Franklin BSP Realty Trust, Inc. 2026 Q3 Earnings Call

Good morning, everyone, and welcome to FBRT's third quarter 2026 earnings call. Thanks for joining us today. As the operator mentioned, I'm Lindsey Crabbe. With me on the call today are Richard Byrne, Chief Executive Officer of FBRT, Jerry Baglien, Co-President, Chief Financial Officer, and Chief Operating Officer of FBRT, and Brian Buffone, Co-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, October 29, 2026.

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 the call over to Rich Byrne.

Great. Thanks, Lindsey, and good morning, everyone. Before Jerry and Brian take you through the quarter in some good detail, I want to spend a few minutes on where we are today and maybe most importantly, on what we're focused on going forward. First, as you know, we've announced a leadership transition. We did that in September. I want to emphasize that FBRT has a very deep and experienced team. Jerry, Brian and I, just for example, have worked together for more than a decade, and we've been certainly through a lot of different market environments together. FBRT is a giant and very important part of Benefit Street Partners, our firm's approximately $17 billion real estate credit platform. We're supported by 90 real estate professionals across Benefit Street Partners as well as in total 300 people, including NewPoint.

Having that kind of experience, scale, and resources behind FBRT is really a big advantage, and it certainly is in today's market. Lastly, on the big picture side, I want to also congratulate Jerry. Jerry now has an expanded role overseeing our broader real estate credit platform. Jerry, many of you know him, has been a senior leader in our business since its inception and has been deeply involved in investments, financing, and operations for many, many years. With that, I really most of all wanted to spend time here on our priorities because they are crystal clear to us, and there's only a few. Let me detail them. First, we want to resolve our watchlist loans and monetize our REO assets. This is a major focus for us. We are actively working on these resolutions. You'll hear more about this in detail especially from Brian.

Just on the big picture sense of it, sometimes taking control of an asset is a very valuable tool in providing the best path to maximizing recovery. Our goal is to convert these assets back into cash and put that capital to better use. That capital has far better use in either buying back shares or being redeployed into new loans. This will benefit us in so many ways. We have a strong asset management team and right now a renewed sense of urgency around getting this done. We're making progress across our five risk-rated watchlist loans, our foreclosure REO, and we're also focusing on our equity investment portfolio. Many of these assets are currently actively in a sale process right now. Again, you'll hear a little bit more about this from Brian. We expect to make good progress in the coming quarters as we work through these resolutions.

Second biggest focus is highly accretive share repurchases. At the substantial discount to book value our stock has been trading, buying back our own shares is an extremely compelling use of capital. During the quarter, we repurchased approximately $60 million of common stock. We paid an average price of $8.14 a share. That generated $0.55 per share of book value accretion. Future buyback activity will of course fluctuate. A lot of variables at play here, of course, is the stock price. Also the repayment speed of our existing portfolio, in other words, how much cash we have to spend and our available liquidity. Importantly, these two priorities, both the share repurchases and the monetization of our underperforming assets, go hand in hand. The accretion from the repurchases gives us greater flexibility to resolve legacy assets.

In certain cases, accepting a reasonable discount to accelerate a sale can make good economic sense when we can redeploy that capital into highly accretive share repurchases or new investments, as I said earlier. Third priority, protecting and growing book value. Despite the credit costs recognized this quarter, our fully converted book value remains stable at $14.26 a share, up $0.02 from last quarter. While the mortgage REIT sector has experienced significant share price pressure, FBRT's economic return, thanks to stability of our book value over time, has performed near the top of our peer group over the past year and two years. We remain disciplined about where we deploy capital, and we have a focus on best risk-adjusted returns. Finally, last point of our priorities, I want to talk about NewPoint.

We continue to be very pleased with this investment and are focused on its continued integration and growth. The acquisition brought really important capabilities to FBRT and added stable, recurring stream of income through its servicing business. The MSR portfolio also provided another source of book value stability and growth. For the other point we made about book value stability, although market-wide volumes have been very slow recently, we believe NewPoint will continue to be an important part of FBRT's long-term value proposition. Let me wrap up with this closing thought. At the significant discount to book value where our shares currently trade, we believe the path to narrowing the gap is clear. One, resolve legacy assets, recycle capital, repurchase shares when the economics are compelling, protect book value, and continue to demonstrate the value of NewPoint.

There's still a lot of work to do, but we know what the priorities are, and we have the right team and resources in place to execute that. With that, I'll turn the rest of the call over to Jerry and Brian. Jerry, first to discuss financial results and the current market environment. Over to you, Jerry. Great.

Thanks, Rich. Good morning, everyone. To start, I wanted to talk a little bit about the current market environment. The recent move higher in interest rates has slowed transaction activity and impacted valuations. Higher borrowing costs are causing some borrowers to revisit purchase prices, while borrowers with flexibility are delaying refinancings and waiting for greater stability. This slower transaction activity also means fewer repayments and as a result, a slower pace of capital recycling. We continue to see repayments, but the timing is less predictable, which can limit the capital available for share repurchases despite the compelling opportunity we see at the current discount. That said, it also means the agency book we service has been stickier than we expected, and overall, our servicing book is growing on a nominal basis. I think it is important to distinguish today's environment from the initial rate shock several years ago.

The market has now had several years to adjust to higher borrowing costs. Property values, financing structures, and borrower expectations have all moved considerably from where they were in 2021 and 2022. Additionally, we are much further along in the multifamily absorption story, and the outlook for future income growth is more constructive than it has been for the past four years. Vintage is the great diversifier in the real estate world today. There is still much stress to digest from the highs of the early 20s. The double hit of rates and stagnant or declining incomes makes that a challenging vintage, thus our emphasis on trying to put the last of that behind us. In regard to that, approximately 82% of our current loan portfolio was originated following the rate hiking cycle, compared with 77% last quarter and 68% at the end of 2025.

That continued transition is important when looking at our results this quarter. We are generating earnings from predominantly newer vintage, higher quality portfolio, while also recognizing the costs associated with resolving the legacy investments. I am going to turn to results for the third quarter. FBRT reported a GAAP net loss of $27 million or $0.36 per fully converted share. Distributable earnings were $3.3 million or negative $0.02 per fully converted share after adjustments to common, reflecting approximately $22 million of net realized loss adjustments. Before realized losses, distributable earnings were $26 million or $0.24 per fully converted share. The quarter included a $37.7 million CECL provision on our core portfolio. This is driven by increased specific reserve on a number of legacy multifamily assets to reflect current market conditions and deterioration in underlying property fundamentals.

As Rich discussed, resolving the legacy portfolio and monetizing REO is our highest priority. At quarter end, we had approximately $300 million of equity tied up in non-performing loans, underperforming loans, and REO assets. Our highest priority is the timely resolution and recycling of this capital. At the same time, we are balancing capital deployment with needs of our CLO financing structures and the opportunity to repurchase shares. During the quarter, we redeployed approximately $300 million of CLO proceeds into new investments while repurchasing 7.4 million shares, or approximately 7.7% of our beginning 2026 share count. Maintaining those CLO structures requires us to reinvest available proceeds rather than simply allowing the debt to amortize. To be able to reinvest, we need loans available, and that requires us to use some capital to originate. An amortizing CLO increases our interest expense and diminishes the power of these long-term liabilities.