Franklin BSP Realty Trust, Inc.

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.

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.

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.