Title

Presentation

Franklin BSP Realty Trust, Inc. beats earnings expectations. Reported EPS is $0.42, expectations were $0.37.

Operator: Good morning, and welcome to the Franklin BSP Realty Trust First Quarter 2023 Earnings Conference Call. [Operator Instructions]. Please note, this event is being recorded. I would now like to turn the conference over to Lindsey Crabbe, Director of Investor Relations. Please go ahead.

Lindsey Crabbe: Good morning. Thank you, Gary, for hosting our call today. Welcome to the SBRT First Quarter Earnings Conference Call. As the operator mentioned, I’m Lindsey Crabbe. With me on the call today are Richard Byrne, Chairman and CEO of FBRT, Jerry Baglien, CFO and Chief Operating Officer of SBRG; and Mike Comparato, President of SBRT. Before we start today’s conversation, I want to mention that some of today’s comments from the team are forward-looking statements and are based on certain assumptions. Those comments and assumptions are subject to inherent risks and uncertainties as described in our most recently filed SEC periodic reports and actual future results may differ materially. The information conveyed on this call is current only as of the date of this call, May 4, 2023.

The company assumes no obligation to update any statements made during this call, including any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by law. Additionally, we will refer to certain non-GAAP financial measures, which are reconciled to GAAP figures in our earnings release and supplementary slide deck, each of which are available on our website at www.fbrtreit.com. We will refer to the supplementary slide deck on today’s call. With that, I’ll turn the call over to Richard Byrne.

Richard Byrne: Thanks, Lindsey. Good morning, everyone, and thank you for joining us today. I’m Rich Byrne, as you heard, of Chairman and CEO of FBRT. As Lindsey mentioned, our earnings release and supplemental deck were published to our website yesterday. This morning, I guess we will cover our financial results for the first quarter of 2023. So I’m going to start on Slide #4 and maybe just kick off with the initial comments that we were very pleased with our performance in the first quarter. The two biggest highlights for us were our earnings increase and improvements in our portfolio. So first, our GAAP net income per share increased by 76% this quarter to $0.44 per diluted share compared to $0.25 in the prior quarter. Our distributable earnings per share increased by 19% this quarter with FBRT generating $0.44 per fully converted share compared to $0.37 in the prior quarter.

Once again, our distributable earnings comfortably covered our common stock dividend, which remained unchanged at $0.355 and represents a yield of approximately 9% on our March 31 book value of $15.78. The sharp earnings increase reflected the benefit of higher base rates, of course, on our floating rate portfolio as well as several other positive portfolio developments in the quarter. Jerry will provide more detail on this in his financial overview. The second biggest highlight in the quarter for us was the improvement in our portfolio. Despite a market that has been unpredictable, we ended the quarter with three loans on watch list, down from five assets at the end of the prior quarter. And after the end of the first quarter, two additional loans were removed from our watch list.

Our watch list now consists of only one asset, a relatively small CBD office loan in Portland, Oregon. One of the assets that came off our watch list after the quarter end was our Brooklyn Hotel loan. In mid-April, we announced the successful completion of the sale process of the asset for $96 million. We recovered 100% of the principal on the loan and approximately $20 million in additional proceeds. We were very happy to have reached a positive resolution on this protracted process, which will now free up considerable capital for us to redeploy. There were several additional developments to note in the quarter. First, our balance sheet. We closed $200 million of new loans in the quarter, maintaining our patience in finding the right opportunities.

Our portfolio size decreased slightly from the prior quarter to $5.1 billion, spread over — excuse me, spread over 157 loans with a heavy focus on multifamily and our book value was flat versus last quarter. While origination volume was lighter, we found attractive investment opportunities. For example, one of the largest loans we originated was a limited service hotel portfolio. Our weighted average spread on new loans in the quarter was 580 basis points. Mike will go into more detail on all this and on our recent investments and of course, our pipeline in his commentary. We ended the quarter with cash and total liquidity of $230 million and $1 billion, respectively. We believe having a robust liquidity position is quite prudent in order to protect our portfolio against any unforeseen credit events as well as to take advantage of the attractive deal flow we are now seeing in the market.

We were also able to deploy capital to buy back our debt and our common stock at meaningful discounts this quarter, which were both accretive to book value. As for the debt, we repurchased and retired $17.5 million of our unsecured debt at 75% of its face value. Jerry will provide details on this in his commentary in a moment. As for the stock, we also repurchased $3.7 million of our common shares in the first quarter. Subsequent to quarter end, we repurchased an additional $4.5 million of common stock. In total, in 2022 and 2023, once we started our buyback programs, the company and its adviser has purchased just under $60 million, $59.7 million to be exact of FBRT stock. So that leaves approximately $40 million, which still remains as our authorized amount for additional repurchases.

Lastly, a few concluding comments and thoughts before I turn it over to Jerry. We are confident in the quality of our portfolio, given its multifamily focused and our limited exposure to the office sector. Office loans represent only 6% of our assets. Our floating rate loans are at the top of the capital stack. We employ relatively light external leverage. Our liquidity levels are robust. And while we are defensively positioned, we will continue to take advantage of origination opportunities that will enhance our stockholder returns. Now I’ll let Jerry walk you through our performance for the quarter.

Jerome Baglien: Thanks, Rich. Hello, everyone. This is Jerry Baglien, the Chief Financial Officer and Chief Operating Officer of FBRT. I appreciate everyone being on the call today. And moving on to results. Let’s start on Slide 5. In Q1, FBRT generated GAAP earnings of $43.8 million, which is $0.44 per diluted common share, and that’s an 11% ROE. Our GAAP earnings this quarter included two onetime events. One was related to the sale of securities, including Arms and CRE CLOs and the second was a partial extinguishment of unsecured floating rate debt. Regarding the debt, we were able to acquire and simultaneously extinguish $17.5 million of the unsecured at a price of $0.75 on the dollar, like Rich mentioned, that resulted in an immediate book value gain for shareholders, and it reduced our ongoing annual debt service on that unsecured by about $1.5 million based on the current cost of the debt.

Our distributable earnings in the first quarter were $44.8 million or $0.44 per fully converted share, and that represents an 11.1% ROE. A walk through of the distributable earnings to GAAP net income can be found in the earnings release. Our commercial real estate portfolio ended the quarter at $5.1 billion in principal balance. Transaction volume remained subdued in the first quarter. And given the earnings capability of our portfolio, we can be very deliberate in our originations, growing the portfolio when it makes the most sense. Spreads on the loans trended modestly higher in the quarter, and we are seeing the benefits of that in our earnings. That said, we have witnessed a spread tightening in the market since quarter end, and Mike will go into that in greater detail.

We maintained a real estate securities position of $246 million in CRE-CLO bonds and ARM securities combined. Our leverage position trended lower this quarter with net leverage ending period at 2.3x, and our recourse leverage ending the quarter at 0.46x, and we feel this is within the appropriate range for our portfolio. And book value ended the quarter flat at $15.78. Moving on to Slide 6. You can see that we had our fourth consecutive quarter of distributable earnings growth. And this growth was largely attributable to increases in SOFR. That’s the base rate underlying most of our assets as well as fees from certain asset payoffs. Turning to Slide 7. We’ll walk you through the activity in our portfolio for the quarter. We received $380 million in loan repayments, 58% of our repayments were from multifamily loans and 25% were from office loans during the quarter.

While no new assets were added to REO in the quarter, we took title to 5 Walgreens properties, which resulted in $25 million in foreclosures or deed in lieu of foreclosures. And after the quarter, we took needs to all the remaining Walgreens properties and now hold the retail portfolio entirely as REO. Inclusive of the 24 Walgreens properties, our foreclosure REO represents approximately 2.5% of our total portfolio. Our remaining two REO properties are a Class A multifamily property and an office tower. We marked the multifamily property down by $1.3 million in the first quarter based on an updated market value — market information. We continue to market both assets for sale. However, depending on pricing levels, we are comfortable owning and operating these assets.

Moving to Slide 8, we have an overview of our capitalization. Our average cost of debt during the quarter was 6.7%. And while short-term rates continue to drive up our borrowing cost, we actively manage our CLO book, taking advantage of reinvest, and we have reinvested available through July of 2024. 79% of our financing on our core book is in nonrecourse and non-mark-to-market facilities — we have knocked on to market with the CLO in 2023, but continue to monitor that space. We have historically been a leading issuer of CLOs and we will look for opportunities to issue when doing so is accretive, both quantitatively and qualitatively to our business. Finally, Slide 10 showcases our liquidity position. As Rich mentioned, we ended the quarter with $1 billion in total available liquidity.

This is through a combination of cash on hand, available CLO reinvest and capacity on our warehouse lines. We have diversified funding sources with six separate counterparties on our warehouse lines. Our liquidity stabilizes our balance sheet and will enable us to take advantage of future origination opportunities. With that, I’ll turn it over to Mike to give you an update on our portfolio.

Michael Comparato: Thanks, Jerry. Good morning, everyone, and thank you for joining us. I am Mike Comparato, President of FBRT. I’m going to start on Slide 12. Our commercial loan portfolio is over 99% senior mortgages and 98% floating rate. It continues to be predominantly multifamily with 76% of our exposure in this sector. We’ve discussed our office exposure in great detail on the last few earnings calls. That exposure continues to decrease and represents only 6% of our total portfolio at quarter end. We continue to view multifamily as having the best credit quality and risk-adjusted returns within the CRE credit space. Our multifamily focus has made our portfolio very liquid. Geographically, we continue to be heavily invested across the Southeast and Southwest and favor assets in areas with positive population trends.

As I mentioned last quarter, we have no international exposure and no intention to add international exposure in the near future. Slide 13 shows our activity specific to the first quarter. We originated 4 loans in the quarter for a total commitment of $200 million at a weighted average spread of 580 basis points. Deal flow is meaningfully better today than in the prior two to three quarters. We are seeing strong deal flow with attractive credit metrics and terms. Interestingly, we have seen a meaningful tightening in credit spreads in the whole loan market in the past 4 to 6 weeks. While I believe a portion of that is credit quality improvements on new origination, I believe there is also a tightening due to scarcity of product, specifically within multifamily credits.

The good credit is getting a lot of attention in the market and is being bid tighter. I also believe several lenders are looking at whole loan coupons versus the components of the coupon. If you can write a good credit loan with an 8 handle coupon that is very compelling given where coupons have been for the prior 20 years. Hospitality was our largest add in the quarter, driven by one large loan. We wrote a $120 million loan on a cross portfolio of 12 limited service hotels. The loan has strong in-place cash flow, included significant equity investment from the borrower at closing and also has a meaningful mezzanine lender in the capital stack. This loan size is greater than our typical loan size, which averages $32 million. Current market conditions are creating opportunities where historically we have not been an active participant.

We’ve discussed how we are waiting for the right opportunities and are able to fill voids in the lending market as we see fit. This is most obvious in both the large loan market as well as the construction loan market. As we’ve discussed for several quarters, negative leverage continues to be a market issue and one that has not resolved itself. We have seen cap rate widening as well as debt coupon tightening and believe within the multifamily sector, we are making positive progress on the severity of negative leverage currently in the floating rate market. Finally, on Slide 14, we have three loans on watch list as of March 31. Two loans were removed from our watch list in the first quarter, one by way of loan pay off at par together with additional penalties and the other by loan modification, which included a meaningful investment of equity by the borrower.

We ended the quarter with three loans on our watch list, the Brooklyn Hotel, the Walgreens portfolio and a CBD office complex. As of today, the only loan still on watch list is a CBD office complex. As Rich said, the Williamsburg Hotel sale was completed in April. On top of a complete recovery of our carrying value, we received an additional $20 million in proceeds at closing. A meaningful amount of capital was freed up with this loan payoff that can be put back to work in our portfolio. We are extremely proud of our team who worked diligently throughout the bankruptcy process to bring this loan to a positive resolution. The Walgreens portfolio continues to be in litigation. And as Jerry mentioned, as of today, it is now entirely held in REO.

With that, I would like to turn the call back over to the operator and begin the Q&A session.

Operator: [Operator Instructions]. Our first question is from Matthew Erdner with JonesTrading.

Operator: The next question is from Sarah Barcomb with BTIG.

Operator: The next question is from Stephen Laws with Raymond James.

Operator: The next question is from Steve Delaney with JMP Securities.

Operator: The next question is from Matthew Howlett with B. Riley.

Operator: This concludes our question-and-answer session. I would like to turn the conference back over to Lindsey Crabbe for any closing remarks.

Lindsey Crabbe: Thank you for joining us this morning. Please reach out with any questions.

Richard Byrne: Thanks, everyone.

Operator: The conference has now concluded. Thank you for attending today’s presentation. You may now disconnect.