Franklin BSP Realty Trust Q4 2024 Earnings Call Transcript

Quartr
Provided by Quartr
February 14, 2025
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Operator

Hello, and welcome to the Franklin BSP Realty Trust Fourth Quarter twenty twenty four Earnings Conference Call. All participants will be in listen only mode. After today's presentation, there will be an opportunity to ask questions. As a reminder, today's call is being recorded. I would now like to hand the conference over to Lindsey Crabb.

Operator

Please go ahead.

Lindsey Crabbe
Lindsey Crabbe
Director of Investor Relations at Franklin BSP Realty Trust

Good morning. Thank you, MJ, for hosting our call today. Welcome to the FBRT fourth quarter twenty twenty four 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 Gerry Baglian, Chief Financial Officer and Chief Operating Officer of FBRT and Michael Comparato, President of FBRT.

Lindsey Crabbe
Lindsey Crabbe
Director of Investor Relations at Franklin BSP Realty Trust

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, 02/14/2025. 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.

Lindsey Crabbe
Lindsey Crabbe
Director of Investor Relations at Franklin BSP Realty Trust

We will refer to this supplementary slide deck on today's call. With that, I'll turn it over to Rich Fern.

Richard Byrne
Richard Byrne
Chairman & CEO at Franklin BSP Realty Trust

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'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.

Richard Byrne
Richard Byrne
Chairman & CEO at Franklin BSP Realty Trust

Gerry will cover our financial results and Mike will discuss market conditions, 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 as 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 $2,000,000,000 in new loan commitments, including $441,000,000,000 in the fourth quarter.

Richard Byrne
Richard Byrne
Chairman & CEO at Franklin BSP Realty Trust

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, '50 '2 percent 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.

Richard Byrne
Richard Byrne
Chairman & CEO at Franklin BSP Realty Trust

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 $1,100,000,000 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.

Richard Byrne
Richard Byrne
Chairman & CEO at Franklin BSP Realty Trust

In some cases, of course, we must take properties as real estate owned, 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 leased 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.

Richard Byrne
Richard Byrne
Chairman & CEO at Franklin BSP Realty Trust

Despite a very active origination year, our portfolio remains flat to 2023, ending the year at $5,000,000,000 of principal balance. Our 2024 originations were offset by $1,600,000,000 in repayments. These repayments, of course, are a blessing and a curse, but we are always happy to see pre rate loans repay in full. We ended the year with $535,000,000 in liquidity, including $184,000,000 in unrestricted cash. We continue to strategically invest our liquidity in new assets to further enhance FBRT's earnings.

Richard Byrne
Richard Byrne
Chairman & CEO at Franklin BSP Realty Trust

Currently, 151 of our 155 positions are risk rated two or three, 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 twenty twenty five and has already sold above our debt basis. This reduces the watch list to 2.3% of our portfolio.

Richard Byrne
Richard Byrne
Chairman & CEO at Franklin BSP Realty Trust

Gerry will cover this in more detail and Mike will provide more detailed update on the remaining watchlist 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 $3,600,000,000 we've originated across our real estate platform in 2024. And with that, I'll hand it over to Gerry.

Jerome Baglien
Jerome Baglien
CFO, COO & Treasurer at Franklin BSP Realty Trust

Great. Thanks, Rich, and thanks for 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 $0.3 and $0.92 per diluted common share for the fourth quarter and the year ended 2024.

Jerome Baglien
Jerome Baglien
CFO, COO & Treasurer at Franklin BSP Realty Trust

Earnings were negatively affected by our non accrual loans and REO positions. We did make progress in increasing the book value attributable to our REO portfolio, which declined by approximately $63,000,000 through asset sales in the fourth quarter. In addition, after the quarter end, we sold another REO asset for $63,800,000 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.

Jerome Baglien
Jerome Baglien
CFO, COO & Treasurer at Franklin BSP Realty Trust

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 $0.25 to $0.3 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.

Jerome Baglien
Jerome Baglien
CFO, COO & Treasurer at Franklin BSP Realty Trust

Turning to Slide seven, this is an overview of our origination activity for the quarter. We originated $441,000,000 dollars in new loan commitments during the quarter, primarily in the multifamily sector, which comprised 68% of our fourth quarter activity. We received $641,000,000 in loan repayments during the quarter with 18 loans paying off in full. Of these, $578,000,000 was from loans originated in 2021 and 2022. And multifamily loans made up the majority of the pay downs.

Jerome Baglien
Jerome Baglien
CFO, COO & Treasurer at Franklin BSP Realty Trust

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 firm 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.

Jerome Baglien
Jerome Baglien
CFO, COO & Treasurer at Franklin BSP Realty Trust

We anticipate returning to the CLO market sometime in 2025. We continue to have meaningful space in our warehouse lines and have unrestricted cash we would like to deploy. Combined with our CLO reinvest available, liquidity at quarter end totals $535,000,000 of which $184,000,000 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.

Michael Comparato
Michael Comparato
President at Franklin BSP Realty Trust

Thanks, Jerry, and good morning, everyone. Thanks for joining us. I'm going to start on Slide 12. Our core portfolio stands at $5,000,000,000 comprised of 155 loans, averaging $32,000,000 each. The portfolio is 99% senior mortgages with 93% being floating rate loans.

Michael Comparato
Michael Comparato
President at Franklin BSP Realty Trust

Multifamily remains our preferred sector, securing 71% of the portfolio. Our core portfolio decreased again this quarter given significant repayments. As Gerry 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 three forty four basis points.

Michael Comparato
Michael Comparato
President at Franklin BSP Realty Trust

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 $3,400,000,000,000 of accrualers real estate debt coming maturing in the next thirty six 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.

Michael Comparato
Michael Comparato
President at Franklin BSP Realty Trust

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 at quarter end, but as both Gerry and Rich mentioned, this has been reduced to three positions given a Q1 twenty twenty five asset sale. We took title to the three seventy six 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 to in Q1 or Q2 of twenty twenty five.

Michael Comparato
Michael Comparato
President at Franklin BSP Realty Trust

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 three zero seven unit student housing property in Norfolk, Virginia. It is risk rated of four.

Michael Comparato
Michael Comparato
President at Franklin BSP Realty Trust

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 three seventy six 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 7. Word of the foreclosure spread very quickly and within seventy two hours we had approximately a dozen written and verbal offers property.

Michael Comparato
Michael Comparato
President at Franklin BSP Realty Trust

One buyer called us and said, I live 3 miles away, I drove the asset this weekend and will go non refundable with a $1,000,000 deposit and no due diligence period. A PSA was signed on January 27 and closing was only sixteen 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.

Michael Comparato
Michael Comparato
President at Franklin BSP Realty Trust

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 and 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.

Michael Comparato
Michael Comparato
President at Franklin BSP Realty Trust

In total, in 2024, our team sold $159,000,000 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 Gerry pointed out, converting this REO back to performing loans has the ability to move our earnings by $0.25 to $0.3 per share annually.

Michael Comparato
Michael Comparato
President at Franklin BSP Realty Trust

So, it is absolutely our primary focus. We've already had a very active first quarter closing just under $200,000,000 of loan commitments. As we completed our first CMBS execution of the year in Q1 as well, resulting in approximately a $4,000,000 gross gain on sale, which will be realized in Q1 figures. We remain confident in FERT'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 and A session.

Operator

Thank you very much. We will now begin the question and answer session. Today's first question comes from Matthew Ertner with Jones Trading. Please go ahead.

Matthew Erdner
Director at Jones Trading

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, kind of in that 8% range. Where do you expect them to settle out?

Matthew Erdner
Director at Jones Trading

And I guess, is it tightening due to competition, increased credit quality, increased asset quality or kind of a combination of all the above?

Michael Comparato
Michael Comparato
President at Franklin BSP Realty Trust

Thanks, Matt. Yes, I mean, the spread tightening, I think, has been a phenomenon we're seeing not only in real estate, but also other credit positions. I think the floating rate credit spreads have probably come in as tight as they can as 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.

Michael Comparato
Michael Comparato
President at Franklin BSP Realty Trust

CMBS remains incredibly liquid CRE CLO market remains incredibly liquid. Spreads on the liability side are tightening 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 types of kind of peak valuations Q4 twenty twenty one, Q1 of '20 '20 '2, probably by 20 to fifty twenty five to 50 basis points. But obviously the difference is we continue to have SOFR still 4.5% higher than it was at those peak valuations as well.

Michael Comparato
Michael Comparato
President at Franklin BSP Realty Trust

So I think we're there was a very long way of me saying, I think the spread tightening in a floating rate world is probably close to its end, but whole dollar coupons continue to

Michael Comparato
Michael Comparato
President at Franklin BSP Realty Trust

have seven handles on them.

Matthew Erdner
Director at Jones Trading

Got it. Yes, that's helpful color there. And then Jerry, a quick kind of modeling question for you. Other expenses, it rose about $5,000,000 give or take quarter over quarter. And number to about $12,400,000 What should we expect the run rate there?

Matthew Erdner
Director at Jones Trading

And is there any material change kind of bench side?

Jerome Baglien
Jerome Baglien
CFO, COO & Treasurer at Franklin BSP Realty Trust

Yes. Let me tell you to think about this in two ways. That's mostly the REO flow 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.

Jerome Baglien
Jerome Baglien
CFO, COO & Treasurer at Franklin BSP Realty Trust

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 earnings call, it's not much of a net contributor overall to the book. So you heard the upside, but in terms of kind of how it comes off through the course of next year, it's really just dependent on timing of asset sales. So I think the easiest way to model is to make some estimate in terms of how the pace of sell downs might occur.

Jerome Baglien
Jerome Baglien
CFO, COO & Treasurer at Franklin BSP Realty Trust

So, you heard me say it could take a few quarters or more for us to work all that out.

Matthew Erdner
Director at Jones Trading

Got it. Yes, that's helpful. Thank you.

Operator

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

Tom Catherwood
Managing Director at BTIG

Thank you and good morning everybody. Mike starting with you, 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?

Michael Comparato
Michael Comparato
President at Franklin BSP Realty Trust

Hey, Tom. Good morning. Thanks for the question. 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.

Michael Comparato
Michael Comparato
President at Franklin BSP Realty Trust

We were able to put on $2,000,000,000 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 offering. Right?

Michael Comparato
Michael Comparato
President at Franklin BSP Realty Trust

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 $2,000,000,000 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 wider than what we're seeing kind of the very highly competed for space. So fully acknowledge that everybody is kind of looking for that easy 88 mile an hour fastball over the fat part of the plate.

Michael Comparato
Michael Comparato
President at Franklin BSP Realty Trust

But we've got the ability to swing at pitches and hit them that other guys don't.

Tom Catherwood
Managing Director at BTIG

I appreciate those answers, Mike. I know you 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?

Michael Comparato
Michael Comparato
President at Franklin BSP Realty Trust

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 four percent ten year versus a five point two five percent ten year. We're doing this delicate dance of how much legacy stuff still has to be worked out. Are we going to have to take back a little more REO?

Michael Comparato
Michael Comparato
President at Franklin BSP Realty Trust

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 with any sort of real certainty when we can out originate repayments. So it's clearly our goal. It's clearly where we want to be.

Michael Comparato
Michael Comparato
President at Franklin BSP Realty Trust

Rich mentioned in his opening remarks that we were 52% of the portfolio is post rate hike originations. Clearly, our without question goal is to get this book completely recycled out of the legacy portfolio and into this new vintage of loans. So we're doing it as fast as we can. I think there's just too many variables that I can pound the table and say by Q4 this year, we've done it. But we're actively working towards that goal on literally a daily basis.

Tom Catherwood
Managing Director at BTIG

Understood. And last one for me. On the remaining REO assets, obviously, you made great progress selling what you've 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?

Michael Comparato
Michael Comparato
President at Franklin BSP Realty Trust

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.

Michael Comparato
Michael Comparato
President at Franklin BSP Realty Trust

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 the vast majority of what's left in the book.

Michael Comparato
Michael Comparato
President at Franklin BSP Realty Trust

Are there going to be some stragglers? Are there going to be some 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.

Tom Catherwood
Managing Director at BTIG

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

Operator

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

Randy Binner
Managing Director at B.Riley Securities

Hey, good morning. Thanks. I had a couple. Just looking to 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.

Randy Binner
Managing Director at B.Riley Securities

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?

Jerome Baglien
Jerome Baglien
CFO, COO & Treasurer at Franklin BSP Realty Trust

Yes. Most of the change is from where pay downs come back to us in terms of does it hit

Jerome Baglien
Jerome Baglien
CFO, COO & Treasurer at Franklin BSP Realty Trust

a CLO with reinvest or does it hit

Jerome Baglien
Jerome Baglien
CFO, COO & Treasurer at Franklin BSP Realty Trust

a CLO that's in the amortization phase? 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. So if you think back to my comment on the fact that we probably launch another CLO later this year, that's the recapture of the equity on those deals that start to amortize down.

Jerome Baglien
Jerome Baglien
CFO, COO & Treasurer at Franklin BSP Realty Trust

It just delays the liquidity, but for the way we kind

Jerome Baglien
Jerome Baglien
CFO, COO & Treasurer at Franklin BSP Realty Trust

of lay it out, it comes out for my purpose of how we calculate that.

Randy Binner
Managing Director at B.Riley Securities

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 exchange. But the specific question is, I think other expenses were elevated to prepare properties for sale that are in REO.

Randy Binner
Managing Director at B.Riley Securities

Did you break out how much of the $10,200,000 of other expense was that versus other stuff?

Jerome Baglien
Jerome Baglien
CFO, COO & Treasurer at Franklin BSP Realty Trust

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.

Jerome Baglien
Jerome Baglien
CFO, COO & Treasurer at Franklin BSP Realty Trust

So it's really just I think it's 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.

Operator

The next question is from Stephen Laws with Raymond James.

Stephen Laws
Stephen Laws
Managing Director at Raymond James Financial

I want to follow-up on the question earlier on the outlook for portfolio growth. I guess, repays are more uncertain. But on the origination front, $450 ish million of fundings last quarter. I believe you said in the prepared remarks around $200,000,000 year to date. So is that kind of $400,000,000 to $500,000,000 of quarterly originations?

Stephen Laws
Stephen Laws
Managing Director at Raymond James Financial

Is that a good run rate as far when you look at your pipeline? Or how much volatility do you expect to see on the origination side?

Michael Comparato
Michael Comparato
President at Franklin BSP Realty Trust

Yes, I mean, look, there is seemingly almost unlimited request for financing right now. If we wanted to take application, we could probably sign $600,000,000 to $800,000,000 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 REOs 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.

Michael Comparato
Michael Comparato
President at Franklin BSP Realty Trust

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 cash and future problems and future REO. It's just it's 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.

Stephen Laws
Stephen Laws
Managing Director at Raymond James Financial

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

Michael Comparato
Michael Comparato
President at Franklin BSP Realty Trust

For the moment, we're going to

Michael Comparato
Michael Comparato
President at Franklin BSP Realty Trust

leave it as five rated. 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 risk rated for.

Stephen Laws
Stephen Laws
Managing Director at Raymond James Financial

Makes sense. 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 in REO?

Michael Comparato
Michael Comparato
President at Franklin BSP Realty Trust

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. 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.

Michael Comparato
Michael Comparato
President at Franklin BSP Realty Trust

So I think there is some price discovery that we have to do on that asset. I think there is 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 in the market a little bit better.

Richard Byrne
Richard Byrne
Chairman & CEO at Franklin BSP Realty Trust

We already wrote down the asset pretty significantly as well.

Stephen Laws
Stephen Laws
Managing Director at Raymond James Financial

Yes, I know you guys have taken reserves on that asset for sure. I think a big part of your reserves actually. Last question on the CLO side, I know you mentioned you were going to return to the market probably at some point in 'twenty five. Can you talk about where those spreads are relative to the asset yields you're able to put on? And additionally, how do the spreads on new CLOs compare to where FL6 is?

Stephen Laws
Stephen Laws
Managing Director at Raymond James Financial

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?

Michael Comparato
Michael Comparato
President at Franklin BSP Realty Trust

Jerry and I and the team talk about it seemingly weekly, almost daily the past few weeks. We're looking at it constantly. The market is very liquid. The cost of financing is very attractive at the moment. If we could tap it sooner rather than later, we would.

Michael Comparato
Michael Comparato
President at Franklin BSP Realty Trust

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 $2,000,000,000 in 2024 at the widest spread that we've seen in years.

Michael Comparato
Michael Comparato
President at Franklin BSP Realty Trust

If we're able to time it where we can issue a liability at the tightest spread 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 quite a bit.

Stephen Laws
Stephen Laws
Managing Director at Raymond James Financial

Yes. And the last deal you're able to get, was it a three year replenishment period on that?

Michael Comparato
Michael Comparato
President at Franklin BSP Realty Trust

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 issues and whatnot, but it's definitely 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.

Michael Comparato
Michael Comparato
President at Franklin BSP Realty Trust

So I think it's important. But overall, 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.

Operator

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.

Lindsey Crabbe
Lindsey Crabbe
Director of Investor Relations at Franklin BSP Realty Trust

We appreciate you joining us today. Please reach out if you have any further

Executives
    • Lindsey Crabbe
      Lindsey Crabbe
      Director of Investor Relations
    • Richard Byrne
      Richard Byrne
      Chairman & CEO
    • Jerome Baglien
      Jerome Baglien
      CFO, COO & Treasurer
    • Michael Comparato
      Michael Comparato
      President
Analysts
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Key Takeaways

  • FBRT has diversified its loan portfolio into three buckets, with 52% of assets originated post‐interest‐rate hikes, reflecting high‐quality, low‐LTV loans under current market conditions and limited competition.
  • The legacy portfolio (pre‐rate hikes) generated $1.1 billion in full payoffs in 2024, and the company is actively pursuing loan modifications or converting select assets to REO to maximize recovery.
  • Traditional multi‐tenant office exposure has been pared down to 2.3% of the portfolio, with marks already taken to reflect market values and a stated goal of exiting this sector entirely.
  • Non-performing loans and REO assets are being resolved—2024 REO sales totaled $159 million—and FBRT estimates resolving these assets could add $0.25–0.30 per share to annual distributable earnings.
  • As of year-end, FBRT reported Q4 GAAP EPS of $0.29 and distributable EPS of $0.30, a book value of $15.19, and maintained $535 million in liquidity (including $184 million cash), with 89% of debt in non-mark-to-market CRE CLOs at SOFR+2.12% and plans for a new CLO in 2025.
AI Generated. May Contain Errors.
Earnings Conference Call
Franklin BSP Realty Trust Q4 2024
00:00 / 00:00

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