Franklin BSP Realty Trust, Inc.

Hello and welcome to the Franklin VFP Realty Trust fourth quarter 2024 earnings conference call. All participants will be in listen-only mode. Did 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 your telephone keypad. To withdraw from the question queue, please press star then two. As a reminder, today's call is being recorded. I would now like to hand the conference over to Lindsay Crabb. Please go ahead.

Good morning. Thank you, MJ, for hosting our call today. Welcome to the FBRT Fourth Quarter 2024 Earnings Conference Call. As the operator mentioned, I'm Lindsay Crabb. With me on the call today are Richard Byrne, Chairman and CEO of FBRT, Jerry Baglian, Chief Financial Officer and Chief Operating Officer of FBRT, and Michael Camperato, President of FBRT. Before we begin, I want to mention that some of today's comments 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, February 14th, 2025. 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 it over to Rich Byrne.

Great. Thanks, Lindsay, and good morning, everyone, and thank you for joining us today. As Lindsay mentioned, our earnings release and supplemental deck were published to our website yesterday. We're going to begin today's call on slide four. We're going to review our fourth quarter results, and then we'll open up the call, as always, to your questions. Jerry will cover our financial results, and Mike will discuss market positions, our watch list, and our REO portfolio. I'm going to highlight key developments from both the fourth quarter and the full year of 2024. With that, maybe just to start, we continue to view our portfolio into three buckets. Loans originated post-interest rate hikes, loans originated pre-interest rate hikes, and office loans. First, let's discuss post-interest rate hike loans. In 2024, we originated $2 billion in in new loan commitments, including 441 in the fourth quarter. Last quarter, we began tracking the percentage of our portfolio that has been originated since January 2023, reflecting current interest rates and valuations. Including origination through January 2025, 52% of our portfolio is loans originated post-interest rate hikes. We believe this is a very important statistic because these are some of the most attractive loans that we have originated in years. We are originating in the current vintage with relatively low competition. This has enabled us to add high-quality borrowers and loans with low LTVs to our book. Okay, as for pre-rate hike loans, our high-quality predominantly multifamily legacy portfolio provides us with a lot of flexibility and negotiating leverage as borrowers approach maturity. Many of our 2021 and 2022 vintage loans have been repaid. In fact, we've received $1.1 billion of full payoffs from this vintage in this past year, in 2024. In other cases, we are actively pursuing modifications with borrowers who improve our debt position. In some cases, Of course, we must take properties as real estate owns, stabilize the asset, and then sell. We are confident that we will achieve better outcomes, even if we need to endure some near-term earnings drag while waiting to maximize recovery. Lastly, regarding the office sector, after two office loan payoffs in Q4, both were at par, and excluding our largest office loan, which is a triple net lease headquarters and distribution facility, Our traditional multi-tenant office exposure at year-end was only 2.3% of our total portfolio. Importantly, this remaining exposure has been significantly marked down in previous quarters to reflect current market conditions. While we did not reach dividend coverage this quarter, we believe that our current dividend level is appropriate given the future earnings potential embedded in our REO and non-performing loans. Despite a very active origination year, our portfolio remained flat to 2023, ending the year at $5.0 billion of principal balance. Our 2024 originations were offset by $1.6 billion in repayments. These repayments, of course, are a blessing and a curse, but we are always happy to see pre-rate high loans repay in full. We ended the year with $535 million in liquidity, including $184 million in unrestricted cash. We continue to strategically invest our liquidity in new assets to further enhance FBRT's earnings. Currently, 151 of our 155 positions are risk-rated 2 or 3, resulting in an overall risk rating of 2.3. As of quarter end, our watch list makes up 3.8% of our portfolio and consists of four names, a net increase of one name during the quarter. A specific CECL charge was taken on the five-rated loan that was added. However, the new five-rated loan was foreclosed on in Q1 in 2025 and has already sold above our debt basis. This reduces the watch list to 2.3% of our portfolio. Jerry will cover this in more detail, and Mike will provide more detailed update on the remaining watch list assets as well as our REO portfolio. Lastly, for me, we remain confident in FBRT's portfolio. In 2025, we are focusing on really two things, actively managing our legacy loan portfolio and pursuing portfolio originations. We see significant opportunities in new originations. as demonstrated by the $3.6 billion we have originated across our real estate platform in 2024. And with that, I'll hand it over to Jerry.

Great. Thanks, Rich. And thanks, everybody, for being on the call today. Moving on to our results, let's start on slide five. FBRT reported GAAP earnings of $0.29 and $0.82 per diluted common share for the fourth quarter and year-ended 2024. Distributable earnings were $0.30 and $0.92 for diluted common share for the fourth quarter and year-ended 2024. Earnings were negatively affected by our non-accrual loans and REO positions. We did make progress in decreasing the book value attributable to our REO portfolio, which declined by approximately 63 million through asset sales in the fourth quarter. In addition, after the quarter end, we sold another REO asset for 63.8 million. This is the asset Rich mentioned. We had an asset-specific reserve in Q4 of $0.03 per common share related to that asset. Our sale ended up being above our debt basis. Our REO and non-performing loans will continue to impact distributable earnings in the short term. As we continue to resolve REO and put that equity back to work, we believe we could generate an additional 25 to 30 cents to our distributable earnings on an annual basis. While that may take a few more quarters to fully resolve, we are confident that our earnings power is within range of our current dividend level. Our book value was $15.19 per fully converted common share. at year end. Changes to our general and asset-specific reserves combined with dividends exceeding other earnings led to a slight decrease in book value in the fourth quarter. Turning to slide seven, this is an overview of our origination activity for the quarter. We originated $441 million in new loan commitments during the quarter, primarily in the multifamily sector, which comprised 68% of our fourth quarter activity. We received 641 million in loan repayments during the quarter, with 18 loans paying off in full. Of these, 578 million was from loans originated in 2021 and 2022. And multifamily loans made up the majority of the pay downs. Importantly, two office loans were also fully repaid, further reducing our exposure to that sector. Turning to slide eight, our average cost of debt on our core portfolio was so far plus 2.12%. Our financings continue to benefit from our CLOs. At quarter end, 89% of our financing was non-mark-to-market, and we have reinvestment capacity available in two of our deals. The non-recourse and non-mark-to-market structure of CLO financing makes it our preferred method for funding our portfolio. We anticipate returning to the CLO market sometime in 2025. We continue to have meaningful space on our warehouse lines and have unrestricted cash we would like to deploy. Combined with our CLO reinvest available, liquidity at quarter end totals $535 million, of which $184 million is unrestricted cash. Our net leverage position was 2.6 times with our recourse leverage standing at 0.3x at the end of the quarter. With that, I'll turn it over to Mike to give you an update on our portfolio.

Thanks, Jerry, and good morning, everyone. Thanks for joining us. I'm going to start on slide 12. Our core portfolio stands at $5 billion, comprised of 155 loans, averaging $32 million each. The portfolio is 99% senior mortgages, with 93% being floating rate loans. Multifamily remains our preferred sector, securing 71% of the portfolio. Our core portfolio decreased again this quarter, given significant repayments. As Jerry and Rich both noted, we have available liquidity that we plan to deploy into the core portfolio. We will also reinvest any equity generated from REO sales. During the quarter, we originated 18 loans at a weighted average spread of 344 basis points. We have seen spreads continue to tighten across most asset classes, but still find this vintage of loans to be extremely compelling from a risk return perspective. Borrowers continue to adjust to the higher for longer rate environment, which we anticipate will continue to create constraints with supply from traditional credit providers. That said, we've seen a moderate return of competition across the space, but I do not believe there is enough credit capital available today to address the approximately 3.4 trillion of a commercial real estate debt maturing in the next 36 months. Legacy loans, specifically office, will remain a problem and will continue to be a problem until lenders finally address the inevitable. FBRT continues to take the acknowledge and address approach when it comes to our legacy loan portfolio. As both Rich and Jerry have discussed, we are actively identifying the loans that may be problematic and our asset management team continues to proactively address these issues. Slide 14 is a summary of our watch list. Our watch list consisted of four properties a quarter end, but as both Jerry and Rich mentioned, this has been reduced to three positions given a Q1 2025 asset sale. We took title to the 376 unit Dallas apartment complex in January 2025, and have subsequently sold the property above our basis. Of the three remaining positions, one is a Denver office building that we anticipate taking Title II in Q1 or Q2 of 25. The next is a Georgia office loan. It qualified for extension in January 2025. Not only does the borrower continue to keep that loan current, but they pay down the principal balance in conjunction with the extension. The final property on our watch list is a 307-unit student housing property in Norfolk, Virginia. It is risk-rated a four. We are in active dialogue with the borrower and have reached terms on a loan modification, which are being papered currently. This is an incredibly well-capitalized borrower, and we recently received positive feedback about property operations. The experience we had on the 376-unit Dallas apartment project is another example of strength in the multifamily sector, as well as the massive amount of liquidity looking for opportunities. We foreclosed that asset on January 7th. Word of the foreclosure spread very quickly, and within 72 hours, we had approximately a dozen written and verbal offers to buy the property. One buyer called us and said, I live three miles away, I drove the asset this weekend, and will go nonrefundable with a million-dollar deposit and no due diligence period. A PSA was signed on January 27th, and closing was only 16 days later. That experience simply would not happen in any other asset class in commercial real estate and is one of the reasons we are so confident in our portfolio. On the other end of the spectrum, we have the office sector. The damage continues to be staggering, but it appears that we have come off the bottom from a sentiment perspective and are seeing a hint more liquidity in the space. As Rich mentioned, our traditional multi-tenant office portfolio is down to 2.3% of our total portfolio, and our goal is to get to zero as soon as possible. While we consider new office originations, the credit bar is incredibly high, and the return bar might be higher. We originated one office loan in 2024, and it has already been repaid in full. Moving to slide 15. Our foreclosure REO portfolio decreased to 11 positions at quarter end, having sold four properties near our basis in the fourth quarter. We closed an additional sale after quarter end and have purchase and sale agreements in place for two additional properties at or above our basis, which are expected to close in the first and second quarters of this year. In total, in 2024, our team sold 159 million of REO properties in the aggregate. Excluding the remaining Walgreens stores and the office building in Portland, the REO portfolio consists of all multifamily properties. Our goal is to liquidate the entire REO portfolio as quickly as possible. However, we continue to believe that stabilizing these assets first will lead to higher recovery prices. As Jerry pointed out, converting this REO back to performing loans has the ability to move our earnings by 25 to 30 cents per share annually. so it is absolutely our primary focus. We've already had a very active first quarter, closing just under $200 million of loan commitments. As we completed our first CMBS execution of the year in Q1 as well, resulting in approximately a $4 million gross gain on sale, which will be realized in Q1 figures. We remain confident in FVRT's ability to perform well in the current market environment. And with that, I'd like to turn it back to the operator to begin the Q&A session.

Thank you very much. We will now begin the question and answer session. To ask a question, you may press star, then 1 on your telephone keypad. If you're using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star, then 2. At this time, we will pause momentarily to assemble our roster. Today's first question comes from Matthew Erdner with Jones Trading. Please go ahead.

Hey, good morning, guys. Thanks for taking the question. Could you talk a little bit about spreads? They've come in kind of from the highs over the cycle, you know, kind of in that 8% range. Where do you expect them to settle out? And, you know, I guess is it tightening due to competition, increased credit quality, increased asset quality, or kind of a combination of all the above?

Thanks, Matt. Yeah, I mean, the spread tightening, I think, has been a phenomenon we're seeing not only in real estate, but also other credit positions. You know, I think the floating rate credit spreads have probably come in, you know, as tight as they can reasonably get. I mean, it would seem pretty unlikely to tighten materially from here. I'm not going to call the last five basis points, obviously, but it would be hard to see them tighten another 50, so to speak. You know, CMBS remains incredibly liquid. CRE, CLO market remains incredibly liquid. Spreads on the liability side are tightening, you know, in lockstep with the asset side tightening. So we're seeing that phenomenon on warehouse lines, CRE, CLO, and CMBS. So I think we're well inside the tight of kind of peak valuations, Q4, 21, Q1 of 22, probably by 20 to 50, 25 to 50 basis points. But obviously the difference is we continue to have, you know, SOFR still four, four and a half, four point, four and a half percent higher than it was at those peak valuations as well. So I think we're, there was a very long way of me saying, I think the spread tightening in the floating rate world is probably close to its end. But, whole dollar coupons, you know, continue to have seven handles on them.

Got it. Yeah, that's helpful color there. And then, Jerry, a quick kind of modeling question for you. Other expenses, it rose about $5 million, give or take, quarter over quarter. And I'm getting a number to about $12.4 million. You know, what should we expect the run rate there? And, you know, is there any material change kind of spend side?

Yeah, let me tell you to think about this in two ways. That's mostly the REO blow-through expenses. They don't all go through there, but the vast majority do. So a little hard to predict based on how quickly we sell down some of this stuff. But the easiest way to think about it is it's kind of offsetting with the REO income that we have up above on the income statement. I mean, those two are close to a wash. Like I mentioned on the last earning call, it's not much of a net contributor overall to the book. So, you know, you heard the upside, but in terms of kind of how it comes off through the course of the next year, it's really just dependent on timing of asset sales. So I think, you know, the easiest way to model is to make some estimate in terms of how the pace of sell downs might occur. So you heard me say it could take, you know, a few quarters or more for us to work all that out. Yeah, that's helpful. Thank you.

Thank you. The next question comes from Tom Catherwood with BTIG. Please go ahead.

Thank you, and good morning, everybody. Maybe, Mike, starting with you, I appreciate your comments on kind of the wave of CRA loan maturities and how that creates opportunity despite new capital coming into the market, but it seems like every lender is following your playbook and jumping into multifamily, are you having to shift your approach or underwriting to maintain origination levels on the multifamily front?

Hey, Tom, good morning. Thanks for the question. You know, obviously, one, we're discussing internally all the time. I think we have a huge benefit of the fact that while all the people that are actively originating right now None of them were originating in 2024. We were able to put on $2 billion of commitments in 2024 at some of the best spreads we've seen on some of the best loans we've seen in years. So we don't have to compete at these levels. We don't have to chase at these levels. And I would also say the great thing about our platform is the breadth of our product offerings. We've got so many different things that we can do that are a wider spread business. So construction lending, the little cottage industry of condo inventory loans, our hospitality book. So we're not really chasing to the tights here because we put on $2 billion last year that no one else did. And I think we're focusing our new originations on stuff where we can get pricing that is still you know, wider than what we're seeing kind of the very highly competed for space. So fully acknowledge that everybody's kind of looking for that, you know, easy 88 mile an hour fastball over the fat part of the plate. But we've got the ability to swing at pitches and hit them that other guys don't.

I appreciate those answers, Mike. I mean, pivoting over to repayments, and I know the timing of repayments can be lumpy and hard to predict, but do you have an internal target for when originations and fundings could outpace repayments to the point in time that the loan book can start growing again?

I would definitely say it's art more than science, right? And a lot of that is also driven by interest rates. My view is very different at 4% 10-year versus a 5.25% 10-year. we're doing this delicate dance of, you know, how much legacy stuff still has to be worked out. You know, are we going to have to take back a little more REO? How fast are we going to sell the existing REO? What are the repayments? I mean, there's just so many variables in there that it's hard to model, you know, with any sort of, you know, real certainty when we can out originate repayments. So, It's clearly our goal. It's clearly where we want to be. You know, Rich mentioned in his opening remarks that we were, you know, 52% of the portfolio is post-rate height originations. Clearly our, you know, without question goal is to get this book completely recycled out of the legacy portfolio and into this new vintage of loans. We're doing it as fast as we can. I think there's just too many variables that I can, you know, pound the table and say, you know, by Q4 this year we've done it. But we're actively working towards that goal on literally a daily basis.

Understood. And last one for me, on the remaining REO assets, obviously made great progress selling what you stabilized and the ones that you recently took title on. For the ones that remain on your books, where are they in terms of executing the business plan, and how much capital or time do you think they have until you can get them to stabilization?

So it's obviously case by case to the asset. Of course, we're just about to get into leasing season across the board. The vast majority of our REO is in fund belt. So we're hoping to see a meaningful increase in leasing in the coming months. As I mentioned in the prepared remarks, we've already got two assets under contract. We are actively in the market with another two assets. that we hope to have acceptable bids on in short order. And then the rest are at various different stages of occupancy. And again, I think that we'll see a pretty healthy occupancy pop as we get into leasing season. And I would say our goal is to have the bulk of this in the market for sale late Q2, early Q3. I think that should be enough time for us to stabilize you know, the vast majority of what's left in the book. Are there going to be some stragglers? Are there going to be some, you know, unexpected twists or turns? Of course, welcome to real estate. But the goal, again, is to get through it as fast as we can, and there appears to be a pretty clear path.

Great. Appreciate all the answers, Mike. Thanks, everyone.

Thank you. The next question comes from Randy Binner with B. Reilly. Please go ahead.

Hey, good morning. Thanks. I had a couple, just look in the slide 10 of the deck on liquidity. I was wondering if you could just dig down a little bit on the change in available liquidity this quarter versus last. And I think it's that financing available and in progress category. Just wondering what the detail is on the lower level of available liquidity. Okay.

Yeah, most of the change is from where paydowns come back to us in terms of does it hit a CLO with reinvest or does it hit a CLO that's in the amortization phase. Got it. And it just so happened we had more amortization on the amortizing CLOs than the non-amortizing CLOs, the reinvest ones. So that just takes down or delays when you can unlock some of that equity. Okay. So if you think back to my comment on the fact that we probably launch another CLO later this year, you know, that's the recapture, the equity on those deals that start to amortize down. It just delays the liquidity. But for the way we kind of lay it out, it comes out for my purpose of how we calculate that.

Okay, got it. That's helpful. And then I think the first set of questions had to do with other expenses, and I just didn't hear the full answer. exchange. But the specific question is, I think other expenses were elevated to prepare properties for sale that are in REO. Did you break out how much of the $10.2 million of other expense was that versus other stuff?

No, we didn't break it out. But I mean, if you just look at our historical levels, it's a pretty decent portion of it. And if you look at the real estate income, I mentioned this before in my earlier answer, but those two roughly offset, that's kind of the best way to think about it. Other expense for us generally is not that large of a line item. So it's really just, I think it more of a net zero basis between those two line items in terms of how REO is actually coming through the books or flowing through from a cash perspective, right? It's almost net neutral in the entirety of context of everything we hold. So it's going to be elevated until we start to take down those assets and it stops flowing through there.

Okay, that's great. That's all I had. Thank you.

Sure.

Thank you. The next question is from Stephen Laws with Raymond James. Please go ahead.

Hi, good morning. I want to follow up on the question earlier on the outlook for portfolio growth. I guess, you know, repays are – you know, more uncertain, but on the origination front, you know, you know, 450 ish million of fundings last quarter, I believe you said that prepared remarks around 200 million year to date. So is that kind of four to 500 million of quarterly originations? Is that a good run rate as far as when you look at your pipeline or, you know, how much volatility do you expect to see on the origination side?

Okay. Steven, good morning. It's Mike. Thanks for the question. Yeah. I mean, look, there is, there is, seemingly almost unlimited requests for financing right now. If we wanted to take application, we could probably sign six to $800 million of new applications next week. There is just a massive, massive, massive ask for credit right now. We're just trying to be patient because of the unknown unknowns. of just, as I mentioned on one of the last questions, we just don't know when we're going to get certain REO sold, when we're getting certain repayments. I've spoken to all of you guys over the past several quarters about one of the hardest things for us to manage right now is borrower behavior. Borrower behavior continues to be really, really difficult with posturing this way and then going the complete opposite direction, or posturing that way and going the complete opposite direction. So, We're doing the best we can to forecast, you know, cash and future problems and future REO. It's just a pretty difficult endeavor. So the opportunity to originate is there in spades. It's really just getting comfortable with the legacy book and cash and repayments to figure out how much we could take on.

Appreciate the color, Mike. Two quick loan questions. I think you guys mentioned the Georgia office was modified and included some pay down at principal. Will that loan be upgraded given those actions and come off the watch list or you intend to leave it as five rated?

For the moment, we're going to leave it as five rated. You know, it's still an office asset. And while I said liquidity has improved in that space, I don't think we have it at a level where we think it is refinanceable. Obviously, we're incredibly encouraged by the fact that the borrower has continued to write checks, continued to pay us down, but I don't think we're in a spot currently where we're comfortable to say that that's, you know, risk-rated for.

Except Denver office, I think you commented, should move to REO sometime in the first half of this year. Do you have a preliminary playbook of kind of how you want to handle that asset once it's an REO?

I think the idea is similar to our multifamily book, albeit meaningfully, meaningfully harder. Try to stabilize it and see what we can get on a liquidation. You know, I think it's just a tough market right now in an office almost anywhere. So, I think a lot of people are getting appraisals for office buildings and able to refinance them. What the real bid is for an office building today, I'm not sure. So it's certainly the most illiquid asset class in commercial real estate. So I think there's some price discovery that we have to do on that asset. I think there's some market and operational discovery that we need to do on that asset. We're laser focused on it and will be, but it is certainly much harder to predict the outcome on an office asset today versus multifamily. So probably can give you a more fulsome answer, Stephen, in a quarter or two after we've actually had our hands on the operation and understand the building and the leasing and the market a little bit better.

Stephen, as you know, we already wrote down the asset pretty significantly as well. So.

Yeah. Yeah. I know you guys have taken, um, reserves on that asset for sure. Um, I think a big part of your reserves actually, um, last question on the CLO side, I know you mentioned you were going to return to the market probably at some point in 25. Can you talk about, um, you know, where those spreads are relative to, um, you know, the asset yield you're able to put on. And, and additionally, um, How do the spreads on new CLOs compare to where FL6 is, and how much would that need to pay down from here to become something you'd look at collapsing and rolling that collateral into your next deal?

Jerry and I and the team talk about it seemingly weekly, almost daily the past few weeks. Yeah, we're looking at it constantly. The market's very liquid. The cost of financing is very, very attractive at the moment. If we could tap it sooner rather than later, we would. But we're looking to maximize a bunch of different things. So I think we will definitely be in the market again at some point in 2025. And if markets stay even close to where they are right now, it would be a very accretive liability for us to add. I mean, we have the benefit, as I mentioned before, we originated $2 billion in 2024 at the widest spread that we've seen in years. If we're able to time it where we can issue a liability at the tightest spreads after that tightening, obviously that's just kind of like having your cake and eating it too. So we want to get there. I think we will get there. I couldn't give you an exact timing, but it's something that Jerry and I work on, you know, quite a bit.

Yeah. And the last year you were able to get, was it a three-year replenishment period on that?

We were. I think we helped the market kind of reset to that level. I don't want to get in the weeds there. It causes some weighted average life, you know, issues and whatnot, but it's definitely a, a very net positive for us to have just additional optionality on the liability side. And I think we do a good job originating tenors and credit tenor that we'll be able to use that in the future. So I think it's important. But overall, you know, the macro on CRE CLO is the advance rate and the cost of funds. And if you get those two things where they currently are, it's a wildly accretive liability. Great color.

Thanks for the comments this morning. Appreciate it.

Thanks, David.

Thank you. This concludes our question and answer session. I would now like to turn the call back over to management for any closing remarks.

We appreciate you joining us today. Please reach out if you have any further questions. We look forward to speaking with you soon. Have a great day. Thanks, everyone.

The conference is now concluded. Thank you for attending today's presentation. You may now disconnect your lines.