Lument Finance Trust, Inc. Annual Report - How They Did This Year

1. What does this company do and how did they perform this year?

Lument Finance Trust, Inc. (ticker LFT on the NYSE; LFTPrA for preferred stock) is a Real Estate Investment Trust (REIT). A REIT owns, operates, or finances real estate that earns money. REITs typically pay most of their taxable earnings to shareholders as dividends. This can provide a nice income stream for investors. LFT started in March 2012, beginning operations that May.

Staying a REIT is crucial. It means they generally avoid U.S. federal income tax. They must distribute at least 90% of their taxable earnings annually. Otherwise, they would pay corporate income tax. This would significantly hurt their financial health.

Who manages the company? Lument Investment Management, LLC (Lument IM) manages LFT. Lument IM is part of a larger group. It's a subsidiary of Lument Real Estate Capital Holdings, LLC ("Lument"). Lument is a subsidiary of ORIX Corporation USA ("ORIX USA"). ORIX USA belongs to ORIX Corporation ("ORIX"). ORIX is a huge, publicly traded financial services company. It is based in Tokyo. As of December 2025, ORIX had over $116 billion in assets. Forbes ranked it #405 on its 2025 Global 2000 list. Lument, the manager's parent, had over 550 employees. They worked across more than 30 U.S. offices by December 31, 2025. This gives LFT a huge network for finding loans. Importantly, LFT has no employees of its own. Lument, their external Manager, handles all executive officers and daily operations. Its employees work for Lument.

What LFT does: It focuses on commercial real estate (CRE) debt investments. This means LFT lends money for properties like apartment buildings or offices. They do not own the properties themselves.

• Their main focus: LFT primarily makes "transitional floating rate CRE mortgage loans." These are often for middle-market apartment buildings. Simply put, they lend money for apartment complexes being renovated. The loan interest rate can change with the market.
  • These loans typically range from $5 million to $75 million. Their interest rates adjust with market changes, tied to SOFR. SOFR (Secured Overnight Financing Rate) measures the cost of overnight cash borrowing. It uses U.S. Treasury securities as collateral. It's a benchmark for many financial products.
  • They seek properties in U.S. markets with strong demand. This includes areas with job growth and new households.
• Other investments: LFT also invests in other commercial real estate debt, such as:
  • Mezzanine loans: These loans bridge the gap between mortgage debt and equity. They rank below senior debt but above equity. If a borrower defaults, LFT might own the property.
  • Preferred equity: This ownership stake gets paid before common stock, but after debt. It's not secured by the property. However, LFT could gain control if payments stop.
  • Commercial mortgage-backed securities (CMBS): These are investments. They bundle many commercial mortgages and sell them to investors.
  • Fixed-rate loans: The interest rate stays the same for the loan's life.
  • Construction loans: Money lent to build new properties.
• Their board also approves specific Investment Guidelines. These guidelines prevent LFT from losing its REIT status. They also avoid regulation as an "investment company" under the 1940 Investment Company Act. They can invest broadly. This includes mortgage-backed securities, mortgage loans (residential, multi-family, CRE), and mortgage servicing rights. Other real estate investments are also possible. They can also put cash into short-term investments. Importantly, their board can change these guidelines without shareholder approval. This gives management flexibility. However, the company's investment focus could shift.

How LFT performed this year (fiscal year ended December 31, 2025):

• Loan Portfolio Growth: LFT's mortgage loan portfolio grew. It now holds 61 senior secured floating rate loans. Their total outstanding balance is $1.1 billion.
• Multifamily Focus: Apartment buildings back 92.7% of this portfolio. This shows LFT's strong commitment to this sector.
• Loan Activity: LFT was busy in 2025!
  • They originated or acquired $403.9 million in new loans.
  • They received $266.6 million from loan repayments.
  • After all activity, their net loan balance grew by $74.7 million for the year.
• Real Estate Owned (REO): LFT took back 3 apartment properties. These were valued at $49.1 million. Borrowers could not pay, so LFT now owns these assets.
• Old Investments: LFT still holds $0.6 million in residential mortgage servicing rights (MSRs). These are from past activities. They stopped new residential loan business in 2016.

2. Financial performance - revenue, profit, growth metrics

We can understand key financial performance aspects for 2025:

• Investment Portfolio Value: Their loan portfolio was worth about $1.114 billion. This was as of December 31, 2025. It's their main asset for earning money.
• Loan Growth: Their loan balance grew by $74.7 million in 2025. This is about a 7.2% increase from last year. It shows their core business is expanding.
• Interest Earnings: Loans in their portfolio had a 7.2% average interest rate. This was at year-end 2025. This suggests potential annual interest income of about $80.2 million. This is how they earn most of their money.
• Credit Loss Provision: LFT set aside $22.7 million for potential loan losses. This is a smart move for loans that might not be fully repaid. This amount directly affects their profit.

3. Major wins and challenges this year

The year 2025 brought both successes and challenges for LFT:

Major Wins:

• Strong Loan Origination: LFT successfully originated or acquired $403.9 million in new loans. This shows their ability to find new opportunities.
• Portfolio Growth: Their loan portfolio grew by $74.7 million. This happened despite many repayments. It expanded their assets that earn income.
• Strategic Financing: LFT secured important new financing. This is crucial for funding growth and managing cash. It included:
  • A new $450 million Uncommitted Master Repurchase Agreement. This provides flexible short-term funding.
  • A new $50 million term lending agreement, offering more capital.
  • A large $663.8 million managed Collateralized Loan Obligation (CLO). This CLO is very helpful. It provides $585.0 million in "non-mark-to-market financing." This means its value doesn't constantly change with market swings. It adds stability to their funding and reduces balance sheet volatility. This financing cost SOFR plus 1.91% on average. This shows a competitive borrowing rate. These new funding sources give LFT capital. They need it to keep growing their loan portfolio.

Challenges Faced:

• Credit Losses: LFT recorded a $22.7 million allowance for credit losses. This means some loans may face repayment issues. It reflects potential credit quality decline in their portfolio.
• Real Estate Owned (REO): LFT took back $62.6 million in loans. These became "real estate owned" assets. This means LFT now owns the properties. This includes the 3 apartment properties worth $49.1 million mentioned earlier. Managing and selling these properties can be complex and costly. It may also lead to losses if market conditions are bad.

4. Financial health - cash, debt, liquidity

Here's a clearer picture of LFT's financial health and how they manage money:

• Investment Size: Their total loan portfolio was worth about $1.114 billion. This was as of December 31, 2025. It makes up most of their assets.
• Debt Strategy: LFT uses borrowed money (leverage) to boost potential shareholder returns. They use tools like non-recourse CRE CLOs and secured repurchase agreements. They also use term loan facilities to finance investments.
• Financing in 2025: At year-end 2025, LFT financed its assets with a mix of tools. This included a new $450 million Repurchase Agreement. It also included a $50 million Term Lending Agreement. The $663.8 million CLO provided $585.0 million in stable, non-mark-to-market financing.
• Here's their financing setup as of December 31, 2025:

This table shows nearly $1 billion ($996.6 million) in outstanding financing. Their total borrowing capacity is over $1.3 billion. Their CLOs provide the largest chunk, $585.0 million. This stable, non-mark-to-market financing reduces exposure to short-term market changes. This structure allows significant future borrowing. They have about $305.8 million in unused capacity. This is under their repurchase and secured lending agreements.

• Managing Risk: LFT aims to "match-fund" and "match-index" investments and borrowings. This means they align loan terms and interest rate types with their debt. For example, both might be floating-rate or SOFR-indexed. This reduces exposure to big interest rate swings. It also minimizes "mark-to-market risk," where asset values change quickly.
• Leverage Limits: Official documents don't set a maximum borrowing limit. However, lenders require specific debt-to-equity ratios. LFT can change its borrowing strategy and leverage without shareholder approval. This offers flexibility but also potential for more risk.
• Regular investors (non-affiliates) held about $68.0 million in common stock. This was as of June 30, 2025.
• As of March 17, 2026, 52,399,265 common stock shares were outstanding.

5. Key risks that could hurt the stock price

LFT was clear about potential problems. These could affect its business and your investment. Here are some big ones, highlighted by this year's activities:

• Economic and Market Conditions: The economy, politics, and market competition can all impact LFT. An economic slowdown or recession could decrease demand for commercial real estate loans. Borrowers might then struggle to repay.
• Interest Rate Swings: Changes in interest rates and credit spreads can hurt LFT's income and cash flow. This can also affect its stock price. It makes paying shareholder dividends harder. Their loans are mostly floating rate, tied to SOFR. So, SOFR changes directly impact their interest income. Changes in borrowing costs, also often SOFR-indexed, impact their expenses. They aim to match-fund. However, big or fast shifts can still create mismatches.
• Real Estate Market Problems: A downturn in commercial real estate is bad news for LFT. It's also bad if real estate projects struggle to get funding. The $62.6 million in "Real Estate Owned" loans in 2025 highlights this risk. Falling property values or borrower distress can force LFT to own assets. This adds management and selling costs.
• Funding Challenges: LFT might struggle to get loans or raise money for new investments. They did secure significant financing in 2025. This included a $450 million repurchase agreement and a $663.8 million CLO. Tight credit markets could still limit future access to capital.
• Profit Squeeze: Lower investment returns (yields) or higher borrowing costs hurt LFT. This double hit reduces their net interest margin and profit.
• Borrower Defaults: A big risk is if borrowers cannot repay their loans. The $22.7 million allowance for credit losses shows LFT expects some issues. It reflects their view of potential future loan losses.
• New Laws & Rules: This includes changes to laws like the Dodd-Frank Act. Such changes could increase bank competition by easing lending rules. The government also constantly eyes more financial services regulation. This focuses on risk, leverage, and transparency. New rules are hard to predict. But they could make business harder or more expensive for LFT.
• Strategy Changes: Their board can change investment guidelines and financing strategy. They do not need shareholder approval. This offers flexibility. However, their direction could shift unexpectedly. This might alter their risk or investment focus.
• Increased Competition: More companies doing what LFT does could make finding good deals harder. It could also lower profits and yields on new investments.
• Global Economic Headwinds: Big global economic shifts create problems. These include high inflation, slow growth, or recession. Changes in government spending or central bank policies, higher interest rates, and worker shortages also hurt. Currency ups and downs and supply chain issues can impact borrower repayment or property values.
• Unexpected Disasters: Natural disasters like hurricanes or pandemics can cause losses. Wars or terrorism can also hurt investments or properties. This can lead to defaults or property damage.
• Property Value Drops: If properties backing loans lose value, LFT's collateral may not cover the loan. This can lead to losses if borrowers default.
• Reinvestment Difficulty: LFT's profits could suffer from "cash drag." This happens if they get repaid but can't quickly reinvest at similar returns.
• Reliance on Their Manager: LFT relies heavily on its Manager (Lument IM). It also relies on Lument, its parent, and the ORIX organization. They provide expertise, resources, and deal flow. If this relationship ends or key people leave the Manager, it could greatly hurt LFT's operations and performance.
• Growth Pains: Growing too fast could create problems. LFT might struggle to manage new assets smoothly. This could lead to inefficiencies or increased risk.
• Accounting Rule Changes: Changes in accounting rules from regulators like the SEC or IRS could impact financial reporting. This might affect reported earnings or balance sheet values.
• Maintaining REIT Status: As a REIT, LFT gets special tax benefits. But they must follow complex IRS rules. This includes asset and income tests. They must also distribute at least 90% of their taxable earnings annually. If LFT fails these rules, it could lose its REIT status. Then, they would pay corporate income tax. This would significantly hurt profits and dividend payments.

6. Competitive positioning

LFT operates in a very competitive market. They compete with many players. These include other mortgage REITs, finance companies, private funds, big banks, and insurers. Many competitors might have advantages, such as:

• Lower cost of funds: Some can borrow money more cheaply. This is due to their size, credit rating, or different funding sources.
• Broader access to funding: Some might get U.S. Government funding. Others have larger balance sheets.
• Fewer restrictions: Many are not bound by LFT's strict rules. LFT must follow REIT rules. It also avoids being an "investment company" under the 1940 Investment Company Act. Competitors have more flexible investment strategies.
• Higher risk tolerance: Some competitors take on more risk. They offer more attractive loan terms than LFT. This includes higher loan-to-value ratios or lower interest rates.
• Potential for increased bank competition: Future law changes, like to the Dodd-Frank Act, could boost bank competition. Easing bank rules or adding new LFT requirements could make operations harder or more expensive.

This intense competition can lower yields (less profit on loans). This makes it harder for LFT to reach target returns. It also makes finding good investments tougher.

However, LFT believes it has an edge. This comes from Lument IM's professionals. They offer deep industry expertise and strong commercial real estate relationships. This network helps LFT assess risks better. It also helps them price investments correctly. This gives them an advantage in finding good opportunities. This is especially true in middle-market apartment buildings.

7. Leadership or strategy changes

LFT is externally managed. Lument Investment Management, LLC handles all daily operations and investment decisions. LFT has no employees of its own. All executive officers work for Lument. Their board can change or waive investment guidelines. They do not need shareholder approval. Similarly, they can change financing strategy and leverage levels. They do not need shareholder consent. This means the company's direction can shift based on board decisions. This offers flexibility to adapt to markets. But investors must trust the board's judgment on these big changes.

The Manager, a subsidiary of ORIX USA, also commits to sustainability. It includes environmental, financial, and governance factors. Operational, reputational, and social factors are also part of investment decisions. LFT's board oversees this commitment. LFT relies heavily on the Manager and its key people. This remains vital for the company's continuity and performance.

8. Future outlook

LFT states its current investment strategy offers "significant opportunities." It aims to achieve attractive risk-adjusted returns for stockholders over time. LFT's outlook highlights its strategy's flexibility. It adapts to economic and real estate cycles. Lument's experienced team and ORIX USA's resources support this. This suggests LFT aims to be nimble. They want to capitalize on changing market conditions. This maximizes shareholder returns. LFT's forward-looking statements acknowledge potential risks. They also note factors influencing future performance.

9. Market trends or regulatory changes affecting them

As noted in the risks, LFT is sensitive to "global economic trends." These include inflation, recessions, and central bank policy changes like interest rate hikes. Their loans are mostly floating rate and tied to SOFR. So, SOFR changes directly impact their interest income. It also affects their borrowing costs. For example, rising SOFR usually increases interest income. But it also increases funding costs.

LFT's operations follow various U.S. government regulations. These cover credit-granting, interest rates, disclosures, and collection procedures. They also comply with parts of the Equal Credit Opportunity Act for commercial loans. A key focus is avoiding classification as an "investment company" under the 1940 Investment Company Act. This would bring new rules, restrictions, and higher compliance costs. Existing regulations haven't had a "material adverse effect" so far. However, there's a constant push for more financial services regulation. This focuses on risk management, leverage, and disclosure. Future law changes, like Dodd-Frank Act amendments, could increase bank competition. Easing bank rules or adding new LFT requirements could make operations harder or more expensive. The exact nature and impact of these future changes are uncertain.