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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 June 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 
oaks-20220630_g1.jpg
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 August 5, 2022
Common stock, $0.01 par value   52,231,152




LUMENT FINANCE TRUST, INC.
 
INDEX
 
PART I - Financial Information
 
     
Item 1.  
 
1
 
2
 
3
 
5
 
6
Item 2.
Item 3.
Item 4.
     
     
Item 1.
Item 1A.
Risk Factors
Item 2.
Item 3.
Item 4.
Item 5.
Item 6.
     
 





PART I - FINANCIAL INFORMATION
Item 1. Financial Statements 

LUMENT FINANCE TRUST, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
 
June 30, 2022(1)
December 31, 2021(1)
  (unaudited)  
ASSETS    
Cash and cash equivalents $ 39,048,256  $ 14,749,046 
Restricted cash 9,659,030  3,530,006 
Commercial mortgage loans held-for-investment, at amortized cost 1,034,001,272  1,001,825,294 
Allowance for loan losses (351,914) — 
Commercial mortgage loans held-for-investment, net of allowance for loan losses 1,033,649,358  1,001,825,294 
Mortgage servicing rights, at fair value 780,595  551,997 
Accrued interest receivable 3,589,187  3,977,752 
Affiliate receivable 33,809,250  — 
Investment related receivable 7,624,400  22,400,000 
Other assets 2,151,746  1,889,258 
Total assets $ 1,130,311,822  $ 1,048,923,353 
LIABILITIES AND EQUITY    
LIABILITIES:    
Collateralized loan obligations, net 828,036,131  826,782,543 
Secured term loan, net 46,845,426  46,845,502 
Accrued interest payable 1,108,536  704,055 
Dividends payable 4,131,369  3,242,809 
Fees and expenses payable to Manager 1,746,815  1,825,142 
Other accounts payable and accrued expenses 347,481  147,802 
Total liabilities 882,215,758  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 June 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 June 30, 2022 and December 31, 2021, respectively
522,252  249,434 
Additional paid-in capital 314,620,222  233,833,749 
Cumulative distributions to stockholders (152,086,688) (143,449,310)
Accumulated earnings 27,685,843  21,387,192 
Total stockholders' equity 247,996,564  169,276,000 
Noncontrolling interests $ 99,500  $ 99,500 
Total equity $ 248,096,064  $ 169,375,500 
Total liabilities and equity $ 1,130,311,822  $ 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 June 30, 2022 and December 31, 2021, assets of consolidated VIEs totaled $1,003,207,498 and $1,003,896,995, respectively and the liabilities of consolidated VIEs totaled $829,058,119 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




LUMENT FINANCE TRUST, INC. AND SUBSIDIARIES
Consolidated Statements of Operations
(unaudited)
Three Months Ended June 30, 2022 Three Months Ended June 30, 2021 Six Months Ended June 30, 2022 Six Months Ended June 30, 2021
Revenues:    
Interest income:    
Commercial mortgage loans held-for-investment $ 12,633,772  $ 8,227,979  $ 22,642,836  $ 15,698,096 
Cash and cash equivalents 4,912  12,778  9,767  17,078 
Interest expense:    
Collateralized loan obligations (5,284,890) (2,211,947) (9,289,128) (4,397,189)
Secured term loan (937,210) (774,363) (1,859,853) (1,546,228)
Net interest income 6,416,584  5,254,447  11,503,622  9,771,757 
Other (loss):    
Provision for loan losses (351,914) —  (351,914) — 
Unrealized gain (loss) on mortgage servicing rights 81,216  (220,435) 228,598  (240,890)
Loss on extinguishment of debt —  (1,663,926) —  (1,663,926)
Servicing income, net 56,053  95,766  123,234  219,922 
Total other (loss) (214,645) (1,788,595) (82) (1,684,894)
Expenses:    
Management and incentive fees 1,090,652  725,465  2,015,269  1,446,464 
General and administrative expenses 960,420  520,013  1,813,152  1,200,327 
Operating expenses reimbursable to Manager 648,645  496,599  1,039,355  809,053 
Other operating expenses 77,808  48,054  153,998  82,807 
Compensation expense 54,893  49,491  105,781  98,626 
Total expenses 2,832,418  1,839,622  5,127,555  3,637,277 
Net income before provision for income taxes 3,369,521  1,626,230  6,375,985  4,449,586 
(Provision for) benefit from income taxes (25,669) 54,012  (77,334) 39,299 
Net income 3,343,852  1,680,242  6,298,651  4,488,885 
Dividends accrued to preferred stockholders (1,185,042) (725,667) (2,370,000) (729,375)
Net income attributable to common stockholders $ 2,158,810  $ 954,575  $ 3,928,651  $ 3,759,510 
Earnings per share:
Net income attributable to common stockholders (basic and diluted) $ 2,158,810  $ 954,575  $ 3,928,651  $ 3,759,510 
Weighted average number of shares of common stock outstanding 52,226,141  24,944,075  44,389,086  24,943,731 
Basic and diluted income per share $ 0.04  $ 0.04  $ 0.09  $ 0.15 
Dividends declared per share of common stock $ 0.06  $ 0.09  $ 0.12  $ 0.18 

The accompanying notes are an integral part of these unaudited consolidated financial statements.
2




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 
 
The accompanying notes are an integral part of these unaudited consolidated financial statements.
3




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 

The accompanying notes are an integral part of these unaudited consolidated financial statements.
4




LUMENT FINANCE TRUST, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(unaudited)
Six Months Ended
June 30, 2022
Six Months Ended
June 30, 2021
Cash flows from operating activities:    
Net income $ 6,298,651  $ 4,488,885 
Adjustments to reconcile net income to net cash provided by operating activities:    
Accretion of commercial mortgage loans held-for-investment discounts (125,098) (3,781)
Amortization of commercial mortgage loans held-for-investment premiums 50,522  78,008 
Accretion of collateralized loan obligations discounts —  207,767 
Amortization of deferred offering costs (85,867) — 
Amortization of deferred financing costs 1,372,887  573,113 
Provision for loan losses 351,914  — 
Loss on extinguishment of debt —  1,663,926 
Unrealized (gain) loss on mortgage servicing rights (228,598) 240,890 
Restricted stock compensation expense 9,114  6,126 
Net change in:    
Accrued interest receivable 388,565  (796,111)
Other assets (262,488) (523,140)
Accrued interest payable 404,480  233,341 
Fees and expenses payable to Manager (78,327) 371,469 
Other accounts payable and accrued expenses 199,679  520,727 
Net cash provided by operating activities 8,295,434  7,061,220 
Cash flows from investing activities:    
Purchase of commercial mortgage loans held-for-investment (222,142,167) (338,386,251)
Principal payments from commercial mortgage loans held-for-investment 171,007,115  273,837,132 
Investment related receivable —  (79,457,686)
Net cash (used in) investing activities (51,135,052) (144,006,805)
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 
Payment of collateralized loan obligations —  (465,316,126)
Payment of deferred financing costs (119,375) (7,789,364)
Dividends paid on common stock (5,378,818) (5,487,543)
Dividends paid on preferred stock (2,370,000) (7,500)
Net cash provided by financing activities 73,267,852  412,407,902 
Net increase in cash, cash equivalents and restricted cash 30,428,234  275,462,317 
Cash, cash equivalents and restricted cash, beginning of period 18,279,052  69,375,356 
Cash, cash equivalents and restricted cash, end of period $ 48,707,286  $ 344,837,673 
Supplemental disclosure of cash flow information    
Cash paid for interest $ 9,371,614  $ 4,929,197 
Non-cash investing and financing activities information    
Dividends declared but not paid at end of period $ 4,131,369  $ 3,164,059 

The accompanying notes are an integral part of these unaudited consolidated financial statements.
5



LUMENT FINANCE TRUST, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 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 June 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 June 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 June 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 June 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 June 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.
6



LUMENT FINANCE TRUST, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2022
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

Restricted cash includes cash held within LFT CRE 2021-FL1 as of June 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.

June 30, 2022 December 31, 2021
Cash and cash equivalents $ 39,048,256  $ 14,749,046 
Restricted cash CRE 2021-FL1, Ltd. $ 9,659,030  $ 3,530,006 
Total cash, cash equivalents and restricted cash $ 48,707,286  $ 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
7



LUMENT FINANCE TRUST, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 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 June 30, 2022, the Company held one loan on non-accrual status.

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 June 30, 2022, the Company identified one loan, collateralized by an office building, as impaired and established an allowance for loan loss of $0.4 million for the three months ended June 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 June 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 June 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 of $1,524,508 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 June 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 June 30, 2022 and December 31, 2021, respectively.

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
8



LUMENT FINANCE TRUST, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2022
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

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 June 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 June 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 six months ended June 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.

Recently Issued and/or Adopted Accounting Standards

Credit Losses
9



LUMENT FINANCE TRUST, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2022
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

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 is currently engaging with 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.

Financial Instruments

In March 2020, the FASB issued ASU 2020-03 which makes improvements to financial instruments guidance, including the current expected credit losses (CECL) guidance in ASU 2016-13. Only Issue 1, of the 7 improvement issues applies to the Company, which is effective upon issuance, requires all entities to provide fair value option disclosures. MSRs are reported at fair value as a result of the fair value election, as discussed in Mortgage Servicing Rights, at Fair Value above.

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 June 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 June 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)
June 30, 2022
Loans held-for-investment
Senior secured loans(3)
$ 1,033,971,397  $ 1,034,001,272  69  100.0  % 4.5  % 3.7
Allowance for loan losses N/A (351,914)
Loans held-for-investment, net of allowance for loan losses 1,033,971,397  1,033,649,358  69  100.0  % 4.5  % 3.7
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 1.12% and 0.10% and 30-day Term Secured Overnight Financing Rate ("SOFR") of 1.13% and 0.00% as of June 30, 2022 and December 31, 2021, respectively, inclusive of weighted average interest rate floors of 0.24% and 0.49%, respectively. As of June 30, 2022, 91.5% of the investments by total investment exposure earned a floating rate indexed to one-month
10



LUMENT FINANCE TRUST, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2022
NOTE 3 - COMMERCIAL MORTGAGE LOANS HELD-FOR-INVESTMENT (Continued)
USD LIBOR and 8.5% 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 June 30, 2022, $982,932,117 of the outstanding senior secured loans were held in VIEs and $51,039,280 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 six months ended June 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 222,142,167 
Principal payments (190,040,765)
Accretion of purchase discount 125,098 
Amortization of purchase premium (50,522)
Provision for loan losses (351,914)
Balance at June 30, 2022
$ 1,033,649,358 

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 June 30, 2022 and December 31, 2021:

June 30, 2022 December 31, 2021
Risk Rating Number of Loans Unpaid Principal Balance Net Carrying Value Number of Loans Unpaid Principal Balance Net Carrying Value
1 —  $ —  —  —  —  — 
2 45  667,068,717  667,068,717  40  634,438,386  634,438,386 
3 23  355,154,481  355,184,356  23  342,350,405  342,305,705 
4 —  —  —  25,081,203  25,081,203 
5 11,748,199  11,396,285  —  —  — 
69  $ 1,033,971,397  1,033,649,358  66  1,001,869,994  1,001,825,294 

As of June 30, 2022, the average risk rating of the commercial mortgage loan portfolio was 2.3 (Low Risk), weighted by investment carrying value, with 98.9% 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 remained stable during the six months ended June 30, 2022. The change in underlying risk rating consisted of loans that paid off with a risk rating of "2" of $83.0 million, a risk rating of "3" of $99.0 million and a risk rating of "4" of $8.0 million, offset by the purchase of commercial mortgage loans with a risk rating of "2" of $119.0 million and a risk rating of "3" of $103.2 million during the six months ended June 30, 2022. Additionally, $80.0 million of loans with a risk rating of "2" transitioned to a risk rating of "3", $76.7 million of loans with a risk rating of "3" transitioned to a risk rating of "2", $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 $11.7 million transitioned from a risk rating of "4" to a risk rating of "5".

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 June 30, 2022 and December 31, 2021:

Loans Held-for-Investment
June 30, 2022 December 31, 2021
Geography
South 48.0  % 46.2  %
Southwest 22.9  27.5 
Mid-Atlantic 13.5  7.9 
West 8.8  13.9 
Midwest 6.1  4.5 
11



LUMENT FINANCE TRUST, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2022
NOTE 3 - COMMERCIAL MORTGAGE LOANS HELD-FOR-INVESTMENT (Continued)
Northeast 0.7  — 
Total 100.0  % 100.0  %

June 30, 2022
December 31, 2021
Collateral Property Type
Multifamily 95.4  % 92.0  %
Self-Storage 1.9  5.2 
Retail 1.6  1.7 
Office 1.1  1.1 
Total 100.0  % 100.0  %

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

Three months ended Six months ended
June 30, 2022 June 30, 2021 June 30, 2022 June 30, 2021
Allowance for loan losses at beginning of period —  —  —  — 
Provision for loan losses 351,914  —  351,914  — 
Allowance for loan losses at end of period 351,914    351,914   


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

During the period ended June 30, 2022, management identified one loan, collateralized by an office building, with an unpaid principal value of $11.7 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 June 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 June 30, 2022, this loan was not yet in default, but the borrower may not be able to repay or refinance the loan at maturity. Based on this review, a reserve of $0.4 million was recorded for this impaired loan in the three months ended June 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.

The CLO we consolidate is subject to collateralization and coverage tests that are customary for these types of securitizations. As of June 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 June 30, 2022 and December 31, 2021 included the following VIE assets and liabilities:

ASSETS June 30, 2022 December 31, 2021
Cash, cash equivalents and restricted cash $ 9,659,031  $ 3,530,006 
Accrued interest receivable 3,313,989  3,941,695 
Investment related receivable 7,624,400  22,400,000 
12



LUMENT FINANCE TRUST, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2022
NOTE 4 – USE OF SPECIAL PURPOSE ENTITIES AND VARIABLE INTEREST ENTITIES (Continued)
Loans held for investment, net of allowance for loan losses 982,610,078  974,025,294 
Total Assets $ 1,003,207,498  $ 1,003,896,995 
LIABILITIES
Accrued interest payable $ 1,021,988  $ 607,892 
Collateralized loan obligations(1)
828,036,131  826,782,543 
Total Liabilities $ 829,058,119  $ 827,390,435 
Equity 174,149,379  176,506,560 
Total liabilities and equity $ 1,003,207,498  $ 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 June 30, 2022 and December 31, 2021:
As of June 30, 2022
Collateralized Loan Obligations Count Principal Value
Carrying Value(1)
Wtd. Avg. Yield
Collateral (loan investments) 65 $ 982,932,117  $ 982,610,078 
L + 3.33%
Financing provided 1 833,750,000  828,036,133 
L + 1.43%

As of December 31, 2021
Collateralized Loan Obligations Count Principal Value
Carrying Value(1)
Wtd. Avg. Yield
Collateral (loan investments) 64 $ 974,069,994  $ 974,025,294 
L + 3.42%
Financing provided 1 83,375,000  826,782,543 
L + 1.43%

(1)     The carrying value for LFT CRE 2021-FL1, Ltd. is net of debt issuance costs of $5,713,869 and $6,967,457 for June 30, 2022 and December 31, 2021, respectively.

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 six months ended June 30, 2022 and June 30, 2021 include the following income and expense items:

Statements of Operations Three Months Ended June 30, 2022 Three Months Ended June 30, 2021
Interest income $ 11,734,126  $ 7,867,960 
Interest expense (5,284,890) (2,211,947)
Net interest income $ 6,449,236  $ 5,656,013 
Loss on extinguishment of debt —  (1,663,926)
Provision for loan losses (351,914) — 
General and administrative fees (177,845) 91,786 
Net income $ 5,919,477  $ 4,083,873 

Statements of Operations Six Months Ended June 30, 2022 Six Months Ended June 30, 2021
Interest income $ 21,546,569  $ 15,131,821 
Interest expense (9,289,128) (4,397,189)
Net interest income $ 12,257,441  $ 10,734,632 
Loss on extinguishment of debt —  (1,663,926)
Provision for loan losses (351,914) — 
General and administrative fees (324,367) (28,800)
Net income $ 11,581,160  $ 9,041,906 




13



LUMENT FINANCE TRUST, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2022
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 ($904,574 and $904,498 at June 30, 2022 and December 31, 2021, respectively). As of June 30, 2022 and December 31, 2021, the outstanding balance and total commitment under the Credit Agreement consisted of the following:


June 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 June 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.

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 June 30, 2022, the Company retained the servicing rights associated with an aggregate principal balance of $79,643,107 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 six months ended June 30, 2022 and the six months ended June 30, 2021:

  June 30, 2022 June 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 300,977  68,314 
14



LUMENT FINANCE TRUST, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2022
NOTE 7 – MSRs (Continued)
Other changes to fair value(1)
(72,379) (309,204)
Balance at end of period $ 780,595  $ 678,788 
Loans associated with MSRs(2)
$ 79,643,107  $ 127,453,198 
MSR values as percent of loans(3)
0.98  % 0.53  %
(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 June 30, 2022 and June 30, 2021, respectively.
(3)Amounts represent the carrying value of MSRs at June 30, 2022 and June 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 six months ended June 30, 2022 and June 30, 2021:
Three Months Ended
June 30, 2022
Three Months Ended
June 30, 2021
Servicing income, net $ 56,053  $ 95,766 
Total servicing income $ 56,053  $ 95,766 

Six Months Ended June 30, 2022 Six Months Ended June 30, 2021
Servicing income, net $ 123,234  $ 219,922 
Total servicing income $ 123,234  $ 219,922 

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 June 30, 2022 and December 31, 2021:

  June 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 June 30, 2022
Assets:        
Mortgage servicing rights —  —  780,595  780,595 
Total $   $   $ 780,595  $ 780,595 

  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 June 30, 2022 and December 31, 2021, the Company had $780,595 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 June 30, 2022 and December 31, 2021:

As of June 30, 2022
Valuation Technique Unobservable Input Range Weighted Average
Discounted cash flow Constant prepayment rate
8.0 - 13.7%
9.1  %
  Discount rate 12.0  % 12.0  %
15



LUMENT FINANCE TRUST, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2022
NOTE 8 – FAIR VALUE (Continued)
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:
June 30, 2022
Level in Fair Value Hierarchy Carrying Value Face Amount Fair Value
Assets:
Cash and cash equivalents 1 39,048,256  39,048,256  39,048,256 
Restricted cash 1 9,659,030  9,659,030  9,659,030 
Commercial mortgage loans held-for-investment 3 1,033,649,358  1,033,971,397  1,025,297,089 
Total $ 1,082,356,644  $ 1,082,678,683  $ 1,074,004,375 
Liabilities:
Collateralized loan obligations 2 828,036,131  833,750,000  815,290,375 
Secured Term Loan 3 46,845,426  47,750,000  44,279,667 
Total $ 874,881,557  $ 881,500,000  $ 859,570,042 

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 

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
16



LUMENT FINANCE TRUST, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2022
NOTE 9 - RELATED PARTY TRANSACTIONS (Continued)

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 June 30, 2022, the Company incurred management fees of $1,090,652 (June 30, 2021: $725,465), recorded as "Management and incentive fees" in the consolidated statement of operations, of which $1,095,000 (June 30, 2021: $726,000) 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 June 30, 2022 and the three months ended June 30, 2021, the Company did not incur any incentive fees.

For the six months ended June 30, 2022, the Company incurred management fees of $2,015,269 (June 30, 2021: $1,314,232), recorded as "Management and incentive fees" in the consolidated statement of operations, of which $1,095,000 (June 30, 2021: $726,000) was accrued but had not been paid, included in "Fees and expenses payable to Manager" in the consolidated balance sheets.

For the six months ended June 30, 2022, the Company did not incur incentive fees (June 30, 2021: $132,232), recorded as "Management and incentive fees" in the consolidated statement of operations, of which $0 (June 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 June 30, 2022, the Company has provided the full support of $1.96 million under the agreement.

For the three months ended June 30, 2022, the Company incurred reimbursable expenses of $648,645 (June 30, 2021: $496,599), recorded as "operating expenses reimbursable to Manager" in the consolidated statement of operations, of which $651,815 (June 30, 2021: $497,000) 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 June 30, 2022, the Company waived $96,230 in gross exit fees, reducing reimbursed expenses due to the Manager by $48,115 and for the three months ended June 30, 2021, the Company waived $93,677 in gross exit fees, reducing reimbursed expenses due to the Manager by $46,838.

For the six months ended June 30, 2022, the Company incurred reimbursable expenses of $1,039,355 (June 30, 2021: $809,053), recorded as "operating expenses reimbursable to Manager" in the consolidated statement of operations, of which $651,815 (June 30, 2021: $497,000) 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 six months ended June 30, 2022, the Company waived $699,547 in gross exit fees, reducing reimbursed expenses due to the Manager by $349,774 and for the six months ended June 30, 2021, the Company waived $351,918 in gross exit fees, reducing reimbursed expenses due to the Manager by $175,959.

Manager Equity Plan

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 six months ended June 30, 2022 and June 30, 2021:

Six Months Ended June 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 June 30, 2022, the Company recognized compensation expense related to restricted common stock of $9,114 (2021: $6,126). The Company has unrecognized compensation expense of $13,030 as of June 30, 2022 (2021: $18,036) for unvested shares of restricted common stock. As of June 30, 2022, the weighted average period for which the unrecognized compensation expense will be recognized is 11.7 months.
17



LUMENT FINANCE TRUST, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2022
NOTE 9 - RELATED PARTY TRANSACTIONS (Continued)

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 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.

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..

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
18



LUMENT FINANCE TRUST, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2022
NOTE 10 - GUARANTEES (Continued)
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 June 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 June 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 June 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 June 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.

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

Unfunded Commitments

As of June 30, 2022, LSF, an affiliate of the Manager, had $85.6 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 June 30, 2022, LSF, an affiliate of the Manager, had $5.7 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.

19



LUMENT FINANCE TRUST, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2022
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 June 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 June 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 June 30, 2022, $9.4 million of common stock remained authorized for future share repurchase under the Repurchase Program.

Preferred Stock

At June 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 June 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

For the 2022 taxable year to date, the Company has declared dividends to common stockholders totaling $6,267,378, or $0.12 per share. The following table presents cash dividends declared by the Company on its common stock during the six months ended June 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  $ 0.071 
June 15, 2022 June 30, 2022 July 15, 2022 $ 3,133,869  $ 0.071 

The following table presents cash dividends declared by the Company on its Series A Preferred stock for the six months ended June 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 

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 June 30, 2022, LCMT paid 7,500 in dividends on the LCMT Preferred Shares which are reflected in "dividends to preferred stockholders" in the Company's consolidated statements of operations.

20



LUMENT FINANCE TRUST, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2022
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 six months ended June 30, 2022 and June 30, 2021:
  Three Months Ended June 30, 2022 Three Months Ended June 30, 2021
Net income $ 3,343,852  $ 1,680,242 
Less dividends:        
Common stock $ 3,133,869    $ 2,245,309   
Preferred stock 1,185,042    725,667   
  4,318,911    2,970,976 
Undistributed earnings (deficit) $ (975,059) $ (1,290,734)

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) —  (0.02) —  (0.05)
Total $ 0.06  $ 0.04  $ 0.09  $ 0.04 

For the three months ended June 30,
2022 2021
Basic weighted average shares of common stock 52,221,394  24,939,575 
Weighted average of non-vested restricted stock 4,747  4,500 
Diluted weighted average shares of common stock outstanding 52,226,141  24,944,075 

Six Months Ended June 30, 2022 Six Months Ended June 30, 2021
Net income 6,298,651  $ 4,488,885 
Less dividends:
Common stock $ 6,267,378  $ 4,490,214 
Preferred stock 2,370,000  729,375 
8,637,378  5,219,589 
Undistributed earnings (deficit) $ (2,338,727) $ (730,704)
Unvested Share-Based
Payment Awards
Common Stock Unvested Share-Based
Payment Awards
Common Stock
Distributed earnings $ 0.14  $ 0.14  $ 0.18  $ 0.18 
Undistributed earnings (deficit) —  (0.05) —  (0.03)
Total $ 0.14  $ 0.09  $ 0.18  $ 0.15 

For the six months ended June 30,
2022 2021
Basic weighted average shares of common stock 44,384,462  24,939,231 
Weighted average of non-vested restricted stock 4,624  4,500 
Diluted weighted average shares of common stock outstanding 44,389,086  24,943,731 

21



LUMENT FINANCE TRUST, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2022
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 June 30, 2022 and December 31, 2021, we were in compliance with all REIT requirements.

As of June 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.
22




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
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 six months ended June 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.
The U.S. Federal Reserve has recently 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 an 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.

Second Quarter 2022 Summary
 
Acquired two loans with an initial unpaid principal balance of $17.9 million with a weighted average interest rate of one-month U.S. LIBOR plus 3.30% and a weighted average LIBOR floor of 0.10%.
Acquired two loans with an initial unpaid principal balance of $19.3 million with a weighted average interest rate of 30-day term SOFR plus 3.64% and a weighted average SOFR floor of 0.69%.
On June 15, 2022, the Company announced its second quarter common dividend of $0.06 per share of common stock, in line with the previous quarter.
On June 15, 2022, the Company announced its second 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.

 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 June 30, 2022, 99.9% of our investments by total investment exposure earned a floating rate of interest, of which 91.5% were indexed to one-month LIBOR and 8.5% 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 0.25% and a weighted average SOFR floor of 0.20% as of June 30, 2022. As of June 30, 2022, 99.0% of the loans in our commercial mortgage loan portfolio are structured with LIBOR/SOFR floors, 3.1% of which had 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 June 30, 2022, the weighted average spread of our commercial loan portfolio was 3.35%, 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.

Recently, interest rates have remained at relatively low levels on a historical basis and 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 and July 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 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-
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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 June 30, 2022, 91.5% 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 June 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 June 30, 2022, the Company identified one office loan as impaired and established an allowance for loan loss of $0.4 million for the three months ended June 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 June 30, 2022, our aggregate unamortized purchase premium was $29,875 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.

Managing Our Business through COVID-19

As of March 13, 2020, our Manager, and its affiliates, implemented a work from home, or WFH, policy for employees in all locations. On October 1, 2021, our Manager began reopening offices on a limited basis with certain staff returning to the office on a staggered partial schedule. As of April 1, 2022, all of our offices have reopened with continued flexible work arrangements. Our Manager's highly experienced senior team and dedicated employees have been and continue to be fully operational during this ongoing disruption and are continuing to execute on all investment management, asset management, servicing, portfolio monitoring, financial reporting and related control activities. Our Manager's and affiliates employees are in constant communication to ensure timely
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coordination and early identification of issues. We continue to engage in ongoing active dialogue with the borrowers in our commercial mortgage loan portfolio to understand what is taking place at the properties collateralizing our investments.

Considering the current economic environment caused by COVID-19 we are mindful of constraints on landlord enforcement rights and continue to monitor the impact of fiscal stimulus on our loan portfolio. From September 4, 2020, through August 26, 2021, when the Centers for Disease Control ("CDC") Agency Order was overturned by the U.S. Supreme Court, residential landlords and those with similar eviction rights could not evict "covered persons" for nonpayment of rent in any U.S. state or territory. Covered persons (a) use best efforts to obtain government assistance; (b) make less than $99,000 or $198,000 jointly; (c) have suffered loss of income or extraordinary medical expenses; (d) use of best efforts to make partial payments; and (e) have no other housing options. In the last month before the Supreme Court lifted the order, the moratorium added to the definition of "covered persons" to include (f) the individual resides in a U.S. county experiencing substantial or high rates of community transmission levels of SARS-COV-2 as defined by CDC. As a result of the national restriction, multifamily apartments borrowers had less ability to address nonpayment of tenants, which in turn may have negatively impacted a property's cash flow coverage of the debt service of their loans. Additionally, due to COVID-19, there have been potential challenges facing third-party providers, such as appraisers, environmental and engineering consultants we rely on to make new investments which may make it more difficult to make these investments. Currently, despite the Supreme Court having lifted the CSC order, individual states and localities continue to maintain limited evictions restrictions. New York, Washington D.C., Massachusetts, Minnesota, New Mexico, Oregon and Nevada all have some form of limited or prohibited residential evictions while the tenant applies for rental assistance. California has local eviction moratoriums that may extend beyond that in different municipalities, but not statewide.

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 June 30, 2022, we recorded earnings per share of $0.04, declared a quarterly dividend of $0.06 per share, and reported $0.05 per share of Distributable Earnings. In addition, our book value per share of common stock was $3.60.

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
June 30, 2022 June 30, 2021
Net income(1)
$ 2,158,810  $ 954,575 
Weighted-average shares outstanding, basic and diluted 52,226,141  24,944,075 
Net income per share, basic and diluted $ 0.04  $ 0.04 
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:
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Three Months Ended
June 30, 2022 March 31, 2022
Net income attributable to common stockholders $ 2,158,810  $ 1,769,841 
Unrealized (gain) on mortgage servicing rights (81,216) (147,382)
Unrealized provision for loan losses 351,914  — 
Recognized compensation expense related to restricted common stock 4,476  4,638 
Adjustment for income taxes 25,669  51,665 
Distributable Earnings $ 2,459,653  $ 1,678,762 
Weighted-average shares outstanding, basic and diluted 52,226,141