Yahoo Finance Franklin BSP Realty Trust, Inc. (NYSE:FBRT) Q1 2024 Earnings Call Transcript
Franklin BSP Realty Trust, Inc. (NYSE:FBRT) Q1 2024 Earnings Call Transcript April 30, 2024
Franklin BSP Realty Trust, Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: Good day and welcome to the Franklin BSP Realty Trust First Quarter 2024 Earnings Call. [Operator Instructions] 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.
Lindsey Crabbe: 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 report 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 this call, including any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by law. Additionally, we will refer to certain non-GAAP financial measures, which are reconciled to GAAP figures in our earnings release and supplementary slide deck. Each of which are available on our website at www.fbrtreit.com. We will refer to the supplementary slide deck on today’s call. With that, I will turn the call over to Rich Byrne.
Richard Byrne: Great. Thanks, Lindsey and good morning, everyone. 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 four, 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 a 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. This 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 active 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 six loans with a risk rating of four on our watch list.
Our watch list represents approximately 5% of our core portfolio. As previously disclosed, one 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 three or better.
Our foreclosure REO positions also remains unchanged, sitting at three 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 FDRT 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 19th, 2024. This totals 3.8 million year-to-date. In total, since our program began, the company and its advisor 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.
Jerry Baglien: Great. Thanks, Rich. And I appreciate everyone being on the call today. Moving on to our results, let's start on slide five. 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 walkthrough 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 watchlist 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 seven 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 eight. 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 non-recourse and non-mark-to-market. The reinvestment period is still available on two of our five 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 six 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 boast some of the highest credit quality we've seen in several years. We maintained a net leverage position of 2.4 times 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.
Michael Comparato: 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 to do 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 metros 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 off 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 least corporate headquarters and distribution facility, our office exposure is under 5% of the portfolio.
Our conduit program platform had an excellent quarter closing five 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 looked 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 six loans on our watch list, all four rated 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 four-rated asset is one that is an asset with an underperforming business plan with the potential of some interest loss, but still expecting a positive return on investment. The six loans on our watch list are a CBD high-rise office building in Denver, Colorado. This loan was amended and extended maturity by two 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 one year. The borrowers were 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 ad this quarter and we are in active dialogue with the borrower. And the last two watch list loans are a 471-Unit apartment community in Raleigh, North Carolina and a two-property portfolio of apartment assets in Mooresville & Chapel Hill, North Carolina.
We are in the process of foreclosing on these assets and as of today, we expect to finalize their sale to third parties at or above our basis in the second quarter. With respect to non-accruals, we will highlight the four 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 two assets are the two last watch list loans I just discussed. And 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 place these assets on non-accrual 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 three remaining non-accruals will be resolved in the second quarter.
With respect to modifications in Q1, we close 17 credit-positive loan modifications and negotiated paydowns on nine loans, representing 4.1% of their 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 three 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 increased occupancy. It is still classified as held for investment through our improvements in retenanting. And our last REO is our Walgreens portfolio.
We hold 23 retail stores as part of this portfolio at quarter-end, all assets around the market for sale, and we are actively attempting to liquidate the entire portfolio. In aggregate, our foreclosure REO balance ended the quarter $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.
Operator: Thank you. We will now begin the question-and-answer session. [Operator Instructions] And the first question will come from Stephen Laws with Raymond James. Please go ahead.
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