Good day, and welcome to the Franklin BSP Realty Trust First Quarter 2024 Earnings Conference Call. Please note this event is being recorded. I would now like to turn the conference over to Ms. Lindsey Crabbe. Please go ahead, ma'am.

Good morning. Thank you, Chuck, for hosting our call today. Welcome to the Franklin BSP Realty Trust First Quarter 2024 Earnings Conference Call. As the operator mentioned, I'm Lindsey Crabbe. With me on the call today are Richard Byrne, Chairman and CEO of FBRT; Jerry Baglien, Chief Financial Officer and Chief Operating Officer of FBRT; and Michael Comparato, 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, April 30, 2024. The company assumes no obligation to update any statements made during the 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 the call over to Rich Byrne.

Great. Thanks, Lindsey, and good morning, everyone, and thank you for joining us today. As Lindsey mentioned, our earnings release and supplemental deck were published to our website yesterday. We will begin today's call on Slide 4, and I'm going to review our first quarter results and then open the call up, as always, for your questions. First, we were pleased with our first quarter results. FBRT's distributable earnings increased to $0.41 per fully converted share compared to $0.39 in the prior quarter. This equates to a 10.4% distributable earnings return on common equity. Our distributable earnings dividend coverage for the quarter was 115%. Our strong earnings are the result of stable portfolio size throughout most of the quarter, which had the continued benefit of higher base rates as well as a strong contribution from our conduit business. Our conduit is an alternative business line that can be an earnings enhancer. CMBS has, again, become one of the lower cost financing options in the market. So we remain cautiously optimistic that conduit revenues will continue to benefit our earnings in future quarters. Our core portfolio ended the quarter at $5.2 billion of principal balance, which is an increase from the last quarter. This was due to very strong originations in Q1. In fact, Q1 was our fourth largest origination quarter since the inception of our company. We added $591 million of new loan commitments in the quarter and committed to $756 million of originations through the entire year-to-date as of yesterday. Most of our Q1 portfolio growth happened towards the back half of the quarter. So we did not see the full benefit of the larger portfolio in our first quarter net interest margin. We expect to enjoy this positive impact in future quarters. Multifamily continues to be our main sector, which represents 75% of our commercial real estate loan portfolio. We closed the quarter with $1 billion in available liquidity, including $240 million of unrestricted cash. Our cash balance decreased by $98 million in the quarter versus Q4 due to our deployment into new originations. Our strong liquidity position allows us to capitalize on the current abundance of attractive new investment opportunities and provides us flexibility to resolve credit issues to the extent they arise. Turning to our watch list. We ended the quarter with 6 loans with a risk rating of 4 on our watch list. Our watch list represents approximately 5% of our core portfolio. As previously disclosed, 1 asset was removed from our watch list during this quarter, taken as REO and then liquidated at a modest gain. We have been successful in working through problem loans and achieving positive outcomes. While there will continue to be changes to our watch list each quarter, with loans potentially being added and/or removed, we are optimistic about our team's ability to continue to manage this process. Mike will provide more watch list detail in his comments, including promising feedback on several assets. The risk profile of our portfolio remains low with an average overall risk rating of 2.3 at quarter end, unchanged from the prior quarter, and 95% of our loans are risk rated 3 or better. Our foreclosure REO positions also remain unchanged, sitting at 3 at quarter end. The Walgreens retail portfolio continues to make up most of this balance. And as we have said previously, the portfolio is being actively marketed for sale. In aggregate, our foreclosure REO positions represent 2.2% of our total assets. Lastly, I want to mention that we purchased 1.9 million of FBRT common stock during the first quarter. We continue to be active in the second quarter. And so far, we've repurchased an additional 2.0 million of our common stock through April 19, 2024. This totaled $3.8 million year-to-date. In total, since our program began, the company and its adviser purchased 68 million of FBRT common stock. Our company buyback program is authorized through the end of 2024. Finally, FBRT's first quarter was a strong start to 2024. Our distributable earnings once again comfortably exceeded our dividend level, and we were able to grow our loan portfolio, adding what we would call a new vintage of loans that offers strong credit quality which will also enhance FBRT's earnings power. While we continue to see a challenging environment for commercial real estate, especially as many loans reach initial maturity this year, we are confident in the resilience of our multifamily-focused portfolio and our ability to effectively resolve challenging loans. Now with all that, Jerry, I'm going to turn things over to you to cover our financial results.

Great. Thanks, Rich, and I appreciate everyone being on the call today. Moving on to our results. Let's start on Slide 5. FBRT generated GAAP earnings of $35.8 million or $0.35 per diluted common share, that's an increase of $0.07 from the prior quarter. And this earnings level represents an 8.9% return on common equity in the first quarter. We earned $41 million in distributable earnings in the first quarter and a walk-through of our distributable earnings to GAAP net income can be found in the earnings release. Our CECL reserve increased by $2.9 million during the quarter, which includes an asset-specific reserve of $700,000 on one of our watch list loans. The CECL increase resulted in a $0.03 per share reduction to GAAP earnings. This also impacted our first quarter book value, which ended the quarter at $15.68 per share. Slide 7 summarizes our portfolio progression. As Rich said, our core portfolio ended the quarter with $5.2 billion in principal balance, new commitments, future funding on existing loans and repayments this quarter resulted in a net increase of $199 million from last quarter. Nine loans were repaid in full during the quarter. Multifamily made up 70% of our repayments with hospitality, self-storage and office contributing to the remaining balance. We expect the pace of repayments to be similar in the coming quarters. Turning to Slide 8. This provides a high-level snapshot of our capitalization. Our average cost of debt during the quarter was modestly lower at 7.8%. Our liability structure provides us with optionality. A large portion of our portfolio is financed through our CLOs. At quarter end, 87% of our financing on our core book is nonrecourse and non-mark-to-market. The reinvestment period is still available on 2 of our 5 CLOs. And despite limited issuance, the CRE CLO market has seen some activity and offerings since our last deal in September. Our current funding position is strong. However, we will remain opportunistic in accessing the capital markets when necessary in future quarters. We can strategically tap into CLO financing when market conditions are attractive and align with our future funding needs. Our liability structure is further enhanced by our warehouse facilities. We maintain strong relationships with a diverse group of 6 lenders, each demonstrating a healthy appetite for our loans. This strong demand underscores the credit quality of our entire portfolio, encompassing both legacy assets and our recent originations. Notably, our new loans post some of the highest credit quality we've seen in several years. We maintained a net leverage position of 2.4x at quarter end. Importantly, we have consistently delivered relatively strong distributable earnings return on our equity without taking what we believe to be an outsized risk. With that, I'll turn it over to Mike to give you an update on our portfolio.

Thanks, Jerry, and good morning, everybody. Thank you for joining us. I'm going to start on Slide 12. Our core portfolio ended the quarter at $5.2 billion, spread across 145 loans with an average size of $36 million. As you can see, 99% of our loans are senior secured, and our exposure is 75% in the multifamily sector. We continue to be long-term bullish on the fundamentals of multifamily. As previously discussed, the asset class offers compelling advantages due to its superior credit quality and robust liquidity profile. We're strategically concentrated on the Southeast and Southwest U.S. Given the positive macroeconomic trends of the major markets within those geographies, these areas continue to be a focus for new investments. Slide 13 highlights our origination activity in the first quarter. We originated 11 loans at a weighted average spread of 464 basis points. While we had several unique transactions this quarter, this spread is indicative of the market opportunity previously mentioned. The quality of the deal flow we are seeing is very attractive with strong terms, including higher debt yields and lower loan-to-values of revalued asset levels. This quarter, we originated loans in the multifamily, industrial, hospitality, and office sectors. And while we remain extremely bearish on office, the office loan we closed in March was a unique credit opportunity that came with very attractive economics. However, inclusive of this new loan, our office exposure still stands at only 6% across our entire portfolio. And excluding our long-term net lease corporate headquarters and distribution facility, our office exposure is under 5% of the portfolio. Our conduit program platform had an excellent quarter closing 5 transactions. Echoing Rich's earlier remarks, we are encouraged by the conduit's momentum. And in Q1, we securitized $101 million of loans with a weighted average profit margin of 5.5 points. We look to conduit revenue to continue to contribute to earnings in the coming quarter, but this is historically lumpy revenue and difficult to model. We believe this is the first quarter in quite some time that we can say that all businesses within FBRT were hitting on all cylinders. That said, we recognize the current market presents challenges with increased borrowing costs and softening asset values. Fortunately, FBRT benefits from being a part of BSP's broader real estate platform and can leverage a team, we believe, is among the industry's best. Our asset and senior management teams are actively working with borrowers to develop solutions and address any loan-related issues that may arise. Moving to Slide 14, you will see a summary of our watch list activity. We ended the quarter with 6 loans on our watch list, all rated 4 with an aggregate value of $264 million. Last quarter, I provided detailed information on our risk rating process, and I'll remind you today that a rate of 4-rated asset is one that has an underperforming business plan with the potential of some interest loss, but is still expecting a positive return on investment. The 6 loans on our watch list are a CBD high-rise office building in Denver, Colorado. This loan was amended and extended maturity by 2 years and requires a $2 million principal paydown later in 2024. We have a Class A suburban office building in Alpharetta, Georgia. This loan was also recently amended to extend maturity by 1 year. The borrower paid down the loan by approximately $1.4 million in 2023 and paid down an additional $1 million in the first quarter of 2024. A full-service 279-key hotel in Dallas, Texas, this property is finalizing its sale process and should pay off at or very close to our outstanding debt balance based on offers received to date. A 426-unit apartment property in Cleveland, Ohio, is a new addition this quarter, and we are in active dialogue with the borrower. The last 2 watch list loans are a 471-unit apartment community in Raleigh, North Carolina, and a 2-property portfolio of apartment assets in Mooresville and Chapel Hill, North Carolina. We are in the process of foreclosing on these assets. As of today, we expect to finalize their sale to third parties at or above our basis in the second quarter. With respect to nonaccruals, we will highlight the 4 loans. One is a newly built multifamily asset in Las Vegas, where subsequent to quarter end, a mezzanine lender has taken control of the asset and the loan is now current. Another 2 assets are the last watch list loans I just discussed. Lastly, we have a cross portfolio of multifamily assets that are also in the process of being sold. It is important to note that while we placed these assets on nonaccrual in Q1, we have been receiving payments and recognizing them on a cash basis. All in all, I believe we are making good progress through our watch list loans, and we are hopeful the 3 remaining nonaccruals will be resolved in the second quarter. With respect to modifications in Q1, we closed 17 credit positive loan modifications and negotiated paydowns on 9 loans, representing 4.1% of the respective loan balance on average. Our borrowers contributed nearly $30 million of incremental equity related to extensions and modifications in the first quarter. Moving to Slide 15. We had 3 foreclosure REO positions at quarter end. Those positions are a Portland office building, which we continue to believe is not the right time to exit the asset; a multifamily asset in Lubbock, Texas, where our asset management team continues to meaningfully improve the asset and increase occupancy; it is still classified as held for investment through our improvements in re-tenanting. Our last REO is our Walgreens portfolio. We hold 23 retail stores as part of this portfolio at quarter end. All assets are on the market for sale, and we are actively attempting to liquidate the entire portfolio. In aggregate, our foreclosure REO balance ended the quarter at $122 million, which is approximately 2.2% of our total assets. Wrapping up, we are very bullish about the market opportunity for FBRT. We have a legacy loan portfolio that will continue to require our focused attention, but at the same time, a combination of factors are leading to compelling new origination opportunities, which we are taking advantage of. Every new loan we originate improves the overall credit quality of our portfolio, and we will continue to be a market leader on new originations. With that, I would like to turn the call back to the operator and begin the Q&A session.

And the first question will come from Stephen Laws with Raymond James.

I guess to start, Mike, I appreciate all the comments on the portfolio. Can you touch on the nonperforming loans? And what type of sponsors those are? Are there any similarities or multiple loans to the same sponsor? And just generally, what you're seeing in multifamily around sponsor stress, especially given kind of this higher for longer rate outlook and decisions that the sponsors are making, whether to protect or walk away from assets?

Sure. Thanks, Stephen, for the question, and thanks for joining this morning. I would say, generally, we're seeing more stress in the syndicated borrower structure than anything else. The typical GP, LP, 95-5, 90-10 syndicated equity where there's less control by the underlying sponsor and some of the decisions on capital calls are being made at the LP level. Again, I think we've seen our borrowers generally trying to work things out in a positive way. And I think, strangely, one of the strongest positives is we're not experiencing negative outcomes having many fights, which is really helpful through the workout process. I think that a lot of borrowers, if they have decided the time has come, they are ready, willing, and generally able to work with us quickly to resolve things. And we're not ending up in court, which is a positive for everybody.

Great. Appreciate the color there. And 1 quick follow-up. Jerry, you mentioned the financing facilities and noticed, I think 1 with Atlas, the capacity was trimmed a bit. Can you talk to that decision and kind of how those discussions are with your financing line providers?

Yes. I mean, just generally in terms of how the conversations are, I think they've been very positive for us because we're primarily using those facilities to finance the new originations that we're closing today. So in terms of credits that we're putting to the banks today, they're all brand-new lease at prices as clean as you're going to get some of the best credits we've seen in a long time. So all that's well received. In terms of sizing, some of that's just rebalancing to where we want and where we're using capacity more and where we're using it less. We don't want to carry more than we need with certain counterparties. So we always assess kind of size and dispersion of availability across the set that we hold on our books, that's all.

And then, I guess, one last one. Mike, I think the Q1 originations were about 465 over, I believe. Can you talk about the spreads you've generated on the $165 million of originations quarter-to-date?

I don’t have the exact number on the quarter-to-date spreads. They are expected to be tighter, Stephen. As I mentioned, we closed that office loan in Q1, which was priced at SOFR 938. This is effectively offsetting our Q1 figures. Therefore, I can confidently say that we will be within the range for Q1.

Your next question will come from Steve Delaney with Citizens JMP.

Congratulations on a solid start to 2024, everyone. Rich, there's an old saying among bankers that the only problem with making good loans is that they pay off too fast. I'm just curious if you feel when you look at the portfolio today, do you think there's enough solid demand out there that you can maintain the portfolio above $5 billion? And on the other hand, with respect to potential new CLO, is there any chance to see net portfolio growth with your existing capital base?

Well, since you called me out, Steve, I'll start that answer. I agree. What the whole industry is dealing with now is all those loans that record origination quarters across the street all occurred in late 2020, mostly 2021 and beginning of 2022, and all that stuff is coming due. So first problem is just resolving all that and then getting on to the next vintage. We're really excited about this vintage because, as Mike said, you're resetting asset values and making new loans there, and there isn't a lot of competition. Banks are on the sidelines. A lot of our peers are on the sidelines, and we're getting looks at great loans, maybe some loans we may never have seen at better terms. So I think that's the opportunity. As far as being able to continue to grow the portfolio, yes, I mean, we have over $200 million of cash. We have the Walgreens book that's another $100 million that's really earning something resembling cash that when those assets get sold, we can redeploy. And we're only running at 2.4x leverage. We never really go much higher than that, but it certainly provides us with some capacity to grow the book from there. So as we've said, I mean, I think people are going to look at this vintage of deals as one being one of the best. I think when you look back on it, that we've ever seen or certainly that we've seen in a long time, and we're going to continue to actively originate into this opportunity.

Mike, I have a question for you. In the first quarter, we have noticed that CMBS AAA spreads have tightened, which seems to be encouraging more people to refinance and move into fixed-rate conduit loans. After a slow 2023, is there potential for conduit lending to gain momentum? While achieving 5% every quarter might not be feasible, could you provide some insight on whether conduit lending this year could approach the $384 million you reached in 2022? Additionally, what tighter range might you suggest for gain on sale?

Thanks, Steve. Yes. I mean, first, it's a double green light. We are originating as much as we can, as fast as we can, and more importantly, securitizing it as fast as we can because as tight as spreads can go in, they can go the other way. So we want them to be touch and go on the balance sheet. But no, the group is very active in this space. I do think that Q1 on a profit margin basis is hard to repeat and hard to repeat in scale. I think, generally speaking, where I would be very happy is if we could do just $2 million a quarter for the rest of 2024 in the conduit; that would be really great. And if we can exceed that in any given quarter, that's just a cherry on top. But an additional $5 million, $6 million, $7 million of conduit revenue through the balance of 2024, I think, would be a really good earnings stabilizer for us.

That's great. That's helpful. And we can pick and choose their volume and margin on numbers. That's very helpful guidance for us on what you expect from the group for the year. I appreciate both of your comments today.

Next question will come from Matthew Erdner with JonesTrading.

Could you talk a little bit about cap rates and what you're underwriting to going in and exiting on these new deals?

Sure, Matt. I mean, do you want it across all asset classes or specific to multifamily?

Yes. I mean, the more color you're willing to give, I think that would be great.

Multifamily is currently characterized by two distinct segments: stabilized and non-stabilized. For stabilized multifamily, cap rates have generally aligned with 10-year Fannie Mae and Freddie Mac coupons over the past several quarters. For instance, if you can secure a 10-year loan from Fannie or Freddie with a 60% loan-to-value ratio at an interest rate of 5.5%, you can expect cap rates around that same percentage. On the other hand, when it comes to non-stabilized multifamily properties, buyers are not evaluating them based on cap rates; rather, they compare the cost of purchasing an asset against its replacement cost. For example, an asset built in 2020 might have a purchase price of $225,000 per unit, but rebuilding that asset would now cost around $300,000. Thus, transactions are based more on overall cost rather than cap rates. In the industrial sector, cap rates are slightly wider than those in stabilized multifamily. For retail, you might see an additional 100 basis points depending on the type, with grocery-anchored properties generally trading more favorably than power centers or strip malls. In hospitality, cap rates are generally between 7.5% and 8.5%, depending on the quality of the asset and its market. As for office properties, they seem to be trading based on price per square foot rather than cap rates, reflecting a long-term investment strategy where buyers believe they're acquiring assets at such a low price that they will be satisfied with their value five or ten years down the road.

Yes, right. That makes sense, and that's very helpful and good color there. And then are you guys still seeing opportunities for construction loans? And what's your appetite going forward on that?

We are. I think the stress at the bank level really hasn't abated. And with rates generally higher for longer, it doesn't appear that it's going to abate anytime soon. So I think they're squarely on the sidelines for the balance of 2024 and perhaps a decent part of 2025, right? Banks don't typically jump into the pool cannonball-style. When they come back in, it's going to be a toe, then an ankle, then a knee, and it's going to take some time. So we do view it as an opportunity. We continue to close construction loans in Q1. I think some of our best risk returns are in our construction book. The issue is they're just inefficient assets for us because they dribble capital out, little pieces over an extended period of time. But overall, continuing to see opportunities and we'll continue to be active in the space provided those opportunities persist.

The next question will come from Matthew Howlett with B. Riley.

Regarding return on equity, I'm curious about your targets for this year. The 8.9% seems to have been impacted by some temporary factors this quarter. With the growth in the portfolio and the buyback, as well as cash that might be released from real estate sales, what do you think the potential could be for that to reach 12% or 13%? If that happens, would you consider increasing the dividend?

Thank you for your straightforward question. I believe that Rich, Jerry, and I have all expressed confidence that the future looks promising. We have investment capital and are expanding our portfolio, which grew in the first quarter. We are among the most active originators in the market today, and we intend to keep growing the portfolio. We see a clear path for this growth, with no significant obstacles in our way. To put it simply, we are eager to grow the portfolio and enhance our return on equity. At the right time, and in consultation with the Board, if we feel we have effectively managed the legacy portfolio and are comfortable with our position, we could consider increasing the dividend in the future. While I don’t expect that to happen in 2024, I do see it as a very real possibility that we discuss regularly.

And then again, I'm not asking for guys, but if you look at the second quarter number, clearly with the late-stage portfolio growth in the first quarter, the drag from some of those one-time nonaccruals? And then with the buyback accelerates, clearly, it's got to be on pace to be up in the second quarter from the first quarter.

Yes, my focus is more on reflecting on past performance rather than looking ahead. We have a significant portfolio that we need to manage throughout the rest of the year. It's important to ensure that we've addressed any issues with the legacy book to minimize surprises. We want to have a strong level of confidence before considering any changes to the dividend. The legacy portfolio will play a significant role in that discussion, more so than future origination opportunities.

Yes. Matt, as do rates, I think the whole world is now convinced on higher for longer, which is making us skeptical, but yes, a lot of factors at play.

And obviously, the rates are part of that legacy book that come together.

And the last thing, I mean, the Walgreens, I think as analysts, I'm not sure how to model that could be significant if you can reinvest, and you can get out of that and reinvest those into today's new originations, what you said are the best you've seen in years. I mean, just an update what can you tell us to expect anything this year? Is it just going to be opportunistic if someone hits your bid? Any color on how that process is going would be appreciated.

Yes, we are actively working on selling the portfolio. We understand the situation, as you do. We currently have about $100 million of capital tied up, which is generating cash-like returns, while we typically originate loans at significantly better rates. We see a clear opportunity here. We have a few stores under contract and a few others under letter of intent. I'm optimistic that next quarter we can provide a more detailed update on their status, but we are still in the process of finalizing these contracts and making them nonrefundable, so it feels premature to discuss that fully today. However, this is a high-priority issue for us, and we see it as the quickest and easiest way to enhance our portfolio. We are very focused on resolving as much of the Walgreens situation as possible in 2024.

Matt, the good news is we have over $200 million, $240 million of cash to spend first. So it's not like we're missing an opportunity now. We have plenty of liquidity even without it. So we're trying to be, as Mike pointed out, as disciplined as possible. We want to sell into strength, but with an eye towards sooner rather than later.

And there's no debt on the REO, there's no financing on that at all, you'll know that screen is clear, that's going to be all cash back to you.

That's correct.

This concludes our question-and-answer session. I would like to turn the conference back over to Ms. Lindsey Crabbe for any closing remarks. Please go ahead, ma'am.

We appreciate you joining us today. If you have any further questions, please reach out to me or our team. Thank you.

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