Good day and welcome to the Franklin BSP Realty Trust First Quarter 2022 Financial Results Conference Call. All participants will be in a listen-only mode. [Operator Instructions] After today's presentation, there will be an opportunity to ask questions. [Operator Instructions] Please also note this event is being recorded. And now I would like to turn the conference over to Lindsey Crabbe. Please go ahead.

Good morning. Thank you, Tom, for hosting our call today. Welcome to the Franklin BSP Realty Trust First Quarter Earnings Conference Call. As the Operator mentioned, I am Lindsey Crabbe, Director of Investor Relations. With me on the call today are Richard Byrne, Chairman and CEO of FBRT, Jerome Baglien, Chief Financial Officer and Chief Operating Officer. Michael Comparato, Head of Commercial Real Estate, and Roy Kim, Managing Director of our Capital Markets Group. Before we start today's conversation, I want to mention that some of today's comments from the team 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 Form 10-Q and 10K, filed with the SEC, and actual future results may differ materially. The information conveyed on this call is current only as of the date of this call, May 5th, 2022. 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, 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 Richard Byrne.

Terrific. Thanks, Lindsey. Good morning, everyone and happy Cinco de Mayo. Most importantly, thank you all for joining our call. I'm Rich Byrne. I'm Chairman and CEO of FBRT. As Lindsey mentioned, our earnings release and supplemental deck were published on our website yesterday evening. So for this call, we're going to review first-quarter results and walk you through the current status of the portfolio. Will also give you an up to the minute update on our residential ARMs portfolio. Then we're going to open up the call for questions. The supplemental deck that we're going to be referencing and you've hopefully are seeing on your screen contains more information than we can cover today. But we hope and we think you'll find it useful as you evaluate the quarter. After my initial remarks, Jerry, our CFO will cover our financial highlights, then Mike will discuss the portfolio in more detail and provide some really good general market color. But first, I want to go through FBRT's current position and the progress we've made in the first quarter of 2022. I'll start on Slide 4. We are very pleased with how our commercial real estate strategy has performed this quarter. FBRT produced Distributable Earnings, that's Distributable Earnings before trading and derivatives gains and losses on our ARMs portfolio of $40.1 million or $0.39 million a share. This equates to a 9.3 ROE on our core strategy. We view this distributable earnings number as our run rate distributable earnings and is indicative of the performance of our core commercial real estate portfolio. Importantly, our 9.3% ROE was attributable to our strong net interest margin, which in turn was the product of the high-quality loans we underwrote and the low cost and flexible balance sheet we have. We did not achieve this…

Great. Thanks, Rich. Hello everyone. I'm Jerry Baglien, the Chief Financial Officer and the Chief Operating Officer of FBRT. I appreciate everyone being on the call today. Moving onto our results. Let's start on Slide 5. As Rich mentioned, in Q1 FBRT generated a run rate distributable earnings of $40.1 million or $0.39 million per fully diluted converted share, representing a 9.3% ROE. A walk rate of our run rate distributable earnings to GAAP net income can be found in the earnings release. It's at the back of that and it will give you a full walk. We paid an aggregate common stock dividend of $35.5 per share for the quarter. And that represents a yield of approximately 8.6% on our fully converted book value of 1,650. Our fully converted book value declined this quarter from 1,725 at the end of Q4. This decline is predominantly attributable to the trading losses that we had in our agency ARM portfolio. Net leverage at the quarter came down to 2.95 times with our recourse leverage ending the quarter at 1.3 times. The leverage on our core book, as Rich mentioned, is 2.5 times. And we expect our overall company leveraged to decline slightly as we continue to sell down ARMs portfolio and reposition to our core assets. Moving on to Slide 6. We have some added context to our run rate distributable earnings over the last few quarters. We just want to highlight that the run rate coverage in earnings continue to be ahead of our dividend rate. On Slide 7, I wanted to highlight the advantage of our floating rate portfolio for both assets and our liabilities. With the Fed's announcement of increases to short-term rates, our portfolio will see an almost immediate benefit in earnings. This chart shows the per-share…

Thanks, Jerry. Good morning, everyone. I'm Mike Comparato, Head of Commercial Real Estate. I also appreciate you being on the call today. I'm going to start on Slide 13. This is the entirety of our commercial loan portfolio. The portfolio consists of 166 loans, of which 99% are senior mortgages. The portfolio is largely MultiFamily, with 72% of the book allocated to that sector. Our geographic footprint remains predominantly focused across the Southeast and Southwest. Let's move to Slide 14 to see our activity in Q1. As previously noted, we priced FL7 in December 2021 at LIBOR 164 and shortly thereafter priced FL8 in January 2022 at SOFR 172. We saw early in the quarter that spreads were moving wider and have long held that interest rates generically would be moving higher as well. Accordingly, we paired back our originations for Q1 by about 1/3 of our budget, as we felt future opportunities will be priced more attractively. We ended the quarter having originated 16 loans for a total commitment of $603 million. Our thesis was correct on spreads, the patience paid off. Towards the end of the quarter, we elected to ramp up our originations and have a robust forward pipeline today and some of the most attractive spreads we've seen in years outside of the early days of COVID. MultiFamily continue to be our largest add in the quarter with over 68% of originations in that sector. We witnessed one of, if not the largest percentage increases in new treasury rates in my career during the quarter. While we did believe the direction was going to be higher, the velocity of the move back to slightly above 3% was remarkable and unexpected. As a result, low cap rate assets are now experiencing negative leverage in both the floating…

Thank you. We will now begin the question-and-answer session. (Operator Instructions). We will pause momentarily to assemble the roster. And the first question comes from Jason Stewart with Jones Trading. Please go ahead.

Hey, good morning. Thanks for taking the question. And I appreciate the color on the cadence of activity of originations throughout the quarter. I was wondering if you could give us some thoughts on feedback in terms of market reception to higher rates and assets like MultiFamily, if you're starting to see those lending rates being pushed higher, if the markets pushing back or accepting them.

Yeah. Thank you. So I think we've been seeing a pretty remarkable slowdown in the transactional activity in the MultiFamily sector just in terms of acquisitions. Value-add buyers continue to believe that they can add value through the renovation programs, but I think the very different change is now they're experiencing negative leverage to a pretty meaningful extent through that renovation and transaction -- transitional period. So we've definitely seen acquisitions slow down. And speaking with market participants, buyers, accessing OEMS, bidding on transactions is down meaningfully compared to where we were about 90 days ago.

Okay. I appreciate that. And then how should we think about the roughly $0.5 billion of commitments that remain outstanding in terms of draw down schedule, or timing? How should we be thinking about that?

In what capacity? In terms of how much we're funding quarterly?

Correct. Of the committed but undrawn.

Yes. So, Jerry, you want to -- I know last quarter we did $65 million approximately. Do we have a projected forward run rate on future funding, Jerry?

Yeah. I don't think there's going to be a major deviation to that. I mean, we see a general range of call it $45 million to $75 million, depending on how quickly the projects move through. I don't expect it to move materially from that range going forward. So I think that's a pretty fair assumption. So thinking about how spread out that is, that's obviously over the course of a couple of years that you're actually going to deploy that. There's always some portion of that, that never ends up being deployed, based on how business plans actually get executed.

And I would add to that, that there's a decent amount of that future funding is in our construction loan, MultiFamily construction loan business. And those are very, very attractive spreads. So a lot of the future funding you're seeing are going to be SOFR 650 to 800 type price credits.

Okay. That's helpful. Thank you. Last one and I'll jump out. In terms of the collateral mix of origination activity in the first quarter, the surprise is the industrial in there, given the appreciation for that asset class right now. Is this indicative of what we should be thinking of the mix going forward or are you going to push more into Hospitality, add retail?

So we originated a fairly large retail loan at the beginning of Q2. It is a portfolio of long-term investment grade leases to retail tenant. So we're very pleased to get that out. I would say, generically, we are trying to look for non - MultiFamily assets. So we're looking to add industrial, retail, certainly hospitality, and we're also looking to do some more non-conventional stuff; condo inventory loans, condo construction loans. So we are looking to add yield and add other asset classes away from MultiFamily to the extent we can find the right credits at the right returns.

Thanks for taking the questions. I'll jump out now. Thank you.

Great. Thanks, Jason.

[Operator Instructions] And the next question comes from Steve DeLaney with JMP Securities. Please go ahead.

Thanks. Good morning, everyone. If you'll allow me, I have some specific questions, but I'd like to just make a brief comment about the agency MBS market. We've been receiving -- since we launched coverage on FBRT, we've been receiving a lot of inquiries and questions from customers about the ARMs portfolio and the fair value losses. And I just want to say that JMP follows all 17 of the residential mortgage REIT s very closely. And I can say to anyone who is concerned about the ARM losses and how they might have been avoided, we basically are seeing every one of these companies down 10% to 20% in book value in the first quarter. And just this morning, one company mentioned they're down another 13% in book just in the month of April. So my view is it was wise to move expeditiously out of the ARMs. Gosh, you can always talk about hedging this or hedging that, but we're in -- this is the reality of the world in the residential agency MBS base, that there are fair value losses broadly. Turning to the real business and the future of FBRT and why JMP was interested in picking up coverage, I'm curious on Mike's comments as far as opportunities to widen spreads. I think your comment to Jason about property types has something to do with that. But can you quantify in basis points what you think the pickup might be? Generally, above the 377 basis point average spread at March 31. Thank you.

So Steve, let me just give you a very high level answer to that. On an asset --

Okay.

-- class basis for what we're seeing in the middle market and some of the larger loans that we're participating in. Generically, MultiFamily today, I think is around 350 over.

Yeah.

We're seeing Hospitality credits roughly in the 500 to 550 range. And I would say retail and office credits that we like are somewhere in between those two, but certainly with a forehand. As you get --

Okay.

-- into some of the more non-traditional asset classes, as I mentioned, some condo inventory loans, you can see 78 handle on the spreads. So I -- those are the asset classes. And obviously, our primary focus is credit first and then pricing second. But we're definitely achieving better returns in the other asset classes away from MultiFamily and industrial.

Great. And obviously, you were very heavy in MultiFamily to begin with. Was it 70% or something like that?

Yeah. We are 72% MultiFamily. And I think I mentioned on our last call, we definitely did not see that going higher and hope that we will be able to pair that back by finding other opportunities. and other asset classes.

Got it that's helpful, Mike. Thank you. My last question was about the stock purchase plans. Obviously, Franklin's program does benefits -- provide support for the stock in the market, but has absolutely no impact on your balance sheet or your book value per share. Once that's completed I guess, then management and the board has to decide what to do about the $65 million and that will obviously impact your balance sheet. Any -- the goal, I guess there is to be -- deploy that in a way that it maximizes the accretion. I guess the success of it will be measured by the amount of accretion you can achieve in your book value. And so Richard or Jerry, is there any target range that you could tell us or investors that you would look to deploy it without pinning you down on that? But I'd just be curious where you see value on a price to book value levels to use that money?

Sure, Steve. Well, first of all, we have about another slow more money to go on our $35 million purchase program through the advisor, as you said, Franklin or Benefit Street Partners. After that, it's $65 million from the company, just to bring everybody up to speed. That 65 we've thought about as dedicated share repurchase proceeds to support the stock, should it need it. And we're planning on spending that money as long as the stock is below book value. Hopefully it won't be, but we think it's an important support mechanism. We just brought the company through the merge -- the reverse merger broader public, and wanted to have as much firepower as possible to take out any kind of technical factors that could impact our stocks. So answered your questions is I think it's less about for us trying to try to time the market and work for the maximum accretion. It's mostly about supporting the stocks. So you'll see us in the market as long as the shares trade below book value.

Got it. That's helpful. That's a little unique compared to some who I think just use it as a kind of a bottom feeding type thing when they're slammed down to 80%. But hopefully you won't get down there. You just had a large, I guess, the Series E converted mandatorily, April 19th. Any sense from those Investor Relationships, whether they are sitting on the stock, whether they're -- I know you can't speak specifically, but -- about any particular investor, but what is your sense that the mindset of those in -- those Series E -- previously Series E holders might be at this time?

Well, it's a good question, Steve. I mean, certainly can't speak for what their intentions may or may not be. We had an equity base of approximately $1 billion dollars pre the merger with Capstead. That, obviously, plus Capstead is to where we are today. Those shareholders consisted of the legacy shareholders, most of it retail, and about $400 million that we raised ourselves through the institutional market. The convertible preferred, which is now common, was amongst that additional capital that we raised from institution. So our expectation is that it's stickier, maybe even a little less fickle than retail can be sometimes. But probably I'll leave it to them to answer that question. But we've -- even while we were private, we treated this company as if it we're a public company. We did earnings calls just like this. We called them webinars, but they were calls just like this, and provided transparency. We've been pretty consistent in our performance, in our message, and hopefully our shareholders will be with us for a long time.

That's great. Well, I think the retail guys, they're focused on that dividend. And I think as long as you maintain or even grow the dividend, they're going to be happy campers, I would expect. Listen, thank you all for your comments this morning and we look forward to doing this again on your second quarter call. Thanks.

Great. Thanks, Steve.

We have no further questions. So this concludes our question-and-answer session, and I'll turn the conference back over to Lindsey Crabbe for any closing remarks.

Thank you for attending our call today. To reiterate, we are proud of the results we posted yesterday. If you have any further questions, please do not hesitate to reach out. Thanks.

This conference has now concluded. Thank you for attending today's presentation, and you may now disconnect.