Franklin BSP Realty Trust (NASDAQ:FBRT) reported a robust third quarter, with distributable earnings of $0.43 per fully converted share, indicating a 10.7% return on equity. The company's portfolio ended the quarter at $5 billion, predominantly comprised of multifamily collateral. Despite anticipating continued market distress due to a significant volume of commercial real estate debt maturing in the coming years, FBRT expressed confidence in its ability to navigate this dislocation.
Key takeaways from the earning call:
- FBRT originated $153 million of new loan commitments and received repayments of $290 million in Q3.
- The company closed a roughly $900 million Commercial Real Estate Collateralized Loan Obligation (CRE CLO), enhancing its total liquidity position to $1.8 billion.
- The average risk rating remained stable at 2.2, with a watch-list of three loans rated 4, accounting for only 1.7% of the total portfolio.
- FBRT had $110 million in foreclosure Real Estate Owned (REO), primarily consisting of its Walgreens retail portfolio.
- The company's buyback authorization had $39 million remaining at the end of the quarter.
- 90% of borrowers in the commercial mortgage REIT portfolio have activated interest rate caps and have not been significantly impacted by the increase in interest rates.
- The REIT's office sector exposure has been reduced to 6%, with the largest office loan being triple net leased to a large public company.
- The REIT plans to liquidate its Walgreens retail portfolio as the market allows.
- FBRT is actively seeking to invest in multifamily and hospitality assets.
FBRT's proactive approach to addressing maturing loans was highlighted during the call, with a focus on extending or modifying loans. The company has reduced its exposure to the office sector to 6%, with the largest office loan being triple net leased to a large public company. The company's REO positions at the end of the quarter stood at 2, with the majority of exposure in the Walgreens retail portfolio, which FBRT plans to liquidate as the market allows.
Despite acknowledging a market slowdown in new lease rent growth in certain areas due to elevated supply and increased concessions from developers, FBRT expressed confidence that the impact on credit would be short-term. The company expects a decline in supply in the future and anticipates a potential increase in rent growth.
The company closed a CRE CLO expected to yield a high teens return on equity, with an 18-month reinvestment period. Leverage decreased to 2.2 at the end of the quarter, but may increase as the REIT deploys cash into new opportunities. The Q3 deals were executed at less than 60% average Loan-to-Value ratios, with some involving existing sponsors while others were with new sponsors.
In response to a question about a slowdown in the multifamily market, the company agreed there is a supply issue in certain markets, specifically Phoenix, Suburban Austin, and Downtown Nashville. However, they believe it will only have a short-term impact on credit, expecting a significant decline in supply in 2025. They also anticipate a large number of renters in the future due to high mortgage rates, leading to potential rent growth. The call concluded with an invitation for further questions.
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