Franklin BSP Realty Trust, Inc. Q4 FY2024 earnings call

Origination Activity

• Originated $441 million in new loan commitments in the fourth quarter, primarily in the multifamily sector (68% of Q4 activity).

Repayments

• Received $641 million in loan repayments during the quarter, with 18 loans paying off in full, including $578 million from 2021 and 2022 vintage loans and 2 office loans.

Portfolio Composition

• Ended the year with a principal balance of $5.0 billion, 99% senior mortgages, 93% floating rate loans, and 71% in the multifamily sector.

REO Portfolio

• Foreclosure REO decreased to 11 positions at quarter end, with 4 properties sold near basis in Q4, an additional sale after quarter end, and purchase and sale agreements for 2 more properties expected to close in Q1 and Q2 2025. In 2024, $159 million of REO properties were sold.

Watch List

• Reduced to 3 positions from 4 at quarter end, with one Denver office building, a Georgia office loan that was extended and had principal paid down, and a Norfolk student housing property in active dialogue for a loan modification.

The company's portfolio is divided into three buckets: post-interest rate hike loans, pre-rate hike loans, and office loans. In 2024, $2 billion in new loan commitments were originated, including $441 million in the fourth quarter. 52% of the portfolio is loans originated post interest rate hikes. Pre-rate hike loans saw $1.1 billion in full payoffs from 2021 and 2022 vintages in 2024. The traditional multi-tenant office exposure at year-end was only 2.3% of the total portfolio.

CLO Market

• Anticipates returning to the CLO market sometime in 2025.

Earnings Potential

• Believes resolving REO could generate an additional $0.25 to $0.30 per share annually on a distributable earnings basis.

Portfolio Recycling

• Goal to recycle the portfolio out of the legacy portfolio and into new vintage loans, with 52% of the portfolio already being post-interest rate hike originations.

• Uncertainty in the timing of loan repayments affecting portfolio growth projections.
• Challenges in the office sector recovery with high credit and return bars making new office originations difficult.
• Volatility in origination and repayment dynamics making it hard to predict exact timing of portfolio growth outpacing repayments.

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

A: The spread tightening has been a phenomenon seen in real estate and other credit positions. Floating rate credit spreads have likely tightened close to their limit, with CMBS, CLO, and warehouse lines seeing spread tightening in lockstep. Whole dollar coupons still have 7 handles.

Q: Maybe, Mike, starting with you. I appreciate your comments on kind of the wave of CRE 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?

A: We don't have to compete at current levels as we put on $2 billion of commitments in 2024 at good spreads. Our platform has a wide product offering, focusing on areas with higher pricing than highly competitive spaces. Our goal is to recycle the portfolio out of legacy loans into new vintage loans, working towards that daily but with many variables affecting timing Q: Just looking at 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.

A: Most change is from paydowns hitting amortizing CLOs vs. non-amortizing ones, delaying equity unlock. We plan to launch another CLO later in 2025, which delays liquidity but is part of our strategy Q: I want to follow up on a 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 million year-to-date. So is that kind of $400 million to $500 million of quarterly originations? Is that kind of $400 million to $500 million of quarterly originations? Is that a good run rate as far as when you look at your pipeline? Or how much volatility do you expect to see on the origination side?

A: There's massive demand for financing, but borrower behavior and legacy book issues make origination growth uncertain. We're patient due to unknowns, but actively working towards portfolio growth