Lument Finance Trust Inc

Previous wording

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

Current wording

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

Previous wording

The year ended December 31, 2023 and period ended March 31, 2024, have been characterized by significant volatility in global markets, driven by heightened inflation, higher interest rates, slowing economic growth, geopolitical uncertainty and instability in the banking sector following multiple bank failures. Inflation reached generational highs in many economies, prompting central banks to take monetary policy tightening actions that have and are likely continue to create headwinds to economic growth.

Current wording

The last eighteen months have been characterized by significant volatility in global markets, driven by heightened inflation, higher interest rates, slowing economic growth, geopolitical uncertainty and instability in the banking sector following multiple bank failures. Inflation reached generational highs in many economies, prompting central banks to take monetary policy tightening actions that have and are likely continue to create headwinds to economic growth.

Previous wording

•On March 15, 2014, the Company announced its first quarter common dividend of $0.07 per share of common stock,in line with the previous quarter.

Current wording

•On June 13, 2024, the Company announced its second quarter common dividend of $0.08 per share of common stock, a 14.3% increase to the previous quarter.

Previous wording

•On March 15, 2024, the Company announced its first quarter preferred dividend of $0.49219 per share of Series A Preferred Stock.

Current wording

•On June 13, 2024, the Company announced its second quarter preferred dividend of $0.49219 per share of Series A Preferred Stock.

Previous wording

•Book value per share of common stock as of March 31, 2024 was $182.8 million, or $3.50 per share of common stock

Current wording

•Book value per share of common stock as of June 30, 2024 was $182.1 million, or $3.48 per share of common stock

Previous wording

•Experienced $97.4 million in loan payoffs

Current wording

•Experienced $98.2 million in loan payoffs

Previous wording

•$1.3 billion senior loan portfolio is 100% floating rate with an average spread to 30-day term SOFR of 3.60%, excluding unamortized purchase discounts of $6.3 million as of March 31, 2024

Current wording

•$1.2 billion senior loan portfolio is 100% floating rate with an average spread to 30-day term SOFR of 3.59%, excluding unamortized purchase discounts of $5.6 million as of June 30, 2024

Previous wording

•Multifamily assets represent 93.6% of loan portfolio

Current wording

•Multifamily assets represent 93.2% of loan portfolio

Previous wording

•Non-mark-to-market financing is $1.1 billion as of March 31, 2024, representing 100% of our secured financings

Current wording

•Non-mark-to-market financing is $1.0 billion as of June 30, 2024, representing 100% of our secured financings

Previous wording

Changes in market interest rates. Generally, our business model is such that rising interest rates will increase our net interest income, while declining interest rates will decrease our net interest income. As of March 31, 2024, 99.9% of our investments by total investment exposure earned a floating rate of interest, of which 100.0% were indexed to 30-day term SOFR, and all of our collateralized loan obligations and secured financings were indexed to 30-day term SOFR, and as a result we are less sensitive to variability in our net interest income resulting from interest rate changes. As of March 31, 2024, 99.0% of the loans in our commercial mortgage loan portfolio are structured with SOFR floors with a weighted average SOFR floor of 0.40%, none of which currently has a floor greater than the current spot interest rate. When interest rates are above our average interest rate floor, an increase in interest rates will increase our interest income. Alternatively, when interest rates are below our average interest rate floor, an increase in interest rates will decrease our net interest income until such time as interest rates rise above our average interest rate floor. Although our Manager is currently originating loans with SOFR floors, there can be no assurance that we will continue to obtain SOFR floors on future originations or acquisitions. Similarly, net interest income is also impacted by the spread in our commercial mortgage loan portfolio. As of March 31, 2024, the weighted average spread of our commercial loan portfolio was 3.60%, but there is no assurance that these spreads will be maintained as market environments fluctuate.

Current wording

Changes in market interest rates. Generally, our business model is such that rising interest rates will increase our net interest income, while declining interest rates will decrease our net interest income. As of June 30, 2024, 99.9% of our investments by total investment exposure earned a floating rate of interest, of which 100.0% were indexed to 30-day term SOFR, and all of our collateralized loan obligations and secured financings were indexed to 30-day term SOFR, and as a result we are less sensitive to variability in our net interest income resulting from interest rate changes. As of June 30, 2024, 99.1% of the loans in our commercial mortgage loan portfolio are structured with SOFR floors with a weighted average SOFR floor of 0.42%, none of which currently has a floor greater than the current spot interest rate. When interest rates are above our average interest rate floor, an increase in interest rates will increase our interest income. Alternatively, when interest rates are below our average interest rate floor, an increase in interest rates will decrease our net interest income until such time as interest rates rise above our average interest rate floor. Although our Manager is currently originating loans with SOFR floors, there can be no assurance that we will continue to obtain SOFR floors on future originations or acquisitions. Similarly, net interest income is also impacted by the spread in our commercial mortgage loan portfolio. As of June 30, 2024, the weighted average spread of our commercial loan portfolio was 3.59%, but there is no assurance that these spreads will be maintained as market environments fluctuate.

Previous wording

The Federal Reserve maintained the federal funds target range at 0.0% to 0.25% for much of 2021. However in March 2022, the Federal Reserve approved a 0.25% rate increase and subsequently increased rates an additional six times during 2022, raising the federal funds target range to 4.25% to 4.50%. On February 2, 2023, March 20, 2023, May 3, 2023 and July 26, 2023, the Federal Reserve approved its eighth, ninth, tenth and eleventh rate increases, increasing the federal funds target range to 5.25% to 5.50%. While the Federal Reserve has indicated it may decrease interest rates in 2024, they remain highly attentive to inflation risks and do not expect that it will be appropriate to lower its policy rate until it has greater confidence that inflation is moving sustainably down towards 2%.

Current wording

The Federal Reserve maintained the federal funds target range at 0.0% to 0.25% for much of 2021. However, beginning in March 2022, the Federal Reserve raised the federal funds rate eleven times, increasing the federal funds target range to 5.25% to 5.50%. While the Federal Reserve has indicated it may decrease interest rates in 2024, they remain highly attentive to inflation risks and do not expect that it will be appropriate to lower its policy rate until it has greater confidence that inflation is moving sustainably down towards 2%.

Previous wording

In addition to the risk related to fluctuations in cash flows associated with movements in interest rates, there is also the risk of non-performance on floating rate assets. In the case of significant increase in interest rates, the additional debt service payments due from our borrowers may strain the operating cash flows of the real estate assets underlying our mortgages and/or impact their ability to be refinanced at such higher interest rates, potentially, contribute to non-performance or, in severe cases, default. This risk is partially mitigated during the underwriting process, which generally includes a requirement for our borrowers to purchase interest rate cap contracts with an unaffiliated third-party, provide an interest rate reserve deposit, and/or provide other structural protections. As of March 31, 2024, 94.7% of our performing loans have interest rate caps with a weighted-average strike price of 2.6%.

Current wording

In addition to the risk related to fluctuations in cash flows associated with movements in interest rates, there is also the risk of non-performance on floating rate assets. With the continuation in elevated interest rates, the additional debt service payments due from our borrowers have been strained and may continue to strain the operating cash flows of the real estate assets underlying our mortgages and/or impact their ability to be refinanced at such higher interest rates, potentially, contribute to non-performance or, in severe cases, default. This risk is partially mitigated during the underwriting process, which generally includes a requirement for our borrowers to purchase interest rate cap contracts with an unaffiliated third-party, provide an interest rate reserve deposit, and/or provide other structural protections. As of June 30, 2024, 94.5% of our performing loans have interest rate caps with a weighted-average strike price of 2.8%.

Previous wording

Credit risk. Our commercial mortgage loans and other investments are also subject to credit risk. The performance and value of our loans and other investments depend upon the sponsor's ability to operate properties that serve as our collateral so that they produce cash flows adequate to pay interest and principal due to us. To monitor this risk, the Manager's asset management team reviews our portfolio and maintains regular contact with borrowers, co-lenders and local market experts to monitor the performance of the underlying collateral, anticipate borrower, property and market issues and, to the extent necessary or appropriate, enforce our rights as lender. The market values of commercial mortgage assets are subject to volatility and may be adversely affected by a number of factors, including, but not limited to, national, regional and local economic conditions (which may be adversely affected by industry slowdowns and other factors); local real estate conditions; changes or continued weakness in specific industry segments; construction quality, age and design; demographic factors; and retroactive changes to building or similar codes. In addition, decreases in property values reduce the value of the collateral and potential proceeds available to a borrower to repay the underlying loans, which could also cause us to suffer losses. As of March 31, 2024, 100.0% of the commercial mortgage loans in our portfolio were current as to principal and interest. Additionally, we have reviewed the loans designated as Default Risk for impairment. Impairment of these loans, which are collateral dependent, is measured by comparing the estimated fair value of the underlying collateral, less costs to sell, to the book value of the respective loan. We can provide no assurances that our borrowers will remain current as to principal and interest, or that we will not enter into forbearance agreements or loan modifications in order to protect the value of our commercial mortgage loan assets. Should that occur, it could have a material negative impact on our results of operations.

Current wording

Credit risk. Our commercial mortgage loans and other investments are also subject to credit risk. The performance and value of our loans and other investments depend upon the sponsor's ability to operate properties that serve as our collateral so that they produce cash flows adequate to pay interest and principal due to us. To monitor this risk, the Manager's asset management team reviews our portfolio and maintains regular contact with borrowers, co-lenders and local market experts to monitor the performance of the underlying collateral, anticipate borrower, property and market issues and, to the extent necessary or appropriate, enforce our rights as lender. The market values of commercial mortgage assets are subject to volatility and may be adversely affected by a number of factors, including, but not limited to, national, regional and local economic conditions (which may be adversely affected by industry slowdowns and other factors); local real estate conditions; changes or continued weakness in specific industry segments; construction quality, age and design; demographic factors; and retroactive changes to building or similar codes. In addition, decreases in property values reduce the value of the collateral and potential proceeds available to a borrower to repay the underlying loans, which could also cause us to suffer losses. As of June 30, 2024, 97.3% of the commercial mortgage loans in our portfolio were current as to principal and interest. Additionally, we have reviewed the loans designated as Default Risk for specific allowance for credit loses. Specific allowance for credit losses of these loans, which are collateral dependent, is measured by comparing the estimated fair value of the underlying collateral, less costs to sell, to the book value of the respective loan. We can provide no assurances that our borrowers will remain current as to principal and interest, or that we will not enter into forbearance agreements or loan modifications in order to protect the value of our commercial mortgage loan assets. Should that occur, it could have a material negative impact on our results of operations.

Previous wording

Prepayment speeds. Prepayment risk is the risk that principal will be repaid at a different rate than anticipated, causing the return on certain investments to be less than expected. As we receive prepayments of principal on our assets, any premiums paid on such assets are amortized against interest income. In general, an increase in prepayment rates accelerates the amortization of purchase premiums, thereby reducing the interest income earned on the assets. Conversely, discounts on such assets are accreted into interest income. In general, an increase in prepayment rates accelerates the accretion of purchase discounts, thereby increasing the interest earned on the assets. With the exception of twenty-nine loans acquired and seventeen funded loan advances with an initial aggregate unpaid principal balance of $473.1 million with an aggregate purchase discount of $8.1 million, all of our commercial mortgage loans were acquired at par. As of March 31, 2024, our aggregate unamortized purchase discount was $6.3 million, and accordingly we do not believe this to be a material risk to interest income for us at present. Additionally, we are subject to prepayment risk associated with the terms of our secured borrowings. Due to the generally short-term nature of transitional floating-rate commercial mortgage loans, our secured borrowings include a reinvestment period during which principal repayments and prepayments on our commercial mortgage loans may be reinvested in similar assets, subject to meeting certain eligibility criteria. The reinvestment period for the 2021-FL1 CLO expired in December 2023 and for LMF 2023-1 remains in place through July 2025. While the interest-rate spreads of our secured borrowings are fixed until they are repaid, the terms, including spreads, of newly originated loans are subject to uncertainty based on a variety of factors, including market and competitive conditions, which remain uncertain and volatile in light of the current inflationary environment. To the extent that such conditions result in lower spreads on the assets in which we reinvest, we may be subject to a reduction in interest income in the future. However, our loan agreements provide for prepayment penalties which are intended to offset any potential reduction in future interest income.

Current wording

Prepayment speeds. Prepayment risk is the risk that principal will be repaid at a different rate than anticipated, causing the return on certain investments to be less than expected. As we receive prepayments of principal on our assets, any premiums paid on such assets are amortized against interest income. In general, an increase in prepayment rates accelerates the amortization of purchase premiums, thereby reducing the interest income earned on the assets. Conversely, discounts on such assets are accreted into interest income. In general, an increase in prepayment rates accelerates the accretion of purchase discounts, thereby increasing the interest earned on the assets. With the exception of twenty-nine loans acquired and seventeen funded loan advances with an initial aggregate unpaid principal balance of $473.1 million with an aggregate purchase discount of $8.1 million, all of our commercial mortgage loans were acquired at par. As of June 30, 2024, our aggregate unamortized purchase discount was $5.6 million, and accordingly we do not believe this to be a material risk to interest income for us at present. Additionally, we are subject to prepayment risk associated with the terms of our secured borrowings. Due to the generally short-term nature of transitional floating-rate commercial mortgage loans, our secured borrowings include a reinvestment period during which principal repayments and prepayments on our commercial mortgage loans may be reinvested in similar assets, subject to meeting certain eligibility criteria. The reinvestment period for the 2021-FL1 CLO expired in December 2023 and for LMF 2023-1 remains in place through July 2025. While the interest-rate spreads of our secured borrowings are fixed until they are repaid, the terms, including spreads, of newly originated loans are subject to uncertainty based on a variety of factors, including market and competitive conditions, which remain uncertain and volatile in light of the current inflationary environment. To the extent that such conditions result in lower spreads on the assets in which we reinvest, we may be subject to a reduction in interest income in the future. However, our loan agreements provide for prepayment penalties which are intended to offset any potential reduction in future interest income.

Previous wording

As a real estate investment trust, we believe the key financial measures and indicators for our business are earnings per share, dividends declared, Distributable Earnings, and book value per share of common stock. For the three months ended March 31, 2024, we recorded earnings per share of $0.11, declared a quarterly dividend of $0.07 per share, and reported $0.15 per share of Distributable Earnings. In addition, our book value per share of common stock was $3.50.

Current wording

As a real estate investment trust, we believe the key financial measures and indicators for our business are earnings per share, dividends declared, Distributable Earnings, and book value per share of common stock. For the three months ended June 30, 2024, we recorded earnings per share of $0.07, declared a quarterly dividend of $0.08 per share, and reported $0.09 per share of Distributable Earnings. In addition, our book value per share of common stock was $3.48.

Previous wording

(1) Book value as of March 31, 2024 and December 31, 2023 includes the impact of an estimated CECL allowance of $7,816,762 or $0.15 per common share and $6,059,006 or $0.12 per common share, respectively.

Current wording

(1) Book value as of June 30, 2024 and March 31, 2024 includes the impact of an estimated CECL allowance of $9,193,174 or $0.18 per common share and $7,816,462 or $0.15 per common share, respectively.

Previous wording

(1) Carrying Value includes $6,289,627 and $7,000,863 in unamortized purchase discounts as of March 31, 2024 and December 31, 2023, respectively.

Current wording

(1) Carrying Value includes $5,577,040 and $7,000,863 in unamortized purchase discounts as of June 30, 2024 and December 31, 2023, respectively.

Previous wording

(2) Weighted average coupon assumes applicable 30-day Term Secured Overnight Financing Rate ("SOFR") of 5.32% and 5.33% as of March 31, 2024 and December 31, 2023, respectively, inclusive of weighted average interest rate floors of 0.40% and 0.38%, respectively. As of March 31, 2024 and December 31, 2023, 100.0% of the investments by total investment exposure earned a floating rate indexed to 30-day Term SOFR.

Current wording

(2) Weighted average coupon assumes applicable 30-day Term Secured Overnight Financing Rate ("SOFR") of 5.33% as of June 30, 2024 and December 31, 2023, respectively, inclusive of weighted average interest rate floors of 0.42% and 0.38%, respectively. As of June 30, 2024 and December 31, 2023, 100.0% of the investments by total investment exposure earned a floating rate indexed to 30-day Term SOFR.

Previous wording

During the period ended March 31, 2024, management identified one loan, collateralized by a multifamily property in Brooklyn, NY, with an unpaid principal value of $17.3 million as requiring individual evaluation for a specific allowance for credit losses due to expected imminent maturity default, and a resulting risk rating of "5"; however no specific allowance for credit losses were required after analysis of the underlying collateral value. This loan is on non-accrual status as a result of the expected imminent maturity default, with interest recognized as income on a cash basis.

Current wording

During the period ended June 30, 2024, management identified one loan, collateralized by a multifamily property in Brooklyn, NY, with an unpaid principal value of $17.3 million as requiring individual evaluation for a specific allowance for credit losses due to maturity default, and a resulting risk rating of "5"; however no specific allowance for credit losses were required after analysis of the underlying collateral value. This loan is on non-accrual status as a result of the maturity default, with interest recorded as income on a cash basis.

Previous wording

During the period ended March 31, 2024, management identified one loan, collateralized by two multifamily properties near Augusta, GA, with an aggregate unpaid principal value of $20.3 million as requiring individual evaluation for a specific allowance for credit losses due to monetary default, and a resulting risk rating of "5"; however no specific allowance for credit losses were required after analysis of the underlying collateral value. This loan is on non-accrual status as a result of monetary default, with interest recognized as income on a cash basis.

Current wording

During the period ended June 30, 2024, management identified one loan, collateralized by two multifamily properties near Augusta, GA, with an unpaid aggregate principal value of $20.3 million as requiring individual evaluation for a specific allowance for credit losses due to monetary default, and a resulting risk rating of "5"; however no specific allowance for credit losses were required after analysis of the underlying collateral value. This loan is on non-accrual status as a result of monetary default, with interest recognized as income on a cash basis.

Previous wording

Throughout 2023, management identified one loan, collateralized by a multifamily property in Columbus, Ohio, with an initial unpaid principal value of $12.8 million as impaired due to monetary default resulting in a risk rating of "5." In the first quarter of 2023, this loan was placed on non-accrual status with interest collections accounted for under the cost recovery method. As of December 31, 2023, the carrying value of this loan was $8.9 million, which reflected a $5.0 million payment received on November 25, 2023 under an insurance claim, of which $3.1 million was applied to carrying value reduction and a $1.9 million payable established primarily related to a tenant settlement. As of December 31, 2023, no specific reserves were required after analysis of the underlying collateral value. In the first quarter of 2024, we received additional insurance proceeds in the amount of $13.5 million which reduced the carrying value of this loan to $0, and after taking into consideration certain legal and other costs and amounts deemed recoverable, resulting in the recognition of approximately $2.5 million of income in the quarter ended March 31, 2024.

Current wording

Throughout 2023, management identified one loan, collateralized by a multifamily property in Columbus, Ohio, with an initial unpaid principal value of $12.8 million as impaired due to monetary default resulting in a risk rating of "5." In the first quarter of 2023, this loan was placed on non-accrual status with interest collections accounted for under the cost recovery method. As of December 31, 2023, the carrying value of this loan was $8.9 million, which reflected a $5.0 million payment received on November 25, 2023 under an insurance claim, of which $3.1 million was applied to carrying value reduction and a $1.9 million payable established primarily related to a tenant settlement. As of December 31, 2023, no specific reserves were required after analysis of the underlying collateral value. In the first quarter of 2024, we received additional insurance proceeds in the amount of $13.5 million which reduced the carrying value of this loan to $0, and after taking into consideration repayment of an interest rate cap and certain legal and other costs and amounts deemed recoverable, resulting in the recognition of approximately $2.5 million of income in the quarter ended March 31, 2024.

Previous wording

During the period ended December 31, 2023, management identified one loan, collateralized by a multifamily property in Virginia Beach, VA, with an unpaid principal balance of $36.8 million as impaired due to monetary default resulting in a risk rating of "5"; however no specific asset reserves were required after analysis of underlying collateral value. This loan was on non-accrual status as a result as a result of monetary default and impaired loan classification. In the first quarter of 2024, the Company and the borrower entered into a loan modification and the loan was loan returned to accrual status. In connection with the modification, the borrower, among other things, made a principal payment of approximately $3.6 million and brought current any past due interest, escrows and reserves, which resulted in interest of approximately $0.5 million that was unpaid as of December 31, 2023 recognized as income in the quarter ended March 31, 2024. The note rate on the loan has been amended to SOFR + 400 basis points from SOFR + 327 basis points and the stated maturity date of the loan has been amended to April 5, 2024, with the ability for borrower to extend, under certain conditions, to May 3, 2024. On May 3, 2024, the loan repaid in full according to the terms of the loan modification.

Current wording

During the period ended December 31, 2023, management identified one loan, collateralized by a multifamily property in Virginia Beach, VA, with an unpaid principal balance of $36.8 million as impaired due to monetary default resulting in a risk rating of "5"; however no specific asset reserves were required after analysis of underlying collateral value. This loan was on non-accrual status as a result of monetary default and impaired loan classification. In the first quarter of 2024, the Company and the borrower entered into a loan modification and the loan was loan returned to accrual status. In connection with the modification, the borrower, among other things, made a principal payment of approximately $3.6 million and brought current any past due interest, escrows and reserves, which resulted in interest of approximately $0.5 million that was unpaid as of December 31, 2023 recognized as income in the quarter ended March 31, 2024. The note rate on the loan was amended to SOFR + 400 basis points from SOFR + 327 basis points and the stated maturity date of the loan was amended to April 5, 2024, with the ability for borrower to extend, under certain conditions, to May 3, 2024. On May 3, 2024, the loan repaid in full according to the terms of loan modification.

Previous wording

Loan modifications and amendments are commonplace in the transitional lending business. We may amend or modify a loan depending on the loan's specific fact and circumstances. These loan modifications typically include additional time for a borrower to refinance or sell their property, adjustment or waiver of performance tests that are prerequisite to the extension of a loan maturity, modification of terms of interest rate cap agreements, and/or deferral of scheduled principal payments. In exchange for a modification, we often receive a partial repayment of principal, a cash infusion to replenish interest or capital improvement reserves, termination of all or a portion of the remaining unfunded loan commitment, additional call protection and/or an increase in the loan coupon or additional fees. We continue to work with our borrowers to address issues as they arise while seeking to preserve the credit attributes of our loan. However, we cannot assure you that these efforts will be successful, and we may experience payment delinquencies, defaults, foreclosures or losses.

Current wording

Loan modifications and amendments are commonplace in the transitional lending business. We may amend or modify a loan depending on the loan's specific facts and circumstances. These loan modifications typically include additional time for a borrower to refinance or sell their property, adjustment or waiver of performance tests that are prerequisite to the extension of a loan maturity, modification of terms of interest rate cap agreements, and/or deferral of scheduled principal payments. In exchange for a modification, we often receive a partial repayment of principal, a cash infusion to replenish interest or capital improvement reserves, termination of all or a portion of the remaining unfunded loan commitment, additional call protection and/or an increase in the loan coupon or additional fees. We continue to work with our borrowers to address issues as they arise while seeking to preserve the credit attributes of our loan. However, we cannot assure you that these efforts will be successful, and we may experience payment delinquencies, defaults, foreclosures or losses.

Previous wording

As discussed in Note 2 to our consolidated financial statements, our Manager performs a quarterly review of our loan portfolio, assesses the performance of each loan, and assigns a risk rating between "1" and "5," from less risk to greater risk. The weighted average risk rating of our total loan exposure was 3.5 as of March 31, 2024 and December 31, 2023, respectively. The change in underlying risk rating consisted of loans that paid off with a risk rating of "3" of $85.0 million and a risk rating of "5" of $12.4 million during the three months ended March 31, 2024. Additionally, $9.4 million of loans with a risk rating of "3" transitioned to a risk rating of "2," $71.0 million of loans with a risk rating of "3" transitioned to a risk rating of "4", $17.3 million of loans with a risk rating of "3" transitioned to a risk rating of "5", $80.7 million of loans with a risk rating of "4" transitioned to a risk rating of "3", $20.3 million of loans with a risk rating of "4" transitioned to a risk rating of "5" and $33.2 million of loans with a risk rating of "5" transitioned to a risk rating of "4". The following table presents the principal balance and net book value based on the Company's internal risk ratings as of March 31, 2024 and December 31, 2023:

Current wording

$119.7 million, a risk rating of "4" of $30.2 million and a risk rating of "5" of $45.7 million during the six months ended June 30, 2024. Additionally, $7.0 million of loans with a risk rating of "2" transitioned to a risk rating of "3," $206.5 million of loans with a risk rating of "3" transitioned to a risk rating of "4", $17.3 million of loans with a risk rating of "3" transitioned to a risk rating of "5", $39.2 million of loans with a risk rating of "4" transitioned to a risk rating of "3" and $66.9 million of loans with a risk rating of "4" transitioned to a risk rating of "5". The following table presents the principal balance and net book value based on the Company's internal risk ratings as of June 30, 2024:

Previous wording

(1) Maximum facility size represents the largest amount of borrowings under a given facility once sufficient collateral assets have been approved by the lender and pledged by us. Collateralized loan obligations maximum facility size reduced by repayment of Class A Notes of $71.2 million.

Current wording

(1) Maximum facility size represents the largest amount of borrowings under a given facility once sufficient collateral assets have been approved by the lender and pledged by us. Collateralized loan obligations maximum facility size reduced by repayment of Class A Notes of $152.1 million. Includes $166.3 million in collateralized loan obligations retained interests and $68.6 million in secured financings retained interests that are eliminated in consolidation in our balance sheets at June 30, 2024 and December 31, 2023, respectively.

Previous wording

(2) Represents the principal balance of the collateral assets. Collateral assets of the collateralized obligations includes $17.3 million in unsettled loan payoffs.

Current wording

(2) Represents the principal balance of the collateral assets.

Previous wording

(1) The carrying value of the collateral is net of unaccreted purchase discounts of $6,289,627 as of March 31, 2024. The carrying value for the 2021-FL1 CLO is net of debt issuance costs of $1,281,294 for March 31, 2024 and the carrying value for LMF 2023-1 Financing is net of debt issuance costs of $3,074,297 for March 31, 2024.

Current wording

(1) The carrying value of the collateral is net of unaccreted purchase discounts of$5,712,646 as of June 30, 2024. The carrying value for the 2021-FL1 CLO is net of debt issuance costs of $651,034 as of June 30, 2024 and the carrying value for LMF 2023-1 Financing is net of debt issuance costs of $2,820,891 as of June 30, 2024.

Previous wording

(2) Weighted average coupon for loan investments assumes applicable 30-day Term SOFR of 5.32% as of March 31, 2024, inclusive of weighted average interest rate floors of 0.40% and spreads of 3.60%. Weighted average coupon for the financings assumes applicable 30-day Term SOFR of 5.33% as of March 31, 2024 and spreads of 2.03% for March 31, 2024.

Current wording

(2) Weighted average coupon for loan investments assumes applicable 30-day Term SOFR of 5.33% as of June 30, 2024, inclusive of weighted average interest rate floors of 0.42% and spreads of 3.59%. Weighted average coupon for the financings assumes applicable 30-day Term SOFR of 5.33% as of June 30, 2024 and spreads of 2.10% as of June 30, 2024.

Previous wording

Any loans considered to be a Default Risk or otherwise deemed to be collateral dependent will be individually evaluated for a specific allowance for credit losses. A loan is considered collateral dependent when the Company determines that the facts and circumstances of the loan deem the debtor to be experiencing financial difficulty and repayment is expected to be provided substantially through the sale or operation of the collateral. If a loan is considered to be collateral dependent, a specific allowance for credit losses is recorded to reduce the carrying value of the loan through a charge to the provision for (reversal of) credit losses. The specific allowance for credit losses is measured by comparing the estimated fair value of the underlying collateral, less costs to sell, to the amortized cost of the respective loan. These valuations require significant judgments, which include assumptions regarding capitalization rates, leasing, creditworthiness of major tenants, occupancy rates, availability of financing, exit plan, actions of other lenders, and other factors deemed necessary by the Manager. Actual losses, if any, could ultimately differ from estimated losses.

Current wording

Any loans considered to be a Default Risk or otherwise deemed to be collateral dependent will be individually evaluated for a specific allowance for credit losses. A loan is considered collateral dependent when the Company determines that the facts and circumstances of the loan deem the debtor to be experiencing financial difficulty and repayment is expected to be provided substantially through the sale or operation of the collateral. If a loan is considered to be collateral dependent, a specific allowance for credit losses is recorded to reduce the carrying value of the loan through a charge to the provision for credit losses. The specific allowance for credit losses is measured by comparing the estimated fair value of the underlying collateral, less costs to sell, to the amortized cost of the respective loan. These valuations require significant judgments, which include assumptions regarding capitalization rates, leasing, creditworthiness of major tenants, occupancy rates, availability of financing, exit plan, actions of other lenders, and other factors deemed necessary by the Manager. Actual losses, if any, could ultimately differ from estimated losses.

Previous wording

The table below presents information from our Statement of Operations for the three months ended March 31, 2024 and March 31, 2023, respectively:

Current wording

The table below presents information from our Statement of Operations for the three and six months ended June 30, 2024 and June 30, 2023, respectively:

Previous wording

For the three months ended March 31, 2024, our net income attributable to common stockholders was $5,795,183, or $0.11 basic and diluted net income per average share, compared with net income of $4,581,733, or $0.09 basic and diluted net income per average share, for the three months ended March 31, 2023. The principal drivers of this net income increase was an increase in net interest income from $8,246,368 for the three months ended March 31, 2023 to $12,992,557 for the three months ended March 31, 2024, an increase in total other income from $182,083 for the three months ended March 31, 2023 to total other loss of $1,733,743 for the three months ended March 31, 2024 and an increase in total expenses from $2,672,006 for the three months ended March 31, 2023 to $4,267,740 for the three months ended March 31, 2024.

Current wording

For the three months ended June 30, 2024, our net income attributable to common stockholders was $3,413,445, or $0.07 basic and diluted net income per average share, compared with net income of $1,389,185, or $0.03 basic and diluted net income per average share, for the three months ended June 30, 2023. The principal drivers of this net income increase was an increase in net interest income from $7,508,980 for the three months ended June 30, 2023 to $9,522,927 for the three months ended June 30, 2024, an increase in total other expense from $509,481 for the three months ended June 30, 2023 to $1,391,707 for the three months ended June 30, 2024 and a decrease in total expenses from $4,425,049 for the three months ended June 30, 2023 to $3,533,804 for the three months ended June 30, 2024.

Previous wording

Exit and extension fees in the three months ended March 31, 2024 and three months ended March 31, 2023 were unchanged. For the three months ended March 31, 2024, we experienced loan payoffs on five loans with net principal balances of 67.5 which generated exit fees of $0.7 million included in interest income and one loan with net principal balance of $17.5 million which waived exit fees of $0.2 million resulting in a reduction to expense reimbursement of $0.1 million included in operating expenses reimbursable to Manager. For the three months ended March 31, 2023, we experienced loan payoffs on three loans with net principal balances of $45.6 million which generated exit fees of $0.7 million included in interest income.

Current wording

As disclosed above, we experienced an increase in exit and extension fees in the three months ended June 30, 2024. For the three months ended June 30, 2024, we experienced loan payoffs on three loans with net principal balances of $96.8 million which generated exit fees of $0.6 million included in interest income and extended five loans which generated $0.3 million in fees included in interest income. For the three months ended June 30, 2023, we experienced loan payoffs on three loans with net principal balances of $38.0 million which generated exit fees of $0.5 million included in interest income, one loan with net unpaid principal balance of $33.5 million which waived exit fees of $0.2 million resulting in a reduction to expense reimbursement of $0.1 million included in operating expenses reimbursable to Manager and extended one loan which generated $0.1 million in fees included in interest income.

Previous wording

For the three months ended March 31, 2024, the Company recognized a provision for income taxes of $10,892 and for the three months ended March 31, 2023, the Company recognized a benefit from income taxes in the amount of $10,246. The period-over-period decrease in tax provision primarily reflects the change in gross deferred revenue at FOAC due to the change in unrealized loss on mortgage servicing rights.

Current wording

For the three months ended June 30, 2024, the Company recognized a benefit from income taxes of $1,030 and for the three months ended June 30, 2023, the Company recognized a provision for income taxes in the amount of $223. The period-over-period increase in tax benefit primarily reflects the change in gross deferred revenue at FOAC due to the change in unrealized loss on mortgage servicing rights.

Previous wording

For the three months ended March 31, 2024 and the three months ended March 31, 2023, our net interest income was $12,992,557 and $8,246,368, respectively. The increase was primarily due to (i) a $350.4 million increase in weighted-average principal balance of our loan portfolio; (ii) a 81bps increase in weighted-average floating rate of our loan portfolio; (iii) a 16bps increase in weighted-average spread on the loan portfolio; (iv) an increase in accretion of purchase discount of $0.7 million; (v) an increase in interest earned on cash of $0.4 million and (vi) one-time income of $2.5 million related to the resolution of the defaulted Columbus, Ohio loan for the three months ended March 31, 2024 compared to the corresponding period in 2023. This was partially offset by (i) a $277.2 million increase in weighted-average principal balance of our secured borrowings; (ii) an 81bps increase in weighted-average floating rate for our secured borrowing liabilities for the three months ended March 31, 2024 compared to the corresponding period in 2023 and (iii) a 58bps increase in weighted-average spread for our secured borrowing liabilities and (iv) amortization of debt issuance costs of $0.3 million for the three months ended March 31, 2024 compared to the corresponding period in 2023.

Current wording

For the six months ended June 30, 2024 and the six months ended June 30, 2023, our net interest income was $22,515,484 and $15,755,348, respectively. The increase was primarily due to (i) a $320.0 million increase in weighted-average principal balance of our loan portfolio; (ii) a 56bps increase in weighted-average floating rate of our loan portfolio; (iii) a 15bps increase in weighted-average spread on the loan portfolio; (iv) an increase in accretion of purchase discount of $1.5 million; (v) an increase in interest earned on cash of $0.4 million; (vi) an increase in exit/extension fees of $0.3 million and (vii) one-time income of $2.5 million related to the resolution of the defaulted Columbus, Ohio loan for the six months ended June 30, 2024 compared to the corresponding period in 2023. This was partially offset by (i) a $238.1 million increase in weighted-average principal balance of our secured borrowings; (ii) an 56bps increase in weighted-average floating rate for our secured borrowing liabilities for the six months ended June 30, 2024 compared to the corresponding period in 2023 and (iii) a 61bps increase in weighted-average spread for our secured borrowing liabilities and (iv) amortization of debt issuance costs of $0.5 million for the six months ended June 30, 2024 compared to the corresponding period in 2023.

Previous wording

The period-over-period increase in operating expenses primarily reflects an increase in accounting, administration, audit, bank, incentive and professional fees as well as an increase to CLO fees, which more than offset a decrease in insurance, legal and reimbursed expense fees.

Current wording

The period-over-period increase in operating expenses primarily reflects an increase in incentive fees, accounting, administration, audit, bank and professional fees as well as an increase to CLO fees, which more than offset a decrease in insurance, legal, discontinued deal costs and reimbursed expense fees.

Previous wording

For the three months ended March 31, 2024, our other loss was $1,733,743. This loss was driven by provision for credit losses of $1,776,873 primarily due to changes in macroeconomic assumptions employed in determining the Company's model-based general reserve which reflects softening in CRE prices, which more than offset net servicing income of $38,503 and net unrealized gains on mortgage servicing rights of $4,627 as a result of increased interest rates in the period.

Current wording

For the six months ended June 30, 2024, our other loss was $3,125,450. This loss was driven by provision for credit losses of $3,176,576 primarily due to specific reserves taken on a risk-rated "5" multifamily loan and changes in macroeconomic assumptions employed in determining the Company's model-based general reserve which reflects softening in CRE prices and net unrealized loss on mortgage servicing rights of $5,647 as a result of reduction in principal balance in the period, which more than offset net servicing income of $56,773.

Previous wording

For the three months ended March 31, 2023, our other income was $182,083. This gain was driven by reversal of credit reserves of $179,684 and net servicing income of $51,528 which more than offset net unrealized losses on mortgage servicing rights of $49,129 as a result of decreased interest rates in the period.

Current wording

For the six months ended June 30, 2023, our other income was $327,398. This loss was driven by provision for credit losses of $375,399 and net unrealized losses on mortgage servicing rights of $48,923 as a result of reduction in principal balance in the period, which more than offset net servicing income of $96,924.

Previous wording

Liquidity is a measurement of our ability to meet potential cash requirements, including ongoing commitments to pay dividends, fund investments, comply with margin requirements, if any, and repay borrowings and other general business needs. Our primary sources of liquidity have been met with net proceeds of common or preferred stock issuance, net proceeds from debt offerings and net cash provided by operating activities. We have added to our liquidity position in February 2022, by completing a transferable common stock rights offering issuing and selling 27,277,269 shares of common stock for net proceeds of approximately $81.1 million and in May 2021 by issuing 2,400,000 shares of 7.875% Series A Cumulative Redeemable Preferred Stock resulting in net proceeds (after underwriting discount and commission but before operating expense) of $58.1 million. We finance our commercial mortgage loans primarily with non-recourse match term secured borrowings, which are not subject to margin calls or additional collateralization requirements. On June 14, 2021, we closed the 2021-FL1 CLO issuing eight tranches of CLO notes totaling $903.8 million. Of the total CLO notes issued $833.8 million were investment grade notes issued to third-party investors and $70.0 million were below investment-grade notes retained by us. On July 12, 2023, we closed LMF 2023-1 placing $270.4 million of an investment-grade rated senior secured floating-rate loan with a private lender, issued and sold approximately $47.3 million of investment-grade rated notes to an affiliate of our Manager and retained the subordinate interests in the issuing vehicle of approximately $68.6 million. On August 23, 2021 we drew an additional $7.5 million of our Secured Term Loan pursuant to the Third Amendment. As of March 31, 2024, our balance sheet included $47.8 million of a secured term loan and $1.1 million in collateralized loan financing, gross of discounts and debt issuance costs. Our secured term loan matures in February 2026, our collateralized loan financing is term-matched and matures in 2039 or later and our collateralized financing is match-termed and matures in 2032 or later. However, to the extent that we seek to invest in additional commercial mortgage loans, we will in part be dependent on our ability to issue additional collateralized loan obligations to secure alternative financing facilities or to raise additional common or preferred equity.

Current wording

Liquidity is a measurement of our ability to meet potential cash requirements, including ongoing commitments to pay dividends, fund investments, comply with margin requirements, if any, and repay borrowings and other general business needs. Our primary sources of liquidity have been met with net proceeds of common or preferred stock issuance, net proceeds from debt offerings and net cash provided by operating activities. We have added to our liquidity position in February 2022, by completing a transferable common stock rights offering issuing and selling 27,277,269 shares of common stock for net proceeds of approximately $81.1 million and in May 2021 by issuing 2,400,000 shares of 7.875% Series A Cumulative Redeemable Preferred Stock resulting in net proceeds (after underwriting discount and commission but before operating expense) of $58.1 million. We finance our commercial mortgage loans primarily with non-recourse match term secured borrowings, which are not subject to margin calls or additional collateralization requirements. On June 14, 2021, we closed the 2021-FL1 CLO issuing eight tranches of CLO notes totaling $903.8 million. Of the total CLO notes issued, $833.8 million were investment grade notes issued to third-party investors and $70.0 million were below investment-grade notes retained by us. On July 12, 2023, we closed LMF 2023-1 placing $270.4 million of an investment-grade rated senior secured floating-rate loan with a private lender, issued and sold approximately $47.3 million of investment-grade rated notes to an affiliate of our Manager and retained the subordinate interests in the issuing vehicle of approximately $68.6 million. On August 23, 2021 we drew an additional $7.5 million of our Secured Term Loan pursuant to the Third Amendment. As of June 30, 2024, our balance sheet included $47.8 million of a secured term loan and $1.0 billion in collateralized loan financing, gross of discounts and debt issuance costs. Our secured term loan matures in February 2026, our collateralized loan financing is term-matched and matures in 2039 or later and our collateralized financing is match-termed and matures in 2032 or later. However, to the extent that we seek to invest in additional commercial mortgage loans, we will in part be dependent on our ability to issue additional collateralized loan obligations to secure alternative financing facilities or to raise additional common or preferred equity.

Previous wording

We intend to continue to maintain a level of liquidity in relation to our assets that enables us to meet reasonably anticipated investment requirements and unforeseen business needs but that also allows us to be substantially invested in our target assets. We may misjudge the appropriate amount of our liquidity by maintaining excessive liquidity, which would lower our investment returns, or by maintaining insufficient liquidity, which would force us to liquidate assets into unfavorable market conditions and harm our operating results. As of March 31, 2024, we had unrestricted cash and cash equivalents of $64.6 million, compared to $51.2 million as of December 31, 2023.

Current wording

We intend to continue to maintain a level of liquidity in relation to our assets that enables us to meet reasonably anticipated investment requirements and unforeseen business needs but that also allows us to be substantially invested in our target assets. We may misjudge the appropriate amount of our liquidity by maintaining excessive liquidity, which would lower our investment returns, or by maintaining insufficient liquidity, which would force us to liquidate assets into unfavorable market conditions and harm our operating results. As of June 30, 2024, we had unrestricted cash and cash equivalents of $65.1 million, compared to $51.2 million as of December 31, 2023.

Previous wording

As of March 31, 2024, we consolidated the assets and liabilities of the 2021-FL1 CLO and LMF 2023-1 collateralized financings. The assets of the 2021-FL1 CLO and LMF 2023-1 are restricted and can only be used to fulfill their respective obligations, and accordingly the obligations of the trust, which we classify as collateralized loan obligations, do not have any recourse to us as the consolidator of the trust. As of March 31, 2024, the carrying value of these non-recourse liabilities aggregated to $1,075.9 million. As of March 31, 2024, our total debt to equity ratio was 4.6:1 on a GAAP basis.

Current wording

As of June 30, 2024, we consolidated the assets and liabilities of the 2021-FL1 CLO and LMF 2023-1 collateralized financings. The assets of the 2021-FL1 CLO and LMF 2023-1 are restricted and can only be used to fulfill their respective obligations, and accordingly the obligations of the trust, which we classify as collateralized loan obligations, do not have any recourse to us as the consolidator of the trust. As of June 30, 2024, the carrying value of these non-recourse liabilities aggregated to $995.9 million. As of June 30, 2024, our total debt to equity ratio was 4.3:1 on a GAAP basis.