Franklin BSP Realty Trust, Inc.

Good day and welcome to this Franklin BSD Realty Trust second quarter 2022 earnings conference call. All participants will be in a listen-only mode. Should you need assistance, please signal a conference specialist by 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 a touch-tone phone. To withdraw your question, please press star, then two. Please note this event is being recorded. I would now like to turn the conference over to Lindsay Crabb, Director of Investor Relations. Please go ahead.

Good morning. Welcome to the Franklin BST Realty Trust Second Quarter Earnings Conference Call. As the operator mentioned, I am Lindsay Crabb, Director of Investor Relations. With me on the call today are Richard Byrne, Chairman and CEO of SBRT, Jerry Baglian, Chief Financial Officer and Chief Operating Officer of SBRT, and Michael Camperato, Head of Commercial Real Estate of BSP. 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 Form 10-Q filed with the SEC, and actual future results may differ materially. The information conveyed on this call is current only as of the date of this call, July 29th, 2022. 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.sbrtreit.com. We will refer to the supplementary slide deck on today's call. With that, I will turn the call over to Richard Burns.

Rich Byrne Great. Thanks, Lindsay. And good morning, everyone. And thank you for joining us today. I'm Rich Byrne. I'm the Chairman and CEO of FBRT. As Lindsay mentioned, our earnings release and supplemental deck were published to our website earlier this morning. So, for this call, we're going to review second quarter results and walk you through the current status of the portfolio. Then, of course, we'll open it up to questions. After my initial remarks, Jerry will cover our financial highlights, then Mike will discuss the portfolio in more detail and provide some general market color. I'm going to begin on slide four. The second quarter for us was a transitional quarter, which is certainly consistent with our expectations. There were also a number of one-time events in the quarter that negatively affected our results. I'm going to walk through all of this activity and everything else that we experienced in Q2. Let me start with our divestiture of our residential armed securities that took place, you know, over the course of the time since we've taken over the company that we inherited from our merger with Capstead and tell you that that's virtually complete. At the beginning of the quarter, we owned $1.9 billion in arms. That amount is now down to a de minimis $270 million, or less than 2% of our total equity. The ARMS portfolio was $7.1 billion in size when we took it over in October. At that time, we indicated that we thought it would take 15 to 18 months to divest. We delivered in advance of our timeline, wrapping this up in a little less than eight months, And now, finally, we are able to solely focus on our commercial real estate portfolio. Also, we originated approximately $1 billion in new loan commitments this quarter. This was our second biggest volume quarter ever. And we now have an extremely well-diversified portfolio of 174 loans. I mentioned that we expected this to be a transitional quarter. This is because despite our strong origination volume in the quarter, we were not able to fully redeploy all of the sale proceeds from the arms assets into commercial real estate loans during the quarter. In addition, we closed much of our Q2 deal flow during the back end of the quarter. This, of course, was due to challenging market conditions. and our deliberate strategy to wait for spreads to begin to widen before adding loans to our book. This strategy paid off and will benefit our returns in the long run, but also has had a dilutive effect on Q2 earnings because it left us with more cash on our balance sheet, especially towards the beginning of the quarter. As such, our distributable earnings fell below our dividend level this quarter. We earned 29 cents per fully converted share which translated to a 7% ROE. And we paid a quarterly common dividend of 35.5 cents versus that 29 cents we earned. This resulted in a return of capital. Despite this under coverage, we remain comfortable with the dividend level. Our commercial real estate portfolio ended the quarter at 5.3 billion. 6.2 billion is our target for an optimized portfolio. In the current environment, we believe we are on pace to reach this point during the fourth quarter. Mike will cover all this and more in the latter half of the call. Given our market timing of having a fully optimized core portfolio in the fourth quarter, we expect to return to levels more consistent with our historical performance. Also in the quarter, we priced our ninth CLO, FL9, We viewed this financing as very strategic because it further strengthens our balance sheet by freeing up capacity under our warehouse facilities. This availability, in addition to our cash on hand, will give us enormous firepower to take advantage of evolving market conditions during the second half of the year. We are seeing opportunities now, loans at wider spreads, that we can take advantage of because of our positioning. Notably in the quarter, our book value declined to $15.81 per share. Jerry will walk you through all of the components of this decline in greater detail momentarily. But the biggest item I want to mention was from an unexpected credit loss provision of $28.4 million specific to one loan. We've released the details about this in our 8K filing this morning. But to provide you all with some color on this event, Post-quarter end, we discovered that a borrower made material fraudulent misrepresentations on a loan we closed in April that resulted in an overvaluation of the collateral. Our original principal loan balance was $113.2 million. The loan is a first mortgage loan secured by a portfolio of 24 properties that are net leased to Walgreens, an investment-grade tenant. On July 26th, the company filed a civil lawsuit against the borrower, and the other third parties that the company believes were involved in the perpetuation of the fraud. On Wednesday, this past Wednesday, July 27th, a court granted our request for a temporary freeze on the assets of the borrower. The company has reported the crime to law enforcement, and we will assist them on this matter. I want to make clear that this was an act of fraud that we discovered. After determining that the borrower made material misrepresentations in connection with a second pending loan we conducted additional forensic inquiries on the original loan. At that point, it was determined that the borrower had provided the company with approximately 100 falsified and forged documents in connection with the underwriting of this loan. This served to materially overstate the actual rents and duration of the lease terms for the Walgreens stores. When confronted, the borrower subsequently confessed verbally and in writing to the fraudulent acts. So we intend to pursue all legal remedies against any party determined to have been involved in or improperly benefited from the scheme. Any amounts recovered through the legal processes net of expenses will reduce the amount of the actual loss ultimately recognized. Lastly, I just want to hit one more topic. I'd like to provide you with some color and an update on the company and the manager's buyback programs. As many of you know, our manager committed to a $35 million share repurchase program in connection with the Capstead merger. As of July 8th, the manager fulfilled that commitment. Now that the manager's plan is complete, the company's $65 million repurchase program is operative. Unlike the manager's program, which was a contractual commitment, the company program is a more traditional discretionary program that will be used opportunistically when the company determines it's an effective use of our capital. Before I turn things over to Jerry, I just want to reiterate in summary that our second quarter was clearly a transitional period that included some one-time events. Going forward, we are excited to be able to focus completely on our commercial lending strategy now that our arms transition is essentially complete. We are moving into the third quarter well positioned with a strong balance sheet and ample liquidity, allowing us to be nimble and to take advantage of market opportunities as they present themselves. I'll let Jerry now walk you through our performance this quarter.