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Operator
Hello, and welcome to the Franklin BSP Realty Trust Third Quarter 2021 Earnings Conference Call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist for pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star, then one on your touchtone phone. To withdraw your question, please press star, then two. Please note, Today's event is being recorded. I now would like to turn the conference over to your host today, Lindsay Crabb. Ms. Crabb, please go ahead.
Lindsay Crabb
Good morning. Thank you, Keith, for hosting our call today. Welcome to the Franklin BSP Realty Trust Third Quarter Earnings Conference Call. I'm Lindsay Crabb, Vice President of Investor Relations. With me on the call today are Richard Byrne, Chairman and CEO of FBRT, Jerome Baglian, Chief Financial Officer and Chief Operating Officer, Michael Comparato, Head of Commercial Real Estate, and Roy Kim, Managing Director of our Real Estate Group. Before we start today's conversation, I want to mention that some of today's comments from the team could be considered 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 recent filings on Form 10Q, 10K, and Form S4 filed with the SEC, and actual future results may differ materially. Additionally, we'll refer to to certain non-GAAP financial measures which are reconciled to GAAP figures in our earnings release and supplementary slide deck, which are available on the investor relations section of our website at www.fbrtread.com. The information conveyed on this call is current only as the date of this call, November 11, 2021. 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. With that, I will turn the call over to Richard Byrne, our Chairman and CEO of SBRT. Richard Byrne Great.
Keith
Thanks, Lindsay. First off, before we start, I just wanted to say to everyone on this Veterans Day, thank you to all who have served and continue to serve. We are so thankful for your bravery and sacrifice for our country. Good morning. We are very excited to be here today, and thank you all for joining us. This is our debut earnings call as a public company. As a reminder, the merger of FBRT with Capstead was consummated on October 19th, not too long ago, and our shares were listed on the New York Stock Exchange under the symbol FBRT. In fact, yesterday, if you maybe saw it on TV, we rang the closing bell to celebrate our new listing. As an introduction, and I'm sure many of you know this already, FBRT is a commercial mortgage REIT that originates, acquires, and manages a diversified portfolio of commercial real estate debt with a focus on the middle market space. 99% of our loans are senior secured mortgages. We also have a very large team of over 70 individuals with significant real estate experience, as well as finance, capital markets, operations, legal, and compliance. On this call, we'll plan to review some of the key attributes of our transaction and some of the key differentiators of our strategy. But first, since this is, in fact, an earnings call, I'll just get right to the numbers. Let's turn to slide four. And let me first explain, as we go through numbers and as Jerry, our CFO, goes through the numbers, we've broken this up into two sections. In the future, of course, we'll present our results on a consolidated basis, but for the purposes of this call, we are showing the results of each company separately since the merger was consummated after the end of Q3. FBRT, so I'm going to start with FBRT pre-Capstead. FBRT had a record-breaking third quarter results generating distributable earnings of $40 million or 69 cents per diluted share. This represented a 15% distributable ROE. Our gap net income was also our highest quarterly performance in our history. We believe these results compare very favorably to our peer group. Pre our merger-related expenses, Q3 also represented our sixth consecutive quarterly book value increase. Our common stock dividend is 0.355 per share, or 35.5 cents, representing a yield of approximately 8% on our fully diluted adjusted book value of 1778. This book value is after all merger consideration and is adjusted for transaction expenses we expect to take in the fourth quarter. Also, net leverage at quarter end was 2.2 times. Our non-recourse leverage ended the quarter at 0.57 times. I think we hope this showcases another great quarter of conservative leverage use. Originations were strong in Q3. resulting in net portfolio growth of $138 million, bringing our core portfolio to $3.3 billion of principal balance with 150 loans. Our average loan size is $22 million. And lastly, our conduit, we run a commercial real estate conduit within the REIT. During the quarter, we closed 69 million of new loans and sold 145, producing a gain on sale. Lastly, lastly, we sold an equity investment bringing in 8.7 million gain in the quarter. Those are the results for FBRT excluding Capstead. Now let's just give you a quick snapshot of the predecessor Capstead results in Q3. Capstead's net GAAP net income was $10.4 million or $0.06 per share for Q3. That represented a 3.6% ROE. Capstead's core net income was $12.1 million or $0.07 per share in Q3, which represented a 4.7% ROE. Capstead's book value at quarter end was $6.03. Maybe most importantly now, and I know this slide is very busy, but, you know, it kind of encapsulates everything really need to know about our quarter. Looking forward, we wanted to give you a forward-looking update here on recent activity through November 5th. We are proceeding with our plan to execute the orderly sale of our portfolio. As we have previously stated, our plan is to monetize the Capstead portfolio through runoff as well as opportunistic sales. and then recycle these proceeds into our commercial real estate lending strategy where we have a very strong deal backlog of deal flow. To that end, our new originations have been strong. As I said, we have already closed in the quarter to date 430 million of new loan commitments. That's in our core portfolio in Q4 and have strong Q4 pipelines sitting right now at more than $1 billion. Moving to slide six, we can briefly go through some of the highlights of our merger. The combination of FBRT and Capstead created one of the largest publicly traded commercial mortgage REITs with over $1.8 billion in pro forma equity. We have a very strong and flexible balance sheet with significant liquidity, totaling approximately $1.3 billion of commitments from seven distinct lenders. We also take a very conservative approach to leverage. Our commercial real estate business has been generating very strong ROEs. During this transitional period, as we recycle Capstead's capital into our commercial strategy, we expect to be able to support a dividend consistent with its current level. That's 8%. Of course, as we get closer to fully transitioning the cap state capital into our commercial real estate lending strategy and the higher ROEs it has historically delivered, we expect our dividend will be in line with our earnings growth. FBRT has world-class sponsorship backed by the leading global asset management firms, Benefit Street Partners and Franklin Templeton. And as a reminder, the company agreed to certain structural features to support the stock price, namely a $100 million share repurchase commitment of which $35 million will be funded by Franklin Templeton. Lastly, in addition to some of the attributes of the deal I already mentioned, one of our biggest challenges in the past has been our very high class problem before the merger that our origination capabilities have far exceeded our equity base. As we continue to move out of Capstead's ARM portfolio, we intend to tap into the large backlog of attractive origination opportunities we have. Moving to slide seven, you can see exactly how much the addition of Capstead's capital has propelled us forward, making FBRT one of the largest publicly traded commercial mortgage REITs. On slide eight, I've already highlighted our sponsorship. In a bit, I'll let Mike touch on our team a bit later. But I want to run through some of the key points of our story. Our strategy is differentiated, allowing us to produce attractive risk-adjusted returns for our stockholders. Between our middle market strategy focusing on senior floating rate loans and our conduit, we feel we have a great opportunity to continue to outperform. Our net interest margin is best in class. It was 3.9% in the most recent quarter. Our historical strong NIM performance has enabled us to run our balance sheet with very conservative leverages. This has enabled us to still maintain a competitive ROE despite the lower leverage. While our leverage will be temporarily elevated due to the Capstead transaction, we expect to see this will continue to fall back to levels more in line with our norms as we recycle the Capstead portfolio into commercial loans. We built a flexible balance sheet. Approximately 71% of our debt is non-mark-to-market. We have access to two revolvers and four warehouse lines. Lastly, we have experienced zero credit losses since we began running the company in 2016. Now that I've gone through some of the highlights of our quarter and post-quarter activity with the merger completion, I'll now turn things over to Jerry Baglian. As a reminder, Jerry is our CFO and COO of FBRT. And Jerry will run through a more detailed financial update.
Lindsay
Great. Thank you, Rich. Hello, everyone. I appreciate you being on the call today. Rich hit this before, but just as a reminder, as of September 30th, both FBRT and CMO were two separate entities. So while I go through the next couple slides, I'm going to do those on an individual company basis. And obviously going forward, those will be on a fully consolidated basis. So starting with the first one, it's a high-level overview of Capstead's quarter. And Capstead had distributable earnings of $12.1 million, or $0.07 a share. And in terms of their book value, they ended the quarter at $6.03, and that was the book value prior to merger expenses. Full core ROE for the quarter came in at 5.7%, and leverage ended the quarter at 7.6 times. Turning to slide 12. we have a summary of FBRT's quarter and key metrics. Most notably, we produced our highest distributable earnings number to date at 40 million, or 69 cents a share, which is roughly a 15% ROE and compares very favorably to our peer group. Our dividend for the quarter was 35.5 cents, and to provide some context on that number, it equates to an 8% yield on the adjusted pro forma fully diluted book value per share of 1778. and that's net of the impacts of the merger, including the transaction expenses and the premium paid by FBRT. Turning to our balance sheet, we have continued to scale this in size with $138 million in net core portfolio loan growth, and that takes our total core portfolio to approximately $3.3 billion as of the end of the quarter. In terms of leverage, we were at 2.24 times, and that's in range of where we've been over the last few quarters of FBRT. On the next slide, I provide a little more detail on the quarterly and annual portfolio growth. In the quarter, we had 519 million in new loan commitments and an additional 32 million in add-on funding. This was offset by 337 million in repayments during the quarter. We ended with almost 3.8 billion of gross loan commitments and approximately 3.3 billion of outstanding principal balance. On slide 14, This just demonstrates the core portfolio growth from the end of last year, with FBRT ending this quarter at 3.3 billion of loans. That's approximately 550 million of net growth so far during 2021. On the next slide, our distributable earnings and GAAP earnings are the highest they've ever been at 40 million and 38.5 million, respectively. This is held by a one-time gain on sale, as previously mentioned by Rich. On slide 16, we provide a little more color on our financing strategy and current positions. We have significant liquidity at quarter end with over 1.3 billion of commitments from seven lenders and 600 of additional availability on those commitments as of the end of the quarter. We take a very conservative approach to leverage. Our total leverage at the end of the quarter was 2.24 times. But if you look at our leverage on a recourse basis, it's just over half a turn of leverage. And I also want to highlight that we have a long-term match funding strategy through the issuance of our CLOs. They comprise 71% of our financing strategy as of the end of the quarter. Those are non-recourse and non-mark-to-market. Our last CLO issuance was the first quarter of 2021, a $700 million deal, FL6, which included 2.5 years of reinvestment. To give some context post-merger, on a 930 basis, so if we combine both companies, Capstead and CMO, the combined leverage at that point in time would be 4.7 times. And with that, I'll pass it off to Mike. He's the head of real estate for Benefit Street Partners, and he'll give a deeper dive into our portfolio and the current market conditions.
Rich
Thanks, Jerry, and good morning. Appreciate everybody joining the call. I'm going to start on slide 17. as this slide dives deeper into our portfolio. I want to start by reiterating our focus is on the middle market for commercial real estate mortgages, which we believe creates attractive risk-adjusted returns for our shareholders. Within this sector, we are generally seeking lighter-touch renovation loans and value-add transitional lending opportunities. Our current portfolio is $3.3 billion. As you can see, the portfolio is comprised of 99% senior loans with an average loan size of 22 million, reflecting a very granular asset base. Of these loans, 96% are floating rate. We continue to position ourselves as a market-leading, middle-market, multifamily lender. As of the end of the quarter, multifamily assets represented 57% of FBRT's portfolio, However, 97% of all Q3 originations were in multifamily assets. Multifamily remains our largest segment, a growing segment, and we continue to find it an attractive place to invest with strong loan demand and excellent credit performance. We are well diversified in other sectors but have been selective in our relatively low exposure to retail and hospitality. In terms of geographic diversity, we have our largest footprint in the southwest and the southeast regions and continue to see strong demographic growth and strong opportunities in those markets. Lastly, although not covered on this page, I wanted to reiterate that we do run a conduit business that is a gain-on-sale business, and that business had 145 million of sales in this quarter, representing another positive gain for the REIT. Before I turn things back to the operator for Q&A, I just want to reiterate, we have an experienced team of over 70 people in our real estate group. We have extensive origination, underwriting, and asset management capabilities and a substantial network of relationships with both brokers and borrowers, which drives proprietary deal flow and a large pipeline of investment opportunities that have been paramount to our success. With that, I would like to turn it back over to the operator to begin the Q&A session.
Operator
Yes, thank you. At this time, we will begin the question and answer session. To ask a question, you may press star, then 1 on your touchtone phone. If you are using a speakerphone, please pick up your handset before pressing the keys. To try your question, please press star, then 2. This time, we will pause momentarily to assemble the roster. And the first question this morning comes from Stephen Delaney with J&P Securities.
Stephen Delaney
Thanks. Good morning, all, and congratulations on your successful merger. And welcome to the world of public mortgage REITs. We're glad to have you in the group. Rich, I'll start with you if I can. You have two of your CLOs. You've been a consistent issuer. But those 2008 vintage transactions have to be, I assume, out of any replenishment opportunity And will you be looking to call and refinance those in the next few quarters and possibly improve your terms and certainly the leverage?
Keith
Sure. Hey, Steve, I'm going to pass that question over to Jerry.
Stephen Delaney
Okay, fine.
Keith
Thanks, Rich.
Lindsay
Hi, Jerry. Yeah, hey, good to talk to you again. It's obviously something that we're constantly analyzing. You know, for us, we look to hit a certain – IRR return on those CLOs, as that starts to drop to an inflection point, that's when we look to call it. You know, ideally, we line that call up with another new deal so you can kind of roll the two together. So I think it's almost programmatic for us that, you know, as those start to age and they reach a certain point and it lines up with the timing of another deal, you know, we'll try to pair those activities together for kind of the most seamless performance in terms of managing the liabilities.
Stephen Delaney
Yeah, and I know that sometimes if you call them too soon, you get an acceleration of your issuance expenses, right, and that can create a lot of noise in a quarter. So I assume you try to let them mature a little bit so that you recover your front cost.
Lindsay
Yeah, I think we would always like to get a certain amount of term over the CLOs. I mean, part of the advantage of those is you can spread them over a longer period of time with the reinvestment. But it's also just making it easy to pair with a new deal, too. You don't want to use up too much warehouse space on deals that are closed. You'd rather just be more efficient with your use of that, minimize the time that things are in mark-to-market, and then just kind of roll them right in. So that's the other thing I would say is a factor in how we evaluate that. Great.
Stephen Delaney
Okay. Thanks, Jerry. Mike, I guess one for you. The conduit lending, you know, is obviously a high ROE business. Most of your peers do not have that added, you know, tool in the tool chest. Could you just comment on, you know, the issuers that you've sold loans to, you know, over the years? How many shelves are you active with? And I know that moves around a lot, but just some comments about that business and really trying to get a sense for, the growth opportunity and sort of the legs and if you see that sort of as a long-term piece of the story. Thanks.
Rich
Sure. I do see it as a long piece, a long-term part of the story. I think first and foremost, when we were building the REIT, we really wanted to build a company that could walk into our clients and offer as many different products as possible. So that when we're in front of a client, we can provide short-term, long-term, floating rate, fixed rate, construction loans, you know, loans for existing assets. So I think as part of that overall, you know, building that platform, the conduit represents a strong piece of that pie. We have several shelves that we have the ability to contribute to. I would say, obviously, the dislocation that we saw as a result of COVID, you know, has made hospitality financing very difficult in Conduit. And I think the, you know, historically low cap rates have made Conduit very difficult as well in terms of getting leverage to a point that's interesting for end borrowers. So it's been a tougher environment to originate conduit loans than it has been for the past, I would say, decade or so. But we do find it to be a great area of growth. As you pointed out, it is, you know, by far the highest ROE business that we have. And we just find it to be additive to every aspect of the business, to our shareholders as well to our origination staff when talking to clients. You know, go ahead, Rich. I'm sorry.
Keith
Sorry, Steve, before you go, I was just going to add, you know, to Mike's remarks that it's also one of the things we love about it is the flexible use of, you know, our equity capital based on, you know, the attractiveness of our core book versus the conduit book. We've never, I don't think ever exceeded 5% equity use. Obviously, that'll flex even down, you know, lower than that, you know, when the opportunities are less. But it's just a great sort of – you know, as Mike said, or maybe as you said, tool in the toolbox to enhance our ROE.
Stephen Delaney
Yeah. And I guess you're, you know, you're heavy multifamily in your bridge book. So as those assets stabilize, I assume they're probably looking for maybe a Freddie Fannie execution as opposed to CMBS. But Mike, have you ever had a situation where you've a relationship that's in a bridge loan, and let's say it's light transitional, quickly stabilized. Have you been able to go from bridge to conduit, you know, with the same borrower on the same project?
Rich
We have very few times, and it is mostly when the agencies are at their lending limits for the year. It usually happens once per year, later in the year. It's typically late third quarter, early fourth quarter, where magically CMBS becomes incrementally better than agency financing, and the window is usually very short. So the timing of that doesn't happen often, and I think most of the floating rate loans that we have transitioned into our conduit have been in non-multifamily assets. Non-multifamily.
Stephen Delaney
Thank you all for your comments.
Operator
Thank you. And once again, please press star then one if you would like to ask a question. And the next question comes from Stephen Laws with Raymond James.
Stephen Delaney
Hi, good morning. Echo Steve Blaine's comments.
Steve Blaine 's
Hey, Rich. Congratulations. First call is a public company. It's a big milestone. Thank you. Thank you. We're very excited. Yeah, it's great to hear you guys go through the results as well. So you touched on the pipeline, a billion dollars. Can you maybe give us a little color around the pipeline? Your portfolio is roughly 60% multi, but as mentioned, your Q3 originations were all 97% multi. So how do we think about the mix of the billion-dollar pipeline you guys have in place?
Rich
The billion-dollar pipeline, again, is going to be very, very heavy multifamily. I don't have an exact number at my fingertips, but I would expect it to be, you know, very heavy multifamily.
Steve Blaine 's
So we're likely to see that 57%, you know, trend higher as the portfolio turns and grows here. That's correct.
Keith
Of course, you know, it will depend on, you know, which loans come due and, you know, what the new loans are replacing. You know, backlog is not the same thing as closed deals. So, you know, some of the deals will come and some won't. So hard to forecast, but I think directionally that's a pretty good bet that the multi-percentage will probably start to hedge up a little bit more.
Steve Blaine 's
Right. You know, thinking about the repayment side of things, you know, you guys have while your new public company has had a pretty large portfolio. Are your repayment outlook in the coming quarters, is it pretty normalized? Is there, you know, a pent-up wave of loans to repay that may be extended due to COVID? How do we think about net growth and, therefore, the capital you'll, you know, how quickly you'll be able to wind down the capstead assets?
Lindsay
Yeah, hey, this is Jerry. I'll take this one. If we look at repayments over the last couple quarters, I think it's gone to more of what we've seen as a normalized rate of repayment. So, at this point, I don't see any pent-up expectation for that to drastically jump and somehow skew our ability to net increase the portfolio. You know, we've always kind of assumed about a third, you know, our average loan life is somewhere around 28 months, which has pretty much hit our model natural over the few quarters. we haven't seen anything to indicate that at least near term, we're going to have a substantial change to that. And at least for, you know, the first, you know, four quarters or so as a merged company, the majority of the payoffs we're going to see are going to be on the stuff that was historically ours. So percentage-wise, it's going to be, you know, smaller proportionally on a larger balance sheet.
Rich
And I'll just take the second half of that question regarding the origination. As Rich mentioned early in the call, Origination has never been our issue. It's always been a lack of capital to feed that origination. So the merger obviously opened up our ability to do what we're capable of doing. And I think just from what Rich said earlier, you've already seen we've hit 430 million of closed loans in Q4, and the pipeline, you know, over a billion. Obviously, we don't know what happens tomorrow, but Fast forward to the end of the quarter, and I would expect us to have an incredibly large Q4 origination outcome.
Steve Blaine 's
Great. That's helpful to think about modeling the transition. Les, the Brooklyn Hotel, I think, you know, only watch list asset, which I think only having one is one of the lowest in the groups. But can you touch on that? Just maybe provide some commentary about recent discussions and your outlook for that investment.
Rich
Sure. We continue to go through the bankruptcy court process. I think we all wish that it would go quicker, but we are somewhat just beholden to that process. We are very pleased to see some hospitality transactions, not only across the country, but within the New York MSA increase over the past few quarters. I could point to a few that are very localized to our asset that give us even further comfort that, you know, while our loan is on non-accrual today, we have next to no concerns about taking any sort of losses to that position. We just need to get through what is hopefully the final innings of the bankruptcy process.
Steve Blaine 's
Great. I appreciate the comments this morning and look forward to talking soon. Take care.
Operator
Thanks, Stephen. Thank you. And the next question comes from Jade Romini with KBW.
Stephen
Thank you very much. With the emphasis on multifamily and with supply chain disruptions affecting construction and renovation projects, if there were delays in some of those stabilization timelines, would that be a positive in your viewpoint from the perspective of transitional book or a negative?
Rich
I would say it would be a net negative, given that we are obviously making these loans with the thesis of something is happening at the asset level that will ultimately drive cash flow, that will ultimately drive our ability to get repaid, either through an asset sale or a refinance. We have seen the supply chain issues more in the ground-up construction side of the business than in the lighter touch renovation side of the business. That's not as material heavy. You know, paint appears to be readily available. Some of the lighter touch items, light fixtures, things of that nature seem to be readily available. Obviously, wood, lumber has been an issue. but really not a material that goes into a light touch renovation project. So I would say if we experienced further supply chain issues that did affect that, yes, it would be a net negative. But as of today, we have not experienced that for the existing assets.
Stephen
Thanks. And are you baking in any further cushion into your underwriting in terms of, you know, timeline for stabilization, availability of labor? you know, cost pressures that we're seeing on the industry that could eventually start to impact cap rates?
Rich
Yeah, we look at every credit as part of every investment committee. Obviously, we do an exhaustive sensitivity analysis of, you know, all of the things you mentioned and probably 15 more variables. So we believe we're taking all factors into account when making credit decisions. Again, you know, Rich has said we've been running the vehicle for almost six years with no credit losses. We think our process works and works well, but we do take all of those items into account.
Operator
Thank you very much. Thanks, Jed. Thank you. And this concludes the question and answer session. I would like to turn the floor over to Lindsay Crabb for any closing comments.
Lindsay Crabb
Thank you for joining us today. If you have any further questions please do not hesitate to reach out.
Operator
Thank you. The conference has now concluded. Thank you for attending today's presentation
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