Lument Finance Trust (LFT) risk factors, FY2024 10-K

Risks Related to Financing and Hedging

1. 01Risks Associated with Our Relationship with Our Manager
2. 45Our strategy involves leverage, which may amplify losses and there is no specific limit on the amount of leverage that we may use
3. 46We may incur significant additional debt in the future, which will subject us to increased risk of loss and may reduce cash available for distributions to our stockholders
4. 47There can be no assurance that our Manager will be able to prevent mismatches in the maturities of our assets and liabilities
5. 48Lenders generally require us to enter into restrictive covenants relating to our operations
6. 49We have financed, and may in the future seek to finance, CRE loans and investments through non-recourse secured financings, including CRE CLOs, and such transactions involve significant risks and expose us to losses
7. 50Our inability to meet certain financial covenants related to our credit agreements could adversely affect our business, financial condition and results
8. 51We may enter into repurchase agreements, and our rights under such repurchase agreements may be subject to the effects of the bankruptcy laws in the event of the bankruptcy or insolvency of us or our counterparties under the repurchase agreements
9. 52Master repurchase agreements, credit facilities, or other financings that we may use in the future to finance our assets may require us to provide additional collateral or pay down debt
10. 53Interest rate fluctuations could increase our borrowing costs, which could lead to a significant decrease in our results of operations, cash flows and the market value of investments
11. 54We have utilized and may utilize in the future non-recourse securitizations to finance our loans and investments, which may expose us to risks that could result in losses
12. 55The failure of assets subject to repurchase agreements to qualify as real estate assets could adversely affect our ability to qualify as a REIT
13. 56We may enter into hedging transactions that expose us to contingent liabilities in the future, which may adversely affect our financial results or cash available for distribution to stockholders
14. 57Hedging against interest rate exposure may adversely affect our earnings, which could reduce our cash available for distribution to our stockholders, and such transactions may fail to protect us from the losses that they were designed to offset
15. 58Our loans and investments may be subject to fluctuations in interest rates that may not be adequately protected, or protected at all, by our hedging strategies
16. 59Our board of directors has approved very broad investment guidelines for our Manager and will not approve each investment and financing decision made by our Manager
17. 60We are dependent on our Manager and its key personnel for our success
18. 61There are conflicts of interest in our relationship with our Manager, ORIX and ORIX affiliates that could result in decisions that are not in the best interests of our stockholders
19. 62The incentive fee payable to our Manager under the Management Agreement is payable quarterly and is based on our core earnings and, therefore, may cause our Manager to select investments in more risky assets to increase its incentive compensation
20. 63The Management Agreement with our Manager may be costly and difficult to terminate, including for our Manager’s poor performance
21. 64Our Manager’s liability is limited under the Management Agreement and we have agreed to indemnify our Manager and its affiliates against certain liabilities. As a result, we could experience poor performance or losses for which our Manager would not be liable
22. 65Our Manager is subject to extensive regulation as an investment adviser, which could adversely affect its ability to manage our business
23. 66Employee litigation and unfavorable publicity could negatively affect our future business

Risks Related to Our Investment Strategies and Our Businesses

1. 02We may not be able to operate our businesses successfully or generate sufficient revenue to make or sustain distributions to our stockholders
2. 03If we fail to develop, enhance and implement strategies to adapt to changing conditions in the mortgage industry and capital markets, our business, financial condition, results of operations and our ability to make distributions to our stockholders may be adversely affected
3. 04We may change our target assets, investment or financing strategies and other operational policies without stockholder consent, which may adversely affect our business, financial condition, results of operations and our ability to make distributions to our stockholders
4. 05Our portfolio of assets may be concentrated in terms of credit risk
5. 06Our floating-rate commercial mortgage loans are subject to various risks, such as interest rate risk, prepayment risk, real estate risk and credit risk
6. 07Transitional mortgage loans involve greater risk than conventional mortgage loans
7. 08Fluctuations in interest rates could reduce our ability to generate income on our loans and other investments, which could adversely affect our ability to acquire assets that satisfy our investment objectives and to generate income and make distributions to our stockholders
8. 09of transitional floating-rate multifamily and CRE loans and other mortgage related investments with a yield that is above our borrowing cost, our ability to satisfy our investment objectives and to generate income and make distributions to our stockholders may be adversely affected
9. 10The timing of loan repayment is difficult to predict and may adversely affect our financial performance and cash flows
10. 11Difficulty in redeploying the proceeds from repayments of our existing loans and investments may cause our financial performance and returns to investors to suffer
11. 12Our real estate investments are subject to risks particular to real property. These risks may result in a reduction or elimination of, our return from, a loan secured by a particular property
12. 13The impact of any future terrorist attacks, the occurrence of a natural disaster, a significant climate change, health concerns regarding pandemic diseases or changes in laws and regulations expose us to certain risks
13. 14affordable insurance coverage, the value of those investments could decline and in the event of an uninsured loss, we could lose all or a portion of our investment
14. 15Lack of diversification in the number of assets we acquire would increase our dependence on relatively few individual assets
15. 16Investments in non-conforming and non-investment grade rated CRE loans or securities involve increased risk of loss
16. 17Our target assets may include CRE loans which are funded with interest reserves and borrowers may be unable to replenish such interest reserves once they run out
17. 18We may not have control over certain of our loans and investments
18. 19Changes in laws or regulations governing the operations of borrowers could affect our returns with respect to those borrowers
19. 20Climate change, climate change-related initiatives and regulations and the increased focus on sustainability issues may adversely affect our business and financial results and damage our reputation
20. 21We may be subject to lender liability claims, and if we are held liable under such claims, we could be subject to losses
21. 22If the loans that we originate or acquire do not comply with applicable laws, we may be subject to penalties, which could materially and adversely affect us
22. 23If we are unable to implement and maintain effective internal controls over financial reporting in the future, investors may lose confidence in the accuracy and completeness of our financial reports and the market price of our common stock may be negatively affected
23. 24We depend on our accounting services provider for assistance with the preparation of our financial statements, access to appropriate accounting technology and assistance with portfolio valuation
24. 25We operate in a highly competitive market for investment opportunities and competition may limit our ability to acquire desirable investments in assets we target and could also affect the pricing of these securities
25. 26A prolonged economic recession and declining real estate values could impair our assets and harm our operations
26. 27The lack of liquidity in our investments may adversely affect our business
27. 28Our investment in CRE debt securities and other similar structured finance investments may be subject to losses
28. 29Provisions for credit losses are difficult to estimate
29. 30Accounting standards have required us to increase our allowance for credit losses which has had an adverse effect on our business and results of operation and may in the future have a material adverse effect on our business, financial condition and results of operations
30. 31The allowance for credit losses required under ASU 2016-13 is a valuation account that is deducted from the related loans' and debt securities' amortized cost basis on our consolidated balance sheets, and which will reduce our total stockholders' equity
31. 32Our Manager's due diligence may not reveal all of the risks associated with such assets and may not reveal other weaknesses in such assets, which could lead to losses
32. 33Our Manager utilizes analytical models and data in connection with the valuation of certain of our assets, and any incorrect, misleading or incomplete information used in connection therewith would subject us to potential risks
33. 34Any credit ratings assigned to our investments will be subject to ongoing evaluations and revisions and we cannot assure you that those ratings will not be downgraded
34. 35We may be exposed to environmental liabilities with respect to properties to which we take title
35. 36The properties underlying our CRE loans may be subject to other unknown liabilities that could adversely affect the value of these properties, and as a result, our investments
36. 37We may be affected by deficiencies in foreclosure practices of third parties, as well as related delays in the foreclosure process
37. 38Insurance on mortgage loans and real estate securities collateral may not cover all losses
38. 39The allocation of the net proceeds of any equity offering among our target assets, and the timing of the deployment of these proceeds is subject to, among other things, then prevailing market conditions and the availability of target assets
39. 40Real estate valuation is inherently subjective and uncertain
40. 41We may invest in CMBS which are subordinate in right of payment to more senior securities
41. 42Changes in prepayment rates may adversely affect our profitability
42. 43Our business is highly dependent on the communications and information systems of our Manager. Any failure or interruption of our Manager’s systems could have a material adverse effect on our operating results and negatively affect the market price of our equity securities and our ability to make distributions
43. 44Social, political, and economic instability, unrest, and other circumstances beyond our control could adversely affect our business operations

Risks Related to Our Securities

1. 67The market price and trading volume of our securities may vary substantially
2. 68Market factors unrelated to our performance could negatively impact the market price of our securities, and broad market fluctuations could also negatively impact the market price of our securities
3. 69The performance of our securities may be affected by the performance of our investments, which may be speculative and aggressive compared to other types of investments
4. 70An increase in interest rates may have an adverse effect on the market price of our stock and our ability to make distributions to our stockholders
5. 71We have not established a minimum distribution payment level on our common stock and we cannot assure you of our ability to make distributions in the future, or that our board of directors will not reduce distributions in the future regardless of such ability
6. 72Future offerings of debt or equity securities that rank senior to our common stock may adversely affect the market price of our common stock

Risks Related to Our Organization and Structure

1. 73Because of their significant ownership of our common stock, Lument Investment Holdings, LLC, an affiliate of our Manager, and the Hunt Investors have the ability to influence the outcome of matters that require a vote of our stockholders, including a change of control
2. 74Our authorized but unissued shares of common and preferred stock may prevent a change in our control
3. 75Ownership limitations may restrict change of control or business combination opportunities in which our stockholders might receive a premium for their shares
4. 76Certain provisions of the Maryland General Corporation Law ("MGCL") may have the effect of delaying, deferring or preventing a transaction or a change of control of our company that might involve a premium price for holders of our equity securities or otherwise be in their best interests
5. 77Stockholders have limited control over changes in our policies and operations
6. 78Our charter contains provisions that make removal of our directors difficult, which could make it difficult for stockholders to effect changes in management
7. 79Our rights and stockholders’ rights to take action against directors and officers are limited, which could limit recourse in the event of actions not in the best interests of stockholders
8. 80We have made, and in the future may make, distributions of offering proceeds, borrowings or the sale of assets to the extent that distributions exceed earnings or cash flow from our operations
9. 81We are a "smaller reporting company” and we may avail ourselves of the reduced disclosure requirements, which may make the Company’s securities less attractive to investors
10. 82We are subject to financial reporting and other requirements for which our accounting, internal audit and other management systems and resources may not be adequately prepared
11. 83We are required to make critical accounting estimates and judgments, and our financial statements may be materially affected if our estimates or judgments prove to be inaccurate

Tax Risks

1. 84If we fail to remain qualified as a REIT, we will be subject to U.S. federal income tax as a regular corporation and could face a substantial tax liability, which would reduce the amount of cash available for distribution to our stockholders
2. 85If we fail to remain qualified as a REIT, we may default on our current financing facilities and be required to liquidate our assets, and we may face delays or inability to procure future financing
3. 86Dividends payable by REITs do not qualify for the reduced tax rates available for some dividends
4. 87REIT distribution requirements could adversely affect our ability to execute our business plan
5. 88Even if we remain qualified as a REIT, we may face other tax liabilities that reduce our cash flow
6. 89Complying with REIT requirements may cause us to forgo otherwise attractive opportunities and may require us to dispose of our target assets sooner than originally anticipated
7. 90We may be required to report taxable income for certain investments in excess of the economic income we ultimately realize from them
8. 91The "taxable mortgage pool" rules may increase the taxes that we or our stockholders may incur, and may limit the manner in which we effect future securitizations
9. 92Liquidation of our assets may jeopardize our REIT qualification
10. 93Complying with REIT requirements may limit our ability to hedge effectively and may cause us to incur tax liabilities
11. 94Qualifying as a REIT involves highly technical and complex provisions of the Internal Revenue Code
12. 95We may incur a significant tax liability as a result of selling assets that might be subject to the prohibited transactions tax if sold directly by us
13. 96We may be subject to adverse legislative or regulatory tax changes that could increase our tax liability, reduce our operating flexibility and reduce the market price of shares of our equity securities
14. 97Distributions to tax-exempt investors may be classified as unrelated business taxable income, or UBTI, as defined under Section 512(a) of the Internal Revenue Code
15. 98The value of our assets represented by our TRS is required to be limited and a failure to comply with this and certain other rules governing transactions between a REIT and its TRSs would jeopardize our REIT qualification and may result in the application of a 100% excise tax