary are accounted for under the equity method or other appropriate GAAP. All significant intercompany transactions have been eliminated on consolidation.

VIEs

An entity is considered a VIE when any of the following applies: (1) the equity investors (if any) lack one or more essential characteristics of a controlling financial interest; (2) the equity investment at risk is not sufficient to finance that entity's activities without additional subordinated financial support; or (3) the equity investors have voting rights that are not proportionate to their economic interests and the activities of the entity involve or are conducted on behalf of an investor with a disproportionately small voting interest. The Company consolidates VIEs in which it is considered to be the primary beneficiary. The primary beneficiary is defined as the entity having both the following characteristics: (1) the power to direct activities that, when taken together, most significantly impact the VIE performance; and (2) the obligation to absorb losses and right to receive returns from the VIE that would be significant to the VIE.

The Company evaluates quarterly its junior retained notes and preferred shares of LFT CRE 2021-FL1, Ltd. for potential consolidation, and prior to their unwinding in the second quarter of 2021, Hunt CRE 2017-FL1, Ltd. and Hunt CRE 2018-FL2, Ltd. At September 30, 2022, the Company determined it was the primary beneficiary of LFT CRE 2021-FL1, Ltd. based on its obligation to absorb losses derived from ownership of its preferred shares, and prior to the second quarter of 2021 determined it was the primary beneficiary of Hunt CRE 2017-FL1, Ltd. and Hunt CRE 2018-FL2, Ltd. Accordingly, the Company consolidated the assets, liabilities, income and expenses of the underlying issuing entities. The Company's maximum exposure to loss from collateralized loan obligations ("CLO") was $166,250,000 at September 30, 2022 and December 31, 2021, respectively.

Use of Estimates

The financial statements have been prepared on the accrual basis of accounting in accordance with GAAP. The preparation of financial statements in conformity with GAAP requires the Company to make a number of significant estimates. As of September 30, 2022, global macroeconomic conditions, including heightened inflation, changes to fiscal and monetary policy, higher interest rates, currency fluctuations, labor shortages and challenges in the supply chain, coupled with the war in Ukraine and the ongoing effects of the novel coronavirus ("COVID-19") pandemic, have the potential to negatively impact the Company and it borrowers. These current macroeconomic conditions may continue to aggravate and could cause the United States economy or other global economies to experience an economic slowdown or recession. We anticipate our business operations could be materially adversely affected by a prolonged recession in the United States or other major global economy.

We believe the estimates and assumptions underlying our consolidated financial statements are reasonable and supportable based on the information available as of September 30, 2022, however uncertainty over the ultimate impact of COVID-19, rising inflation and increases in interest rates on the global economy generally, and our business in particular, makes any estimates and assumptions as of September 30, 2022 inherently less certain than they would be absent the current and potential impacts of COVID-19, macroeconomic changes, and geopolitical events. Actual results could differ from our estimates and the differences may be material.

Cash and Cash Equivalents and Restricted Cash

Cash and cash equivalents at time of purchase include cash held in bank accounts on an overnight basis and other short term deposit accounts with banks having maturities of 90 days or less at time of acquisition. The Company maintains its cash and cash equivalents with highly rated financial institutions, and at times these balances exceed insurable amounts.

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LUMENT FINANCE TRUST, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

September 30, 2022

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

Restricted cash includes cash held within LFT CRE 2021-FL1 as of September 30, 2022 and December 31, 2021, respectively.

The following table provides a reconciliation of cash, cash equivalents and restricted cash reported within the consolidated balance sheets that sum to the total of the same amounts shown in the statements of cash flows.

			September 30, 2022						December 31, 2021
Cash and cash equivalents			$	48,485,316					$	14,749,046
Restricted cash CRE 2021-FL1, Ltd.			$	28,222,095					$	3,530,006
Total cash, cash equivalents and restricted cash			$	76,707,411					$	18,279,052

Deferred Offering Costs

Direct costs incurred to issue shares classified as equity, such as legal and accounting fees, are deducted from the related proceeds and the net amount recorded as stockholders’ equity. Accordingly, payments made by the Company in respect of such costs related to the issuance of shares are recorded as an asset in the accompanying consolidated balance sheets in the line item "Other assets", for subsequent deduction from the related proceeds upon closing of the offering. To the extent that certain costs, in particular legal fees, are known to have been accrued but have not yet been invoiced and paid, they are included in "Other accounts payable and accrued expenses" on the accompanying consolidated balance sheets.

Fair Value Measurements

The "Fair Value Measurements and Disclosures" Topic 820 of the FASB, or ASC 820, defines fair value, establishes a framework for measuring fair value, and requires certain disclosures about fair value measurement under GAAP. Specifically, the guidance defines fair value based on exit price, or the price that would be received upon the sale of an asset or the transfer of a liability in an orderly transaction between market participants at measurement date. ASC 820 specifies a hierarchy of valuation techniques based on the inputs used in measuring fair value.

Valuation techniques are based on observable and unobservable inputs. Observable inputs reflect readily obtainable market data from independent sources, while unobservable inputs reflect the Company's market assumptions. The three levels are defined as follows:

•Level 1 Inputs – Quoted prices for identical instruments in active markets.

•Level 2 Inputs – Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and model-derived valuations whose inputs are observable or whose significant value drivers are observable.

•Level 3 Inputs – Instruments with primarily unobservable value drivers.

Pursuant to ASC 820 we disclose fair value information about financial instruments, which are not otherwise reported at fair value in our consolidated balance sheet, to the extent it is practicable to estimate fair value for those certain instruments.

The following methods and assumptions are used to estimate the fair value of each class of financial instrument, for which it is practicable to estimate that value:

•Cash and cash equivalents: The carrying amount of cash and cash equivalents approximates fair value.

•Restricted cash: The carrying amount of restricted cash approximates fair value.

•Commercial mortgage loans: The Company determines the fair value of commercial mortgage loans by utilizing a pricing model based on discounted cash flow methodologies using discount rates, which reflect current market interest rates that would be offered for loans with similar characteristics and credit quality. Additionally, the Company may record fair value adjustments on a non-recurring basis when it has determined it necessary to record a specific impairment reserve or charge-off against a loan and the Company measures such specific reserve or charge-off using the fair value of the loan's collateral. To determine the fair value of loan collateral, the Company employs the income capitalization approach, appraised values, broker opinion of value, sale offers, letter of intentions of purchase, or other valuation benchmarks, as applicable, depending upon the nature of such collateral and other relevant market factors.

•Mortgage servicing rights: The Company determines the fair value of MSRs from a third-party pricing service on a recurring basis. The third-party pricing service uses common market pricing methods that include using discounted cash flow models to calculate present value, estimated net servicing income and observed market pricing for MSR purchase and sale transactions. The model considers contractually specified servicing fees, prepayment assumptions, delinquency rates, late charges, other ancillary revenue, costs to service and other economic factors.

•Collateralized loan obligations: The Company determines the fair value of collateralized loan obligations by utilizing a third-party pricing service. In determining the value of a particular investment, pricing service providers may use market spreads, inventory levels, trade and bid history, as well as market insight from clients, trading desks and global research platform.

•Secured term loan: The Company determines the fair value of its secured term loan based on a discounted cash flow methodology.

Commercial Mortgage Loans Held-for-Investment

Commercial mortgage loans held-for-investment represent floating-rate transitional loans and other commercial mortgage loans purchased by the Company. These loans include loans sold into securitizations that the Company consolidates. Commercial mortgage loans held-for-investment are intended to be held-to-maturity and, accordingly, are carried at their unpaid principal balances, adjusted for net unamortized loan fees and costs (in respect of originated loans), premiums and discounts (in respect of purchased loans) and impairment, if any.

Interest income is recognized as revenue using the effective interest method and is recorded on the accrual basis according to the terms of the underlying loan agreement. Any fees, costs, premiums and discounts associated with these loan investments are deferred and amortized over the term of the loan on a straight-line basis approximating the effective interest method. Income accrual is generally suspended and loans are placed on non-accrual status on the earlier of the date at which payment has become 90 days past due or when full and timely collection of interest and principal is considered not probable. The

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LUMENT FINANCE TRUST, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

September 30, 2022

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

Company may return a loan to accrual status when repayment of principal and interest is reasonably assured under the terms of the underlying loan agreement. As of September 30, 2022, the Company held one loan on non-accrual status where interest income is accounted for on a cash basis.

Quarterly, the Company assesses the risk factors of each loan classified as held-for-investment and assigns a risk rating based on a variety of factors, including, without limitation, debt-service coverage ratio ("DSCR"), loan-to-value ratio ("LTV"), property type, geographic and local market dynamics, physical condition, leasing and tenant profile, adherence to business plan and exit plan, maturity default risk and project sponsorship. The Company's loans are rated on a 5-point scale, from least risk to greatest risk, respectively, which ratings are described as follows:

1.Very Low Risk: exceeds expectations and is outperforming underwriting or it is very likely that the underlying loan can be refinanced easily in the period's prevailing capital market conditions

2.Low Risk: meeting or exceeding underwritten expectation

3.Moderate Risk: consistent with underwritten expectations or the sponsor may be in the early stages of executing the business plan and the loan structure appropriately mitigates additional risks

4.High Risk: potential risk of default, a loss may occur in the event of default

5.Default Risk: imminent risk of default, a loss is likely in the event of default

The Company evaluates each loan rated High Risk or above on a quarterly basis as to whether it is impaired. Impaired loans are individually evaluated based on the Company's quarterly assessment of each loan and assignment of a risk rating. Impairment occurs when the Company determines that the facts and circumstances of the loan deem it probable that the Company will not be able to collect all amounts due in accordance with the contractual terms of the loan. If a loan is considered to be impaired, an allowance is recorded to reduce the carrying value of the loan through a charge to the provision for loan losses. Impairment of these loans, all of which are deemed collateral dependent, is measured by comparing the estimated fair value of the underlying collateral, less costs to sell, to the book value of the respective loan. These valuations require significant judgments, which include assumptions regarding capitalization rates, leasing, creditworthiness of major tenants, occupancy rates, availability of financing, exit plan, actions of other lenders, and other factors deemed necessary by the Manager. Actual losses, if any, may ultimately differ from estimated losses. As of September 30, 2022, the Company identified its sole office loan, collateralized by an office building in Chicago, as impaired and established an allowance for loan loss of $1.5 million for the three months ended September 30, 2022 and $1.9 million for the nine months ended September 30, 2022. See Note 3 for further detail.

In addition, the Company evaluates the entire portfolio to determine whether the portfolio has any impairment that requires a valuation allowance on the remainder of the loan portfolio. As of September 30, 2022, the Company has not recognized any additional impairments on its loans held-for-investment, other than the loan noted above. We also assessed the remainder of the portfolio, considering the absence of delinquencies and current market conditions, and, as such has not recorded any allowance for loan losses.

Mortgage Servicing Rights, at Fair Value

Mortgage servicing rights ("MSRs") are associated with residential mortgage loans that the Company historically purchased and subsequently sold or securitized. MSRs are held and managed at Five Oaks Acquisition Corp. ("FOAC"), the Company’s taxable REIT subsidiary ("TRS"). As the owner of MSRs, the Company is entitled to receive a portion of the interest payments from the associated residential mortgage loan, and is obligated to service, directly or through a subservicer, the associated loan. MSRs are reported at fair value. Residential mortgage loans for which the Company owns the MSRs are directly serviced by two sub-servicers retained by the Company. The Company does not directly service any residential mortgage loans.

 

MSR income is recognized at the contractually agreed upon rate, net of the costs of sub-servicers retained by the Company. If a sub-servicer with which the Company contracts were to default, an evaluation of MSR assets for impairment would be undertaken at that time.

Collateralized Loan Obligations

Collateralized loan obligations represent third-party liabilities of LFT CRE 2021-FL1, Ltd. as of September 30, 2022 and Hunt CRE 2017-FL1, Ltd. and Hunt CRE 2018-FL2, Ltd. prior to their unwind date of June 14, 2021 (the "CLOs"). The CLOs are VIEs that the Company has determined it is the primary beneficiary of and accordingly are consolidated in the Company's financial statements, excluding liabilities of the CLOs acquired by the Company that are eliminated on consolidation. The third-party obligations of the CLOs do not have any recourse to the Company as the consolidator of the CLOs. CLOs are carried at their outstanding unpaid principal balances, net of any unamortized discounts or deferred financing costs. Any premiums, discounts or deferred financing costs associated with these liabilities are amortized to interest expense using the effective interest method over the expected average life of the related obligations, or on a straight line basis when it approximates the effective interest method.

Secured Term Loan

The Company and certain of its subsidiaries are party to a $47.75 million credit and guaranty agreement with the lenders referred to therein and Cortland Capital Service LLC, as administrative agent and collateral agent for the lenders (the "Secured Term Loan"). The Secured Term Loan is carried at its unpaid principal balance, net of deferred financing costs. Deferred financing costs associated with this liability are amortized to interest expense on a straight line basis when it approximates the effective interest method. See Note 6 for additional information related to the Secured Term Loan.

Common Stock

At September 30, 2022 and December 31, 2021, the Company was authorized to issue up to 450,000,000 shares of common stock, par value $0.01 per share. On February 22, 2022, the Company closed a transferable common stock rights offering and issued 27,277,269 shares of common stock. The Company had 52,231,152 and 24,947,883 shares of common stock issued and outstanding at September 30, 2022 and December 31, 2021, respectively.

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LUMENT FINANCE TRUST, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

September 30, 2022

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

Stock Repurchase Program

On December 15, 2015, the Company’s Board of Directors authorized a stock repurchase program ("Repurchase Program"), to repurchase up to $10 million of the Company’s outstanding common stock. Subject to applicable securities laws, the repurchase of common stock under the Repurchase Program may be made at times and in amounts as the Company deems appropriate, using available cash resources. Shares of common stock repurchased by the Company under the Repurchase Program, if any, will be canceled and, until reissued by the Company, will be deemed to be authorized but unissued shares of common stock. The Repurchase Program may be suspended or discontinued by the Company at any time and without prior notice.

Preferred Stock

At September 30, 2022 and December 31, 2021, the Company was authorized to issue up to 50,000,000 shares of preferred stock, par value $0.01 per share, with such designations, voting and other rights and preferences as may be determined from time to time by the Company's Board of Directors. On May 5, 2021, the Company issued 2,400,000 shares of 7.875% Series A Cumulative Redeemable Preferred Stock (Series A Preferred Stock"). The Company had 2,400,000 shares of preferred stock issued and outstanding at September 30, 2022 and December 31, 2021, respectively. Our preferred stock is classified as permanent equity and carried at its liquidation preference less offering costs. See Note 12 for additional information related to our Series A Preferred Stock.

Income Taxes

The Company has elected to be taxed as a REIT under the Code for U.S. federal income tax purposes, commencing with the Company’s short taxable period ended December 31, 2012. A REIT is generally taxable as a U.S. C-Corporation; however, so long as the Company qualifies as a REIT it is entitled to a special deduction for dividends paid to stockholders not otherwise available to corporations. Accordingly, the Company generally will not be subject to U.S. federal income tax to the extent its distributions to stockholders equals, or exceeds, its REIT taxable income for the year. In addition, the Company must continue to meet certain REIT qualification requirements with respect to distributions, as well as certain asset, income and share ownership tests, in accordance with Sections 856 through 860 of the Code, as summarized below. In addition, the TRS is maintained to perform certain services and earn income for the Company that the Company is not permitted to engage in as a REIT.

To maintain its qualification as a REIT, the Company must meet certain requirements, including but not limited to the following: (i) distribute at least 90% of its REIT taxable income to its stockholders; (ii) invest at least 75% of its assets in REIT qualifying assets, with additional restrictions with respect to asset concentration risk; and (iii) earn at least 95% of its gross income from qualifying sources of income, including at least 75% from qualifying real estate and real estate related sources. Regardless of the REIT election, the Company may also be subject to certain state, local and franchise taxes. Under certain circumstances, federal income and excise taxes may be due on its undistributed taxable income. If the Company were to fail to meet these requirements, it would be subject to U.S. federal income tax as a U.S. C-Corporation, which could have a material adverse impact on its results of operations and amounts available for distributions to its stockholders.

Certain activities of the Company are conducted through a TRS and therefore are taxed as a standalone U.S. C-Corporation. Accordingly, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.

 

The TRS is not subject to a distribution requirement with respect to its REIT owner. The TRS may retain earnings annually, resulting in an increase in the consolidated book equity of the Company and without a corresponding distribution requirement by the REIT. If the TRS generates net income, and declares dividends to the Company, such dividends will be included in its taxable income and necessitate a distribution to its stockholders in accordance with the REIT distribution requirements.

The Company assesses its tax positions for all open tax years and determines whether the Company has any material unrecognized liabilities in accordance with ASC 740, Income Taxes. The Company records these liabilities to the extent the Company deems them more likely than not to be incurred. The Company's accounting policy with respect to interest and penalties is to classify these amounts as other interest expense.

Earnings per Share

The Company calculates basic and diluted earnings per share by dividing net income attributable to common stockholders for the period by the weighted-average shares of the Company’s common stock outstanding for that period. Diluted earnings per share takes into account the effect of dilutive instruments, such as warrants, stock options, and unvested restricted stock, but use the average share price for the period in determining the number of incremental shares that are to be added to the weighted-average number of shares outstanding. See Note 13 for details of the computation of basic and diluted earnings per share.

Stock-Based Compensation

The Company is required to recognize compensation costs relating to stock-based payment transactions in the consolidated financial statements. The Company accounts for share-based compensation issued to its Manager and non-management directors using the fair-value based methodology prescribed by ASC 505, Equity ("ASC 505"), or ASC 718, Share-Based Payment ("ASC 718"), as appropriate. Compensation cost related to restricted common stock issued to the Manager is initially measured at estimated fair value at the grant date, and is remeasured on subsequent dates to the extent the awards are unvested. Additionally, the compensation cost related to restricted common stock issued to the non-management directors is measured at its estimated fair value at the grant date and amortized and expensed over the vesting period. See Note 9 for details of stock-based awards issuable under the Manager Equity Plan.

Comprehensive Income (Loss) Attributable to Common Stockholders

For the three and nine months ended September 30, 2022 and 2021, comprehensive income equaled net income; therefore, a separate consolidated statement of comprehensive income is not included in the accompanying consolidated financial statements.

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LUMENT FINANCE TRUST, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

September 30, 2022

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

Recently Issued and/or Adopted Accounting Standards

Credit Losses

In June 2016, the FASB issued ASU 2016-13, which is a comprehensive amendment of credit losses on financial instruments. Currently GAAP requires an "incurred loss" methodology for recognizing credit losses that delays recognition until it is probable a loss has been incurred. The standard’s core principle is that an entity replaces the "incurred loss" impairment methodology in current GAAP with a methodology that reflects current expected credit losses and requires consideration of a broader range of reasonable and supportable information to support credit loss estimates. For public business entities that are SEC filers, the amendment in this update is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years.

In November 2019, the FASB issued ASU 2019-10 which amended the effective dates for implementation of ASU 2016-13. ASU 2019-10 defers the effective date of ASU 2016-13 for SEC filers that are eligible to be smaller reporting companies, public business entities that are not SEC filers and all other companies, including not-for-profit companies and employee benefit plans for fiscal years beginning after December 15 2022, including interim periods within those fiscal years. The Company is designated as a smaller reporting company and has deferred implementation of ASU 2016-13 pursuant to ASU 2019-10. The Company has engaged a third-party commercial mortgage backed security and commercial real estate loan data provider to assist the Company in developing an estimate of the impact of this guidance. While we continue to assess the impact ASU 2016-13 will have on our financial statements, we expect that the adoption will result in increased amount of provisions for loan losses as well as recognition of such provisions earlier in the lending cycle.

In February 2020, the FASB issued ASU 2020-02, amending SEC paragraphs in the Codification to reflect the issuance of SEC Staff Accounting Bulletin ("SAB") No. 119 related to the new credit losses standard and revised effective date of the new leases standard. SAB No. 119 provides interpretive guidance on methodologies and supporting documentation for measuring credit losses, with a focus on the documentation the staff would normally expect registrants engaged in lending transactions to prepare and maintain to support estimates of current expected credit losses for loan transactions. This new guidance is effective for fiscal years beginning after December 15, 2022 for smaller reporting companies such as the Company.

Reference Rate Reform

In March 2020, the FASB issued ASU 2020-04, "Reference Rate Reform (Topic 828): Facilitation of the Effects of Reference Rate Reform on Financial Reporting." The standard was issued to ease the accounting effects of reform to the London Interbank Offered Rate ("LIBOR") and other reference rates. The standard provides optional expedients and exceptions for applying GAAP to debt instruments, leases, derivatives and other contracts affected by reference rate reform. ASU 2020-04 generally considers contract modifications related to reference rate reform to be an event that does not require contract remeasurement at the modification date nor a reassessment of a previous accounting determination. The standard is effective for all entities as of March 12, 2020 through December 31, 2022 and may be elected over time as reference rate reform activities occur. We have not adopted any of the optional expedients or exceptions through September 30, 2022, but will continue to evaluate the possible adoption of any such expedients or exceptions..

NOTE 3 - COMMERCIAL MORTGAGE LOANS HELD-FOR-INVESTMENT

The following tables summarize certain characteristics of the Company's investments in commercial mortgage loans as of September 30, 2022 and December 31, 2021:

																								Weighted Average
Loan Type						Unpaid Principal Balance						Carrying Value						Loan Count						Floating Rate Loan %						Coupon(1)						Term  (Years)(2)
September 30, 2022
Loans held-for-investment
Senior secured loans(3)						$	1,045,929,099					$	1,045,953,691					70						100.0		%				6.0		%				3.6
Allowance for loan losses						N/A						(1,872,937)
Loans held-for-investment, net of allowance for loan losses						1,045,929,099						1,044,080,754						70						100.0		%				6.0		%				3.6

																								Weighted Average
Loan Type						Unpaid Principal Balance						Carrying Value						Loan Count						Floating Rate Loan %						Coupon(1)						Term  (Years)(2)
December 31, 2021
Loans held-for-investment
Senior secured loans(3)						$	1,001,869,994					$	1,001,825,294					66						100.0		%				3.9		%				3.7
						1,001,869,994						1,001,825,294						66						100.0		%				3.9		%				3.7

(1)    Weighted average coupon assumes applicable one-month LIBOR of 2.66% and 0.10% and 30-day Term Secured Overnight Financing Rate ("SOFR") of 2.60% and 0.00% as of September 30, 2022 and December 31, 2021, respectively, inclusive of weighted average interest rate floors of 0.26% and 0.49%, respectively. As of September 30, 2022, 83.5% of the investments by total investment exposure earned a floating rate indexed to

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LUMENT FINANCE TRUST, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

September 30, 2022

NOTE 3 - COMMERCIAL MORTGAGE LOANS HELD-FOR-INVESTMENT (Continued)

one-month USD LIBOR and 16.5% of the investments by total investment exposure earned a floating rate indexed to 30-day Term SOFR. As of December 31, 2021, 100% of the investments by total investment exposure earned a floating rate indexed to one-month LIBOR

(2)    Weighted average remaining term assumes all extension options are exercised by the borrower, provided, however, that our loans may be repaid prior to such date.

(3)    As of September 30, 2022, $971,905,743 of the outstanding senior secured loans were held in VIEs and $73,696,034 of the outstanding senior secured loans were held outside of VIEs. As of December 31, 2021, $974,025,294 of the outstanding senior secured loans were held in VIEs and $27,800,000 of the outstanding senior secured loans were held outside VIEs.

Activity: For the nine months ended September 30, 2022, the loan portfolio activity was as follows:

						Commercial Mortgage Loans Held-for-Investment
Balance at December 31, 2021						$	1,001,825,294
Purchases and fundings						269,596,827
Principal payments						(225,537,724)
Accretion of purchase discount						125,098
Amortization of purchase premium						(55,804)
Provision for loan losses						(1,872,937)
Balance at September 30, 2022						$	1,044,080,754

Loan Risk Ratings: As further described in Note 2, the Company evaluates the commercial mortgage loan portfolio on a quarterly basis and assigns a risk rating based on a variety of factors. The following table presents the principal balance and net book value of the loan portfolio based on the Company's internal risk ratings as of September 30, 2022 and December 31, 2021:

						September 30, 2022
																		Amortized Cost by Year of Origination
Risk Rating						Number of Loans						Outstanding Principal						2022						2021						2019						2018						2017
1						—						$	—					—						—						—						—						—
2						23						302,083,221						24,084,750						273,552,471						—						4,446,000						—
3						45						720,837,210						108,478,640						533,959,935						42,077,193						16,672,623						19,673,411
4						1						12,750,000						—						12,750,000						—						—						—
5						1						10,258,668						—						—						—						8,385,731						—
						70						$	1,045,929,099					132,563,390						820,262,406						42,077,193						29,504,354						19,673,411

						December 31, 2021
																		Amortized Cost by Year of Origination
Risk Rating						Number of Loans						Outstanding Principal						2021						2020						2019						2018						2017
1						—						$	—					—						—						—						—						—
2						40						634,438,386						596,052,235						4,920,000						33,466,151						—						—
3						23						342,350,405						201,402,134						6,870,561						70,566,216						43,777,862						19,688,932
4						3						25,081,203						—						8,037,399						5,295,605						11,748,199						—
5						—						—						—						—						—						—						—
						66						$	1,001,869,994					797,454,369						19,827,960						109,327,972						55,526,061						19,688,932

As of September 30, 2022, the average risk rating of the commercial mortgage loan portfolio was 2.7 (Moderate Risk), weighted by investment carrying value, with 97.8% of the net carrying value of commercial loans held-for-investment rated 3 (Moderate Risk) or better by the Company's Manager.

As of December 31, 2021, the average risk rating of the commercial mortgage loan portfolio was 2.3 (Low Risk), weighted by investment carrying value, with 97.5% of the net carrying value of commercial loans held-for-invested rated 3 (Moderate Risk) or better by the Company's Manager.

The average risk rating of the portfolio has increased during the nine months ended September 30, 2022. The change in underlying risk rating consisted of loans that paid off with a risk rating of "2" of $110.0 million, a risk rating of "3" of $99.0 million and a risk rating of "4" of $9.5 million, offset by the purchase of commercial mortgage loans with a risk rating of "2" of $69.0 million and a risk rating of "3" of $193.6 million during the nine months ended September 30, 2022. Additionally, $377.6 million of loans with a risk rating of "2" transitioned to a risk rating of "3", $86.2 million of loans with a risk rating of "3" transitioned to a risk rating of "2", $12.8 million of loans transitioned from a risk rating of "3" to a risk rating of "4", $5.3 million of loans transitioned from a risk rating of "4" to a risk rating of "3", and a loan with an unpaid principal balance of $10.3 million transitioned from a risk rating of "4" to a risk rating of "5".

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LUMENT FINANCE TRUST, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

September 30, 2022

NOTE 3 - COMMERCIAL MORTGAGE LOANS HELD-FOR-INVESTMENT (Continued)

Concentration of Credit Risk: The following tables present the geographic and property types of collateral underlying the Company's commercial mortgage loans as a percentage of the loans' carrying value as of September 30, 2022 and December 31, 2021:

Loans Held-for-Investment

						September 30, 2022						December 31, 2021
Geography
South						48.2		%				46.2		%
Southwest						23.4						27.5
Mid-Atlantic						12.1						7.9
West						9.1						13.9
Midwest						7.2						4.5
Total						100.0		%				100.0		%

						September 30, 2022						December 31, 2021
Collateral Property Type
Multifamily						95.1		%				92.0		%
Self-Storage						1.9						5.2
Retail						1.6						1.7
Office						0.8						1.1
Seniors Housing and Healthcare						0.6						—
Total						100.0		%				100.0		%

Allowance for Loan Losses: The following table presents the changes for the three and nine months ended September 30, 2022 and September 30, 2021 in the provision for credit losses on loans held-for-investment:

						Three months ended												Nine months ended
						September 30, 2022						September 30, 2021						September 30, 2022						September 30, 2021
Allowance for loan losses at beginning of period						351,914						—						—						—
Provision for loan losses						1,521,023						—						1,872,937						—
Allowance for loan losses at end of period						1,872,937						—						1,872,937						—

We did not have any impaired loans, non-accrual loans, or loans in maturity default other than the loan discussed below as of September 30, 2022 or December 31, 2021.

During the period ended September 30, 2022, management identified one loan, collateralized by an office building, with an unpaid principal value of $10.3 million as impaired, reflecting a decline in collateral value attributable to (i) recent and near term vacancies at the property; (ii) new information available during three months ended September 30, 2022 regarding the addition of office space supply that will increase the submarket vacancy rate in the local market and (iii) declining market conditions. As of August 8, 2022, this loan has been placed in maturity default. We entered into a forbearance agreement with the borrower extending the maturity date to December 2022 to allow the borrower more time to market and sell the property, however the borrower will likely not be able to repay or refinance the loan in full at maturity. Based on this review, a reserve of $1.5 million was recorded for this impaired loan in the three months ended September 30, 2022 and $1.9 million for the nine months ended September 30, 2022. Additionally, this loan was placed on non-accrual as result of the impaired loan classification, however, the borrower continues to remain current on debt service payments.

NOTE 4 - USE OF SPECIAL PURPOSE ENTITIES AND VARIABLE INTEREST ENTITIES

We account for CLO transactions on our consolidated balance sheet as financing facilities. Our CLOs are VIEs for which we are the primary beneficiary and are consolidated in our financial statements. The investment grade tranches are treated as secured financings, and are non-recourse to us. See Note 2 ("Summary of Significant Accounting Policies - Principles Consolidation - VIE") for further discussion.

On June 14, 2021, the Company completed a CRE CLO ("LFT CRE 2021-FL1, Ltd."), issuing eight tranches of CLO notes through two newly-formed wholly-owned subsidiaries totaling $903.8 million. Of the total CLO notes issued $833.8 million were investment grade notes issued to third party investors and $70 million were below investment-grade notes retained by us. In addition, a $96.25 million equity interest in the portfolio was retained by us. The financing has an initial two-and-a-half year reinvestment period that allows principal proceeds of the loan obligations to be reinvested in qualifying replacement loan obligations, subject to the satisfaction of certain conditions set forth in the indenture. Thereafter, the outstanding debt balance will be reduced as loans are repaid. Initially, the proceeds of the issuance of the securities also included $330.3 million for the purpose of acquiring additional loan obligations or a period of up to 180 days from the CLO closing date, resulting in the issuer owning loan obligations with a face value of $1.0 billion, representing leverage of 83%.

On June 14, 2021, the Company unwound Hunt CRE 2017-FL1, Ltd. and Hunt CRE 2018-FL2, Ltd. redeeming $388.2 million of outstanding notes which were repaid primarily from the refinancing of the remaining assets primarily within LFT 2021-FL1, Ltd., as well as cash held within Hunt CRE 2018-FL2, and expensed $1.7 million of deferred financing costs into loss on extinguishment of debt on the consolidated statements of operations. As of this date, the Company no longer consolidates the assets and liabilities as of Hunt CRE 2017-FL1, Ltd. and Hunt CRE 2018-FL2, Ltd.

12

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LUMENT FINANCE TRUST, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

September 30, 2022

NOTE 4 – USE OF SPECIAL PURPOSE ENTITIES AND VARIABLE INTEREST ENTITIES (Continued)

The CLO we consolidate is subject to collateralization and coverage tests that are customary for these types of securitizations. As of September 30, 2022 and December 31, 2021 all such collateralization and coverage tests in the CLO we consolidate were met. If the duration of the COVID-19 pandemic continues to prolong, its impact on our borrowers and their tenants could result in a sustained deterioration in a material amount of assets and may impact these tests.

The carrying values of the Company's total assets and liabilities related to LFT CRE 2021-FL1, Ltd. at September 30, 2022 and December 31, 2021 included the following VIE assets and liabilities:

ASSETS						September 30, 2022						December 31, 2021
Cash, cash equivalents and restricted cash						$	28,222,095					$	3,530,006
Accrued interest receivable						3,912,849						3,941,695
Investment related receivable						—						22,400,000
Loans held for investment, net of allowance for loan losses						971,905,743						974,025,294
Total Assets						$	1,004,040,687					$	1,003,896,995
LIABILITIES
Accrued interest payable						$	1,575,598					$	607,892
Collateralized loan obligations(1)						828,673,313						826,782,543
Total Liabilities						$	830,248,911					$	827,390,435
Equity						173,791,776						176,506,560
Total liabilities and equity						$	1,004,040,687					$	1,003,896,995

(1)     The stated maturity of the collateral loan obligations per the terms of the underlying collateralized loan obligation agreement is June 14, 2039 for LFT CRE 2021-FL1, Ltd.

The following tables present certain loan and borrowing characteristics of LFT CRE 2021-FL1, Ltd. as of September 30, 2022 and December 31, 2021:

As of September 30, 2022
Collateralized Loan Obligations						Count						Principal Value						Carrying Value(1)						Wtd. Avg. Coupon(2)
Collateral (loan investments)						64						$	971,881,150					$	971,905,743					6.01%
Financing provided						1						833,750,000						828,673,313						4.25%

As of December 31, 2021
Collateralized Loan Obligations						Count						Principal Value						Carrying Value(1)						Wtd. Avg. Coupon(2)
Collateral (loan investments)						64						$	974,069,994					$	974,025,294					3.93%
Financing provided						1						833,750,000						826,782,543						1.54%

(1)     The carrying value for LFT CRE 2021-FL1, Ltd. is net of debt issuance costs of $5,076,687 and $6,967,457 for September 30, 2022 and December 31, 2021, respectively.

(2)    Weighted average coupon for loan investments assumes applicable one-month LIBOR of 2.66% and 0.10% and 30-day Term Secured Overnight Financing Rate ("SOFR") of 2.60% and 0.00% as of September 30, 2022 and December 31, 2021, respectively, inclusive of weighted average interest rate floors of 0.26% and 0.49%, and spreads of 3.36% and 3.42%, respectively. As of September 30, 2022, 86.5% of the investments by total investment exposure earned a floating rate indexed to one-month USD LIBOR and 13.5% of the investments by total investment exposure earned a floating rate indexed to 30-day Term SOFR. As of December 31, 2021, 100% of the investments by total investment exposure earned a floating rate indexed to one-month LIBOR. Weighted coupon for the financing assumes applicable one-month LIBOR of 2.82% and 0.11% as of September 30, 2022 and December 31, 2021 and spreads of 1.43% for September 30, 2022 and December 31, 2021

The statement of operations related to LFT CRE 2021-FL1, Ltd., Hunt CRE 2017-FL1, Ltd. and Hunt CRE 2018-FL2, Ltd. for the three and nine months ended September 30, 2022 and September 30, 2021 include the following income and expense items:

Statements of Operations						Three Months Ended September 30, 2022						Three Months Ended September 30, 2021
Interest income						$	13,907,856					$	9,412,072
Interest expense						(8,317,893)						(3,891,093)
Net interest income						$	5,589,963					$	5,520,979
Provision for loan losses						351,914
General and administrative fees						(145,418)						(118,804)
Net income						$	5,796,459					$	5,402,175

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LUMENT FINANCE TRUST, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

September 30, 2022

NOTE 4 – USE OF SPECIAL PURPOSE ENTITIES AND VARIABLE INTEREST ENTITIES (Continued)

Statements of Operations						Nine Months Ended September 30, 2022						Nine Months Ended September 30, 20201
Interest income						$	35,454,425					$	24,543,893
Interest expense						(17,607,021)						(8,288,278)
Net interest income						$	17,847,404					$	16,255,615
Loss on extinguishment of debt						—						(1,663,926)
Provision for loan losses						—						—
General and administrative fees						(469,785)						(147,604)
Net income						$	17,377,619					$	14,444,085

NOTE 5 - RESTRICTED CASH

LFT CRE 2021-FL1, Ltd., Ltd. is actively managed with an initial reinvestment period of 30 months that expires in December 2023. As loans payoff or mature, as applicable, during this reinvestment period, cash received is restricted and intended to be reinvested within LFT CRE 2021-FL1, Ltd. in accordance with the terms and conditions of their respective governing agreements.

NOTE 6 - SECURED TERM LOAN

On January 15, 2019, the Company, together with its FOAC and Hunt CMT Equity subsidiaries (together with the Company, the "Credit Parties"), entered into the Secured Term Loan, as amended on February 13, 2019, July 9, 2020, April 21, 2021 and February 22, 2022 with the lenders party thereto and Cortland Capital Market Services, LLC, as administrative agent (in such capacity, the "Agent"), providing for a term facility ("Credit Agreement") to be drawn in an aggregate principal amount of $40.25 million with a maturity of 6 years.

On February 14, 2019, the Company drew on the Secured Term Loan in the aggregate principal amount of $40.25 million generating net proceeds of $39.2 million. The outstanding balance of the Secured Term Loan in the table below is presented gross of deferred financing costs ($841,766 and $904,498 at September 30, 2022 and December 31, 2021, respectively). As of September 30, 2022 and December 31, 2021, the outstanding balance and total commitment under the Credit Agreement consisted of the following:

						September 30, 2022												December 31, 2021
						Outstanding Balance						Total Commitment						Outstanding Balance						Total Commitment
Secured Term Loan						$	47,750,000					$	47,750,000					$	47,750,000					$	47,750,000
Total						$	47,750,000					$	47,750,000					$	47,750,000					$	47,750,000

The borrowings under the Secured Term Loan are joint and several obligations of the Credit Parties. In addition, the Credit Parties’ obligations under the Secured Term Loan are secured by substantially all the assets of the Credit Parties through pledge and security documentation. Amounts advanced under the Secured Term Loan are subject to compliance with a borrowing base comprised of assets of the Credit Parties and certain of their subsidiaries, and include senior and subordinated CRE mortgage loans, preferred equity in CRE assets (directly or indirectly), CRE construction mortgage loans and certain types of equity interests (the "Eligible Assets"). Borrowings under the Secured Term Loan bear interest at a fixed rate of 7.25% for the six-year period following the initial draw-down, which is subject to step up by 0.25% for the first four months after the sixth anniversary of the borrowing of the Senior Secured Term Loan, then by 0.375% for the following four months, then by 0.50% for the last four months until maturity.

In response to the continued COVID-19 pandemic, on July 9, 2020, the Company entered into the Second Amendment to the Credit and Guaranty Agreement. This amendment provides the Company with additional flexibility to effectively manage any potential borrower distress related to COVID-19 that were not originally contemplated in loan documentation.

On April 21, 2021, the Company, together with its Credit Parties, entered into an amendment (the "Third Amendment") to the Credit and Guaranty Agreement. The amendment, among other things, (i) provides the Company with an incremental secured term loan in the aggregate principal amount of $7.5 million; (ii) extends the maturity date of the Secured Term Loan from February 14, 2025 to February 14, 2026; (iii) amends certain asset concentration limits and (iv) amends certain financial covenants. On May 5, 2021 the Third Amendment became effective. On August 23, 2021, the Company drew down the $7.5 million incremental secured term loan.

On February 22, 2022, the Company, together with its Credit Parties, entered into an amendment (the "Fourth Amendment") to the Credit and Guaranty Agreement. This amendment waived the step-down provisions of the maximum total net leverage financial covenant in connection with the February 2022 rights offering, however the step-down provision remains in place for future capital raises.

The Credit Agreement contains affirmative and negative covenants binding the Company and its subsidiaries that are customary for credit facilities of this type, including, but not limited to: minimum asset coverage ratio; minimum unencumbered assets ratio; maximum total net leverage ratio; minimum tangible net worth; and an interest charge coverage ratio. As of September 30, 2022 and December 31, 2021 we were in compliance with these covenants. If the duration of the COVID-19 pandemic continues to prolong, its impact on our borrowers and their tenants could result in a sustained deterioration in a material amount of assets and may impact these covenants.

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LUMENT FINANCE TRUST, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

September 30, 2022

NOTE 6 – SECURED TERM LOAN (Continued)

The Credit Agreement contains events of default that are customary for facilities of this type, including, but not limited to, nonpayment of principal, interest, fees and other amounts when due, violation of covenants, cross default with material indebtedness, and change of control.

NOTE 7 - MSRs

As of September 30, 2022, the Company retained the servicing rights associated with an aggregate principal balance of $76,207,213 of residential mortgage loans that the Company had previously transferred to residential mortgage loan securitization trusts. The Company’s MSRs are held and managed at the Company’s TRS, and the Company employs two licensed sub-servicers to perform the related servicing activities.

The following table presents the Company’s MSR activity for the nine months ended September 30, 2022 and the nine months ended September 30, 2021:

						September 30, 2022						September 30, 2021
Balance at beginning of period						$	551,997					$	919,678
Changes in fair value due to:
Changes in valuation inputs or assumptions used in valuation model						358,436						91,669
Other changes to fair value(1)						(92,526)						(392,335)
Balance at end of period						$	817,907					$	619,012
Loans associated with MSRs(2)						$	76,207,213					$	110,144,748
MSR values as percent of loans(3)						1.07		%				0.56		%

(1)Amounts represent changes due to realization of expected cash flows and prepayment of principal of the underlying loan portfolio.

(2)Amounts represent the unpaid principal balance of loans associated with MSRs outstanding at September 30, 2022 and September 30, 2021, respectively.

(3)Amounts represent the carrying value of MSRs at September 30, 2022 and September 30, 2021, respectively divided by the outstanding balance of the loans associated with these MSRs.

The following table presents the servicing income recorded on the Company’s consolidated statements of operations for the three and nine months ended September 30, 2022 and September 30, 2021:

						Three Months Ended September 30, 2022						Three Months Ended September 30, 2021
Servicing income, net						$	62,451					$	106,392
Total servicing income						$	62,451					$	106,392

						Nine Months Ended September 30, 2022						Nine Months Ended September 30, 2021
Servicing income, net						$	185,685					$	326,314
Total servicing income						$	185,685					$	326,314

NOTE 8 - FAIR VALUE

The following tables summarize the valuation of the Company’s assets and liabilities carried at fair value on a recurring basis within the fair value hierarchy levels as of September 30, 2022 and December 31, 2021:

						September 30, 2022
						Quoted prices in active markets for identical assets Level 1						Significant other observable inputs Level 2						Unobservable inputs Level 3						Balance as of September 30, 2022
Assets:
Mortgage servicing rights						—						—						817,907						817,907
Total						$	—					$	—					$	817,907					$	817,907

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LUMENT FINANCE TRUST, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

September 30, 2022

NOTE 8 – FAIR VALUE (Continued)

						December 31, 2021
						Quoted prices in active markets for identical assets Level 1						Significant other observable inputs Level 2						Unobservable inputs Level 3						Balance as of December 31, 2020
Assets:
Mortgage servicing rights						—						—						551,997						551,997
Total						$	—					$	—					$	551,997					$	551,997

As of September 30, 2022 and December 31, 2021, the Company had $817,907 and $551,997, respectively, in Level 3 assets. The Company’s Level 3 assets are comprised of MSRs. For more detail about Level 3 assets, also see Notes 2 and 7.

The following table provides quantitative information about the significant unobservable inputs used in the fair value measurement of the Company’s MSRs classified as Level 3 fair value assets at September 30, 2022 and December 31, 2021:

As of September 30, 2022
Valuation Technique						Unobservable Input						Range						Weighted Average
Discounted cash flow						Constant prepayment rate						8.0 - 9.7%						8.2		%
						Discount rate						12.0		%				12.0		%

As of December 31, 2021
Valuation Technique						Unobservable Input						Range						Weighted Average
Discounted cash flow						Constant prepayment rate						10.8 - 29.7%						19.1		%
						Discount rate						12.0		%				12.0		%

As discussed in Note 2, GAAP requires disclosure of fair value information about financial instruments, whether or not recognized in the consolidated balance sheets, for which it is practicable to estimate that value. The following table details the carrying amount, face amount and fair value of the financial instruments described in Note 2:

						September 30, 2022
						Level in Fair Value Hierarchy						Carrying Value						Face Amount						Fair Value
Assets:
Cash and cash equivalents						1						48,485,316						48,485,316						48,485,316
Restricted cash						1						28,222,095						28,222,095						28,222,095
Commercial mortgage loans held-for-investment						3						1,044,080,754						1,045,929,099						1,031,678,777
Total												$	1,120,788,165					$	1,122,636,510					$	1,108,386,188
Liabilities:
Collateralized loan obligations						2						828,673,313						833,750,000						804,239,125
Secured Term Loan						3						46,908,234						47,750,000						43,106,254
Total												$	875,581,547					$	881,500,000					$	847,345,379

						December 31, 2021
						Level in Fair Value Hierarchy						Carrying Value						Face Amount						Fair Value
Assets:
Cash and cash equivalents						1						14,749,046						14,749,046						14,749,046
Restricted cash						1						3,530,006						3,530,006						3,530,006
Commercial mortgage loans held-for-investment						3						1,001,825,294						1,001,869,994						1,001,473,884
Total												$	1,020,104,346					$	1,020,149,046					$	1,019,752,936
Liabilities:
Collateralized loan obligations						2						826,782,543						833,750,000						834,425,625
Secured term loan						3						46,845,502						47,750,000						50,986,154
Total												$	873,628,045					$	881,500,000					$	885,411,779

16

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LUMENT FINANCE TRUST, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

September 30, 2022

NOTE 8 – FAIR VALUE (Continued)

Estimates of cash and cash equivalents and restricted cash are measured using quoted prices, or Level 1 inputs. Estimates of the fair value of collateralized loan obligations are measured using observable, quoted market prices, in active markets, or Level 2 inputs. All other fair value significant estimates are measured using unobservable inputs, or Level 3 inputs. See Note 2 for further discussion regarding fair value measurement of certain of our assets and liabilities.

NOTE 9 - RELATED PARTY TRANSACTIONS

Management and Incentive Fee

The Company is externally managed and advised by the Manager. Pursuant to the terms of the management agreement, the Company pays the manager a management fee equal to 1.5% of Stockholders' Equity per annum, calculated and payable quarterly (0.375% per quarter) in arrears. For purposes of calculating the management fee, the Company’s stockholders’ equity includes the sum of the net proceeds from all issuances of the Company’s equity securities since inception (allocated on a pro rata daily basis for such issuances during the fiscal quarter of any such issuance), plus the Company’s retained earnings at the end of the most recently completed calendar quarter (without taking into account any non-cash equity compensation expense incurred in current or prior periods), less any amount that the Company paid for repurchases of the Company’s common stock since inception, and excluding any unrealized gains, losses or other items that did not affect realized net income (regardless of whether such items were included in other comprehensive income or loss, or in net income). This amount will be adjusted to exclude one-time events pursuant to changes in GAAP and certain non-cash items after discussions between the Manager and the Company’s independent directors and approval by a majority of the Company’s independent directors. To the extent asset impairment reduces the Company’s retained earnings at the end of any completed calendar quarter, it will reduce the management fee for such quarter. The Company’s stockholders’ equity for the purposes of calculating the management fee could be greater than the amount of stockholders’ equity shown on the consolidated financial statements. Additionally, starting in the first full calendar quarter following January 3, 2020, the Company is also required to pay the Manager a quarterly incentive fee equal to 20% of the excess of Core Earnings (as defined in the management agreement) over the product of (i) the Stockholders' Equity as of the end of such fiscal quarter, and (ii) 8% per annum. The initial term of our management agreement with our Manager extends until January 3, 2023, with automatic one-year renewals thereafter.

For the three months ended September 30, 2022, the Company incurred management fees of $1,096,144 (September 30, 2021: $807,967), recorded as "Management and incentive fees" in the consolidated statement of operations, of which $1,095,000 (September 30, 2021: $811,000) was accrued but had not been paid, included in "Fees and expenses payable to Manager" in the consolidated balance sheets.

For the three months ended September 30, 2022 and the three months ended September 30, 2021, the Company did not incur any incentive fees.

For the nine months ended September 30, 2022, the Company incurred management fees of $3,111,413 (September 30, 2021: $2,122,199), recorded as "Management and incentive fees" in the consolidated statement of operations, of which $1,095,000 (September 30, 2021: $811,000) was accrued but had not been paid, included in "Fees and expenses payable to Manager" in the consolidated balance sheets.

For the nine months ended September 30, 2022, the Company did not incur incentive fees (September 30, 2021: $132,232), recorded as "Management and incentive fees" in the consolidated statement of operations, of which $0 (September 30, 2021: $132,232) was accrued but had not been paid, included in "Fees and expenses payable to Manager" in the consolidated balance sheets.

Expense Reimbursement

Pursuant to the management agreement, the Company is required to reimburse the Manager for operating expenses related to the Company incurred by the Manager, including accounting, auditing and tax services, technology and office facilities, operations, compliance, legal and filing fees, and miscellaneous general and administrative costs, including the cost of non-investment management personnel of the Manager who spend all or a portion of their time managing the Company’s affairs. The Manager has agreed to certain limitations on manager expense reimbursement from the Company.

On March 18, 2019, the Company entered into a support agreement with the prior manager, pursuant to which, the prior manager agreed to reduce the reimbursement cap by 25% per annum (subject to such reduction not exceeding $568,000 per annum) until such time as the aggregate support provided thereunder equaled approximately $1.96 million. As of September 30, 2022, the Company has provided the full support of $1.96 million under the agreement.

For the three months ended September 30, 2022, the Company incurred reimbursable expenses of $555,307 (September 30, 2021: $511,117), recorded as "operating expenses reimbursable to Manager" in the consolidated statement of operations, of which $553,799 (September 30, 2021: $512,730) was accrued but had not yet been paid, included in "fees and expenses payable to Manager" in the consolidated balance sheets. Per the management agreement, any exit fees waived by the Company as a result of permanent financing by the Manager or any of its affiliates, shall result in a reduction to reimbursed expenses by an amount equal to 50% of the amount of any such waived exit fee. For the three months ended September 30, 2022, the Company waived $204,400 in gross exit fees, reducing reimbursed expenses due to the Manager by $102,200 and for the three months ended September 30, 2021, the Company waived $190,540 in gross exit fees, reducing reimbursed expenses due to the Manager by $95,270.

For the nine months ended September 30, 2022, the Company incurred reimbursable expenses of $1,594,662 (September 30, 2021: $1,320,170), recorded as "operating expenses reimbursable to Manager" in the consolidated statement of operations, of which $553,799 (September 30, 2021: $512,730) was accrued but had not yet been paid, included in "fees and expenses payable to Manager" in the consolidated balance sheets. Per the management agreement, any exit fees waived by the Company as a result of permanent financing by the Manager or any of its affiliates, shall result in a reduction to reimbursed expenses by an amount equal to 50% of the amount of any such waived exit fee. For the nine months ended September 30, 2022, the Company waived $903,947 in gross exit fees, reducing reimbursed expenses due to the Manager by $451,974 and for the nine months ended September 30, 2021, the Company waived $542,458 in gross exit fees, reducing reimbursed expenses due to the Manager by $271,229.

Manager Equity Plan

17

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LUMENT FINANCE TRUST, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

September 30, 2022

NOTE 9 - RELATED PARTY TRANSACTIONS (Continued)

The Company has in place a Manager Equity Plan under which the Company may compensate the Manager and the Company’s independent directors or consultants, or officers whom it may employ in the future. In turn, the Manager, in its sole discretion, grants such awards to its directors, officers, employees or consultants. The Company is able to issue under the Manager Equity Plan up to 3.0% of the total number of issued and outstanding shares of common stock (on a fully diluted basis) at the time of each award. Stock based compensation arrangements may include incentive stock options and non-qualified stock options, stock appreciation rights, restricted stock, restricted stock units, unrestricted stock awards and other awards based on the Company’s common stock.

The following table summarizes the activity related to restricted common stock for the nine months ended September 30, 2022 and September 30, 2021:

						Nine Months Ended September 30,
						2022												2021
						Shares						Weighted Average Grant Date Fair Market Value						Shares						Weighted Average Grant Date Fair Market Value
Outstanding Unvested Shares at Beginning of Period						4,500						$	4.18					4,500						$	2.60
Granted						6,000						2.27						4,500						4.18
Vested						(4,500)						4.18						(4,500)						$	2.60
Outstanding Unvested Shares at End of Period						6,000						$	2.27					4,500						$	4.18

For the period ended September 30, 2022, the Company recognized compensation expense related to restricted common stock of $12,547 (2021: $10,867). The Company has unrecognized compensation expense of $9,627 as of September 30, 2022 (2021: $13,296) for unvested shares of restricted common stock. As of September 30, 2022, the weighted average period for which the unrecognized compensation expense will be recognized is 8.6 months.

OREC Structured Finance, LLC

During the first quarter of 2022, (a) LFT CRE 2021-FL1, Ltd. purchased eight loans with an aggregate unpaid principal balance of $108.9 million at par from OREC Structured Finance, LLC d/b/a Lument Structured Finance ("LSF"), an affiliate of our Manager and (b) Lument Commercial Mortgage Trust ("LCMT") purchased six loans with an aggregate unpaid principal balance of $76.0 million at par from LSF.

During the second quarter of 2022, (a) LFT CRE 2021-FL1, Ltd. purchased three loans with an aggregate unpaid principal balance of $31.2 million at par from LSF and (b) LCMT purchased one loan with an aggregate unpaid principal balance of $6.0 million at par from LSF. As of June 30, 2022, the Company had a $33.8 million receivable from LSF relating to four loans sold by LCMT to LFT CRE 2021-FL1, Ltd. on June 30, 2022. Such receivable was satisfied in full on July 1, 2022.

During the third quarter of 2022, LFT CRE 2021-FL1. Ltd. purchased five loans with an aggregate unpaid principal balance of $47.5 million at par from LSF.

During the first quarter of 2021, Hunt CRE 2018-FL2, Ltd. purchased three loans with an aggregate unpaid principal balance of $34.9 million at par from LSF.

During the second quarter of 2021, (a) Hunt CRE 2018-FL2 purchased six loans with an aggregate unpaid principal balance of $67.8 million at par from LSF (b) LFT CRE 2021-FL1, Ltd. purchased eight loans with an aggregate unpaid principal balance of $82.6 million at par from LSF and (c) LCMT purchased two loans with an aggregate unpaid principal balance of $21.2 million and funded 18 loan advances with an unpaid principal balance of $14.5 million at par from LSF.

During the third quarter of 2021, LFT CRE 2021-FL1, Ltd. purchased fifteen loans with an aggregate unpaid principal balance of $309.1 million at par from LSF.

OREC 2018-CRE1, Ltd.

During the second quarter of 2021, LFT CRE 2021-FL1 purchased nine loans with an aggregate unpaid balance of $112.5 million at a net premium of $0.35 million from OREC 2018-CRE1, Ltd., an affiliate of our Manager.

ORIX Real Estate Holdings, LLC

During the second quarter of 2021, LFT CRE 2021-FL1 purchased eight loans with an aggregate unpaid balance of $4.6 million at a net premium of $0.02 million from OREC 2018-CRE1, Ltd., an affiliate of our Manager.

ORIX Real Estate Capital

ORIX Real Estate Capital, LLC d/b/a Lument Capital ("OREC"), an affiliate of the Manager, was appointed as the servicer and special servicer with respect to mortgage assets for LFT CRE 2021-FL1, Ltd in June 2021 and continues to serve in this role.

Lument IM

Lument IM was appointed as the collateral manager with respect to LFT CRE 2021-FL1, Ltd. in June 2021, and continues to serve in this role. Lument IM has agreed to waive all its entitlements to collateral management fees for so long as Lument IM or an affiliate is the collateral manager and also the manager of Lument Finance Trust, Inc..

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LUMENT FINANCE TRUST, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

September 30, 2022

NOTE 9 - RELATED PARTY TRANSACTIONS (Continued)

OREC Investment Holdings

On February 22, 2022, OREC Investment Holdings purchased 13,071,895 shares of common stock from the transferable common stock rights offering at a price of $3.06 per share.

Hunt Companies, Inc.

One of the Company's directors is also Chief Executive Officer and President of Hunt Companies, Inc. ("Hunt") and is a member of the Hunt Board of Directors, with which affiliates of the Manager have a commercial business relationship. The Manager's affiliates may from time to time sell commercial mortgage loans to Hunt or various of its subsidiaries and affiliates.

On February 22, 2022, an affiliate of Hunt Companies, Inc., purchased 3,524,851 shares of common stock from the transferable common stock rights offering at a price of $3.06 per share.

NOTE 10 - GUARANTEES

The Company, through FOAC, is party to customary and standard loan repurchase obligations in respect of residential mortgage loans that it has sold into securitizations or to third parties, to the extent it is determined that there has been a breach of standard seller representations and warranties in respect of such loans. To date, the Company has not been required to repurchase any loan due to a claim of breached seller reps and warranties.

In July 2016, the Company announced that it would no longer aggregate and securitize residential mortgage loans; however, the Company sought to capitalize on its infrastructure and knowledge to become the provider of seller eligibility review and backstop services to MAXEX. MAXEX's wholly owned clearinghouse subsidiary, MAXEX Clearing LLC, formerly known as Central Clearing and Settlement LLC ("MAXEX Clearing LLC"), functions as the central counterparty with which buyers and sellers transact, and acts as the buyer's counterparty for each transaction. Pursuant to a Master Agreement dated June 15, 2016, as amended on August 29, 2016, January 30, 2017 and June 27, 2018, among MAXEX, MAXEX Clearing LLC and FOAC (the "Master Agreement"), FOAC provided seller eligibility review services under which it reviewed, approved and monitored sellers that sold loans via MAXEX Clearing LLC. Once approved, and having signed the standardized loan sale contract, the seller sold loan(s) to MAXEX Clearing LLC, and MAXEX Clearing LLC simultaneously sold loan(s) to the buyer on substantially the same terms including representations and warranties. The Master Agreement was terminated on November 28, 2018 (the "MAXEX Termination Date"). To the extent that a seller approved by FOAC prior to the MAXEX Termination Date failed to honor its obligations to repurchase a loan based on an arbitration finding that it breached its representations and warranties, FOAC was obligated to backstop the seller's repurchase obligation. The term of the backstop guarantee is the earlier of the contractual maturity of the underlying mortgage, or its earlier repayment in full; however, the incidence of claims for breaches of representations and warranties over time is considered unlikely to occur more than five years from the sale of a mortgage. FOAC's obligations to provide further seller eligibility review and backstop guarantee services terminated on the MAXEX Termination Date. Pursuant to an Assumption Agreement dated December 31, 2018, among MAXEX Clearing LLC and FOAC, MAXEX Clearing LLC assumed all of FOAC's obligations under its backstop guarantees and agreed to indemnify and hold FOAC harmless against any losses, liabilities, costs, expenses and obligations under the backstop guarantee. FOAC paid MAXEX Clearing LLC, as the replacement backstop provider, a fee of $426,770 (the "Alternate Backstop Fee"). MAXEX Clearing LLC represented to FOAC in the Assumption Agreement that it (i) is rated at least "A" (or equivalent) by at least one nationally recognized statistical rating agency or (ii) has (a) adjusted tangible net worth of at least $20 million and (b) minimum available liquidity equal to the greater of (x) $5 million and (y) 0.1% multiplied by the scheduled unpaid principal balance of each outstanding loan covered by the backstop guarantees. MAXEX's chief financial officer is required to certify ongoing compliance by MAXEX Clearing LLC with the aforementioned criteria on a quarterly basis and if MAXEX Clearing LLC fails to satisfy such criteria, MAXEX Clearing LLC is required to deposit into an escrow account for FOAC's benefit an amount equal to the greater of (A) the unamortized Alternate Backstop Fee for each outstanding loan covered by the backstop guarantee and (B) the product of 0.01% multiplied by the scheduled unpaid principal balance of each outstanding loan covered by the backstop guarantees.

The maximum potential amount of future payments that the Company could be required to make under the outstanding backstop guarantees, which represents the outstanding balance of all underlying mortgage loans sold by approved sellers to MAXEX Clearing LLC, was estimated to be $317 million and $348 million as of September 30, 2022 and December 31, 2021, respectively, although the Company believes this amount is not indicative of the Company's actual potential losses. Amounts payable in excess of the outstanding principal balance of the related mortgage, for example any premium paid by the loan buyer or costs associated with collecting mortgage payments, are not currently estimable. Amounts that may become payable under the backstop guarantee are normally recoverable from the related seller, as well as from any payments received on (or from the sale of property securing) the mortgage loan repurchased and, as noted above, MAXEX Clearing LLC has assumed all of FOAC's obligations in respect of its backstop guarantees. Pursuant to the Master Agreement, FOAC is required to maintain minimum available liquidity equal to the greater of (i) $5.0 million or (ii) 0.10% of the aggregate unpaid principal balance of loans backstopped by FOAC, either directly or through a credit support agreement acceptable by MAXEX. As of September 30, 2022, the Company was not aware of any circumstances expected to lead to the triggering of a backstop guarantee obligation.

In addition, the Company enters into certain contracts that contain a variety of indemnification obligations, principally with the Manager, brokers and counterparties to repurchase agreements. The maximum potential future payment amount the Company could be required to pay under these indemnification obligations is unlimited. The Company has not incurred any costs to defend lawsuits or settle claims related to the indemnification obligations. As a result, the estimated fair value of these agreements is minimal. Accordingly, the Company recorded no liabilities for these agreements as of September 30, 2022.

NOTE 11 - COMMITMENTS AND CONTINGENCIES

Impact of COVID-19

As further discussed in Note 2, the full extent of the impact of COVID-19 on the global economy generally, and our business in particular, remains uncertain. As of September 30, 2022, no contingencies have been recorded on our consolidated balance sheet as a result of COVID-19, however, as the global pandemic continues, it may have long-term impacts on our financial condition, results of operations, and cash flows. Refer to Note 2 for further discussion of COVID-19.

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LUMENT FINANCE TRUST, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

September 30, 2022

NOTE 11 COMMITMENTS AND CONTINGENCIES (Continued)

Litigation

From time to time, LFT may be involved in various claims and legal actions arising in the ordinary course of business. LFT establishes an accrued liability for legal proceedings only when those matters present loss contingencies that are both probable and reasonably estimable.

As of September 30, 2022, LFT was not involved in any material legal proceedings regarding claims or legal actions against LFT.

Unfunded Commitments

As of September 30, 2022, LSF, an affiliate of the Manager, had $79.1 million of unfunded commitments related to loans held in LFT CRE 2021-FL1, Ltd. These commitments are not reflected on the Company's consolidated balance sheets.

As of September 30, 2022, LSF, an affiliate of the Manager, had $5.3 million of unfunded commitments related to loans held in LCMT. These commitments are not reflected on the Company's consolidated balance sheets.

As of December 31, 2021, LSF, an affiliate of the Manager had $78.4 million of unfunded commitments related to loans held in LFT CRE 2021-FL1, Ltd. These commitments are not reflected on the Company's consolidated balance sheets.

As of December 31, 2021, LSF, an affiliate of the Manager, had $4.7 million of unfunded commitments related to loans held in LCMT. These commitments are not reflected on the Company's consolidated balance sheets.

Future loan fundings comprise funding for capital improvements, leasing costs, interest and carry costs, and fundings will vary depending on the progress of the business plan and cash flows at the mortgage assets. Therefore, the exact timing and amounts of such future loan fundings are uncertain and will depend on the current and future performance of the underlying mortgage assets. Due to the ongoing COVID-19 pandemic, the progress of capital improvements and leasing is anticipated to be slower than otherwise expected, and, as such the pace of future funding relating to these capital needs may be commensurately lower.

NOTE 12 - EQUITY

Common Stock

The Company has 450,000,000 authorized shares of common stock, par value $0.01 per share, with 52,231,152 and 24,947,883 shares issued and outstanding as of September 30, 2022 and December 31, 2021, respectively.

On February 22, 2022, the Company closed a transferable common stock rights offering. The Company issued and sold 27,277,269 shares of common stock at a price of $3.06 per share resulting in gross proceeds of approximately $83.5 million.

Stock Repurchase Program

On December 15, 2015, the Company’s board of directors authorized a stock repurchase program (or the "Repurchase Program"), to repurchase up to $10 million of the Company’s outstanding common stock. Shares of the Company’s common stock may be purchased in the open market, including through block purchases, or through privately negotiated transactions, or pursuant to any trading plan that may be adopted in accordance with Rule 10b18(b)(1) of the Securities Exchange Act of 1934, as amended. The timing, manner, price and amount of any repurchases will be determined at the Company’s discretion and the program may be suspended, terminated or modified at any time for any reason. Among other factors, the Company intends to only consider repurchasing shares of the Company’s common stock when the purchase price is less than the Company’s estimate of the Company’s current net asset value per common share. Shares of common stock repurchased by the Company under the Repurchase Program, if any, will be canceled and, until reissued by the Company, will be deemed to be authorized but unissued shares of the Company’s common stock. Through September 30, 2022, the Company had repurchased 126,856 shares of common stock at a weighted average share price of $5.09. No share repurchases have been made since January 19, 2016. As of September 30, 2022, $9.4 million of common stock remained authorized for future share repurchase under the Repurchase Program.

Preferred Stock

At September 30, 2022 and December 31, 2021, the Company was authorized to issue up to 50,000,000 shares of preferred stock, par value $0.01 per share, with 2,400,000 shares of Series A Preferred Stock issued and outstanding as of September 30, 2022 and December 31, 2021, respectively. Voting and other rights and preferences will be determined by the Company's Board of Directors upon issuance.

On May 5, 2021, LFT issued 2,400,000 shares of Series A Preferred Stock, and received net proceeds, after underwriting discounts and commissions but before offering expenses payable by the Company, of $58.1 million. The Series A Preferred Stock is redeemable, at LFT's option, at a liquidation preference price of $25.00 per share plus accrued dividends commencing on May 5, 2026. Dividends on the Series A Preferred Stock are payable quarterly in arrears beginning on July 15, 2021.

Distributions to Stockholders

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LUMENT FINANCE TRUST, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

September 30, 2022

NOTE 12 – EQUITY (Continued)

For the 2022 taxable year to date, the Company has declared dividends to common stockholders totaling $9,401,247, or $0.18 per share. The following table presents cash dividends declared by the Company on its common stock during the nine months ended September 30, 2022:

Declaration Date						Record Date						Payment Date						Dividend Amount						Cash Dividend Per Weighted Average Share
March 15, 2022						March 31, 2022						April 15, 2022						$	3,133,509					$	0.067
June 15, 2022						June 30, 2022						July 15, 2022						$	3,133,869					$	0.067
September 15, 2022						September 30, 2022						October 17, 2022						$	3,133,869					$	0.067

The following table presents cash dividends declared by the Company on its Series A Preferred stock for the nine months ended September 30, 2022:

Declaration Date						Record Date						Payment Date						Dividend Amount						Cash Dividend Per Weighted Average Share
March 15, 2022						April 1, 2022						April 15, 2022						$	1,181,250					$	0.49219
June 15, 2022						July 1, 2022						July 15, 2022						$	1,181,250					$	0.49219
September 15, 2022						October 3, 2022						October 17, 2022						$	1,181,250					$	0.49219

Non-controlling Interests

 

On November 29, 2018, Lument Commercial Mortgage Trust, Inc. ("LCMT"), formerly known as Hunt Commercial Mortgage Trust ("HCMT"), an indirect wholly-owned subsidiary of the Company that has elected to be taxed as a REIT issued 125 shares of Series A Preferred Shares ("LCMT Preferred Shares").  Net proceeds to LCMT were $99,500 representing $125,000 in equity raised, less $25,500 in expenses and is reflected as "Non-controlling interests" in the Company’s consolidated balance sheets.  Dividends on the LCMT Preferred Shares are cumulative annually, in an amount equal to 12% of the initial purchase price plus any accrued unpaid dividends.  The LCMT Preferred Shares are redeemable at any time by LCMT.  The redemption price through December 31, 2020 is 1.1x the initial purchase price plus all accrued and unpaid dividends, and the initial purchase price plus all accrued and unpaid dividends thereafter.  The holders of the LCMT Preferred Shares have limited voting rights, which do not entitle the holders to participate or otherwise direct the management of LCMT or the Company.  The LCMT Preferred Shares are not convertible into or exchangeable for any other property or securities of LCMT or the Company.  Dividends on the LCMT Preferred Shares, which amounted to $15,000 for the year ended December 31, 2021 are reflected in "Dividends to preferred stockholders" in the Company’s consolidated statements of operations. As of September 30, 2022, LCMT had $11,292 in accrued dividends on the LCMT Preferred Shares which are reflected in "dividends to preferred stockholders" in the Company's consolidated statements of operations of which $3,791 were accrued and unpaid dividends on the LCMT Preferred Shares which are reflected in "Dividends payable" in the Company's consolidated balance sheet..

NOTE 13 - EARNINGS PER SHARE

In accordance with ASC 260, outstanding instruments that contain rights to non-forfeitable dividends are considered participating securities. The Company is required to apply the two-class method or the treasury stock method of computing basic and diluted earnings per share when there are participating securities outstanding. The Company has determined that outstanding unvested restricted shares issued under the Manager Equity Plan are participating securities, and they are therefore included in the computation of basic and diluted earnings per share. The following tables provide additional disclosure regarding the computation for the three and nine months ended September 30, 2022 and September 30, 2021:

						Three Months Ended September 30, 2022												Three Months Ended September 30, 2021
Net income												$	1,500,275											$	2,374,468
Less dividends:
Common stock						$	3,133,869											$	2,245,310
Preferred stock						1,185,042												1,198,166
												4,318,911												3,443,476
Undistributed earnings (deficit)												$	(2,818,636)											$	(1,069,008)

						Unvested Share-Based Payment Awards						Common Stock						Unvested Share-Based Payment Awards						Common Stock
Distributed earnings						$	0.06					$	0.06					$	0.09					$	0.09
Undistributed earnings (deficit)						—						(0.05)						—						(0.04)
Total						$	0.06					$	0.01					$	0.09					$	0.05

						For the three months ended September 30,
						2022						2021
Basic weighted average shares of common stock						52,225,152						24,943,383
Weighted average of non-vested restricted stock						6,000						4,500
Diluted weighted average shares of common stock outstanding						52,231,152						24,947,883

						Nine Months Ended September 30, 2022												Nine Months Ended September 30, 2021
Net income												7,798,926												$	6,863,353
Less dividends:
Common stock						$	9,401,247											$	6,735,523
Preferred stock						3,555,042												1,927,542
												12,956,289												8,663,065
Undistributed earnings (deficit)												$	(5,157,363)											$	(1,799,712)

						Unvested Share-Based Payment Awards						Common Stock						Unvested Share-Based Payment Awards						Common Stock
Distributed earnings						$	0.20					$	0.20					$	0.27					$	0.27
Undistributed earnings (deficit)						—						(0.11)						—						(0.07)
Total						$	0.20					$	0.09					$	0.27					$	0.20

						For the nine months ended September 30,
						2022						2021
Basic weighted average shares of common stock						47,026,745						24,940,630
Weighted average of non-vested restricted stock						5,088						4,500
Diluted weighted average shares of common stock outstanding						47,031,833						24,945,130

NOTE 14 - SEGMENT REPORTING

The Company invests in a portfolio comprised of commercial mortgage loans and other mortgage-related investments, and operates as a single reporting segment.

NOTE 15 - INCOME TAXES

The Company has elected to be treated as a REIT under federal income tax laws. As a REIT, the Company must generally distribute annually at least 90% of our taxable income, subject to certain adjustments and excluding any capital net gain, in order for U.S. federal income not to apply to our earnings that we distribute. To the extent that we satisfy this distribution requirement, but distribute less than 100% of our net taxable income, we will be subject to U.S. federal income tax on our undistributed taxable income. In addition, we will be subject to a 4% nondeductible excise tax if the actual amount that we pay out to our stockholders in a calendar year is less than a minimum amount specified under U.S. federal tax laws.

Certain activities of the Company that produce prohibited income are conducted through a TRS, FOAC, to protect REIT election and FOAC is therefore subject to tax as a U.S. C-Corporation. To maintain our REIT election, the Company must continue to meet certain ownership, asset and income requirements set forth in the Code. As further discussed below, the Company may be subject to non-income taxes on excess amounts of assets or income that cause a failure of any of the REIT testing requirements. As of September 30, 2022 and December 31, 2021, we were in compliance with all REIT requirements.

As of September 30, 2022, tax years 2018 through 2021 remain subject to examination by taxing authorities.

NOTE 16 - SUBSEQUENT EVENTS

We have evaluated subsequent events occurring through the date that these consolidated financial statements were issued, and determined that no subsequent events occurred that would require accrual or additional disclosure.

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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION

 

In this Quarterly Report on Form 10-Q, or this "report", we refer to Lument Finance Trust as "we," "us," or "our," unless we specifically state otherwise or the context indicates otherwise. We refer to our external manager, OREC Investment Management, LLC doing business as Lument Investment Management, as our "Manager" or "Lument IM".

 

The following discussion should be read in conjunction with our consolidated financial statements and the accompanying notes to our financial statements which are included in Item 1 of this report, as well as information contained in our Annual Report on Form 10-K for the year ended December 31, 2021, or our 2021 10-K, filed with the Securities and Exchange Commission, or SEC, on March 15, 2022.

 

Forward-Looking Statements

 

This Quarterly Report on Form 10-Q contains forward-looking statements intended to qualify for the safe harbor contained in Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act, as amended. Forward-looking statements are subject to risks and uncertainties. These forward-looking statements include information about possible or assumed future results of our business, financial condition, liquidity, results of operations, plans and objectives. In addition, our management may from time to time make oral forward-looking statements. You can identify forward-looking statements by use of words such as "believe," "expect," "anticipate," "estimate" "project," "plan," "continue," "intend," "should," "may," "will," "seek," "would," "could" or the negative of these words and phrases or similar words and phrases, or by discussions of strategy, plans or intentions. Statements regarding the following subjects, among others, may be forward-looking: the return on equity; the yield on investments; the ability to borrow to finance assets; and risks associated with investing in real estate assets, including changes in business conditions and the general economy. Forward-looking statements are based on our beliefs, assumptions and expectations of our future performance, taking into account all information currently available to us on the date of this quarterly report. Actual results may differ from expectations, estimates and projections. Readers are cautioned not to place undue reliance on forward-looking statements in this quarterly report and should consider carefully the risk factors described in Part I, Item IA "Risk Factors" in our annual report on Form 10-K for the year ended December 31, 2021 in evaluating these forward-looking statements. Forward-looking statements are subject to substantial risks and uncertainties, many of which are difficult to predict and are generally beyond our control. Additionally, many of these risks and uncertainties are currently amplified by and will continue to be amplified by, or in the future may be amplified by, the COVID-19 pandemic. It is not possible to predict or identify all such risks. Additional information concerning these and other risk factors are contained in our 2021 10-K which is available on the Securities and Exchange Commission’s website at www.sec.gov.

 

Overview 

 

We are a Maryland corporation that is focused on investing in, financing and managing a portfolio of commercial real estate ("CRE") debt investments.

 

In January 2020, we entered into a series of transactions with subsidiaries of ORIX Corporation USA ("ORIX USA"), a diversified financial company with the ability to provide investment capital and asset management services to clients in the corporate, real estate and municipal finance sectors. We entered into a new management agreement with Lument IM, while another affiliate of ORIX USA purchased an ownership stake of approximately 5.0% through a privately-placed stock issuance. On February 22, 2022, the affiliate purchased an additional 13,071,895 shares of common stock from the transferable common stock rights offering, increasing its beneficial ownership in the Company to approximately 27.4%. These transactions have enhanced the scale of LFT and are expected to generate shareholder value through leveraging ORIX USA's expansive originations, asset management and servicing platform.

Lument IM is an affiliate of Lument, a nationally recognized leader in multifamily and seniors housing and care finance. The Company leverages Lument's broad platform and significant expertise when originating and underwriting investments.

We invest primarily in transitional floating rate CRE mortgage loans with an emphasis on middle market multifamily assets. We may also invest in other CRE-related investments including mezzanine loans, preferred equity, commercial mortgage-backed securities, fixed rate loans, construction loans and other CRE debt instruments. We finance our current investments in transitional multifamily and other CRE loans primarily through match term non-recourse CRE collateralized loan obligations ("CLO"). We may utilize warehouse repurchase agreements or other forms of financing in the future. Our primary sources of income are net interest from our investment portfolio and non-interest income from our mortgage loan-related activities. Net interest income represents the interest income we earn on investments less the expense of funding these investments.

Our investments typically have the following characteristics:

 

•Sponsors with experience in particular real estate sectors and geographic markets;

•Located in U.S. markets with multiple demand drivers, such as growth in employment and household formation;

•Fully funded principal balance greater than $5 million and generally less than $75 million;

•Loan to Value ratio up to 85% of as-is value and up to 75% of as-stabilized value;

•Floating rate loans tied to one-month term SOFR, previously to one-month U.S. denominated LIBOR, and/or in the future potentially any index replacement; and

•Three-year term with two one-year extension options.

We believe that our current investment strategy provides significant opportunities to achieve attractive risk-adjusted returns for our stockholders over time. However, to capitalize on the investment opportunities at different points in the economic and real estate investment cycle, we may modify or expand our investment strategy. We believe that the flexibility of our strategy, which is supported by the significant CRE experience of Lument's investment team, and the extensive resources of ORIX USA, will allow us to take advantage of changing market conditions to maximize risk-adjusted returns to our stockholders.

We have elected to be taxed as a REIT and comply with the provisions of the Internal Revenue Code with respect thereto. Accordingly, we are generally not subject to federal income tax on our REIT taxable income that we currently distribute to our stockholders so long as we maintain our qualification as a REIT. Our continued qualification as a REIT depends on our ability to meet, on a continuing basis, various complex requirements under the Internal Revenue Code relating to, among other things, the source of our gross income, the composition and values of our assets, our distribution levels and the concentration of ownership of our capital stock. Even if we maintain our qualification as a REIT, we may become subject to some federal, state and local taxes on our income generated in our wholly owned taxable REIT subsidiary, Five Oaks Acquisition Corp. ("FOAC").

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Recent Developments

The U.S. Federal Reserve has taken action to increase interest rates in order to control inflation which has created further uncertainty for the economy and our borrowers. Although our business model is such that rising interest rates will, all else being equal, correlate to increases in our net income, increases in interest rates may adversely affect our existing borrowers. Additionally, the anticipated continual rise in interest rates and unpredictable geopolitical landscape may cause further dislocation in the capital markets resulting in a continual reduction of available liquidity and an increase in borrowing costs. A lack of liquidity for a prolonged period of time could limit our ability to grow this business. It is difficult to predict the full impact of recent changes and any future changes in interest rates, inflation or its impact on the debt capital markets.

As the COVID-19 pandemic has evolved from its emergence in early 2020, so has its global impact. In response to COVID-19, the United States and numerous other countries declared national emergencies, which has led to large scale quarantines as well as restrictions to business deemed non-essential. Although more normalized activities have resumed, we are not in a position to estimate the ultimate impact COVID-19 and its variants will have on our business and the economy as a whole. We cannot predict the potential impact related to both known and unknown risks, including future quarantines, closures and other restrictions resulting from the pandemic.

The effects of the COVID-19 pandemic did not significantly impact our operating results for the three and nine months ended September 30, 2022. However, the prolonged duration and impact of the COVID-19 pandemic could materially disrupt our business operations and negatively impact our business, financial performance and operating results for the year ending December 31, 2022 and potentially longer.

Third Quarter 2022 Summary

 

•Acquired five loans with an initial unpaid principal balance of $47.5 million with a weighted average interest rate of 30-day term SOFR plus 3.97% and a weighted average SOFR floor of 0.75%.

•Incurred a $1.5 million provision for loan loss against our sole office loan, collateralized by an office building in Chicago.

•On September 15, 2022, the Company announced its third quarter common dividend of $0.06 per share of common stock, in line with the previous quarter.

•On September 15, 2022, the Company announced its third quarter preferred dividend of $0.49219 per share of Series A Preferred Stock.

Factors Impacting Our Operating Results

Market conditions.    The results of our operations are and will continue to be affected by a number of factors and primarily depend on, among other things, the level of our net interest income, the market value of our assets and the supply of, and demand for, our target assets in the marketplace. Our net interest income, will vary primarily as a result of changes in market interest rates and prepayment speeds, and by the ability of the borrowers underlying our commercial mortgage loans to continue making payments in accordance with the contractual terms of their loans, which may be impacted by unanticipated credit events experienced by such borrowers, such as the ongoing COVID-19 pandemic. Interest rates vary according to the type of investment, conditions in the financial markets, competition and other factors, none of which can be predicted with any certainty, and have most recently been impacted by the ongoing COVID-19 pandemic. Our operating results will also be affected by general U.S. real estate fundamentals and the overall U.S. economic environment, including the pace and degree of recovery from the ongoing COVID-19 pandemic. In particular, our strategy is influenced by the specific characteristics of the underlying real estate markets, including prepayment rates, credit market conditions and interest rate levels. This year has been characterized by significant volatility in global markets, driven by investor concerns over inflation, rising interest rates, slowing economic growth and geopolitical uncertainty. While there is debate among economists as whether such factors, coupled with economic contraction in the U.S. in 2022, indicate that the U.S. has entered, or in the near term will enter a recession, it remains difficult to predict the full impact of the recent changes and any future changes in interest rates or inflation.

 Changes in market interest rates.    Generally, our business model is such that rising interest rates will increase our net interest income, while declining interest rates will decrease our net interest income. As of September 30, 2022, 99.9% of our investments by total investment exposure earned a floating rate of interest, of which 83.5% were indexed to one-month LIBOR and 16.5% were indexed to 30-day term SOFR, and all of our collateralized loan obligations were indexed to one-month LIBOR, and as a result we are less sensitive to variability in our net interest income resulting from interest rate changes. Our net interest income currently benefits from LIBOR/SOFR floors in our commercial loan portfolio, with a weighted average LIBOR floor of 0.24% and a weighted average SOFR floor of 0.33% as of September 30, 2022. As of September 30, 2022, 99.0% of the loans in our commercial mortgage loan portfolio are structured with LIBOR/SOFR floors, none of which currently has a floor greater than the current spot interest rate. When interest rates are above our average interest rate floor, an increase in interest rates will increase our interest income. Alternatively, when interest rates are below our average interest rate floor, an increase in interest rates will decrease our net interest income until such time as interest rates rise above our average interest rate floor. Although our Manager is currently originating loans with SOFR floors, there can be no assurance that we will continue to obtain SOFR floors on future originations or LIBOR floors on future acquisitions. Similarly, net interest income is also impacted by the spread in our commercial mortgage loan portfolio As of September 30, 2022, the weighted average spread of our commercial loan portfolio was 3.39%, but there is no assurance that these spreads will be maintained as market environments fluctuate. Current market conditions have reflected a widening trend in commercial mortgage loan credit spreads which provide a benefit to interest income.

The Federal Reserve maintained the federal funds target range at 0.0% to 0.25% for much of 2021, however in March 2022, the Federal Reserve approved a 0.25% rate increase and in June, July, September and November 2022 approved further 0.75% rate increases. The Federal Reserve has indicated that, in light of increasing sign of inflation, it foresees further increases in interest rates throughout the year and into 2023 and 2024.

In addition to the risk related to fluctuations in cash flows associated with movements in interest rates, there is also the risk of non-performance on floating rate assets. In the case of significant increase in interest rates, the additional debt service payments due from our borrowers may strain the operating cash flows of the real estate assets underlying our mortgages and/or impact their ability to be refinanced at such higher interest rates, potentially, contribute to non-performance or, in severe cases, default.

On November 30, 2020, the ICE Benchmark Administration ("IBA"), with the support of the United States Federal Reserve and United Kingdom's Financial Conduct Authority ("FCA"), announced plans to consult on ceasing publication of LIBOR on December 31, 2021 for only the one week and two month LIBOR tenors, and on June 30, 2023 for all other LIBOR tenors. While this announcement extends the transition period to June 2023, the United States Federal Reserve concurrently issued a statement advising banks to stop new LIBOR issuances by the end of 2021. As of January 1, 2022, our Manager is only originating loans based on 30-day term SOFR, however, our Manager continues to have one-month LIBOR based loans in its pipeline assets available for investment. On March 5, 2021, the FCA confirmed that all LIBOR settings will either cease to be provided by any administrator or no longer be representative: (a) immediately after December 31, 2021, in the case of the one week and two month U.S. dollar settings; and (b) immediately after June 30, 2023, in the case of the remaining U.S. dollar settings. The Alternative Reference Rate Committee ("ARRC"), a committee convened by the Federal Reserve that includes major

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market participants, has proposed an alternative rate to replace U.S. Dollar LIBOR: SOFR. On July 29, 2021 the ARRC ratified term rates for the one-, three- and six-month tenors based on SOFR futures traded. This announcement is expected to expedite the transition from LIBOR to SOFR. The outcome of these reforms is uncertain and any changes in the methods by which LIBOR is determined or regulatory activity related to LIBOR's phase-out could cause LIBOR to perform differently than in the past.

As of September 30, 2022, 83.5% of our commercial mortgage loans by principal balance and 100% of our collateralized loan obligations bear interest related to one-month U.S. LIBOR. All of these arrangements provide procedures for determining an alternative base rate in the event that LIBOR is discontinued. Regardless, there can be no assurances as to what alternative base rates may be and whether such base rate will be more or less favorable than LIBOR and any other unforeseen impacts of the discontinuation of LIBOR. We are monitoring the developments with respect to the phasing out of LIBOR and are working with our lenders and borrowers to minimize the impact of any LIBOR transition on our financial condition and results of operations, but can provide no assurances regarding the impact of the discontinuation of LIBOR.

 

Credit risk.    Our commercial mortgage loans and other investments are also subject to credit risk. The performance and value of our loans and other investments depend upon the sponsor's ability to operate properties that serve as our collateral so that they produce cash flows adequate to pay interest and principal due to us. To monitor this risk, the Manager's asset management team reviews our portfolio and maintains regular contact with borrowers, co-lenders and local market experts to monitor the performance of the underlying collateral, anticipate borrower, property and market issues and, to the extent necessary or appropriate, enforce our rights as lender. The market values of commercial mortgage assets are subject to volatility and may be adversely affected by a number of factors, including, but not limited to, national, regional and local economic conditions (which may be adversely affected by industry slowdowns and other factors); local real estate conditions; changes or continued weakness in specific industry segments; construction quality, age and design; demographic factors; and retroactive changes to building or similar codes. In addition, decreases in property values reduce the value of the collateral and potential proceeds available to a borrower to repay the underlying loans, which could also cause us to suffer losses. As of September 30, 2022, 100% of the commercial mortgage loans in our portfolio were current as to principal and interest. Additionally, we have reviewed the loans designated as High Risk for impairment. Impairment of these loans, which are collateral dependent, is measured by comparing the estimated fair value of the underlying collateral, less costs to sell, to the book value of the respective loan. As of September 30, 2022, the Company identified one office loan as impaired and established an allowance for loan loss of $1.5 million for the three months ended September 30, 2022 and $1.9 million for the nine months ended September 30, 2022. Uncertainty about the severity and duration of the economic impact of the COVID-19 pandemic, as exacerbated by events related to virus strains, persist and potential exists for the credit risk of our portfolio to heighten further. We can provide no assurances that our borrowers will remain current as to principal and interest, or that we will not enter into forbearance agreements or loan modifications in order to protect the value of our commercial mortgage loan assets. Should that occur, it could have a material negative impact on our results of operations.

Liquidity and financing markets. Liquidity is a measurement of our ability to meet potential cash requirements, including ongoing commitments to pay dividends, fund investments and repay borrowings and other general business needs. Our primary sources of liquidity have been proceeds of common or preferred stock issuances, net proceeds from corporate debt obligations, net cash provided by operating activities and other financing arrangements. We finance our commercial mortgage loans primarily with collateralized loan obligations, the maturities of which are matched to the maturities of the loans, and which are not subject to margin calls or additional collateralization requirements. However, to the extent that we seek to invest in additional commercial mortgage loans outside of our CLO, we will in part be dependent on our ability to issue additional collateralized loan obligations, to secure alternative financing facilities or to raise additional common or preferred equity. The anticipated continual rise in interest rates and unpredictable geopolitical landscape may cause a further dislocation in the capital markets resulting in a continual reduction of available liquidity and an increase in borrowing costs. A lack of liquidity for a prolonged period of time could limit our ability to grow this business.

Prepayment speeds.    Prepayment risk is the risk that principal will be repaid at a different rate than anticipated, causing the return on certain investments to be less than expected. As we receive prepayments of principal on our assets, any premiums paid on such assets are amortized against interest income. In general, an increase in prepayment rates accelerates the amortization of purchase premiums, thereby reducing the interest income earned on the assets. Conversely, discounts on such assets are accreted into interest income. In general, an increase in prepayment rates accelerates the accretion of purchase discounts, thereby increasing the interest earned on the assets. With the exception of nine loans acquired with an initial aggregate unpaid principal balance of $117.0 million with an aggregate purchase premium of $538,146 and aggregate purchase discount of $171,186, all of our commercial mortgage loans were acquired at par. As of September 30, 2022, our aggregate unamortized purchase premium was $24,593 and our purchase discount was fully amortized, and accordingly we do not believe this to be a material risk for us at present. Additionally, we are subject to prepayment risk associated with the terms of our collateralized loan obligations. Due to the generally short-term nature of transitional floating-rate commercial mortgage loans, our CLOs include a reinvestment period during which principal repayments and prepayments on our commercial mortgage loans may be reinvested in similar assets, subject to meeting certain eligibility criteria. The reinvestment period for LFT CRE 2021-FL1 remains in place through December 2023. While the interest-rate spreads of our collateralized loan obligations are fixed until they are repaid, the terms, including spreads, of newly originated loans are subject to uncertainty based on a variety of factors, including market and competitive conditions, which remain uncertain and volatile in light of the COVID-19 pandemic. To the extent that such conditions result in lower spreads on the assets in which we reinvest, we may be subject to a reduction in interest income in the future. However, our loan agreements provide for prepayment penalties which are intended to offset any potential reduction in future interest income.

 

Changes in market value of our assets.    We account for our commercial mortgage loans at amortized cost. As such, our earnings will generally not be directly impacted by changes in the market values of these loans. However, if a loan is considered to be impaired as a result of adverse credit performance, an allowance is recorded to reduce the carrying value through a charge to the provision for loan losses. Impairment is measured by comparing the estimated fair value of the underlying collateral, less costs to sell, to the book value of the respective loan. Provisions for loan losses will directly impact our earnings. Given the widespread impact of the COVID-19 pandemic, we consider there to be a heightened credit risk associated with our commercial mortgage loan portfolio.

 Governmental actions. Since 2008, when both Fannie Mae and Freddie Mac were placed under the conservatorship of the U.S. government, there have been a number of proposals to reform the U.S. housing finance system in general, and Fannie Mae and Freddie Mac in particular. We anticipate debate on residential housing and mortgage reform to continue through 2022 and beyond, but a deep divide persists between factions in Congress and as such it remains unclear what shape any reform would take and what impact, if any, reform would have on mortgage REITs.

Key Financial Measure and Indicators

As a real estate investment trust, we believe the key financial measures and indicators for our business are earnings per share, dividends declared, Distributable Earnings, and book value per share of common stock. For the three months ended September 30, 2022, we recorded earnings per share of $0.01,

24

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declared a quarterly dividend of $0.06 per share, and reported $0.03 per share of Distributable Earnings. In addition, our book value per share of common stock was $3.55.

As further described below, Distributable Earnings is a measure that is not prepared in accordance with accounting principles generally accepted in the United States of America, or GAAP, which helps us to evaluate our performance excluding the effects of certain transactions and GAAP adjustments that we believe are not necessarily indicative of our current loan portfolio and operations. In addition, Distributable Earnings is a performance metric we consider when declaring our dividends.

Earnings Per Share and Dividends Declared

The following table sets forth the calculation of basic and diluted net income per share and dividends declared per share:

						Three Months Ended
						September 30, 2022						September 30, 2021
Net income(1)						$	315,233					$	1,176,301
Weighted-average shares outstanding, basic and diluted						52,231,152						24,947,883
Net income per share, basic and diluted						$	0.01					$	0.05
Dividends declared per share						$	0.06					$	0.09

(1)    Represents net income attributable to Lument Finance Trust, Inc.

Distributable Earnings

Distributable Earnings is a non-GAAP financial measure, which we define as GAAP net income (loss) attributable to holders of common stock, or, without duplication, owners of our subsidiaries, computed in accordance with GAAP, including realized losses not otherwise included in GAAP net income (loss) and excluding (i) non-cash equity compensation, (ii) depreciation and amortization, (iii) any unrealized gains or losses or other similar non-cash items that are included in net income for that applicable reporting period, regardless of whether such items are included in other comprehensive income (loss) or net income (loss), and (iv) one-time events pursuant to changes in GAAP and certain material non-cash income or expense items after discussions with the Company's board of directors and approved by a majority of the Company's independent directors.

While Distributable Earnings excludes the impact of any unrealized provisions for credit losses, any loan losses are charged off and realized through Distributable Earnings when deemed non-recoverable. Non-recoverability is determined (i) upon the resolution of a loan (i.e. when the loan is repaid, fully or partially, or in the case of foreclosures, when the underlying asset is sold), or (ii) with respect to any amount due under any loan, when such amount is determined to be non-collectible.

We believe that Distributable Earnings provides meaningful information to consider in addition to our net income (loss) and cash flows from operating activities determined in accordance with GAAP. We believe Distributable Earnings is a useful financial metric for existing and potential future holders of our common stock as historically, over time, Distributable Earnings has been a strong indicator of our dividends per share. As a REIT, we generally must distribute annually at least 90% of our taxable income, subject to certain adjustments, and therefore we believe our dividends are one of the principal reasons stockholders may invest in our common stock. Refer to Note 15 to our consolidated financial statements for further discussion of our distribution requirements as a REIT. Furthermore, Distributable Earnings help us to evaluate our performance excluding the effects of certain transactions and GAAP adjustments that we believe are not necessarily indicative of our current loan portfolio and operations, and is a performance metric we consider when declaring our dividends.

Distributable Earnings does not represent net income (loss) or cash generated from operating activities and should not be considered as an alternative to GAAP net income (loss), or an indication of GAAP cash flows from operations, a measure of our liquidity, or an indication of funds available for our cash needs. In addition, our methodology for calculating Distributable Earnings may differ from the methodologies employed by other companies to calculate the same or similar performance measures, and accordingly, our reported Distributable Earnings may not be comparable to the Distributable Earnings reported by other companies.

The following table provides a reconciliation of Distributable Earnings to GAAP net income:

						Three Months Ended
						September 30, 2022						June 30, 2022
Net income attributable to common stockholders						$	315,233					$	2,158,810
Unrealized (gain) on mortgage servicing rights						(37,312)						(81,216)
Unrealized provision for loan losses						1,521,023						351,914
Recognized compensation expense related to restricted common stock						3,433						4,476
Adjustment for income taxes						(97,974)						25,669
Distributable Earnings						$	1,704,403					$	2,459,653
Weighted-average shares outstanding, basic and diluted						52,231,152						52,226,141
Distributable Earnings per share, basic and diluted						$	0.03					$	0.05

Book Value Per Share of Common Stock

The following table calculates our book value per share of common stock:

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						September 30, 2022						June 30, 2022
Total stockholders' equity						$	245,167,009					$	247,996,564
Less preferred stock (liquidation preference of $25.00 per share)						(60,000,000)						(60,000,000)
Total common stockholders' equity						185,167,009						187,996,564
Shares of common stock issued and outstanding at period end						52,231,152						52,231,152
Book value per share of common stock						$	3.55					$	3.60

As of September 30, 2022, our common stockholders' equity was $186.5 million, and our book value per share of common stock was $3.55 on a basic and fully diluted basis. Our equity decreased by $2.8 million compared to our equity as of June 30, 2022 primarily as a result of $1.5 million allowance or loan loss and $1.3 million in distributions greater than net income the quarter.

Investment Portfolio

Commercial Mortgage Loans

As of September 30, 2022, we have determined that we are the primary beneficiary of LFT CRE 2021-FL1, Ltd. based on our obligation to absorb losses derived from ownership of our residual interests. Accordingly, the Company consolidated the assets, liabilities, income and expenses of the underlying issuing entities, collateralized loan obligations.

The following table details our loan activity by unpaid principal balance:

						Commercial Mortgage Loans Held-for-Investment
Balance at December 31, 2021						$	1,001,825,294
Purchases and fundings						269,596,827
Proceeds from principal repayments						(225,537,724)
Accretion of purchase discount						125,098
Amortization of purchase premium						(55,804)
Provision for loan losses						(1,872,937)
Balance at September 30, 2022						$	1,044,080,754

The following table details overall statistics for our loan portfolio as of September 30, 2022 and December 31, 2021:

																								Weighted Average
Loan Type						Unpaid Principal Balance						Carrying Value						Loan Count						Floating Rate Loan %						Coupon(1)						Remaining  Term  (Years)(2)
September 30, 2022
Loans held-for-investment
Senior secured loans(3)						$	1,045,929,099					$	1,045,953,691					70						100.0		%				6.0		%				3.6
Allowance for loan losses						N/A						$	(1,872,937)
						$	1,045,929,099					$	1,044,080,754					70						100.0		%				6.0		%				3.6

																								Weighted Average
Loan Type						Unpaid Principal Balance						Carrying Value						Loan Count						Floating Rate Loan %						Coupon(1)						Remaining  Term  (Years)(2)
December 31, 2021
Loans held-for-investment
Senior secured loans(3)						$	1,001,869,994					$	1,001,825,294					66						100.0		%				3.9		%				3.7
						$	1,001,869,994					$	1,001,825,294					66						100.0		%				3.9		%				3.7

(1)    Weighted average coupon assumes applicable one-month LIBOR of 2.66% and 0.10% and 30-day Term SOFR of 2.60% and 0.00% as of September 30, 2022 and December 31, 2021, respectively, inclusive of weighted average interest rate floors of 0.26% and 0.49%, respectively. As of September 30, 2022, 83.5% of the investments by total investment exposure earned a floating rate indexed to one-month USD LIBOR and 16.5% of the investments by total investment exposure earned a floating rate indexed to 30-day Term SOFR. As of December 31, 2021, 100% of the investments by total investment exposure earned a floating rate indexed to one-month LIBOR

(2)    Weighted average remaining term assumes all extension options are exercised by the borrower, provided, however, that our loans may be repaid prior to such date.

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(3)    As of September 30, 2022, $971,905,743 of the outstanding senior secured loans were held in VIEs and $73,696,034 of the outstanding senior secured loans were held outside of VIEs. As of December 31, 2021, $974,025,294 of the outstanding senior secured loans were held in VIEs and $27,800,000 of the outstanding senior secured loans were held outside VIEs.

The table below sets forth additional information relating to the Company's portfolio as of September 30, 2022:

Loan #						Form of Investment						Origination Date						Total Loan Commitment(1)						Current Principal Amount						Location						Property Type						Coupon						Max Remaining Term (Years)						LTV(2)
1						Senior secured						December 16, 2021						$	54,455,784					$	51,375,000					Daytona, FL						Multi-Family						1mL + 3.1						4.3						71.7		%
2						Senior secured						November 22, 2019						$	42,600,000					$	36,781,588					Virginia Beach, VA						Multi-Family						1mS + 3.2						2.3						77.1		%
3						Senior secured						June 28, 2021						$	39,263,000					$	34,690,000					Barrington, NJ						Multi-Family						1mL + 3.1						3.8						78.1		%
4						Senior secured						November 2, 2021						$	33,500,000					$	33,500,000					Warner Robbins, GA						Multi-Family						1mL + 3.0						2.2						51.4		%
5						Senior secured						June 8, 2021						$	35,877,500					$	33,360,000					Chattanooga, TN						Multi-Family						1mL + 3.7						3.8						79.8		%
6						Senior secured						June 8, 2021						$	32,500,000					$	30,576,666					Miami, FL						Multi-Family						1mL + 3.2						3.8						74.3		%
7						Senior secured						May 20, 2021						$	33,000,000					$	27,803,800					Marietta, GA						Multi-Family						1mL + 3.1						3.8						77.0		%
8						Senior secured						April 22, 2021						$	27,750,000					$	27,750,000					Los Angeles, CA						Multi-Family						1mL + 3.3						0.2						55.0		%
9						Senior secured						June 7, 2021						$	29,400,000					$	26,400,000					San Antonio, TX						Multi-Family						1mL + 3.4						3.8						80.0		%
10						Senior secured						August 26, 2021						$	27,268,000					$	24,832,000					Clarkston, GA						Multi-Family						1mL + 3.5						3.9						79.0		%
11						Senior secured						November 15, 2021						$	26,003,000					$	24,330,000					El Paso, TX						Multi-Family						1mL + 3.1						4.3						76.0		%
12						Senior secured						October 18, 2021						$	28,250,000					$	23,348,000					Cherry Hill, NJ						Multi-Family						1mL + 3.0						4.2						72.4		%
13						Senior secured						August 26, 2021						$	23,370,000					$	21,957,240					Union City, GA						Multi-Family						1mL + 3.4						4.0						70.4		%
14						Senior secured						November 16, 2021						$	21,975,000					$	20,960,000					Dallas, TX						Multi-Family						1mL + 3.2						4.3						73.5		%
15						Senior secured						August 31, 2021						$	21,750,000					$	20,700,000					Houston, TX						Multi-Family						1mL + 3.3						4.0						74.2		%
16						Senior secured						October 29, 2021						$	20,500,000					$	20,500,000					Knoxville, TN						Multi-Family						1mL + 3.8						4.2						70.0		%
17						Senior secured						June 30, 2021						$	21,968,000					$	20,188,700					Jacksonville, FL						Multi-Family						1mL + 3.5						3.8						77.1		%
18						Senior secured						October 13, 2017						$	20,000,000					$	19,648,818					Seattle, WA						Self Storage						1mL + 3.6						2.2						46.5		%
19						Senior secured						November 5, 2021						$	20,965,000					$	19,200,000					Orlando, FL						Multi-Family						1mL + 3.0						4.2						78.1		%
20						Senior secured						February 11, 2022						$	20,165,000					$	18,599,480					Tampa, FL						Multi-Family						1mS + 3.6						4.5						78.0		%
21						Senior secured						November 23, 2021						$	19,925,000					$	18,400,000					Orange, NJ						Multi-Family						1mL + 3.2						4.3						78.0		%
22						Senior secured						October 12, 2021						$	17,500,000					$	17,500,000					Atlanta, GA						Multi-Family						1mL + 3.2						2.1						42.9		%
23						Senior secured						July 8, 2021						$	17,000,000					$	17,000,000					Knoxville, TN						Multi-Family						1mL + 4.0						1.9						69.7		%
24						Senior secured						December 28, 2018						$	24,123,000					$	16,672,623					Austin, TX						Retail						1mL + 4.6						0.3						60.5		%
25						Senior secured						September 30, 2021						$	17,583,000					$	16,663,000					Hanahan, SC						Multi-Family						1mL + 3.2						4.1						76.4		%
26						Senior secured						February 1, 2022						$	16,160,000					$	15,400,000					San Antonio, TX						Multi-Family						1mS + 3.5						4.4						79.8		%
27						Senior secured						February 22, 2022						$	18,241,527					$	15,000,000					Philadelphia, PA						Multi-Family						1mS + 3.8						4.5						80.0		%
28						Senior secured						April 12, 2021						$	17,000,000					$	15,000,000					Cedar Park, TX						Multi-Family						1mL + 3.8						3.7						66.7		%
29						Senior secured						December 2, 2021						$	16,250,000					$	14,857,637					Colorado Springs, CO						Multi-Family						1mL + 3.0						4.3						72.5		%

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30						Senior secured						December 1, 2021						$	16,071,800					$	14,080,000					Horn Lake, MS						Multi-Family						1mL + 3.3						4.3						75.7		%
31						Senior secured						November 3, 2021						$	13,870,000					$	13,720,000					Louisville, KY						Multi-Family						1mL + 3.4						4.2						75.4		%
32						Senior secured						June 15, 2022						$	15,371,600					$	13,575,000					Denton, TX						Multi-Family						1mS + 3.9						4.8						73.0		%
33						Senior secured						May 28, 2021						$	13,675,000					$	13,332,734					Houston, TX						Multi-Family						1mL + 3.4						1.8						73.8		%
34						Senior secured						May 26, 2022						$	17,500,000					$	13,300,000					Brooklyn, NY						Multi-Family						1mS + 3.8						4.4						64.3		%
35						Senior secured						May 12, 2021						$	13,930,000					$	13,026,000					Fort Worth, TX						Multi-Family						1mL + 3.4						3.8						74.9		%
36						Senior secured						August 16, 2021						$	15,886,000					$	12,750,000					Columbus, OH						Multi-Family						1mL + 3.7						4.0						75.0		%
37						Senior secured						December 13, 2021						$	15,656,650					$	12,600,000					Evansville, IN						Multi-Family						1mL + 3.3						4.3						74.3		%
38						Senior secured						October 1, 2021						$	13,775,000					$	12,100,000					East Nashville, TN						Multi-Family						1mL + 3.4						4.1						79.1		%
39						Senior secured						June 28, 2022						$	12,880,000					$	11,470,000					Colorado Springs, CO						Multi-Family						1mS + 3.9						4.8						73.1		%
40						Senior secured						October 28, 2021						$	12,250,000					$	11,202,535					Tampa, FL						Multi-Family						1mL + 3.0						4.2						75.7		%
41						Senior secured						September 30, 2021						$	11,300,000					$	10,795,000					Clearfield, UT						Multi-Family						1mL + 3.2						4.1						68.0		%
42						Senior secured						April 23, 2021						$	11,600,000					$	10,497,000					Tualatin, OR						Multi-Family						1mL + 3.2						3.7						73.9		%
43						Senior secured						July 23, 2018						$	16,200,000					$	10,258,668					Chicago, IL						Office						1mL + 3.8						0.9						72.7		%
44						Senior secured						December 29, 2021						$	11,000,000					$	10,239,800					Phoenix, AZ						Multi-Family						1mL + 3.7						4.3						75.9		%
45						Senior secured						December 2, 2021						$	9,975,000					$	9,975,000					Tomball, TX						Multi-Family						1mL + 3.4						4.3						68.5		%
46						Senior secured						November 23, 2021						$	10,706,000					$	9,856,000					Atlanta, GA						Multi-Family						1mL + 3.4						4.3						79.5		%
47						Senior secured						January 14, 2022						$	10,234,000					$	9,609,250					Houston, TX						Multi-Family						1mS + 3.6						4.4						78.8		%
48						Senior secured						October 21, 2021						$	11,500,000					$	9,100,000					Madison, TN						Multi-Family						1mL + 3.2						4.2						68.4		%
49						Senior secured						November 30, 2021						$	11,276,000					$	8,400,000					Lindenwood, NJ						Multi-Family						1mL + 3.6						4.3						76.4		%
50						Senior secured						May 12, 2021						$	8,950,000					$	8,220,000					Lakeland, FL						Multi-Family						1mL + 3.4						3.8						76.8		%
51						Senior secured						June 22, 2022						$	9,772,000					$	8,175,500					Des Moines, IA						Multi-Family						1mS + 4.0						4.8						72.0		%
52						Senior secured						April 7, 2021						$	10,152,000					$	7,963,794					Phoenix, AZ						Multi-Family						1mL + 3.6						3.7						69.5		%
53						Senior secured						June 24, 2022						$	7,934,160					$	7,934,160					Monks Corner, SC						Multi-Family						1mS + 4.2						4.8						67.8		%
54						Senior secured						October 29, 2021						$	9,000,000					$	7,934,000					Riverside, MO						Multi-Family						1mL + 3.4						4.2						76.6		%
55						Senior secured						November 16, 2021						$	7,680,000					$	7,680,000					Cape Coral, FL						Multi-Family						1mL + 3.3						2.3						79.2		%
56						Senior secured						September 28, 2021						$	8,125,000					$	7,286,000					Chicago, IL						Multi-Family						1mL + 3.7						4.1						75.9		%
57						Senior secured						February 18, 2022						$	7,800,000					$	7,200,000					Drexel Hills, PA						Multi-Family						1mS + 4.0						4.5						78.1		%
58						Senior secured						March 31, 2021						$	8,432,000					$	6,893,000					Tucson, AZ						Multi-Family						1mL + 3.6						3.6						72.8		%
59						Senior secured						March 18, 2022						$	6,300,000					$	6,300,000					Twinsburg, OH						Seniors Housing and Healthcare						1mS + 4.0						2.1						68.0		%
60						Senior secured						July 1, 2021						$	7,285,000					$	6,290,000					Harker Heights, TX						Multi-Family						1mL + 3.6						3.8						72.3		%
61						Senior secured						April 27, 2022						$	55,220,000					$	6,000,000					North Brunswick, NJ						Multi-Family						1mS + 3.4						4.7						79.9		%
62						Senior secured						May 21, 2021						$	7,172,000					$	5,994,000					Youngtown, AZ						Multi-Family						1mL + 3.7						3.8						71.4		%

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63						Senior secured						October 26, 2021						$	6,807,000					$	5,812,000					Indianapolis, IN						Multi-Family						1mL + 3.9						4.2						77.1		%
64						Senior secured						June 10, 2019						$	6,000,000					$	5,295,605					San Antonio, TX						Multi-Family						1mL + 2.9						1.8						62.9		%
65						Senior secured						April 30, 2021						$	5,472,000					$	5,285,500					Daytona Beach, FL						Multi-Family						1mL + 3.7						3.7						77.4		%
66						Senior secured						December 13, 2021						$	6,799,000					$	5,250,000					Evansville, IN						Multi-Family						1mL + 3.3						4.3						73.9		%
67						Senior secured						July 14, 2021						$	6,048,000					$	5,248,000					Birmingham, AL						Multi-Family						1mL + 3.7						3.9						71.7		%
68						Senior secured						November 19, 2021						$	6,453,000					$	5,040,000					Huntsville, AL						Multi-Family						1mL + 3.8						4.3						78.8		%
69						Senior secured						November 30, 2018						$	4,446,000					$	4,446,000					Anderson, SC						Multi-Family						1mL + 3.3						0.2						53.7		%
70						Senior secured						December 28, 2021						$	52,800,000					$	2,800,000					Houston, TX						Multi-Family						1mS + 3.3						4.3						71.2		%

(1)    See Note 11 Commitments and Contingencies to our consolidated financial statements for further discussion of unfunded commitments.

(2)    LTV as of the date the loan was originated by a Hunt/ORIX affiliate and is calculated after giving effect to capex and earn-out reserves, if applicable. LTV has not been updated for any subsequent draws or loan modifications and is not reflective of any changes in value, which may have occurred subsequent to the origination date.

We did not have any impaired loans, non-accrual loans, or loans in maturity default other than the loan discussed below as of September 30, 2022 or December 31, 2021.

During the period ended September 30, 2022, management identified one loan, collateralized by an office building, with an unpaid principal value of $10.3 million as impaired, reflecting a decline in collateral value attributable to (i) recent and near term vacancies at the property; (ii) new information available during three months ended September 30, 2022 regarding the addition of office space supply that will increase the submarket vacancy rate in the local market and (iii) declining market conditions. As of September 30, 2022, this loan was not yet in default, but the borrower will likely not be able to pay off or refinance the loan at maturity. Based on this review, a reserve of $1.5 million was recorded for this impaired loan in three months ended September 30, 2022 and $1.9 million for the nine months ended September 30, 2022. Additionally, this loan was placed on non-accrual as result of the impaired loan classification, however, the borrower continues to remain current on debt service payments. As of August 8, 2022, this loan has been placed in maturity default. We entered into a forbearance agreement with the borrower extending the maturity date to December 2022 to allow the borrower more time to market and sell the property.

We maintain strong relationships with our borrowers and utilized those relationships to address potential impacts on loans secured by properties experiencing cash flow pressure. All of our loans are current with respect to principal and interest, other than the loan discussed above, however, we will continue to engage in discussions with them should these difficulties arise.

We have not entered into any forbearance agreements or loan modifications to date, other than the forbearance agreement discussed above. However, we can provide no assurances that our borrowers will remain current as to principal and interest, or that we will not enter into any forbearance agreements or loan modifications in order to protect the value of our commercial mortgage loan assets.

As discussed in Note 2 to our consolidated financial statements, our Manager performs a quarterly review of our loan portfolio, assesses the performance of each loan, and assigns a risk rating between "1" and "5," from less risk to greater risk. The weighted average risk rating of our total loan exposure was 2.7 as of September 30, 2022 and December 31, 2021, respectively. The change in underlying risk rating consisted of commercial mortgage loans that paid off with a risk rating of "2" of $110.0 million, a risk rating of "3" of $99.0 million and a risk rating of "4" of $9.5 million, offset by the purchase of commercial mortgage loans with a risk rating of "2" of $69.0 million and a risk rating of "3" of $193.6 million during the three months ended September 30, 2022. Additionally, $377.6 million of loans with a risk rating of "2" transitioned to a risk rating of "3", $86.2 million of loans with a risk rating of "3" transitioned to a risk rating of "2", $12.8 million of loans transitioned from a risk rating of "3" to a risk rating of "4", $5.3 million of loans transitioned from a risk rating of "4" to a risk rating of "3" and $10.3 million of loans transitioned from a risk rating of "4" to a risk rating of "5". The following table presents the principal balance and net book value based on our internal risk ratings:

						September 30, 2022
Risk Rating						Number of Loans						Outstanding Principal						Net Carrying Value
1						—						$	—					$	—
2						23						302,083,221						302,083,221
3						45						720,837,210						720,861,802
4						1						12,750,000						12,750,000
5						1						10,258,668						8,385,731
						70						$	1,045,929,099					$	1,044,080,754

Collateralized Loan Obligations

We may seek to enhance returns on our commercial mortgage loan investments through securitizations, or CLOs, if available, as well as the utilization of warehouse repurchase agreement financing. To the extent available, we intend to securitize the senior portion of some of our loans, while retaining the subordinate securities in our investment portfolio. The securitizations of this senior portion will be accounted for as either a "sale" or as a "financing." If they

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are accounted for as a sale, the loan will be removed from the balance sheet and if they are accounted for as a financing the loans will be classified as "commercial mortgage loans held-for-investment" in our consolidated balance sheets, depending on the structure of the securitization. As of September 30, 2022, the carrying amounts and outstanding principal balances of our collateralized loan obligations were $828.7 million and $833.8 million, respectively. See Note 4 to our consolidated financial statements included in this Quarterly Report on Form 10-Q for additional terms and details of our CLOs.

  

FOAC and Our Residential Mortgage Loan Business

 

In June 2013, we established FOAC as a Taxable REIT Subsidiary, or TRS, to increase the range of our investments in mortgage-related assets. Until August 1, 2016, FOAC aggregated mortgage loans primarily for sale into securitization transactions, with the expectation that we would purchase the subordinated tranches issued by the related securitization trusts, and that these would represent high quality credit investments for our portfolio. Residential mortgage loans for which FOAC owns the MSRs continue to be directly serviced by one or more licensed sub-servicers since FOAC does not directly service any residential mortgage loans.

As noted earlier, we previously determined to cease the aggregation of prime jumbo loans for the foreseeable future, and therefore no longer maintain warehouse financing to acquire prime jumbo loans. We do not expect the previous changes to our mortgage loan business strategy to impact the existing MSRs that we own, or the securitizations we have sponsored to date.

Pursuant to a Master Agreement dated June 15, 2016, as amended on August 29, 2016, January 30, 2017 and June 27, 2018, among MAXEX, LLC ("MAXEX"), MAXEX Clearing LLC, MAXEX's wholly-owned clearinghouse subsidiary and FOAC, FOAC provided seller eligibility review services under which it reviewed, approved and monitored sellers that sold loans via MAXEX Clearing LLC. To the extent that a seller approved by FOAC failed to honor its obligations to repurchase a loan based on an arbitration finding that it breached its representations and warranties, FOAC was obligated to backstop the seller's repurchase obligation. The term of such backstop guarantee was the earlier of the contractual maturity of the underlying mortgage and its repayment in full. However, the incidence of claims for breaches of representations and warranties over time is considered unlikely to occur more than five years from the sale of a mortgage. FOAC's obligations to provide such seller eligibility review and backstop guarantee services terminated on November 28, 2018. Pursuant to an Assumption Agreement dated December 31, 2018, among MAXEX Clearing LLC and FOAC, MAXEX Clearing LLC assumed all of FOAC's obligations under its backstop guarantees and agreed to indemnify and hold FOAC harmless against any losses, liabilities, costs, expenses and obligations under the backstop guarantee. FOAC paid MAXEX Clearing LLC, as the replacement backstop provider, a fee of $426,770 (the "Alternative Backstop Fee"). MAXEX Clearing LLC represented to FOAC in the Assumption Agreement that it (i) is rated at least "A" (or equivalent) by at least one nationally recognized statistical rating agency or (ii) has (a) adjusted tangible net worth of at least $20.0 million and (b) minimum available liquidity equal to the greater of (x) $5.0 million and (y) 0.1% multiplied by the scheduled unpaid principal balance of each outstanding loan covered by the backstop guarantees. MAXEX's chief financial officer is required to certify ongoing compliance by MAXEX Clearing LLC with the aforementioned criteria on a quarterly basis and if MAXEX Clearing LLC fails to satisfy such criteria, MAXEX Clearing LLC is required to deposit into an escrow account FOAC's benefit an amount equal to the greater of (A) the unamortized Alternative Backstop Fee for each outstanding loan covered by the backstop guarantee and (B) the product of 0.01% multiplied by the scheduled unpaid principal balance of each outstanding loan covered by the backstop guarantees. See Note 10 to our consolidated financial statements included in this Quarterly Report on form 10-Q for a further description of MAXEX.

Critical Accounting Policies and Estimates  

 

Our consolidated financial statements are prepared in accordance with GAAP, which requires the use of estimates and assumptions that involve the exercise of judgment and use of assumptions as to future uncertainties. Accounting estimates and assumptions discussed in this section are those that we consider to be the most critical to understanding our financial statements because they involve significant judgments and uncertainties that could affect our reported assets and liabilities, as well as our reported revenues and expenses. All of these estimates reflect our best judgments about current, and for some estimates, future economic and market conditions and their effects based on information available as of the date of the financial statements. If conditions change from those expected, it is possible that the judgments and estimates described below could change, which may result in a change in our interest income recognition, allowance for loan losses, future impairment of our investments, and valuation of our investment portfolio, among other effects. We believe that the following accounting policies are among the most important to the portrayal of our financial condition and results of operations and require the most difficult, subjective or complex judgments.   

Commercial Mortgage Loans Held-for-Investment

Quarterly, the Company assesses the risk factors of each loan classified as held-for-investment and assigns a risk rating based on a variety of factors, including, without limitation, debt-service coverage ratio ("DSCR"), loan-to-value ratio ("LTV"), property type, geographic and local market dynamics, physical condition, leasing and tenant profile, adherence to business plan and exit plan, maturity default risk and project sponsorship. The Company's loans are rated on a 5-point scale, from least risk to greatest risk, respectively, which ratings are described as follows:

1.Very Low Risk: exceeds expectations and is outperforming underwriting or it is very likely that the underlying loan can be refinanced easily in the period's prevailing capital market conditions

2.Low Risk: meeting or exceeding underwritten expectations

3.Moderate Risk: consistent with underwritten expectations or the sponsor may be in the early stages of executing the business plan and the loan structure appropriately mitigates additional risks

4.High Risk: potential risk of default, a loss may occur in the event of default

5.Default Risk: imminent risk of default, a loss is likely in the event of default

The Company evaluates each loan rated High Risk or above as to whether it is impaired on a quarterly basis. Impairment occurs when the Company determines that the facts and circumstances of the loan deem it probable that the Company will not be able to collect all amounts due in accordance with the contractual terms of the loan. If a loan is considered to be impaired, an allowance is recorded to reduce the carrying value of the loan through a charge to the provision for loan losses. Impairment of these loans, which are collateral dependent, is measured by comparing the estimated fair value of the underlying collateral, less costs to sell, to the book value of the respective loan. These valuations require significant judgments, which include assumptions regarding capitalization rates, leasing, creditworthiness of major tenants, occupancy rates, availability of financing, exit plan, actions of other lenders, and other factors deemed necessary by the Manager. Actual losses, if any, could ultimately differ from estimated losses. As of September 30, 2022, the Company identified one office loan as impaired and established an allowance for $1.5 million for the three months ended September 30, 2022 and $1.9 million for the nine months ended September 30, 2022. See Note 3 for further detail.

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In addition, the Company evaluates the entire portfolio to determine whether the portfolio has any impairment that requires a valuation allowance on the remainder of the loan portfolio. As of September 30, 2022, the Company has not recognized any additional impairments on its loans held-for-investment, other than the loan noted above. We also assessed the remainder of the portfolio, considering the absence of delinquencies and current market conditions, and, have not recorded any allowance for loan losses.

Capital Allocation

 

The following tables set forth our allocated capital by investment type at September 30, 2022 and December 31, 2021:

This information represents non-GAAP financial measures within the meaning of Item 10(e) of Regulation S-K, as promulgated by the SEC. We believe that this non-GAAP information enhances the ability of investors to better understand the capital necessary to support each income-earning asset category, and thus our ability to generate operating earnings. While we believe that the non-GAAP information included in this report provides supplemental information to assist investors in analyzing our portfolio, these measures are not in accordance with GAAP, and they should not be considered a substitute for, or superior to, our financial information calculated in accordance with GAAP.

						September 30, 2022
						Commercial Mortgage Loans						MSRs						Unrestricted Cash(1)						Total(2)
Carrying Value						$	1,044,080,754					$	817,907					$	48,485,316					$	1,093,383,977
Collateralized Loan Obligations						(828,673,313)						—						—						(828,673,313)
Other(3)						3,285,399						—						(4,043,415)						(758,016)
Restricted Cash						28,222,095						—						—						28,222,095
Capital Allocated						$	246,914,935					$	817,907					$	44,441,901					$	292,174,743
% Capital						84.5		%				0.3		%				15.2		%				100.0		%

						December 31, 2021
						Commercial Mortgage Loans						MSRs						Unrestricted Cash(1)						Total(2)
Carrying Value						$	1,001,825,294					$	551,997					$	14,749,046					$	1,017,126,337
Collateralized Loan Obligations						(826,782,543)						—						—						(826,782,543)
Other(3)						25,769,860						—						(3,422,658)						22,347,202
Restricted Cash						3,530,006						—						—						3,530,006
Capital Allocated						$	204,342,617					$	551,997					$	11,326,388					$	216,221,002
% Capital						94.5		%				0.3		%				5.2		%				100.0		%

(1)Includes cash and cash equivalents.

(2)Includes the carrying value of our Secured Term Loan.

(3)Includes principal and interest receivable, investment related receivable, prepaid and other assets, interest payable, dividend payable and accrued expenses and other liabilities.

 

Results of Operations  

 

As of September 30, 2022, we consolidated the assets and liabilities of one CRE CLO, LFT CRE 2021-FL1, Ltd. Additionally, although the COVID-19 pandemic did not significantly impact our operating results for the period ended September 30, 2022, should the pandemic and resulting economic deterioration persist, we expect it may affect our business, financial condition, results of operations and cash flows going forward, including but not limited to, interest income, credit losses and commercial mortgage loan reinvestment, in ways that may vary widely depending on the duration and magnitude of the COVID-19 pandemic and ensuing economic turmoil, as well as numerous factors, many of which are outside of our control.

Further in May 2021, we issued 2,400,000 shares of 7.875% Series A Cumulative Redeemable Preferred Stock resulting in net proceeds (after underwriting discount and commission but before operating expenses) of $58.1 million. On August 23, 2021, the Incremental Secured Term Loan of $7.5 million provided for in the Third Amendment to the Credit and Guaranty Agreement was funded. Additionally, in February 2022, we issued 27,277,269 shares of common stock resulting in net proceeds of $81.1 million. We believe that Lument IM and its affiliates continue to identify attractive CRE lending opportunities which we expect will allow us to deploy our capital base into assets that are consistent with our investment strategy. The deployment of these proceeds into our target assets may take time and as such, may result in a temporary decline in net interest income. Additionally, as a result of the Series A Preferred Stock and common stock issuances, Stockholders Equity as calculated per our management agreement h increase, resulting in increased management fees, changes to the core earnings hurdle over which incentive fees are due and payable to our Manager and increase to the reimbursable expense cap.

The table below presents information from our Statement of Operations for the three and nine months ended September 30, 2022 and September 30, 2021, respectively:

Three Months Ended September 30, 2022

Three Months Ended September 30, 2021

Nine Months Ended September 30, 2022

Nine Months Ended September 30, 2021

(unaudited)

(unaudited)

Revenues:

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Interest income:
Commercial mortgage loans held-for-investment						$	14,743,563					$	9,465,332					$	37,386,399					$	25,163,428
Cash and cash equivalents						4,969						5,724						14,736						22,802
Interest expense:
Collateralized loan obligations						(8,317,893)						(3,891,089)						(17,607,021)						(8,288,278)
Secured Term Loan						(947,509)						(846,988)						(2,807,362)						(2,393,216)
Net interest income						5,483,130						4,732,979						16,986,752						14,504,736
Other (loss) income:
Provision for loan losses						(1,521,023)						—						(1,872,937)						—
Unrealized gain (loss) on mortgage servicing rights						37,312						(59,776)						265,910						(300,666)
Loss on extinguishment of debt						—						—						—						(1,663,926)
Servicing income, net						62,451						106,392						185,685						326,314
Total other (loss) income						(1,421,260)						46,616						(1,421,342)						(1,638,278)
Expenses:
Management and incentive fees						1,096,144						807,967						3,111,413						2,254,431
General and administrative expenses						851,528						935,817						2,664,680						2,136,144
Operating expenses reimbursable to Manager						555,307						511,117						1,594,662						1,320,170
Other operating expenses						83,574						91,378						237,572						174,185
Compensation expense						73,016						50,991						178,797						149,617
Total expenses						2,659,569						2,397,270						7,787,124						6,034,547
Net income before provision for income taxes						1,402,301						2,382,325						7,778,286						6,831,911
Benefit from (provision for) income taxes						97,974						(7,857)						20,640						31,442
Net income						1,500,275						2,374,468						7,798,926						6,863,353
Dividends accrued to preferred stockholders						(1,185,042)						(1,198,167)						(3,555,042)						(1,927,542)
Net income attributable to common stockholders						$	315,233					$	1,176,301					$	4,243,884					$	4,935,811
Earnings per share:
Net income attributable to common stockholders (basic and diluted)						$	315,233					$	1,176,301					$	4,243,884					$	4,935,811
Weighted average number of shares of common stock outstanding						52,231,152						24,947,883						47,031,833						24,945,130
Basic and diluted income per share						$	0.01					$	0.05					$	0.09					$	0.20
Dividends declared per share of common stock						$	0.06					$	0.09					$	0.18					$	0.27

 

Net Income Summary

 

For the nine months ended September 30, 2022, our net income attributable to common stockholders was $4,243,884, or $0.09 basic and diluted net income per average share, compared with net income of $4,935,811, or $0.20 basic and diluted net income per average share, for the nine months ended September 30, 2021.  The principal drivers of this net income increase was an increase in net interest income from $14,504,736 for the nine months ended September 30, 2021 to $16,986,752 for the nine months ended September 30, 2022 and a decrease in total other loss of $1,638,278 for the nine months ended September 30, 2021 to $1,421,342 for the nine months ended September 30, 2022, which more than offset an increase in total expenses from $6,034,547 for the nine months ended September 30, 2021 to $7,787,124 for the nine months ended September 30, 2022 and an increase in accrued preferred dividends of $1,927,542 for the nine months ended September 30, 2021 to $3,555,042 for the nine months ended September 30, 2022.

For the three months ended September 30, 2022, our net income attributable to common stockholders was $315,233, or $0.01 basic and diluted net income per average share, compared with net income of $1,176,301, or $0.05 basic and diluted net income per average share, for the three months ended September 30, 2021.  The principal drivers of this net income increase were an increase in net interest income from $4,732,979 for the three months ended September 30, 2021 to $5,483,130 for the three months ended September 30, 2022, which more than offset the change from total other income from $46,616 for the three months ended September 30, 2021 to total other loss of $1,421,260 for the three months ended September 30, 2022 and an increase in total expenses from $2,397,270 for the three months ended September 30, 2021 to $2,659,569 for the three months ended September 30, 2022.

Net Interest Income

 

For the nine months ended September 30, 2022 and the nine months ended September 30, 2021, our net interest income was $16,986,752 and $14,504,736, respectively. The increase was primarily due to (i) a $419.2 million increase in weighted-average principal of our loan portfolio; (ii) a 93bps increase in weighted-average floating rate of our loan portfolio and (iii) a 2bps decrease in weighted average spread for our CLO liabilities. This was offset by (i) a $246.0 million increase in weighted-average principal balance of our CLO liabilities; (ii) a decrease in exit/extension/prepayment fees of $1.5 million for our loan portfolio; (iii) a decrease of 100bps in weighted-average LIBOR/SOFR floors on our loan portfolio for the nine months ended September 30, 2022 compared to the corresponding period in 2021; (iv) a 17bps decrease in weighted-average spread on the loan portfolio for the nine months ended September 30, 2022 compared to the corresponding period in 2021, (v) a 95bps increase in weighted-average LIBOR for our CLO liabilities and (vi) an increase of $543.7 thousand in amortized debt issuance costs.

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As disclosed above, we experienced a decrease of $1.5 million in exit/extension/prepayment fees in the nine months ended September 30, 2022. The primary driver of this change was attributed to exit fees. For the nine months ended September 30, 2022, we experienced loan payoffs on 12 loans with net principal balances of $133.1 million which generated exit fees of $1.3 million included in interest income and 6 loans with net principal balances $90.4 million which waived exit fees of $0.8 million resulting in a reduction to expense reimbursement of $0.4 million included in operating expenses reimbursable to Manager. For the nine months ended September 30, 2021, we experienced loan payoffs on 20 loans with net principal balances of $299.1 million which generated exit fees of $2.8 million included in interest income and 4 loans with net principal balances $44.7 million which waived exit fees of $0.6 million resulting in a reduction to expense reimbursement of $0.3 million included in operating expenses reimbursable to Manager.

For the three months ended September 30, 2022 and the three months ended September 30, 2021, our net interest income was $5,483,130 and $4,732,979, respectively. The increase was primarily due to (i) a $258.9 million increase in weighted-average principal of our loan portfolio and (ii) a 208bps increase in weighted-average floating rate of our loan portfolio. This was offset by (i) a decrease in exit/extension/prepayment fees of $0.5 million for our loan portfolio; (ii) a decrease of 76bps in weighted-average LIBOR/SOFR floors on our loan portfolio for the three months ended September 30, 2022 compared to the corresponding period in 2021; (iii) a 19bps decrease in weighted-average spread on the loan portfolio for the three months ended September 30, 2022 compared to the corresponding period in 2021 and (iv) a 208bps increase in weighted-average LIBOR for our CLO liabilities.

As disclosed above, we experienced a decrease of $0.5 million in exit/extension/prepayment fees in the three months ended September 30, 2022. The primary driver of this change was attributed to exit fees. For the three months ended September 30, 2022, we experienced loan payoffs on 2 loans with net principal balances of $13.6 million which generated exit fees of $0.1 million included in interest income and 2 loans with net principal balances $20.4 million which waived exit fees of $0.2 million resulting in a reduction to expense reimbursement of $0.1 million included in operating expenses reimbursable to Manager. For the three months ended September 30, 2021, we experienced loan payoffs on 5 loans with net principal balances of $71.8 million which generated exit fees of $0.7 million included in interest income and 1 loan with a net principal balance $9.5 million which waived exit fees of $0.2 million resulting in a reduction to expense reimbursement of $0.1 million included in operating expenses reimbursable to Manager.

Other (Loss) Income

 

For the nine months ended September 30, 2022, our other loss was $1,421,342. This loss was driven by allowance for loan losses of $1,521,023 which more than offset net servicing income of $185,685 and net unrealized gains on mortgage servicing rights of $265,910 as a result of increased interest rates in the period.

For the nine months ended September 30, 2021, we incurred a loss of $1,638,278. This loss was driven by loss on extinguishment of debt of $1,663,926 resulting from the unwind of Hunt CRE 2018-FL2 and the impact of net unrealized losses on mortgage servicing rights of $300,666 caused by decreased unpaid principal balance and lower interest rates which increased prepayments and lower projected float income which more than offset net servicing income of $326,314.

The period-over-period increase to other loss was primarily due to the loss on extinguishment of debt from the unwind of Hunt CRE 2018-FL2, the allowance for loan loss taken in 2022 and the change in unrealized gain on mortgage servicing rights as a result of increased interest rates in the period reducing the CPR of the servicing portfolio.

For the three months ended September 30, 2022, our other loss was $1,421,260. This loss was driven by net servicing income of 62,451 and net unrealized gains on mortgage servicing rights of $37,312 as a result of increased interest rates in the period which more than offset allowance for loan losses of $1,521,023.

For the three months ended September 30, 2021, our other income was $46,616. This gain was driven by net servicing income of $106,392, which more than offset the impact of net unrealized losses on mortgage servicing rights of $59,776 caused by decreased unpaid principal balance and lower interest rates which increased prepayments and lower projected float income.

The period-over-period change to other loss was primarily due to the allowance for loans loss taken in the period which more than offset the change in unrealized gain on mortgage servicing rights as a result of increased interest rates in the period reducing the CPR of the servicing portfolio.

Expenses

 

For the nine months ended September 30, 2022, we incurred management and incentive fees of $3,111,413 representing amounts payable to our Manager under our management agreement. We also incurred operating expenses of $4,675,711, of which $1,594,662 was payable to our Manager and $3,081,049 was payable directly by us.

For the nine months ended September 30, 2021, we incurred management and incentive fees of $2,254,431 representing amounts payable to our Manager under our management agreement. We also incurred operating expenses of $3,780,116 of which $1,320,170 was payable to our Manager and $2,459,946 was payable directly by us.

The period-over-period increase in operating expenses primarily reflects an increase in management, accounting, administration, audit, CLO, compensation, legal, listing and professional fees and expense reimbursement.

For the three months ended September 30, 2022, we incurred management and incentive fees of $1,096,144 representing amounts payable to our Manager under our management agreement. We also incurred operating expenses of $1,563,425, of which $555,307 was payable to our Manager and $1,008,118 was payable directly by us.

For the three months ended September 30, 2021, we incurred management and incentive fees of $807,967 representing amounts payable to our Manager under our management agreement. We also incurred operating expenses of $1,589,303 of which $511,117 was payable to our Manager and $1,078,186 was payable directly by us.

The period-over-period increase in operating expenses primarily reflects an increase in management, administration, audit, CLO, compensation, legal, listing and professional fees and expense reimbursement.

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Income Tax (Benefit) Provision

For the nine months ended September 30, 2022, the Company recognized a benefit from income taxes of $20,640 and for the nine months ended September 30, 2021, the Company recognized a benefit from income taxes in the amount of $31,442. The period-over-period decrease in tax benefit primarily reflects the change in gross deferred revenue at FOAC due to the change in unrealized gain on mortgage servicing rights.

For the three months ended September 30, 2022, the Company recognized a benefit from income taxes of $97,974 and for the three months ended September 30, 2021, the Company recognized a benefit from income taxes in the amount of $7,857. The period-over-period increase in tax expense primarily reflects the change in gross deferred revenue at FOAC due to the change in unrealized gain on mortgage servicing rights.

Liquidity and Capital Resources

 

Liquidity is a measurement of our ability to meet potential cash requirements, including ongoing commitments to pay dividends, fund investments, comply with margin requirements, if any, and repay borrowings and other general business needs. Our primary sources of liquidity have been met with net proceeds of common or preferred stock issuance, net proceeds from debt offerings and net cash provided by operating activities. We have added to our liquidity position in February 2022, by completing a transferable common stock rights offering issuing and selling 27,277,269 shares of common stock for net proceeds of approximately $81.1 million and in May 2021 by issuing 2,400,000 shares of 7.875% Series A Cumulative Redeemable Preferred Stock resulting in net proceeds (after underwriting discount and commission but before operating expense) of $58.1 million. We finance our commercial mortgage loans primarily with match term collateralized loan obligations, which are not subject to margin calls or additional collateralization requirements. On June 14, 2021, we closed LFT CRE 2021-FL1 issuing eight tranches of CLO notes totaling $903.8 million. Of the total CLO notes issued $833.8 million were investment grade notes issued to third-party investors and $70 million were below investment-grade notes retained by us. On August 23, 2021 we drew an additional $7.5 million of our Secured Term Loan pursuant to the Third Amendment. As of September 30, 2022, our balance sheet included $47.8 million of a secured term loan and $833.8 million in collateralized loan financing, gross of discounts and debt issuance costs. Our secured term loan matures in January 2026 and our collateralized loan financing is term-matched and matures in 2039 or later. However, to the extent that we seek to invest in additional commercial mortgage loans, we will in part be dependent on our ability to issue additional collateralized loan obligations to secure alternative financing facilities or to raise additional common or preferred equity. The anticipated continual rise in interest rates and unpredictable geopolitical landscape may cause a further dislocation in the capital markets resulting in a continual reduction of available liquidity and an increase in borrowing costs. A lack of liquidity for a prolonged period of time could limit our ability to grow this business.

If we were required to liquidate all or a portion of our portfolio quickly, we may realize significantly less than the value at which we previously recorded our assets, particularly in a financial market that has been significantly disrupted and less liquid as a result of the ongoing COVID-19 pandemic. Assets that are illiquid are more difficult to finance, and to the extent that we use leverage to finance assets that become illiquid, we may lose that leverage or have it reduced if such leverage is, at least in part, dependent on the market value of our assets. Assets tend to become less liquid during times of financial stress, which is often the time that liquidity is most needed. As a result, our ability to sell assets or vary our portfolio in response to changes in economic and other conditions may be limited by liquidity constraints, which could adversely affect our results of operations and financial condition. We seek to limit our exposure to illiquidity risk to the extent possible, by ensuring that the collateralized loan obligations that we use to finance our commercial mortgage loans are not subject to margin calls or other limitations that are dependent on the market value of the related loan collateral.

We intend to continue to maintain a level of liquidity in relation to our assets that enables us to meet reasonably anticipated investment requirements and unforeseen business needs but that also allows us to be substantially invested in our target assets. We may misjudge the appropriate amount of our liquidity by maintaining excessive liquidity, which would lower our investment returns, or by maintaining insufficient liquidity, which would force us to liquidate assets into unfavorable market conditions and harm our operating results.  As of September 30, 2022, we had unrestricted cash and cash equivalents of $48.5 million, compared to $14.7 million as of December 31, 2021.

As of September 30, 2022, we had $47.8 million in outstanding principal under our Senior Secured Term Loan, with a borrowing rate of 7.25%. As of September 30, 2022, the ratio of our recourse debt to equity was 0.2:1.

As of September 30, 2022, we consolidated the assets and liabilities of LFT CRE 2021-FL1, Ltd. The assets of the trust are restricted and can only be used to fulfill their respective obligations, and accordingly the obligations of the trust, which we classify as collateralized loan obligations, do not have any recourse to us as the consolidator of the trust. As of September 30, 2022, the carrying value of these non-recourse liabilities aggregated to $828.7 million. As of September 30, 2022, our total debt to equity ratio was 3.6:1 on a GAAP basis.

Cash Flows

The following table sets forth changes in cash, cash equivalents and restricted cash for the nine months ended September 30, 2022 and 2021:

						For the nine months ended September 30,
						2022						2021
Cash Flows From Operating Activities						11,736,702						11,925,131
Cash Flows From Investing Activities						(22,261,076)						(304,955,386)
Cash Flows From Financing Activities						68,952,733						415,801,466
Net Increase in Cash, Cash Equivalents and Restricted Cash						$	58,428,359					$	122,771,211

During the nine months ended September 30, 2022, cash, cash equivalents and restricted cash increased by $58.4 million and for the nine months ended September 30, 2021, cash, cash equivalents and restricted cash increased by $122.8 million.

Operating Activities

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For the nine months ended September 30, 2022 and 2021, net cash provided operating activities totaled $11.7 million and $11.9 million, respectively. For the nine months ended September 30, 2022, our cash flows from operating activities were primarily driven by interest received from the junior retained notes and preferred shares of LFT CRE 2021-FL1, Ltd., a VIE we consolidated during the period, of $20.1 million, interest received from our senior secured loans held outside the VIE we consolidate of $1.7 million and cash received from mortgage servicing rights of $0.2 million exceeding cash interest expense paid on our Secured Term Loan of $2.6 million, management and incentive fees of $3.1 million, expense reimbursements of $1.8 million and other operating expenditures of $2.8 million. For the nine months ended September 30, 2021, our cash flows from operating activities were primarily driven by interest received from the junior retained notes and preferred shares of Hunt CRE 2017-FL1, Ltd. and Hunt CRE 2018-FL2, Ltd., VIE’s we consolidated in the period, of $18.4 million, interest received from our senior secured loans held outside VIE’s we consolidate of $0.6 million and cash received from mortgage servicing rights of $0.3 million exceeding cash interest expense paid on our Secured Term Loan of $2.3 million, management fees of $1.9 million, expense reimbursement of $1.2 million and other operating expenditures of $2.6 million.

Investing Activities

For the nine months ended September 30, 2022, net cash used in investing activities totaled $22.3 million. This was a result of the cash used for the purchase and funding of commercial mortgage loans held for investment exceeding the principal repayment of commercial mortgage loans held for investment during the period. For the nine months ended September 30, 2021 net cash used in investing activities totaled $305.0 million. This was the result of cash received from principal repayment of commercial mortgage loans held for investment exceeding the cash used for purchase and funding of commercial mortgage loans held for investment for the purchase and funding of commercial mortgage loans held for investment.

Financing Activities

For the nine months ended September 30, 2022, net cash provided by financing activities totaled $69.0 million and primarily related to proceeds from issuance of common stock of $81.1 million which more than offset payments of common stock dividends of $8.5 million, payments of preferred stock dividends of $3.6 million and payment of debt issuance costs of $0.1 million. For the nine months ended September 30, 2021, net cash used in financing activities totaled $415.8 million and primarily related to proceeds from issuance of our Series A Preferred Stock of $57.3 million, proceeds from collateralized loan obligations of $833.8 million and proceeds from our Secure Term Loan of $7.5 million which more than offset payment of common stock dividends of $7.7 million, repayment of collateralized loan obligations of $465.3 million and payment of debt issuance costs of $8.7 million.

Forward-Looking Statements Regarding Liquidity  

 

Based upon our current portfolio, leverage rate and available borrowing arrangements, we believe that the net proceeds of our prior equity sales combined with cash flow from operations and available borrowing capacity will be sufficient to enable us to meet anticipated short-term (one year or less) liquidity requirements to fund our investment activities, pay fees under our management agreement, fund our distributions to stockholders and for other general corporate expenses.  

Our ability to meet our long-term (greater than one-year) liquidity and capital resource requirements will be subject to, amongst other things, obtaining additional debt financing and equity capital. We may increase our capital resources by obtaining long-term credit facilities, additional collateralized loan obligations or making additional public or private offerings of equity or debt securities, possibly including classes of preferred stock, common stock and senior and subordinated notes.

 

To maintain our qualification as a REIT, we generally must distribute annually at least 90% of our "REIT taxable income" (determined without regard to the deduction for dividends paid and excluding net capital gain). These distribution requirements limit our ability to retain earnings and thereby replenish or increase capital for operations.  

Off-Balance Sheet Arrangements   

As of September 30, 2022, we did not maintain any relationships with unconsolidated financial partnerships, or special purpose or variable interest entities, established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes. Further, as of September 30, 2022, we had not guaranteed any obligations of unconsolidated entities or entered into any commitment or intent to provide funding to any such entities.   

In connection with the provision of seller eligibility and backstop guarantee services provided to MAXEX, we previously accounted for the related non-contingent liability at its fair value on our consolidated balance sheet as a liability. As of September 30, 2022, pursuant to an Assumption Agreement dated December 31, 2018, among MAXEX Clearing LLC and FOAC, MAXEX Clearing LLC assumed all of FOAC's obligations under its backstop guarantees and agreed to indemnify and hold FOAC harmless against any losses, liabilities, costs, expenses and obligations under the backstop guarantee, see Note 10 for further information.

Distributions  

 

We intend to continue to make regular quarterly distributions to holders of our common stock. U.S. federal income tax law generally requires that a REIT distribute annually at least 90% of its "REIT taxable income" (determined without regard to the deduction for dividends paid and excluding net capital gain) and that it pay tax at regular corporate rates to the extent that it annually distributes less than 100% of its "REIT taxable income." We have historically made regular monthly distributions, and with effect from the third quarter of 2018 we now make regular quarterly distributions, to our stockholders in an amount equal to all or substantially all of our REIT taxable income. Although FOAC no longer aggregates and securitizes residential mortgages, it continues to generate taxable income from MSRs and other mortgage-related activities. This taxable income will be subject to regular corporate income taxes. We generally anticipate the retention of profits generated and taxed at FOAC. Before we make any distribution on our common stock, whether for U.S. federal income tax purposes or otherwise, we must first meet both our operating requirements and any debt service obligations on debt payable. If cash available for distribution to our stockholders is less than our taxable income, we could be required to sell assets or borrow funds to make cash distributions, or we may make a portion of the required distribution in the form of a taxable stock distribution or distribution of debt securities.   

 

If substantially all of our taxable income has not been paid by the close of any calendar year, we may declare a special dividend prior to the end of such calendar year, to achieve this result. On June 15, 2022, we announced that our board of directors had declared a cash dividend rate for the third quarter of 2022

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of $0.06 per share of common stock which was paid on July 15, 2022 and declared a cash dividend rate for the third quarter of 2022 of $0.49219 per share of Series A Preferred Stock which was paid on July 15, 2022.

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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS

 

Not applicable.

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ITEM 4.  CONTROLS AND PROCEDURES

 

Evaluation of Disclosure Controls and Procedures

 

Our management is responsible for establishing and maintaining disclosure controls and procedures (as defined in Rules 13a-15(e) or 15d-15(e)) under the Securities Exchange Act of 1934, as amended, or Exchange Act, that are designed to ensure that information we are required to disclose in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include controls and procedures designed to ensure that information required to be disclosed by us in the reports we file or submit under the Exchange Act is accumulated and communicated to our management, including our principal executive officer and principal financial officer, to allow timely decisions regarding required disclosure.

 

Under the supervision and with the participation of management, including our principal executive officer and principal financial officer, we carried out an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures pursuant to paragraph (b) of Exchange Act Rules 13a-15 or 15d-15 as of September 30, 2022. Based upon our evaluation, our principal executive officer and principal financial officer have concluded that our disclosure controls and procedures were effective as of September 30, 2022.

Changes in Internal Control Over Financial Reporting

 

There have been no changes in our internal control over financial reporting identified in connection with the evaluation required by paragraph (d) of Exchange Act Rule 13a-15 or 15d-15 that occurred during our most recently completed fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

   

PART II - OTHER INFORMATION

 

Item 1. Legal Proceedings

 

From time to time, we may be involved in various claims and legal actions arising in the ordinary course of business. As of the date hereof, neither we nor, to our knowledge, our Manager, are subject to any legal proceedings that we or our Manager considers to be material (individually or in the aggregate). 

 

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

 

None.

Item 1A. Risk Factors

There have been no material changes to the Risk Factors previously disclosed in Part I, Item 1A in our Annual Report on Form 10-K for the year ended December 31, 2021.

Item 3. Defaults Upon Senior Securities

 

None.

Item 4. Mine Safety Disclosures

 

Not applicable.

 

Item 5. Other Information

 

None.

 

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Item 6. Exhibits

 

The exhibits listed on the accompanying Index of Exhibits are filed or furnished herewith, as applicable, as a part of this report. Such Index is incorporated herein by reference.

EXHIBIT INDEX

 

Exhibit Number						Exhibit Description
31.1*						Certification of Chief Executive Officer pursuant to Rule 13a-14(a) and Rule 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2*						Certification of Chief Financial Officer pursuant to Rule 13a-14(a) and Rule 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1**						Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2**						Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101.INS*						XBRL Instance Document
101.SCH*						XBRL Taxonomy Extension Schema Document
101.CAL*						XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF*						XBRL Taxonomy Extension Definition Linkbase Document
101.LAB*						XBRL Taxonomy Extension Label Linkbase Document
101.PRE*						XBRL Taxonomy Extension Presentation Linkbase Document

			*			Filed herewith
			**			Furnished herewith

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SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

			LUMENT FINANCE TRUST, INC.
Dated: November 8, 2022			By			/s/ James P. Flynn
						James P. Flynn
						Chief Executive Officer (Principal Executive Officer)
Dated: November 8, 2022			By			/s/ James A. Briggs
						James A. Briggs
						Chief Financial Officer (Principal Financial Officer and Principal Accounting Officer)

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