Franklin BSP Realty Trust, Inc. (FBRT) Q3 2025 Earnings Call Transcript

Access earnings results, analyst expectations, report, slides, earnings call, and transcript.

Overview

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.

Key Financial Performance

NewPoint originations $2.2 billion in originations, a record volume quarter, resulting in a $1.8 billion increase in the agency servicing portfolio. Reasons for change: Successful integration of NewPoint into FBRT.

Distributable earnings $26.7 million or $0.22 per fully converted share, including $1.7 million of realized losses related to an REO sale. Excluding this, distributable earnings were $0.23 per share. Reasons for change: Contributions from NewPoint and REO sales.

GAAP net income $17.6 million or $0.13 per fully converted common share. Reasons for change: Impact of NewPoint acquisition and dividend under coverage.

Book value per share $14.29 per fully converted share, a decrease due to under coverage of the dividend and the NewPoint acquisition.

Loan originations $304 million in new loan commitments, with $196 million funded. Reasons for change: Liquidity maintained for the NewPoint acquisition.

Loan repayments $275 million in loan repayments. Reasons for change: Portfolio adjustments and repayments.

Available liquidity $522 million at quarter end. Reasons for change: Maintenance of liquidity for acquisitions and operations.

CRE CLO issuance Approximately $1.1 billion CRE CLO issued, reducing financing costs by 65 basis points and generating $250 million in cash. Reasons for change: Refinancing older CLOs and optimizing financing structure.

NewPoint contribution to distributable earnings $9.3 million or $0.09 per fully converted share. Reasons for change: Record origination volume and integration benefits.

MSR income $19.7 million in the third quarter, with an average MSR rate of approximately 91 basis points. Reasons for change: High origination volume and servicing portfolio growth.

Servicing portfolio value $47.3 billion at quarter end. Reasons for change: Growth in NewPoint's operations and integration.

REO portfolio 9 foreclosure REO positions at quarter end, reduced from 10. Reasons for change: Sale of 1 multifamily asset and ongoing asset management.

Office loan exposure $70 million across 4 loans, reduced to 1.6% of the portfolio. Reasons for change: Payoff of a net lease headquarter office asset and portfolio adjustments.

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Operating Highlights

NewPoint Acquisition: FBRT successfully closed the acquisition of NewPoint on July 1, 2025. NewPoint had a record volume quarter with $2.2 billion of originations, contributing $9.3 million to distributable earnings in its first full quarter.

Market Conditions: Borrowers and lenders are resetting and marking assets realistically, leading to healthier market conditions. Multifamily fundamentals are improving with slowing new supply, reduced concessions, and reappearing rent growth.

Loan Portfolio: FBRT originated $304 million in new loan commitments and funded $196 million, primarily in multifamily. The core portfolio size is expected to return to at least $5 billion over the next few quarters.

Liquidity and Financing: FBRT had $522 million in available liquidity at quarter-end and closed its 12th CRE CLO post-quarter, adding $1 billion of origination capacity and reducing interest expenses.

Share Repurchases: FBRT resumed share repurchases in Q4, buying back 540,000 shares for $6 million, with $25.6 million remaining in the buyback allocation.

NewPoint Integration: Integration of NewPoint is progressing well, with migration of BSP loan servicing expected to complete by Q1 2026. NewPoint is expected to be accretive to earnings and book value by 2026.

Portfolio Diversification: FBRT is exploring additional investment opportunities outside the whole loan space, including CMBSB pieces, horizontal risk retention investments, and CRE CLO bond investments.

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Risk or Challenges

Liquidity constraints: Maintaining liquidity for the NewPoint acquisition limited new loan originations early in the quarter, leading to a slight decline in the core portfolio size.

Watch list loans: Three new loans were added to the watch list this quarter, indicating potential risks in the portfolio. While one loan was removed following full repayment, the watch list count remains a concern.

Legacy portfolio challenges: The company continues to address legacy portfolio issues, including REO assets and watch list loans, which tie up capital and require active management.

Spread environment: Spreads on whole loan origination have tightened, making leverage returns less compelling and requiring careful pacing of capital deployment.

Office loan exposure: Although reduced, office loan exposure remains at $70 million across four loans, posing a risk given the challenges in the office real estate market.

Short sale risk: One watch list asset is expected to be a short sale, resulting in a $2.3 million markdown this quarter.

Dividend undercoverage: The dividend remains undercovered, with key drivers for improvement still in progress.

Foreclosure REO portfolio: The company has nine foreclosure REO positions, with some assets under PSA but still requiring optimization and execution to enhance value.

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Guidance & Outlook

Core Portfolio Growth: The company expects its core portfolio to return to its target size of at least $5 billion over the next few quarters.

CLO Transaction Impact: The recent CLO transaction is expected to lower interest expenses and add approximately $1 billion of origination capacity to the total loan portfolio.

Share Repurchases: The company has resumed share repurchases in Q4, with $25.6 million remaining on the buyback allocation, and the authorization has been extended through December of next year.

NewPoint Integration: The integration of NewPoint is expected to generate $0.04 to $0.06 per fully converted share annually to earnings once the migration of FBRT's loan servicing book is completed by Q1 2026. NewPoint is expected to be accretive to GAAP earnings and book value per share in the first half of 2026 and accretive to distributable earnings in the second half of 2026.

Dividend Coverage: The company expects to move toward dividend coverage, with incremental earnings contributions from recent CLO transactions and REO sales projected to add $0.05 to $0.07 and $0.08 to $0.12 per share per quarter, respectively.

Market Trends and Multifamily Fundamentals: Multifamily fundamentals are improving, with new supply slowing, concessions burning off, and rent growth reappearing in some markets. Quality assets are leasing well, and the company is confident in underwriting attractive and differentiated deal flow.

CMBS Performance: The company anticipates strong CMBS performance in Q4, potentially one of the strongest quarters in its history, if market conditions hold.

Watch List and REO Portfolio: The company expects to remove several watch list loans in Q4 via loan modifications or asset sales. Additionally, four REO assets are under PSA, with two expected to close in the next two weeks.

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Shareholder Return Plan

Dividend under coverage: The decrease in book value per share was caused by under coverage of the dividend and by the NewPoint acquisition. The company is focused on moving towards dividend coverage, with key drivers outlined to achieve this goal.

Dividend contribution from REO sales: The company reduced its REO balance this quarter through asset sales and plans to redeploy that capital into new originations. This activity is estimated to contribute approximately $0.08 to $0.12 per share per quarter to distributable earnings over time.

Dividend coverage timeline: The company expects NewPoint to be accretive to GAAP earnings and book value per share in the first half of 2026 and accretive to distributable earnings in the second half of 2026, which will support dividend coverage.

Share repurchase program: The company resumed share repurchases in Q4, repurchasing 540,000 shares for approximately $6 million through October 24. The Board of Directors expanded the buyback authorization through December of next year, with $25.6 million remaining on the buyback allocation.

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Key Q&A

Q:What led to the higher end of origination volumes and what will drive the higher end in Q4?

A:The company has been able to cultivate the balance sheet and convert loans from a floating rate basis into their CMBS product, which faces less competition. If market conditions hold, Q4 is expected to be a strong quarter for the CMBS group.

Q:Does the company plan to move away from the core portfolio while exploring alternative investments?

A:No, the company is actively originating in its core business of whole loans for the balance sheet. They are exploring opportunities in markets with better returns and credit profiles while maintaining their core focus.

Q:What should be expected regarding the comp and benefits expense line item going forward?

A:The expense is variable and trends with volume, as it is tied to profit share on originations. It may scale throughout the year as people hit volume targets, making it difficult to extrapolate from Q3 alone. A few quarters are needed to establish a normal range.

Q:Are repayments expected to remain elevated in Q4?

A:Repayments are expected to be relatively in line with the pace seen throughout the year. However, Q4 is harder to predict due to variability in year-end closings.

Q:Is there a target size for the core portfolio?

A:The company is targeting a stabilized portfolio size of $5 billion to $5.5 billion on a whole loan basis.

Q:Is the record quarter for NewPoint a good run rate going forward, or is there further upside?

A:The record quarter is not expected to be repeatable every quarter. The company does not expect NewPoint to achieve $8 billion of origination in 2026. The quarter was an outlier, and annual guidance should be used for expectations.

Q:Did the large transaction in Q3 have lower margins, and could there be margin improvement going forward?

A:Yes, the large transaction had slightly lower margins, and there could be margin improvement in the future.

Q:What are the company's thoughts on the GSEs coming out of conservatorship and its potential market impact?

A:The company believes it is a complicated issue and does not expect quick changes. They speculate that an explicit guarantee might replace the implicit guarantee to avoid market disruption, but they remain skeptical about the timeline.

Q:Review of Unclear Management Responses

A:Management avoided giving a direct answer regarding the potential impact of GSEs coming out of conservatorship, as their response was speculative and lacked concrete details.

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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) Q3 2025 Earnings Call Transcript

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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%.

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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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The earnings call reveals a mixed financial performance with negative distributable earnings, but liquidity remains strong. The NewPoint acquisition is expected to enhance future earnings, though it currently adds to expenses. Dividend coverage is below 100%, raising concerns about sustainability. The Q&A indicates management's cautious optimism but lacks specific guidance on key metrics, leading to uncertainty. Given the company's small market cap, the stock price may fluctuate within a neutral range as investors weigh the potential benefits of the acquisition against current financial challenges and dividend concerns.

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