Franklin BSP Realty Trust, Inc. (FBRT) Q2 2025 Earnings Call Transcript

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Overview

The earnings call summary reveals strong financial performance and strategic growth, particularly with the NewPoint acquisition and loan originations focused on multifamily. Liquidity is robust, and REO sales are above principal basis, indicating effective asset management. The Q&A session supports this with positive insights on spreads, leverage plans, and asset quality. Despite a slight dip in book value, the overall outlook is optimistic, with expected accretive benefits from NewPoint. Given the $1 billion market cap, the stock is likely to see a positive reaction, with a predicted movement of 2% to 8%.

Key Financial Performance

New Loan Commitments $61 million in new loan commitments this quarter, primarily in multifamily assets. This was deliberately lower as the company maintained a higher cash balance ahead of the NewPoint acquisition.

Loan Repayments $317 million in loan repayments in the second quarter across 4 different property types. This is an encouraging trend as the company plans to redeploy these funds into new loans with more attractive credit metrics.

Distributable Earnings $0.27 per fully converted share. The company believes there is a clear path to growing this to support their dividend.

REO Portfolio Sales Sold 3 multifamily assets totaling $56 million, which in aggregate was above the principal basis at the time of foreclosure. This reflects the company's strategy of being selective and patient in managing REO to maximize recoveries.

Liquidity Position $501 million, including $77 million in unrestricted cash, excluding the cash paid at the NewPoint acquisition closing. This liquidity provides significant capacity for future investments.

GAAP Earnings $24.4 million or $0.21 per fully converted common share. This reflects the company's financial performance for the quarter.

Book Value $14.82 per fully converted share. This is a key indicator of the company's valuation.

Average Cost of Debt SOFR plus 2.3%. This reflects the company's financing costs for its core portfolio.

Net Leverage Position 2.2x with recourse leverage at 0.3x. This indicates the company's leverage and financial stability.

NewPoint Acquisition Expected to generate $4 billion to $5 billion in agency FHA volume in 2025. Year-to-date, NewPoint has already closed $1.9 billion in agency and FHA volume. The acquisition is expected to be accretive to earnings and book value in 2026.

Watch List Loans Represent only 5% of the total portfolio. This indicates the company's proactive management of underperforming assets.

Foreclosure REO Portfolio Over the past 2 years, 19 properties totaling $560 million in UPB were taken into REO. 10 of these have been sold for $270 million, in aggregate above the principal balance at the time of foreclosure.

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Operating Highlights

NewPoint Acquisition: FBRT successfully closed the NewPoint acquisition on July 1, 2025. This acquisition expands FBRT's platform in multifamily lending, adds scaled origination and servicing capabilities, and integrates a mortgage servicing platform. It is expected to drive long-term earnings and book value growth.

Market Positioning in Multifamily Lending: The NewPoint acquisition significantly increases FBRT's addressable market in multifamily lending, enhancing its competitive positioning.

Loan Originations and Repayments: FBRT originated $61 million in new loan commitments, primarily in multifamily assets, and received $317 million in loan repayments in Q2 2025.

REO Portfolio Management: FBRT sold 3 multifamily assets totaling $56 million, above the principal basis at the time of foreclosure, and achieved 90% occupancy in its largest REO asset in Raleigh, North Carolina.

Financial Performance: FBRT reported GAAP earnings of $24.4 million ($0.21 per share) and distributable earnings of $29 million ($0.27 per share). The book value ended at $14.82 per share.

Dividend Strategy: FBRT maintained its dividend at $0.355 per share and outlined three key drivers to achieve dividend coverage, including CLO calls, REO portfolio reinvestment, and NewPoint's contribution.

Stock Valuation and Legacy Portfolio: FBRT addressed concerns about its stock trading at a discount to book value, emphasizing the strength of its legacy portfolio and the unlikelihood of significant unrealized losses.

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Risk or Challenges

Dividend Coverage Concerns: The company acknowledges concerns about its current dividend coverage, which could impact investor confidence and stock valuation.

Legacy Portfolio Quality: The market is skeptical about the quality of assets in the legacy portfolio, particularly loans originated before interest rate hikes, which could lead to potential losses.

NewPoint Acquisition Risks: The recent acquisition of NewPoint introduces integration risks, including achieving projected synergies, cost savings, and earnings contributions.

Office Exposure: The company has $105 million in office exposure, which is a sector facing challenges such as lease terminations and market dislocation.

Watch List Loans: 5% of the portfolio is on the watch list, including underperforming multifamily loans and office assets, which require active management and could lead to losses.

Foreclosure and REO Risks: The company has taken 19 properties into REO over the past two years, with 9 still unsold, posing risks related to stabilization and market conditions.

Market Dislocation: The broader CRE market is experiencing dislocation, with lenders and borrowers needing to reset expectations, which could impact asset valuations and liquidity.

Interest Rate Environment: Higher long-term interest rates and uncertainty around Fed policy could affect loan demand and portfolio performance.

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Guidance & Outlook

Loan Repayments and Redeployment: The company received $317 million in loan repayments in Q2 2025 and plans to redeploy these funds into new loans with more attractive credit metrics, benefiting future performance.

Dividend Growth Path: Distributable earnings were $0.27 per share, with a clear path to growing this to support the dividend.

NewPoint Acquisition Impact: The acquisition of NewPoint is expected to significantly increase the addressable market, enhance income stability, and provide recurring book value per share growth. NewPoint is projected to be accretive to GAAP earnings and book value per share in the first half of 2026 and to distributable earnings in the second half of 2026.

CLO Optimization: Plans to call several CLOs past their reinvestment periods to unlock liquidity and reinvest equity, potentially generating $0.04 to $0.06 per share quarterly.

REO Portfolio Reinvestment: Reinvestment of equity from the REO portfolio is expected to contribute $0.08 to $0.12 per share per quarter to distributable earnings.

NewPoint Long-Term Contribution: NewPoint is expected to deliver an 8% ROE or better, generating approximately $0.08 per share in quarterly earnings contribution, with potential for low teens ROE over time.

Market Trends and Multifamily Recovery: Multifamily fundamentals are improving with slowing new supply, reemerging rent growth, and positive momentum in strong markets. Legacy assets from the 1970s and 1980s are expected to lag in recovery.

CRE Market Reset: A period of market reset is anticipated, with lenders marking loans appropriately and moving capital, which is expected to bring back healthy market functionality.

Loan Servicing Migration: Migration of BSP loans to NewPoint's servicing platform is expected to be completed by Q1 2026, resulting in several million dollars of savings and incremental float.

2025 and 2026 NewPoint Projections: NewPoint is expected to close $4 billion to $5 billion in agency FHA volume in 2025, with GAAP net income projected between $23 million and $27 million and distributable earnings between $13 million and $17 million. Earnings contribution is expected to grow meaningfully in 2026.

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Shareholder Return Plan

Dividend per share: The Board determined it was appropriate to maintain the second quarter dividend at the current level of $0.355 per share.

Dividend coverage: The company believes there is a clear path to growing distributable earnings to a level that supports the dividend.

Dividend growth drivers: Three key drivers were identified to achieve dividend coverage: calling CLOs to generate liquidity, reinvesting equity from REO portfolio, and growing contributions from the NewPoint acquisition.

Stock valuation and shareholder returns: The company highlighted that its stock trades at a steep discount to book value and emphasized its strong economic returns, defined as change in book value plus dividends paid, of 6.6% and 11.9% over the past 12 and 24 months, respectively.

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Key Q&A

Q:Have you resumed originations for the core portfolio, and at what pace?

A:Yes, originations have resumed. The pace will start slow but is expected to grow quarter-over-quarter, especially in conjunction with the calling of CLOs. The target portfolio size to maximize dividend coverage is around $5 billion, with an additional $0.5 billion in net originations.

Q:What are you seeing in terms of spreads compared to a year ago?

A:Spreads are meaningfully tighter compared to a year ago, by about 100 to 125 basis points for a fairway multifamily loan. Compared to 60-90 days ago, spreads are tighter by 25 to 50 basis points.

Q:Do CLOs need to be replaced with other debt when called?

A:Yes, the plan is to relever the assets back up to around 75% advance levels, which will free up cash for more originations. This will also align with the target leverage range of 2.5 to 2.75x.

Q:When will the pro forma numbers for NewPoint be available, and how should they be interpreted?

A:The pro forma numbers will be available within 24 hours. They will provide a guidepost for structuring the forward-looking combined business and help model volume numbers and expected results.

Q:What impact would GSE privatization have on the business?

A:Management believes GSE privatization would have no significant impact on the business. The federal government is expected to maintain liquidity in the housing sector, ensuring it remains the lowest cost of capital.

Q:What is the current state of the bridge business and asset quality?

A:The bridge business is experiencing a deluge of liquidity, with spreads tightening across the board. Asset quality is significantly better than 4-5 years ago, with newer, high-quality multifamily assets and improved credit metrics.

Q:What does the NewPoint platform need to ramp origination activity?

A:The platform needs a larger sourcing network and additional personnel to expand its reach. Capital is not a limiting factor.

Q:What will spark a sustained recovery in investment sales?

A:Management believes there will not be a specific catalyst but rather a gradual acceptance phase where investors and regulators move past the 'pretend and extend' approach.

Q:Is there a savings related to migrating FBRT's loans to NewPoint's servicer?

A:Yes, migrating loans will eliminate markups and provide savings from cash reserve float, benefiting FBRT and other managed loans.

Q:What is the marginal ROE on new CLO originations?

A:The marginal ROE on new CLO originations is in the low teens, which is excellent on a nominal and risk-adjusted basis.

Q:What are the real-time renewal rates in multifamily?

A:Management could not provide specific details on renewal rates, as they vary by market.

Q:Review of Unclear Management Responses

A:Management avoided directly answering the question about real-time renewal rates in multifamily, citing variability by market.

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Earnings Word Cloud

The most frequently occurring keywords in this quarter's earning call

FBRT Transcript

Franklin BSP Realty Trust, Inc. (FBRT) Q4 2025 Earnings Call Transcript

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The earnings call highlights several positive factors: a strategic shift towards stable earnings, a strong share buyback program, and improving multifamily fundamentals. Despite some uncertainties in the Q&A, the company's focus on core portfolio growth and dividend coverage, alongside anticipated strong CMBS performance, suggest a positive outlook. The market cap suggests moderate volatility, supporting a 'Positive' prediction (2% to 8%) for stock price movement over the next two weeks.

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The earnings call summary reflects strong financial performance with record origination volumes and a significant agency servicing portfolio increase. The NewPoint acquisition is expected to enhance earnings and market presence. The Q&A session reveals a positive outlook on future origination volumes and strategic focus, despite some margin concerns. The expanded buyback authorization and improved liquidity further bolster the positive sentiment. Given the company's small market cap, the stock price is likely to react positively, potentially moving within the 2% to 8% range.

Franklin BSP Realty Trust, Inc. (FBRT) Q2 2025 Earnings Call Transcript

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Earnings call transcript: Franklin BSP Realty Trust Q1 2025 misses EPS forecast

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The earnings call reveals negative distributable earnings and a dividend payout exceeding earnings, leading to a decreased book value. The company anticipates falling short of dividend coverage, and the dividend may be revisited due to market conditions. While liquidity is strong, management's avoidance of specific guidance on revenue from the agency business and the timeline for REO asset turnover adds uncertainty. Despite a strategic acquisition, these factors suggest a negative sentiment, likely leading to a stock price decline of 2% to 8% over the next two weeks.

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