Quarterly Report (10-q)

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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 September 30, 2022


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

For the transition period from ________ to ____________

Commission File No. 001-35845

LUMENT FINANCE TRUST, INC.

(Exact name of registrant as specified in its charter)


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


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

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

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

Title of Each Class:

Trading Symbol(s)

Name of Exchange on Which Registered:

Common Stock, par value $0.01 per share

LFT

New York Stock Exchange

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

LFTPrA

New York Stock Exchange

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

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

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


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

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

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

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


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

LUMENT FINANCE TRUST, INC.

INDEX


PART I - Financial Information

Item 1.	Financial Statements
	Consolidated Balance Sheets as of September 30, 2022 (unaudited) and December 31, 2021	1
	Consolidated Statements of Operations for the three and nine months ended September 30, 2022 (unaudited) and September 30, 2021 (unaudited)	2
	Consolidated Statement of Changes in Equity for the three and nine months ended September 30, 2022 (unaudited) and September 30, 2021 (unaudited)	3
	Consolidated Statements of Cash Flows for the nine months ended September 30, 2022 (unaudited) and September 30, 2021 (unaudited)	5
	Notes to Unaudited Consolidated Financial Statements	6
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	22
Item 3.	Quantitative and Qualitative Disclosures about Market Risks	37
Item 4.	Controls and Procedures	38

PART II - Other Information		38

Item 1.	Legal Proceedings	38
Item 1A.	Risk Factors	38
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	38
Item 3.	Defaults Upon Senior Securities	38
Item 4.	Mine Safety Disclosures	38
Item 5.	Other Information	38
Item 6.	Exhibits	39

Signatures		40

PART I - FINANCIAL INFORMATION

Item 1. Financial Statements

LUMENT FINANCE TRUST, INC. AND SUBSIDIARIES

Consolidated Balance Sheets


	September 30, 2022(1)		December 31, 2021(1)
	(unaudited)
ASSETS
Cash and cash equivalents	$	48,485,316	$	14,749,046
Restricted cash	28,222,095		3,530,006
Commercial mortgage loans held-for-investment, at amortized cost	1,045,953,691		1,001,825,294
Allowance for loan losses	(1,872,937)		—
Commercial mortgage loans held-for-investment, net of allowance for loan losses	1,044,080,754		1,001,825,294
Mortgage servicing rights, at fair value	817,907		551,997
Accrued interest receivable	4,259,025		3,977,752
Investment related receivable	601,972		22,400,000
Other assets	2,199,881		1,889,258
Total assets	$	1,128,666,950	$	1,048,923,353

LIABILITIES AND EQUITY
LIABILITIES:
Collateralized loan obligations, net	828,673,313		826,782,543
Secured term loan, net	46,908,234		46,845,502
Accrued interest payable	1,662,145		704,055
Dividends payable	4,135,161		3,242,809
Fees and expenses payable to Manager	1,648,799		1,825,142
Other accounts payable and accrued expenses	372,789		147,802
Total liabilities	883,400,441		879,547,853

COMMITMENTS AND CONTINGENCIES (NOTES 10 & 11)

EQUITY:
Preferred Stock: par value $0.01 per share; 50,000,000 shares authorized; 7.875% Series A Cumulative Redeemable, $60,000,000 aggregate liquidation preference, 2,400,000 shares issued and outstanding at September 30, 2022 and December 31, 2021, respectively	57,254,935		57,254,935
Common Stock: par value $0.01 per share; 450,000,000 shares authorized, 52,231,152 and 24,947,883 shares issued and outstanding, at September 30, 2022 and December 31, 2021, respectively	522,252		249,434
Additional paid-in capital	314,609,303		233,833,749
Cumulative distributions to stockholders	(156,405,599)		(143,449,310)
Accumulated earnings	29,186,118		21,387,192
Total stockholders' equity	245,167,009		169,276,000
Noncontrolling interests	$	99,500	$	99,500
Total equity	$	245,266,509	$	169,375,500

Total liabilities and equity	$	1,128,666,950	$	1,048,923,353

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

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

LUMENT FINANCE TRUST, INC. AND SUBSIDIARIES

Consolidated Statements of Operations

(unaudited)


	Three Months Ended September 30, 2022		Three Months Ended September 30, 2021		Nine Months Ended September 30, 2022		Nine Months Ended September 30, 2021

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

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

LUMENT FINANCE TRUST, INC. AND SUBSIDIARIES

Consolidated Statement of Changes in Equity

(unaudited)


	Preferred Stock			Common Stock			Additional Paid-in Capital		Cumulative Distributions to Stockholders		Accumulated Earnings		Total Stockholders' Equity		Noncontrolling interests		Total Equity
	Shares	Value		Shares	Par Value
Balance at December 31, 2021	2,400,000	$	57,254,935	24,947,883	$	249,434	$	233,833,749	$	(143,449,310)	$	21,387,192	$	169,276,000	$	99,500	$	169,375,500
Issuance of common stock	—	—		27,277,269	272,773		83,195,670		—		—		$	83,468,443	—		$	83,468,443
Cost of issuing common stock	—	—		—	—		(2,404,070)		—		—		$	(2,404,070)	—		$	(2,404,070)



Restricted stock compensation expense	—	—		—	—		4,638		—		—		$	4,638	—		$	4,638
Net income	—	—		—	—		—		—		2,954,799		$	2,954,799	—		$	2,954,799



Common stock dividends	—	—		—	—		—		(3,133,509)		—		$	(3,133,509)	—		$	(3,133,509)
Preferred stock dividends	—	—		—	—		—		(1,184,958)		—		(1,184,958)		—		$	(1,184,958)
Balance at March 31, 2022	2,400,000	57,254,935		52,225,152	$	522,207	$	314,629,987	$	(147,767,777)	$	24,341,991	$	248,981,343	$	99,500	$	249,080,843
Issuance of common stock	—	—		6,000	45		18,765		—		—		$	18,810	—		$	18,810
Cost of issuing common stock	—	—		—	—		(14,196)		—		—		$	(14,196)	—		$	(14,196)



Restricted stock compensation expense	—	—		—	—		(14,334)		—		—		$	(14,334)	—		$	(14,334)
Net income	—	—		—	—		—		—		3,343,852		$	3,343,852	—		$	3,343,852



Common stock dividends	—	—		—	—		—		(3,133,869)		—		$	(3,133,869)	—		$	(3,133,869)
Preferred stock dividends	—	—		—	—		—		(1,185,042)		—		$	(1,185,042)	—		$	(1,185,042)
Balance at June 30, 2022	2,400,000	57,254,935		52,231,152	522,252		314,620,222		(152,086,688)		27,685,843		247,996,564		99,500		248,096,064
Issuance of common stock, net	—	—		—	—		—		—		—		$	—	—		$	—
Cost of issuing common stock	—	—		—	—		(14,352)		—		—		$	(14,352)	—		$	(14,352)



Restricted stock compensation expense	—	—		—	—		3,433		—		—		$	3,433	—		$	3,433
Net income				—	—		—		—		1,500,275		$	1,500,275	—		$	1,500,275



Common dividends declared	—	—		—	—		—		(3,133,869)		—		$	(3,133,869)	—		$	(3,133,869)
Preferred dividends declared	—	—		—	—		—		(1,185,042)		—		$	(1,185,042)	—		$	(1,185,042)
Balance at September 30, 2022	2,400,000	57,254,935		52,231,152	522,252		314,609,303		(156,405,599)		29,186,118		245,167,009		99,500		245,266,509

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

LUMENT FINANCE TRUST, INC. AND SUBSIDIARIES

Consolidated Statement of Changes in Equity

(unaudited)


	Preferred Stock		Common Stock		Additional Paid-in Capital	Cumulative Distributions to Stockholders	Accumulated Earnings	Total Stockholders' Equity		Noncontrolling interests	Total Equity
	Shares	Value	Shares	Value
Balance at December 31, 2020	—	—	24,943,383	249,389	233,850,271	(131,355,978)	10,859,970	113,603,652		99,500	113,703,152


Restricted stock compensation expense	—	—	—	—	2,885	—	—	2,885		—	2,885
Net income	—	—	—	—	—	—	2,808,643	2,808,643		—	2,808,643
Common stock dividends	—	—	—	—	—	(2,244,904)	—	(2,244,904)		—	(2,244,904)
Preferred stock dividends	—	—	—	—	—	(3,708)	—	(3,708)		—	(3,708)
Balance at March 31, 2021	—	—	24,943,383	249,389	233,853,156	(133,604,590)	13,668,613	114,166,568		99,500	114,266,068
Issuance of common stock	—	—	4,500	45	11,655	—	—	$	11,700	—	$	11,700

Issuance of preferred stock, net	2,400,000	57,258,435	—	—	—	—	—	$	57,258,435	—	$	57,258,435
Restricted stock compensation expense	—	—	—	—	(8,459)	—	—	$	(8,459)	—	$	(8,459)
Net income	—	—	—	—	—	—	1,680,242	$	1,680,242	—	$	1,680,242
Common stock dividends	—	—	—	—	—	(2,245,309)	—	$	(2,245,309)	—	$	(2,245,309)
Preferred stock dividends	—	—	—	—	—	(725,667)	—	$	(725,667)	—	$	(725,667)
Balance at June 30, 2021	2,400,000	57,258,435	24,947,883	249,434	233,856,352	(136,575,566)	15,348,855	170,137,510		99,500	170,237,010
Issuance of common stock	—	—	—	—	—	—	—	$	—	—	$	—
Cost of issuing common stock	—	—	—	—	(11,201)	—	—	$	(11,201)	—	$	(11,201)
Restricted stock compensation expense	—	—	—	—	4,741	—	—	$	4,741	—	$	4,741
Net income	—	—	—	—	—	—	2,374,468	$	2,374,468	—	$	2,374,468
Common dividends declared	—	—	—	—	—	(2,245,310)	—	$	(2,245,310)	—	$	(2,245,310)
Preferred dividends declared	—	—	—	—	—	(1,198,166)	—	$	(1,198,166)	—	$	(1,198,166)
Balance at September 30, 2021	2,400,000	57,258,435	24,947,883	249,434	233,849,892	(140,019,042)	17,723,323	169,062,042		99,500	169,161,542

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

LUMENT FINANCE TRUST, INC. AND SUBSIDIARIES

Consolidated Statements of Cash Flows

(unaudited)


	Nine Months Ended September 30, 2022		Nine Months Ended September 30, 2021

Cash flows from operating activities:
Net income	$	7,798,926	$	6,863,353
Adjustments to reconcile net income to net cash provided by operating activities:
Accretion of commercial mortgage loans held-for-investment discounts	(125,098)		(24,773)
Amortization of commercial mortgage loans held-for-investment premiums	55,804		361,227
Accretion of collateralized loan obligations discounts	—		207,767
Amortization of deferred offering costs	(100,219)		(11,201)
Amortization of deferred financing costs	2,072,877		1,260,660
Provision for loan losses	1,872,937		—
Loss on extinguishment of debt	—		1,663,926
Unrealized (gain) loss on mortgage servicing rights	(265,910)		300,666
Restricted stock compensation expense	12,547		10,867
Net change in:
Accrued interest receivable	(281,273)		(1,067,059)

Other assets	(310,623)		(371,732)
Accrued interest payable	958,090		216,110
Fees and expenses payable to Manager	(176,343)		472,199
Other accounts payable and accrued expenses	224,987		2,043,121
Net cash provided by operating activities	11,736,702		11,925,131
Cash flows from investing activities:
Purchase of commercial mortgage loans held-for-investment	(269,596,827)		(647,459,391)
Principal payments from commercial mortgage loans held-for-investment	247,335,751		391,394,015
Investment related receivable	—		(48,890,010)

Net cash (used in) investing activities	(22,261,076)		(304,955,386)
Cash flows from financing activities:
Proceeds from issuance of common stock	81,136,045		—
Net proceeds from issuance of preferred stock	—		57,258,435
Proceeds from collateralized loan obligation	—		833,750,000
Proceeds from credit facility	—		7,500,000
Payment of collateralized loan obligations	—		(465,316,126)
Payment of deferred financing costs	(119,375)		(8,731,741)
Dividends paid on common stock	(8,512,687)		(7,732,853)
Dividends paid on preferred stock	(3,551,250)		(926,249)
Net cash provided by financing activities	68,952,733		415,801,466
Net increase in cash, cash equivalents and restricted cash	58,428,359		122,771,211
Cash, cash equivalents and restricted cash, beginning of period	18,279,052		69,375,356
Cash, cash equivalents and restricted cash, end of period	$	76,707,411	$	192,146,567


Supplemental disclosure of cash flow information
Cash paid for interest	$	17,383,416	$	8,996,957


Non-cash investing and financing activities information
Dividends declared but not paid at end of period	$	4,135,161	$	3,443,476

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

LUMENT FINANCE TRUST, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

September 30, 2022

NOTE 1 – ORGANIZATION AND BUSINESS OPERATIONS

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

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

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

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation

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

Principles of Consolidation

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

VIEs

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

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

Use of Estimates

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

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

Cash and Cash Equivalents and Restricted Cash

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

LUMENT FINANCE TRUST, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

September 30, 2022

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

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

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


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

Deferred Offering Costs

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

Fair Value Measurements

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

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

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

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

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

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

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

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

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

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

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

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

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

Commercial Mortgage Loans Held-for-Investment

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

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

LUMENT FINANCE TRUST, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

September 30, 2022

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

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

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

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

2.Low Risk: meeting or exceeding underwritten expectation

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

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

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

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

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

Mortgage Servicing Rights, at Fair Value

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

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

Collateralized Loan Obligations

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

Secured Term Loan

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

Common Stock

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

LUMENT FINANCE TRUST, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

September 30, 2022

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

Stock Repurchase Program

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

Preferred Stock

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

Income Taxes

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

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

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

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

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

Earnings per Share

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

Stock-Based Compensation

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

Comprehensive Income (Loss) Attributable to Common Stockholders

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

LUMENT FINANCE TRUST, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

September 30, 2022

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

Recently Issued and/or Adopted Accounting Standards

Credit Losses

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

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

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

Reference Rate Reform

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

NOTE 3 - COMMERCIAL MORTGAGE LOANS HELD-FOR-INVESTMENT

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


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


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

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

LUMENT FINANCE TRUST, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

September 30, 2022

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

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

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

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

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


	Commercial Mortgage Loans Held-for-Investment



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

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


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


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

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

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

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

LUMENT FINANCE TRUST, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

September 30, 2022

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

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

Loans Held-for-Investment


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


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

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


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

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

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

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

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

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

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

LUMENT FINANCE TRUST, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

September 30, 2022

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

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

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


ASSETS	September 30, 2022		December 31, 2021
Cash, cash equivalents and restricted cash	$	28,222,095	$	3,530,006
Accrued interest receivable	3,912,849		3,941,695
Investment related receivable	—		22,400,000
Loans held for investment, net of allowance for loan losses	971,905,743		974,025,294
Total Assets	$	1,004,040,687	$	1,003,896,995

LIABILITIES
Accrued interest payable	$	1,575,598	$	607,892
Collateralized loan obligations(1)	828,673,313		826,782,543
Total Liabilities	$	830,248,911	$	827,390,435
Equity	173,791,776		176,506,560
Total liabilities and equity	$	1,004,040,687	$	1,003,896,995

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

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


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


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

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

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

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


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

LUMENT FINANCE TRUST, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

September 30, 2022

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


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

NOTE 5 - RESTRICTED CASH

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

NOTE 6 - SECURED TERM LOAN

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

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


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

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

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

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

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

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

LUMENT FINANCE TRUST, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

September 30, 2022

NOTE 6 – SECURED TERM LOAN (Continued)

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

NOTE 7 - MSRs

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

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


	September 30, 2022			September 30, 2021
Balance at beginning of period	$	551,997		$	919,678
Changes in fair value due to:
Changes in valuation inputs or assumptions used in valuation model	358,436			91,669
Other changes to fair value(1)	(92,526)			(392,335)
Balance at end of period	$	817,907		$	619,012

Loans associated with MSRs(2)	$	76,207,213		$	110,144,748
MSR values as percent of loans(3)	1.07		%	0.56		%

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

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

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

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


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


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

NOTE 8 - FAIR VALUE

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


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

LUMENT FINANCE TRUST, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

September 30, 2022

NOTE 8 – FAIR VALUE (Continued)


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

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

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


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


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

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


	September 30, 2022
	Level in Fair Value Hierarchy	Carrying Value		Face Amount		Fair Value
Assets:
Cash and cash equivalents	1	48,485,316		48,485,316		48,485,316
Restricted cash	1	28,222,095		28,222,095		28,222,095
Commercial mortgage loans held-for-investment	3	1,044,080,754		1,045,929,099		1,031,678,777
Total		$	1,120,788,165	$	1,122,636,510	$	1,108,386,188

Liabilities:
Collateralized loan obligations	2	828,673,313		833,750,000		804,239,125
Secured Term Loan	3	46,908,234		47,750,000		43,106,254
Total		$	875,581,547	$	881,500,000	$	847,345,379


	December 31, 2021
	Level in Fair Value Hierarchy	Carrying Value		Face Amount		Fair Value
Assets:
Cash and cash equivalents	1	14,749,046		14,749,046		14,749,046
Restricted cash	1	3,530,006		3,530,006		3,530,006
Commercial mortgage loans held-for-investment	3	1,001,825,294		1,001,869,994		1,001,473,884
Total		$	1,020,104,346	$	1,020,149,046	$	1,019,752,936

Liabilities:
Collateralized loan obligations	2	826,782,543		833,750,000		834,425,625
Secured term loan	3	46,845,502		47,750,000		50,986,154
Total		$	873,628,045	$	881,500,000	$	885,411,779

LUMENT FINANCE TRUST, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

September 30, 2022

NOTE 8 – FAIR VALUE (Continued)

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

NOTE 9 - RELATED PARTY TRANSACTIONS

Management and Incentive Fee

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

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

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

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

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

Expense Reimbursement

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

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

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

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

Manager Equity Plan

LUMENT FINANCE TRUST, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

September 30, 2022

NOTE 9 - RELATED PARTY TRANSACTIONS (Continued)

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

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


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

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

OREC Structured Finance, LLC

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

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

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

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

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

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

OREC 2018-CRE1, Ltd.

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

ORIX Real Estate Holdings, LLC

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

ORIX Real Estate Capital

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

Lument IM

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

LUMENT FINANCE TRUST, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

September 30, 2022

NOTE 9 - RELATED PARTY TRANSACTIONS (Continued)

OREC Investment Holdings

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

Hunt Companies, Inc.

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

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

NOTE 10 - GUARANTEES

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

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

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

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

NOTE 11 - COMMITMENTS AND CONTINGENCIES

Impact of COVID-19

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

LUMENT FINANCE TRUST, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

September 30, 2022

NOTE 11 COMMITMENTS AND CONTINGENCIES (Continued)

Litigation

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

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

Unfunded Commitments

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

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

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

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

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

NOTE 12 - EQUITY

Common Stock

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

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

Stock Repurchase Program

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

Preferred Stock

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

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

Distributions to Stockholders

LUMENT FINANCE TRUST, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

September 30, 2022

NOTE 12 – EQUITY (Continued)

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


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

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


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

Non-controlling Interests

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

NOTE 13 - EARNINGS PER SHARE

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


	Three Months Ended September 30, 2022				Three Months Ended September 30, 2021
Net income			$	1,500,275			$	2,374,468

Less dividends:
Common stock	$	3,133,869			$	2,245,310
Preferred stock	1,185,042				1,198,166
			4,318,911				3,443,476
Undistributed earnings (deficit)			$	(2,818,636)			$	(1,069,008)


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


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


	Nine Months Ended September 30, 2022			Nine Months Ended September 30, 2021
Net income			7,798,926			$	6,863,353

Less dividends:
Common stock	$	9,401,247		$	6,735,523
Preferred stock	3,555,042			1,927,542
			12,956,289			8,663,065

HCFT

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