Franklin BSP Realty Trust, Inc.

Hey, and welcome to the Franklin BSP Realty Trust third 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. Thank you for hosting our call today. Welcome to the Franklin BSP Realty Trust Third 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 FBRT, Jerome Baglian, Chief Financial Officer and Chief Operating Officer of FBRT, and Michael Camperato, Head of Commercial Real Estate at Benefit Street Partners. 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, November 10th, 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.fbrtreit.com. We will refer to the supplementary slide deck on today's call. With that, I will turn the call over to Richard Burns.

Great. Thanks, Lindsay. And good morning, everyone. Thank you all for joining us today. As Lindsay said, I'm Rich Byrne. I'm the chairman and CEO of FBRT. As Lindsay mentioned also, our earnings release and supplemental deck were published to our website yesterday. This morning, we're going to review our third quarter results and walk you through the current status of the portfolio. After my initial remarks, Jerry is going to cover our financial highlights, and then Mike is going to discuss the portfolio in greater detail and provide some general market color. Then, of course, we're going to open the call up for questions. I'm going to begin, if you're following along on our slide deck on slide four, and I'm going to walk you through all of our third quarter activity. So we were very pleased with our third quarter results. We generated strong distributable earnings despite the challenging backdrop of the macroeconomic environment. Market conditions were largely similar to those in the second quarter as the Fed continued to fight inflation through interest rate increases, or at least that was the biggest part of the story. While higher rates continued to benefit our earnings, the market experienced lower transactional volume. But more importantly, we also slowed our origination pace given the market volatility and our expectation that the future will bring more attractive opportunities. Despite all this and the lower deal flow in the broader market, as well as our deliberate posture, we originated $470 million of new loan commitments this quarter. These loans were originated on better terms than what we saw in the first half of the year and with certainly much wider spreads. The weighted average spread on loans we originated in Q3 was 651 basis points. This is approximately 200 to 300 basis points wider than the spreads we experienced in the first half of the year. Our ending portfolio balance increased to approximately 5.4 billion in Q3. We have a well-diversified portfolio of 166 loans, and our average loan size is 32 million. Incidentally, our $5.4 billion portfolio is now only slightly shy of our $5.8 to $6 billion stabilized portfolio target. At that level, we should achieve our full earnings power. As I'm sure many of you will ask, it's hard for us to predict when we will reach our optimal portfolio level, but believe it will be in the next one to two quarters. Mike will provide much more color on this later in the call. For the quarter, our distributable earnings were 33 cents per fully converted share, up almost 14% from the prior quarter. This translates to an 8.3% return on common equity. The increase in earnings was almost entirely driven by our increased net interest margin. We maintained our dividend level at 35.5 cents per share, representing a 9% yield on our fully converted book value. Once our portfolio reaches optimization, we expect distributable earnings to match or exceed our dividend level. Now I want to focus on our balance sheet. Our book value increased this quarter to $15.84 per fully converted share. This increase was largely driven by our common stock repurchases. And speaking of those repurchases, let me just go into that briefly. Shortly after the end of the second quarter, our advisor's stock program was exhausted. At that point, the company's $65 million share repurchase plan was activated. Through the end of the quarter, the company repurchased approximately 931,000 shares for $11 million. Post-quarter end, we were active as well. And through November 4, we repurchased an additional 485 million, excuse me, 1,000 shares for 5.5 million. Year to date, the advisor's purchase program and the company's repurchase program, through both, we bought $51.6 million of our common stock under the company's plan, which, by the way, the board extended through December 2023. We have $48.4 million still available to repurchase in the coming quarters. Looking at our assets, we are confident in the quality of our diversified portfolio and continue to favor the middle market space, where conditions are less competitive than those for bigger loans. And thus, we believe the risk return is very attractive. Importantly, 75% of our portfolio collateral is in multifamily asset class spread largely throughout the Sunbelt region, where we continue to see large amounts of population migration And as a result, positive performance trends at the property level. Our portfolio has only 8% exposure to the office sector, and we have no international exposure at all. Mike will go into all this and more in much greater detail later in the call. Importantly, 68% of our portfolio, of our performing loan portfolio was originated in the last 15 months. We have limited near-term maturities as well. Jerry will discuss this and more, but we believe analysis of metrics like these will be increasingly relevant when assessing the quality of commercial real estate portfolios and predicting defaults and write-downs going forward. Our liquidity position at quarter end was extremely strong with ample cash reserves, capacity in our warehouse lines, and reinvest options across our CLOs. Our total liquidity at quarter end was just under $1.2 billion. This provides a great liquidity buffer and affords us flexibility to take advantage of opportunities as they arise from market volatility. Another structural highlight is our conservative use of leverage. We ended this quarter with 2.5 times net debt to equity. And 78% of this is non-recourse and non-mark-to-market of our debt. Our portfolio risk rating remained at 2.1 for the quarter, which we believe to be a good indication of the inherent strength of our credits. We added two loans to our watch list this quarter and continue to have two loans on our non-accrual list. Both of the non-accrual loans we have discussed with you in the past. Mike will update you later on all this in the call, but to provide some brief color on the two non-accrual loans, we feel positive about the potential resolution of our Brooklyn hotel loan, and we expect final recovery in 2023. We believe this could result in a gain. Because of the ongoing litigation, we did not have a lot to report on the Walgreens portfolio. However, there have been a few positive developments there that Mike will touch on. To conclude, our platform is stable and we view volatile markets like those that we are currently experiencing to be an opportunity. We came through the COVID quarters as a market leader and were able to lend when others were not. Our defensive positioning has and will continue to enable us to take advantage of attractive opportunities that arise through times of market dislocation. I'll let Jerry now walk you through our performance in the quarter.