Hello, and welcome to the Franklin BSP Realty Trust Fourth Quarter 2024 Earnings Conference Call. [Operator Instructions]. As a reminder, today's call is being recorded. I would now like to hand the conference over to Lindsey Crabbe. Please go ahead.

Good morning. Thank you, MJ, for hosting our call today. Welcome to the FBRT Fourth 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, February 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. We will refer to the supplementary slide deck on today's call. With that, I'll turn it 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're going to begin today's call on Slide 4. We're going to review our fourth quarter results, and then we'll open up the call, as always, to your questions. Jerry 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 into 3 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 billion in new loan commitments, including $441 million in the fourth quarter. Last quarter, we began tracking the percentage of our portfolio that has been originated since January 2023, reflecting current interest rates and valuations. Including originations through January 2025, 52% 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. 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 $1.1 billion of full payoffs from this vintage in this past year in 2024. In other cases, we are actively pursuing modifications with…

Great. Thanks, Rich, and thanks for everybody for being on the call today. Moving on to our results. Let's start on Slide 5. 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 $0.30 and $0.92 per diluted common share for the fourth quarter and the year-ended 2024. Earnings were negatively affected by our nonaccrual loans and REO positions. We did make progress in decreasing the book value attributable to our REO portfolio, which declined by approximately $63 million through asset sales in the fourth quarter. In addition, after the quarter end, we sold another REO asset for $63.8 million. 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. Our REO and nonperforming 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 $0.30 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. Turning to Slide 7. This is an overview of our origination activity for the quarter. We originated $441 million in new loan commitments during the quarter, primarily in the multifamily sector, which comprised 68% of our fourth quarter activity. We received $641 million in loan repayments during the quarter with 18 loans paying off in full. Of these, $578 million was from loans originated in 2021 and 2022 and multifamily loans made up the majority of the paydowns. Importantly, 2 office loans were also fully repaid, further reducing our exposure to that sector. Turning to Slide 8. Our average cost of debt on our core portfolio was SOFR 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 2 of our deals. The nonrecourse and non-mark-to-market structure of CLO financing makes it our preferred method for funding our portfolio. 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 million, of which $184 million is unrestricted cash. Our net leverage position was 2.6x 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.

Thanks, Jerry, and good morning, everyone. Thanks for joining us. I'm going to start on Slide 12. Our core portfolio stands at $5 billion, comprised of 155 loans averaging $32 million each. The portfolio is 99% senior mortgages with 93% being floating rate loans. Multifamily remains our preferred sector, securing 71% of the portfolio. Our core portfolio decreased again this quarter given significant repayments. As Jerry 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 344 basis points. 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 have 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 $3.4 trillion of commercial real estate debt maturing in the next 36 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. 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 4 properties at quarter end but as both Jerry and Rich mentioned, this has been reduced to…

[Operator Instructions]. Today's first question comes from Matthew Erdner with JonesTrading.

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?

Yes. 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 reasonably get. I mean it would seem pretty unlikely to tighten materially from here. I'm not going to call the last 5 basis points, obviously, but it would be hard to see them tighten another 50, so to speak. 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 tight of kind of peak valuations, Q4 '21, Q1 of '22, probably by 25 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. So I think there was a very long way of me saying, I think the spread tightening in the floating rate world is probably close to its end, but whole dollar coupons continue to have 7 handles on them.

And then, Jerome, a quick kind of modeling question for you. Other expenses, it rose about $5 million, give or take, quarter-over-quarter. And number to about $12.4 million. What should we expect the run rate there? And is there any material change kind of expense side?

Yes. Let me tell you to think about this in 2 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. 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 2 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. So you heard me say it could take a few quarters or more for us to work all that out.

The next question comes from Tom Catherwood with BTIG.

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?

Tom, 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. We were able to put on $2 billion 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 that the great thing about our platform is the breadth of our product offering, right? 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 tight here because we put on $2 billion 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 that part of the plate but we've got the ability to swing at pitches and hit them that other guys don't.

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?

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 4% 10-year versus a 5.25% 10-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? 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. 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 of this year, we've done it. But we're actively working towards that goal on literally a daily basis.

On the remaining REO assets, obviously, made great progress selling what you 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?

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 Sunbelt. 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 2 assets under contract. We are actively in the market with another 2 assets that we hope to have acceptable bid 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. 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.

The next question comes from Randy Binner with B. Riley.

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.

Yes. Most of the change is from where paydowns come back to us in terms of does it hit a CLO with reinvest or does it hit 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. It just delays the liquidity. But for the way we kind of lay it out, it comes out for my purpose of how we calculate that.

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. Did you break out how much of the $10.2 million of other expenses was that versus other stuff?

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 2 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. So it's really just I think it more of a net zero basis between those 2 line items in terms of how REO is actually coming through the books or flowing through from a cash perspective. It's almost net neutral in the entirety of the 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.

The next question is from Stephen Laws with Raymond James.

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 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?

Stephen, it's Mike. Thanks for the question. Yes. I mean, look, there is seemingly almost unlimited request for financing right now. If we wanted to take applications, we could probably sign $600 million to $800 million 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 REO 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. Borrower behavior continues to be really, really difficult with posturing this way and then going a completely 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 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.

Two quick loan questions. I think you guys mentioned the Georgia office was modified and included some paydown of the principal. Will that loan be upgraded given those actions can come off the watch list? Or you intend to leave it as 5 rated?

For the moment, we're going to leave it as 5-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, continue 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 4.

Denver office, I think you commented it 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?

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. So I think there's some price discovery that we have to do on that asset. I think there's 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 a multifamily. So probably can give you a more fulsome answer, Stephen, in a quarter or 2 after we've actually had our hands on the operation and understand the building and the leasing in the market a little bit better.

We already wrote down the asset pretty significantly as well.

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're going to return to the market probably at some point in '25. 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? 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?

Jerry and I and the team talk about it seemingly weekly, almost daily the past few weeks. We're looking at it constantly. It's 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 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 billion in 2024 at the widest spreads that we've seen in years. if we're able to time it where we can issue a liability at the tightest spreads 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.

And the last deal, you were able to get -- was it a 3-year replenishment period on that?

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 tenors that we'll be able to use that in the future. 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 2 things where they currently are, it's a wildly accretive liability.

This concludes our question-and-answer session. I would now like to turn the call back over to management for any closing remarks.

We appreciate you joining us today. Please reach out if you have any further questions. We look forward to speaking with you soon. Have a great day.

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