Lument Finance Trust Inc

Previous wording

This Quarterly Report on Form 10-Q contains forward-looking statements intended to qualify for the safe harbor contained in Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act, as amended. Forward-looking statements are subject to risks and uncertainties. These forward-looking statements include information about possible or assumed future results of our business, financial condition, liquidity, results of operations, plans and objectives. In addition, our management may from time to time make oral forward-looking statements. You can identify forward-looking statements by use of words such as "believe," "expect," "anticipate," "estimate" "project," "plan," "continue," "intend," "should," "may," "will," "seek," "would," "could" or the negative of these words and phrases or similar words and phrases, or by discussions of strategy, plans or intentions. Statements regarding the following subjects, among others, may be forward-looking: the return on equity; the yield on investments; the ability to borrow to finance assets; and risks associated with investing in real estate assets, including changes in business conditions and the general economy. Forward-looking statements are based on our beliefs, assumptions and expectations of our future performance, taking into account all information currently available to us on the date of this quarterly report. Actual results may differ from expectations, estimates and projections. Readers are cautioned not to place undue reliance on forward-looking statements in this quarterly report and should consider carefully the risk factors described in Part I, Item IA "Risk Factors" in our annual report on Form 10-K for the year ended December 31, 2023 in evaluating these forward-looking statements. Forward-looking statements are subject to substantial risks and uncertainties, many of which are difficult to predict and are generally beyond our control. It is not possible to predict or identify all such risks. Additional information concerning these and other risk factors are contained in our 2023 10-K which is available on the Securities and Exchange Commission's website atwww.sec.gov.

Current wording

This Quarterly Report on Form 10-Q contains forward-looking statements intended to qualify for the safe harbor contained in Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act, as amended. Forward-looking statements are subject to risks and uncertainties. These forward-looking statements include information about possible or assumed future results of our business, financial condition, liquidity, results of operations, plans and objectives. In addition, our management may from time to time make oral forward-looking statements. You can identify forward-looking statements by use of words such as "believe," "expect," "anticipate," "estimate" "project," "plan," "continue," "intend," "should," "may," "will," "seek," "would," "could" or the negative of these words and phrases or similar words and phrases, or by discussions of strategy, plans or intentions. Statements regarding the following subjects, among others, may be forward-looking: the return on equity; the yield on investments; the ability to borrow to finance assets; and risks associated with investing in real estate assets, including changes in business conditions, changes in interest rates or inflation and any resulting effect on our borrowers or liquidity, and the general economy. Forward-looking statements are based on our beliefs, assumptions and expectations of our future performance, taking into account all information currently available to us on the date of this quarterly report. Actual results may differ from expectations, estimates and projections. Readers are cautioned not to place undue reliance on forward-looking statements in this quarterly report and should consider carefully the risk factors described in Part I, Item IA "Risk Factors" in our annual report on Form 10-K for the year ended December 31, 2023 in evaluating these forward-looking statements. Forward-looking statements are subject to substantial risks and uncertainties, many of which are difficult to predict and are generally beyond our control. It is not possible to predict or identify all such risks. Additional information concerning these and other risk factors are contained in our 2023 10-K which is available on the Securities and Exchange Commission's website atwww.sec.gov.

Previous 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.

Current wording

The last several quarters 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

The U.S. Federal Reserve and other central banks have taken action to increase interest rates in order to control inflation, which has begun to moderate as a result of monetary tightening. While it is anticipated that central banks may begin to lower interest rates in 2024, interest rates may remain higher for longer, which creates further uncertainty for the economy and for our borrowers. Although our business model is such that higher interest rates will, all else being equal, correlate to increases in our net income, interest rates remaining elevated for an extended period of time may adversely affect our existing borrowers. Additionally, higher interest rates and unpredictable geopolitical landscape may cause further dislocation in the capital markets resulting in a continual reduction of available liquidity and an increase in borrowing costs. A lack of liquidity for a prolonged period of time could limit our ability to grow our business. It remains difficult to predict the full impact of recent events and any future changes in interest rate or inflation.

Current wording

Although the Federal Reserve lowered interest rates by 0.50% and 0.25% on September 18, 2024 and November 7, 2024, respectively, interest rates remain elevated, and the timing, direction and extent of any future interest rate changes remain uncertain. Although our business model is such that higher interest rates will, all else being equal, correlate to increases in our net income, interest rates remaining elevated for an extended period of time may adversely affect our existing borrowers. Additionally, higher interest rates and unpredictable geopolitical landscape may cause further dislocation in the capital markets resulting in a continual reduction of available liquidity and an increase in borrowing costs. A lack of liquidity for a prolonged period of time could limit our ability to grow our business. It remains difficult to predict the full impact of recent events and any future changes in interest rate or inflation.

Previous 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.

Current wording

•On September 15, 2024, the Company announced its third quarter common dividend of $0.08 per share of common stock

Previous wording

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

Current wording

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

Previous 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

Current wording

•Book value per share of common stock as of September 30, 2024 was $183.0 million, or $3.50 per share of common stock

Previous wording

•Experienced $98.2 million in loan payoffs

Current wording

•Experienced $51.4 million in loan payoffs

Previous 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

Current wording

•$1.2 billion senior loan portfolio is 100% floating rate with an average spread to 30-day term SOFR of 3.58%, excluding unamortized purchase discounts of $4.3 million as of September 30, 2024

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 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.

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 September 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 September 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 0.55%, 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 September 30, 2024, the weighted average spread of our commercial loan portfolio was 3.58%, 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, 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%.

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%. On September 18, 2024 and November 7, 2024, 2024, the Federal Reserve lowered interest rates by 0.50% and 0.25%, respectively, however, interest rates remain elevated, and the timing, direction and extent of any future interest rate changes remain uncertain.

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. 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%.

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, and 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 September 30, 2024, 95.3% of our performing loans have interest rate caps with a weighted-average strike price of 2.9%.

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 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.

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 September 30, 2024, 98.8% 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 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.

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 September 30, 2024, our aggregate unamortized purchase discount was $4.3 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.

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 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.

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 September 30, 2024, we recorded earnings per share of $0.10, declared a quarterly dividend of $0.08 per share, and reported $0.10 per share of Distributable Earnings. In addition, our book value per share of common stock was $3.50.

Previous wording

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

Current wording

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

Previous 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.

Current wording

(1) Book value as of September 30, 2024 and June 30, 2024 includes the impact of an estimated CECL allowance of $9,515,493 or $0.18 per common share and $9,193,174 or $0.18 per common share, respectively.

Previous 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.

Current wording

(1) Carrying Value includes $4,344,687 and $7,000,863 in unamortized purchase discounts as of September 30, 2024 and December 31, 2023, respectively.

Previous wording

(2) Weighted average coupon assumes applicable 30-day Term Secured Overnight Financing Rate ("SOFR") of 5.33% 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.

Current wording

(2) Weighted average coupon assumes applicable 30-day Term Secured Overnight Financing Rate ("SOFR") of 5.16% and 5.33% as of September 30, 2024 and December 31, 2023, respectively, inclusive of weighted average interest rate floors of 0.55% and 0.38%, respectively. As of September 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

(4) As of June 30, 2024, all of the outstanding senior secured loans were held in VIEs. As of December 31, 2023, $1,375,277,312 of the outstanding senior secured loans were held in VIEs and $8,603,886 of the outstanding senior secured loans were held outside VIEs.

Current wording

(4) As of September 30, 2024, $1,161,565,228 of the outstanding senior secured loans were held in VIEs and $20,102,328 of the outstanding senior loans were held outside of VIEs. As of December 31, 2023, $1,375,277,312 of the outstanding senior secured loans were held in VIEs and $8,603,886 of the outstanding senior secured loans were held outside VIEs.

Previous 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.

Current wording

During the period ended September 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 has been on non-accrual status since June 30, 2024 as a result of the maturity default, with interest recorded as income on a cash basis. During the three months ended September 30, 2024, the Company recognized $0.4 million of interest on this loan.

Previous 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.

Current wording

During the period ended September 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 has been on non-accrual status since March 31, 2024 as a result of monetary default, with interest recognized as income on a cash basis. During the three months ended September 30, 2024, the Company recognized $0.7 million of interest on this loan and for the six months ended September 30, 2024, during which this loan has been on non-accrual status the Company recognized $1.2 million of interest on this loan.

Previous wording

During the period ended June 30, 2024, management identified one loan, collateralized by two multifamily properties in Philadelphia, PA, with an unpaid aggregate principal value of $15.0 million as requiring individual evaluation for a specific allowance for credit losses due to monetary default, and a resulting risk rating of "5"; a specific allowance of $0.9 million for credit losses was required after analysis of the underlying collateral value. This loan is on non-accrual status as a result of monetary default, with interest collections accounted for under the cost recovery method.

Current wording

During the period ended September 30, 2024, management identified one loan, collateralized by two multifamily properties in Philadelphia, PA, with an unpaid aggregate principal value of $15.0 million as requiring individual evaluation for a specific allowance for credit losses due to monetary default, and a resulting risk rating of "5"; a specific allowance of $0.9 million for credit losses was required after analysis of the underlying collateral value. This loan has been on non-accrual status since June 30, 2024 as a result of monetary default, with interest collections accounted for under the cost recovery method. During the three months ended September 30, 2024, the Company applied $0.3 million in interest received from the borrower as a reduction in the carrying basis of this loan.

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 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.

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 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

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 3.6 as of June 30, 2024 and and 3.5 as of December 31, 2023. The change to underlying risk rating consisted of loans that paid off with a risk rating of "3" of

Current 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 3.6 as of September 30, 2024 and 3.5 as of December 31, 2023. The change to underlying risk rating consisted of loans that paid off with a risk rating of "3" of $164.1 million, a risk rating of "4" of $37.3 million and a risk rating of "5" of $45.7 million during the nine months ended September 30, 2024. Additionally, $7.0 million of loans with a risk rating of "2" transitioned to a risk rating of "3," $18.9 million of loans with a risk rating of "3" transitioned to a risk rating of

Previous 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:

Current wording

"2", $234.4 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", $35.5 million of loans with a risk rating of "4" transitioned to a risk rating of "3" and $66.5 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 September 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 $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.

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 $193.8 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 September 30, 2024 and December 31, 2023, respectively.

Previous 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.

Current wording

(1) The carrying value of the collateral is net of unaccreted purchase discounts of $4,468,136 as of September 30, 2024. The carrying value for the 2021-FL1 CLO is net of debt issuance costs of $13,851 as of September 30, 2024 and the carrying value for LMF 2023-1 Financing is net of debt issuance costs of $2,564,697 as of September 30, 2024.

Previous 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.

Current wording

(2) Weighted average coupon for loan investments assumes applicable 30-day Term SOFR of 5.16% as of September 30, 2024, inclusive of weighted average interest rate floors of 0.56% and spreads of 3.58%. Weighted average coupon for the financings assumes applicable 30-day Term SOFR of 5.10% as of September 30, 2024 and spreads of 2.13% as of September 30, 2024.

Previous wording

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.

Current wording

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 Secured Term Loan, then by 0.375% for the following four months, then by 0.50% for the last four months until maturity.

Previous 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:

Current wording

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

Previous 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.

Current wording

For the three months ended September 30, 2024, our net income attributable to common stockholders was $5,095,684, or $0.10 basic and diluted net income per average share, compared with net income of $5,174,685, or $0.10 basic and diluted net income per average share, for the three months ended September 30, 2023. The principal drivers of this net income decrease was a decrease in net interest income from $9,544,365 for the three months ended September 30, 2023 to $9,484,463 for the three months ended September 30, 2024, an increase in total expenses from $2,445,687 for the three months ended September 30, 2023 to $2,897,067 for the three months ended September 30, 2024 partially offset by a decrease in total other expense from $719,148 for the three months ended September 30, 2023 to $303,182 for the three months ended September 30, 2024.

Previous wording

For the three months ended June 30, 2024 and the three months ended June 30, 2023, our net interest income was $9,522,927 and $7,508,980, respectively. The increase was primarily due to (i) a $289.5 million increase in weighted-average principal balance of our loan portfolio; (ii) a 31bps 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 exit/extension fees of $0.2 million and (v) an increase in accretion of purchase discount of $0.7 million. This was partially offset by (i) a $199.1 million increase in weighted-average principal balance of our secured borrowings; (ii) an 32bps increase in weighted-average floating rate for our secured borrowing liabilities for the three months ended June 30, 2024 compared to the corresponding period in 2023 and (iii) a 64bps 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 June 30, 2024 compared to the corresponding period in 2023.

Current wording

For the three months ended September 30, 2024 and the three months ended September 30, 2023, our net interest income was $9,484,463 and $9,544,365, respectively. The decrease was primarily due to (i) a $143.1 million decrease in weighted-average principal balance of our loan portfolio; (ii) a $145.0 million increase in weighted-average principal balance of our secured borrowings; (iii) a 34bps increase in weighted-average floating rate for our secured borrowing liabilities for the three months ended September 30, 2024 compared to the corresponding period in 2023 and (iv) a 19bps increase in weighted-average spread for our secured borrowing liabilities This was partially offset by (i) a 36bps increase in weighted-average floating rate of our loan portfolio; (ii) a 12bps increase in weighted-average spread on the loan portfolio; (iii) an increase in exit/extension fees of $0.1 million and (iv) an increase in accretion of purchase discount of $0.8 million.

Previous wording

As disclosed above, we experienced an increase in exit and extension fees for the six months ended June 30, 2024 For the six months ended June 30, 2024, we experienced loan payoffs on eight loans with net principal balances of $164.3 million which generated exit fees of $1.4 million included in interest income, one loan with net unpaid 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 and extended five loans which generated $0.3 million in fees included in interest income. For the six months ended June 30, 2023, we experienced loan payoffs on six loans with net principal balances of $83.5 million which generated exit fees of $1.2 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 two loans which generated $0.2 million in fees included in interest income.

Current wording

As disclosed above, we experienced an increase in exit and extension fees in the three months ended September 30, 2024. For the three months ended September 30, 2024, we experienced loan payoffs on two loans with net principal balances of $17.2 million which generated exit fees of $0.1 million included in interest income, three loans with net unpaid principal balance of $31.7 million which waived exit fees of $0.2 million resulting in a reduction to expenses reimbursement of $0.1 million included in operating expenses reimbursable to Manager and extended three loans which generated $0.4 million in fees included in interest income. For the three months ended September 30, 2023, we experienced loan payoffs on four loans with net principal balances of $48.9 million which generated exit fees of $0.5 million included in interest income, four loans with net unpaid principal balance of $60.8 million which waived exit fees of $0.6 million resulting in a reduction to expense reimbursement of $0.3 million included in operating expenses reimbursable to Manager.

Previous wording

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

Current wording

The period-over-period increase in expenses primarily reflects an increase to reimbursed expenses, accounting, administration, audit, investor relations and professional fees, which more than offset a decrease in pricing fees.

Previous wording

For the three months ended June 30, 2024, our other loss was $1,391,707. This loss was driven by provision for credit losses of $1,399,703 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 $10,274 as a result in reduction in principal balances, which more than offset net servicing income of $18,270.

Current wording

For the three months ended September 30, 2024, our other loss was $303,182. This loss was driven by provision for credit losses of $317,448 primarily due to changes in macroeconomic assumptions employed in determining the Company's model-based general reserve and net unrealized loss on mortgage servicing rights of $46,017 as a result in reduction in principal balances, which more than offset net servicing income of $60,283.

Previous wording

For the three months ended June 30, 2023, our other loss was $509,481. This loss was driven by provision for credit losses of $555,083 primarily related to changed in macroeconomic forecast, which ore than offset net servicing income of $45,396 and net unrealized gains on mortgage servicing rights of $206 as a result of decreased interest rates in the period.

Current wording

For the three months ended September 30, 2023, our other loss was $719,148. This loss was driven by provision for credit losses of $791,563 primarily related to changed in macroeconomic forecast, which ore than offset net servicing income of $70,842 and net unrealized gains on mortgage servicing rights of $1,573 as a result of decreased interest rates in the period.

Previous 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.

Current wording

For the three months ended September 30, 2024, the Company recognized a provision for income taxes of $3,489 and for the three months ended September 30, 2023, the Company recognized a provision for income taxes in the amount of $19,803. The period-over-period decrease 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 six months ended June 30, 2024, our net income attributable to common stockholders was $9,208,628, or $0.18 basic and diluted net income per average share, compared with net income of $5,970,918, or $0.11 basic and diluted net income per average share, for the six months ended June 30, 2023. The principal drivers of this net income increase was an increase in net interest income from $15,755,348 for the six months ended June 30, 2023 to $22,515,484 for the six months ended June 30, 2024, an increase in total other expense from $327,398 for the six months ended June 30, 2023 to $3,125,450 for the six months ended June 30, 2024 and an increase in total expenses from $7,097,055 for the six months ended June 30, 2023 to $7,801,544 for the six months ended June 30, 2024.

Current wording

For the nine months ended September 30, 2024, our net income attributable to common stockholders was $14,304,312, or $0.27 basic and diluted net income per average share, compared with net income of $11,145,603, or $0.21 basic and diluted net income per average share, for the nine months ended September 30, 2023. The principal drivers of this net income increase was an increase in net interest income from $25,299,713 for the nine months ended September 30, 2023 to $31,999,947 for the nine months ended September 30, 2024, partially offset by an increase in total other expense from $1,046,546 for the nine months ended September 30, 2023 to $3,428,632 for the nine months ended September 30, 2024 and an increase in total expenses from $9,542,742 for the nine months ended September 30, 2023 to $10,698,611 for the nine months ended September 30, 2024.

Previous 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.

Current wording

For the nine months ended September 30, 2024 and the nine months ended September 30, 2023, our net interest income was $31,999,947 and $25,299,713, respectively. The increase was primarily due to (i) a $142.6 million increase in weighted-average principal balance of our loan portfolio; (ii) a 36bps increase in weighted-average floating rate of our loan portfolio; (iii) a 9bps increase in weighted-average spread on the loan portfolio; (iv) an increase in accretion of purchase discount of $2.2 million;(v) an increase in exit/extension fees of $0.4 million and (vi) one-time income of $2.5 million related to the resolution of a defaulted Columbus, Ohio loan for the nine months ended September 30, 2024 compared to the corresponding period in 2023. This was partially offset by (i) a $109.1 million increase in weighted-average principal balance of our secured borrowings; (ii) an 35bps increase in weighted-average floating rate for our secured borrowing liabilities for the nine months ended September 30, 2024 compared to the corresponding period in 2023 and (iii) a 43bps increase in weighted-average spread for our secured borrowing liabilities; (iv) amortization of debt issuance costs of $0.5 million for the nine months ended September 30, 2024 compared to the corresponding period in 2023; (v) an decrease in interest earned on cash of $0.2 million.

Previous 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.

Current wording

As disclosed above, we experienced an increase in exit and extension fees for the nine months ended September 30, 2024 For the nine months ended September 30, 2024, we experienced loan payoffs on ten loans with net principal balances of $178.5 million which generated exit fees of $1.4 million included in interest income, four loans with net unpaid principal balance of $49.2 million which waived exit fees of $0.4 million resulting in a reduction to expense reimbursement of $0.2 million included in operating expenses reimbursable to Manager and extended eight loans which generated $0.7 million in fees included in interest income. For the nine months ended September 30, 2023, we experienced loan payoffs on ten loans with net principal balances of $132.9 million which generated exit fees of $1.7 million included in interest income, five loans with net unpaid principal balance of $94.3 million which waived exit fees of $0.7 million resulting in a reduction to expense reimbursement of $0.8 million included in operating expenses reimbursable to Manager.