FBRT Q3 2026 Earnings Call Transcript

DATE

Thu, Oct. 29, 2026

CALL PARTICIPANTS

• Executive Director of Investor Relations - Lindsey Crabbe
• Chief Executive Officer - Richard Jan Byrne
• Co-President, Chief Financial Officer and Chief Operating Officer - Jerome Stephen Baglien
• Co-President - Brian Buffone

TAKEAWAYS

• GAAP Net Loss -- $27.0 million, representing a $(0.41) loss per diluted common share, primarily due to credit loss provisions and realized loss adjustments.
• Distributable Earnings -- $3.3 million or $(0.02) per fully converted share, reflecting approximately $24.2 million of net realized loss adjustments during the quarter.
• Core Portfolio Provision for Credit Losses -- $37.7 million, driven by specific reserves on legacy multifamily assets reflecting deterioration in underlying property fundamentals.
• Book Value per Share -- $14.26 on a fully converted basis, representing an increase of $0.02 from the prior quarter.
• Common Stock Repurchases -- 7,433,748 shares at an average price of $8.14 per share, totaling $60.5 million in aggregate value.
• Buyback Accretion -- $0.55 per diluted common share, resulting from the significant discount between the repurchase price and book value.
• Core Loan Portfolio -- $4.1 billion across 175 loans, with an average loan size of $23.2 million at the end of the quarter.
• Multifamily Portfolio Concentration -- 83% of the core portfolio, up from 80% in the previous quarter as the company continues to focus on this asset class.
• Office Sector Exposure -- 1% of the total loan portfolio, remaining stable as management works through legacy credit issues.
• New Loan Commitments -- $249.3 million closed during the quarter at a weighted average spread of 266 basis points.
• Watch List Loans -- 13 loans totaling $333.6 million, representing approximately 8% of the total loan portfolio, a decline from 10% in the second quarter.
• Real Estate Owned (REO) -- 10 foreclosure positions with a total book value of $339.5 million, an increase of $140 million due to transitions from the watch list.
• Agency Business Originations -- $670.4 million in new commitments, representing a 68% increase from the second quarter of 2026.
• Agency Servicing Portfolio -- $61.3 billion, which grew by $1.4 billion during the quarter.
• NewPoint Distributable Earnings -- $11 million for the quarter, delivering a double-digit return on investment and benefiting from strong HUD activity.
• Total Liquidity -- $407.2 million, including $100.8 million of cash and cash equivalents.
• Net Leverage -- 2.7x at the end of the quarter, providing balance sheet flexibility for strategic priorities.
• Conduit Activity -- $61.5 million of fixed-rate conduit loans originated and $54.5 million sold for a gross gain of $1.0 million.
• Mortgage Servicing Rights (MSR) -- $201.2 million book value, providing a natural hedge against interest rate volatility.
• Loan Repayments -- $405.5 million received during the quarter, aiding in capital recycling and leverage management.
• Portfolio Vintage -- 82% of the loan portfolio originated after the 2022 interest rate hiking cycle, up from 77% last quarter.
• Interest Expense -- $59.8 million for the quarter, compared to $76.5 million in the prior year quarter.
• Specific Allowance Provision -- $38.7 million in specific allowances for the core portfolio, partially offset by a $1.0 million general benefit.
• Servicing Revenue -- $12.3 million net revenue, up from $3.6 million in the prior year quarter.
• CLO Reinvestment -- $300 million of CLO proceeds redeployed into new investments to maintain the power of long-term financing structures.

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RISKS

• Baglien stated, "The recent move higher in interest rates has slowed transaction activity and impacted valuations," noting that higher borrowing costs are causing some borrowers to revisit purchase prices.
• Baglien warned that slower transaction activity "means fewer repayments and, as a result, a slower pace of capital recycling," which can limit capital available for share repurchases.
• Buffone noted, "The market is in flux. And I think when that is happening, it has a direct flow through to valuation," particularly regarding distressed assets undergoing the risk rating process.

SUMMARY

Franklin BSP Realty Trust, Inc. (NYSE:FBRT) reported a GAAP net loss of $27.0 million for the third quarter of 2026, driven largely by credit loss provisions and realized losses as the company focused on resolving legacy assets. Management reported that its highest priorities include the monetization of real estate owned (REO) positions and the recycling of capital into accretive share repurchases, which added $0.55 per share to book value this quarter. The company maintained a stable fully converted book value of $14.26 per share, even while recognizing significant credit costs. The loan portfolio continued its transition toward newer vintages, with over 80% of loans now originating after the initial 2022 interest rate shocks, while the Agency Business and NewPoint segment provided stable recurring income streams through servicing and MSR portfolios.

• Byrne stated, "The accretion from the repurchases gives us greater flexibility to resolve legacy assets."
• Management reported that 10 assets from the equity investment and REO portfolios are currently in an active sale process.
• Baglien noted that approximately $300 million of equity is currently tied up in nonperforming loans, underperforming loans, and REO assets, which the company aims to convert back to cash.
• The company's board of directors extended the share repurchase program through Dec. 31, 2027, as of Oct. 27, 2026.
• Buffone indicated that for remaining REO assets, the company is "completing construction stabilizing operations and evaluating the appropriate timing for a sale to maximize recovery."
• Management reported that while HUD activity was strong in the third quarter, the volume was higher than what would be expected on an annualized basis.

INDUSTRY GLOSSARY

• CECL: Current Expected Credit Losses, an accounting standard for estimating allowances for credit losses on financial instruments.
• CLO: Collateralized Loan Obligation, a structured financial product backed by a pool of loans.
• HUD: The U.S. Department of Housing and Urban Development, which provides mortgage insurance and support for multifamily and healthcare properties.
• MSR: Mortgage Servicing Rights, the contractual right to perform servicing activities for a loan in exchange for a fee.
• PSA: Purchase and Sale Agreement, a legally binding contract between a buyer and seller that outlines the terms and conditions of a real estate transaction.
• REO: Real Estate Owned, a class of property owned by a lender after a foreclosure or a deed-in-lieu transaction.

Full Conference Call Transcript

Operator: Good day. And welcome to the Franklin BSP Realty Trust Third Quarter of 26 Earnings Conference Call. All participants will be in a listen only mode for the duration of the call. And should you need any assistance today, please signal a conference specialist by pressing the star key followed by 0. After today's presentation, will be an opportunity to ask questions. Also, please be aware that today's call is being recorded. I would now like to turn the call over to Lindsey Crabbe, Executive Director of Investor Relations. Please go ahead.

Lindsey Crabbe: Thank you. Morning, everyone, and welcome to FBRT's third quarter 2026 earnings call. Thanks for joining us today. As the operator mentioned, I am Lindsey Crabbe. With me on the call today are Richard Jan Byrne, Chief Executive Officer of SBRT; Jerome Stephen 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.

Information conveyed on this call is current only as of the date of this call, 10/29/2026, 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.sbrtreit.com. Will refer to the supplementary slide deck on today's call. With that, I will turn the call over to Richard Jan Byrne.

Richard Jan 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 are focused on going forward. First, as you know, we have announced the leadership transition. We did that in September. I want to emphasize that FBRT has a very deep and team. Jerry, Brian, and I, just for example, have worked together for more than a decade, and we have been certainly through a lot of different market environments together.

But also FBRT is a giant and very important part of Benefit Street Partners, our firms, approximately 17 billion real estate credit platform. We are supported by 90 real estate professionals across benefits Street Partners as well as or 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 the senior leader in our business since its inception and has been deeply involved in our investments financing, and operations for many, many years. So with that, I really most of all wanted to spend time here on our priorities because they are crystal clear to us. And there is only a few. And so let me detail them. First, we want to resolve our watch list loans and monetize our REO assets. This is a major focus for us. We are actively working on these resolutions. You will hear more about this in detail from especially from Brian.

But you know, just in 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 are making progress across our 5-rated watch list loans, our foreclosure REO and we are also focusing on our equity investment portfolio.

10 of these assets are currently actively in a sale process right now. Again, you will 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. So 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. So 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, much cash we have to spend and our available liquidity. Importantly, these 2 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. So 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. And 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 2 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 new point. 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. Also the MSR portfolio also provided another source of book value stability and growth you know, 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 long term value proposition. So 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. 1, resolve legacy assets.

Recycle capital, repurchase shares when the economics are compelling, protect book value, and continue to demonstrate the value of NewPoint. there is 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. So with that, I will 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.

Jerome Stephen Baglien: Great. Thanks, Richard. Good morning, everyone. To start, 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 and 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 shocks 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 2022 and 2020. 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 4 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 twenties. 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.

Now 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. It was driven by increased specific reserve on a number of legacy multifamily assets to reflect current market conditions 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 nonperforming 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. We do not want to hamper the long term benefits they provide. Our balance sheet provides us with flexibility to execute on these priorities. Net leverage ended the quarter at 2.7x. Approximately 81% of our financing on our core book is non mark to market, we ended the quarter with approximately $47 million of liquidity. Turning to NewPoint, agency and FHA origination volumes increased approximately 68% from the second quarter to $670 million Originations continue to be soft across the market with the rise in rates.

Although higher rates have impacted origination volume, they make our MSR portfolio more durable providing a natural hedge and increasing income on our servicing book via float income. It also means we do not need to originate as much to maintain the stability and thus the yield of our servicing book. We have seen the benefits of this natural interest rate hedge. NewPoint generated approximately $11 million of distributable earnings during the quarter, delivering a double digit return on our investments. Results benefited from particularly strong HUD activity, which while welcome is higher than what we would expect on an annualized basis. And with that, turn it over to Brian to give more detail on our portfolio.

Brian Buffone: Thanks, Jerry. Good morning, everyone. Our core loan portfolio ended the quarter at approximately $4.1 billion across 175 loans with an average loan size of approximately $23 million. Multifamily represents more than 83% of our portfolio now. that is up from 80% last quarter and 77% at the end of 2025. And office exposure remains at just 1%. As Jerry mentioned, the portfolio continues to migrate toward newer vintage loans which were underwritten in a substantially different rate and valuation environment than the legacy loans that continue to account for most of our credit issues. During the quarter, we closed 17 new loans totaling $249 million of commitments at a weighted average spread of 266 basis points.

Approximately 97% of the quarter's new originations were multifamily. The lending market for high quality assets remains very competitive. And we continue to see some lenders prioritize higher volume at tighter spreads. We, however, remain disciplined not just on pricing, but also with a focus on credit and debt yields we are targeting. Particularly with the recent volatility that we have seen in the treasury market. We are focused on experienced sponsors, appropriate leverage and transactions where we believe we are adequately being paid for the risk we are taking. Turning to our credit, our average portfolio risk rating remained at 2.4 during the quarter. We ended September with 13 watch list loans.

4 loans were added consisting of 3 multifamily loans and 1 hospitality loan, while 3 multifamily loans were removed as they transitioned into REO. Despite the increase in loan count on watch list, the total dollar amount on watchlist declined to $334 million that is approximately 8% of our total loan portfolio and down from 10% last quarter. Of the watch list loans, 7 are risk-rated 5, and 6 are risk-rated 4, Importantly, we are actively pursuing sales across the majority of our risk rated 5 loans as well as the majority of our foreclosed REO portfolio. As Jerry mentioned, resolution of these items is a major focus of ours right now.

Turning specifically to the foreclosure REO, we ended the quarter with 10 assets totaling $340 million of book value. That is up approximately $140 million versus last quarter primarily reflecting the transition of assets from the watchlist to REO. Several REO assets are currently being marketed for sale. 2 are currently under signed PSAs and our Houston asset multifamily asset was sold during the quarter or I am sorry, after quarter end. For the remaining assets, we are completing construction stabilizing operations and evaluating the appropriate timing for a sale to maximize recovery. We have a high degree of confidence in our asset management team's ability to execute these plans.

Our objective is to convert these under earning positions back to cash as efficiently as possible and recycle that capital into higher returning opportunities, including share buybacks. We believe the actions underway across the watchlist and REO portfolio represent a measurable progress towards resolving these legacy issues. We With that, I will turn it back to the operator for questions.

Operator: We will now begin the question and answer session. If you are using a speakerphone, please pick up your handset before pressing the keys. And to withdraw a question, you may press star, then 2. At this time, we will pause just momentarily to assemble our roster. And our first question here will come from Matthew Erdner with Jones. Please go ahead.

Matthew Erdner: Richard, nice to hear from you again. I would like to kind of touch on the REO a little bit and if you guys could give kind of any sense of timing or expectations there and I guess, if there is a better way to kind of frame it, just overall about the transaction environment we are in today, you know, it seems like that is slowed down quite a bit. And, you know, what would it take for, I guess, the transaction market to get a little more velocity behind it, which in turn, I think, lead to kind of more REO sales on your guys' end.

Just how are you guys kind of thinking about the overall environment right now?

Brian Buffone: Yeah. I will take that 1. Thanks. Thanks for the question. We have talked about it on multiple earnings calls now, and the. You know, I think the biggest head. Headwind we are seeing now is in the. what is happening in the treasury market. And, you know, 6 months ago when we were sitting at a 4.5% 10-year, I would have expected a lot more transaction volume, a lot more acceleration of REOs coming off of the book. And to your point, that slowed when we went from 4.5, 10-year to 5 and a quarter and now kind of settling in, hopefully, around the 5-year.

So I think that is the that is the biggest unknown on a going forward basis. If we finally settle in and get some stability in the 10 year, even if it is at 5, I think that will give borrowers and buyers clear. A more clear outlook on what is happening in the in the borrowing environment. And so we will. They will be able to value their properties a little bit more accurately then we will be able to have additional transactional volume to then clear out the REO book.

So it is really a function of where we end up in the 10-year If we if we drop back down to the 4.5% range where we were 6 months ago, I would expect transactional volume to increase pretty significantly at that level. If we continue to go higher to 5.5% or 6%, again, you just. You could see that rotation from watchlist into REO. And while we resolve the REO position, and start to clean that up, you could still see some properties coming in on the back end. So it is really a function of the of the 10-year, but we are cautiously optimistic that we have got these in our. In the right spot.

And again, actively marketing the majority of our REO and being proactive on the watch list to have that cleared up before it becomes REO.

Richard Jan Byrne: Yeah. Hey, Matthew. it is really. Matthew, it is Richard. I just wanted to add. I think it kind of came across in the earlier remarks, but I just want to. really want to underscore it. Share buybacks are so accretive. That you know, it sort of changes your religion around, you know, defending book value marks and what you truly think assets are worth. And sort of seeing through the stabilization to, sort of, the, you know, price it to perfection.

And for us, if that means taking a little loss or something on where our basis is, that gets completely offset and then some by, you know, using any of those proceeds to go buy back shares at what they. Where they trade. So it is given us a little bit of new religion around how we think about sales. And I think that will accelerate the pace. Brian's point is it is hard to do when the market you know, there is nothing going on. But, you know, if you have a little bit of price flexibility beyond, you know, what you have had in the past, it could help speed things up materially.

So that is 1 way where we plan to keep our foot on the gas pedal.

Matthew Erdner: Right. that is helpful. Appreciate the color there, Richard. And Brian. And then, kind of as a follow-up to that, you mentioned kind of the investments on the REO side. Like are you willing to maybe move on from those? I know it was kind of a hold period there. Previously.

Jerome Stephen Baglien: Yeah. Maybe I will-- Jerry. Go ahead. Yeah. I will start. I will let you chime in on the market there a little bit. But I would say, it is an evaluation of what you can do with the capital today. Again, the same calculus applies in terms of the held for investment REO as the REO by less choice, if you will. And that is what can you do from a return perspective with that capital. So would we evaluate it? 100%, we are evaluating it.

But you have gotta weigh that with the same backdrop that Brian just mentioned, right, with valuation changes in the market, it is getting to a level there that makes more sense to repurpose that capital. With the stuff we have through foreclosure, I think that is less impactful from a return perspective. The yield it gives today. 1 is potentially a drag, the other is just under deployed, if you will, versus maybe a stock repurchase or a new investment today. So if you are thinking about prioritization, you know, that is probably secondary to moving on the other stuff. But in terms of the high level calculus, yes, you are correct.

I think in an opportune exit, would it make sense to recycle out of some of that? 100%.

Matthew Erdner: Got it. That makes sense. And then 1 last 1 for me, then I will hop out Interest income kind of declined a good bit quarter over quarter. Was that due largely to timing of when you guys pulled some of these assets through?

Jerome Stephen Baglien: Yes. Partially. I think there is a couple of things going on. You had some loans go to nonaccrual. that is sort of the watch list transition there. But we are also shrinking the book. I mean part of buying back shares is that the overall size of that portfolio is going to go down a little bit. So on a gross nominal basis, you should expect the loan portfolio has to decline because you have got to get the cash from somewhere and some of it comes from loans, some of it comes from the repurposing of REO.

So the total nominal basis of our net interest margin or our gross interest, if you are looking at that, that will go down. I think what we are trying to preserve is what is it on a per share basis because that functional amount is actually the focus. You know, as you take down your equity, you are obviously gonna take down your loan book So the focus is not really on that larger number, but what is the effective allocation of that number on a per share basis. that is really the better way to look at it on the go forward.

Matthew Erdner: Got it. that is helpful. Thank you, guys.

Operator: And our next question will come from Chris Miller with Citizens Capital Markets. Please go ahead.

Christopher Muller: Chris, your line is a bit muffled.

Operator: Is that better? Yes. We can hear you now.

Christopher Muller: Alright. There you are. So I guess on the specific reserves, can you guys talk me through the drivers here? How many loans the new reserve is against? And, I mean, the outlook for rates is higher now, but we have only had 1 rate hike materialize. So I guess what is driving the stress at this time?

Jerome Stephen Baglien: I can start with the stress and specifics. Maybe, Brian, you could jump in on some of these. But I mean, there is clear valuation moves in terms of how assets are valued from the end of second quarter to the end of third quarter? You had a pretty decent move in the tenure, like Brian mentioned, that flows through to the cap rate that you are going to apply to the asset. So even all things being equal from a performance side, you should have a theoretical decline in asset valuations.

But I think you also have a practical decline in market participation we have seen that through you know, retrades on either stuff that we are financing or stuff that we have been selling or actively pursuing on other parts of our real estate business, the market is in flux. And I think when that is happening, it has a direct flow through to valuation. So in terms of how you are getting to specifics, those things are going to have specific impacts to the things that were in the process of working out.

So you are applying those market dynamics which had moved over the course of the quarter to the assets are in a distressed position where you are taking specific reserves. Brian, I do not know if there is anyone you want to point to specifically that maybe exemplify that, but that is kind of the broader reason we are seeing those changes.

Brian Buffone: I would not say anything specific We are we are trying to be proactive on the risk rated fives on our watch list. And so instead of waiting for a resolution and then and then taking a taking a write down at that time. We are we are trying to we are we are trying to be open about it and upfront about it and show that in the in the quarters where we think that even it is a. Even prior to it becoming an REO, that there is a new valuation on that And so I do not think anything. Any assets specifically. it is more just a.

I mean, we have taken, obviously, it on individual assets because it is a specific allowance. But I just. Again, we are trying to be proactive and message to the market that is. Here's where we are and hopefully, we do not have additional surprises when. If it becomes an REO position.

Christopher Muller: Got it. That makes a lot of sense. And then I guess, looking at your watch list, majority of the watch list loans are Texas and Arizona. Can you guys just give an update on what you are seeing in those markets? And are you still making new loans in those markets?

Brian Buffone: We are selectively. And so, there are pockets of each of those markets different MSAs in each of those markets that are actually fine. And we are starting to see some rent growth. And so we will have strategic discussions internally on when and what markets to get back into. But you know, a lot of these MSAs have been on headlines for being oversupplied and rent declines and that is entirely true. But even in pockets of oversupplied markets, we are starting to see some fundamentals actually hit a turning point and an inflection point and come back to a little bit of market rent growth. And so we are constantly reviewing and strategizing about those markets.

And even in the markets that we are generally oversupplied and, you know, we do not need to go through the list, I think we are probably all familiar with them. there is still a fundamental population growth happening And in the foreseeable future, a lack of new supply coming online. And so we are getting close to a level where the absorption is starting to become a little bit more predictable. And then you get to a point in the next 12, 24, 36 months for sure, that you do not have any new supply coming on the market.

And so we are we are really driven by and focused on, underlying fundamentals in each market, focused on markets that are showing still strong population growth that will eventually move into these oversupplied properties. And then you have got a potential because of no new construction coming online. So those are the markets that we are focused on. Even in some of the oversupplied markets, the larger MSAs within that market, you can still find pockets that make sense.

Christopher Muller: Got it. that is very helpful. Appreciate you guys taking the question this morning. Thanks, Chris.

Operator: And again, if you have a question, or follow-up, you may press star then 1. Our next question will come from Timothy D'Agostino with B. Riley Securities. Please go ahead.

Timothy D'Agostino: Yeah. Hi. Thanks for taking the questions this morning. Just kind of thinking about different vintages I noticed that there is 22 fives added to the watch list, and I believe there is 1 last quarter that was removed. I guess, were those 2 that were added, are those loan-specific, or are you starting to see anything in that 2025 vintage? Thank you.

Brian Buffone: No. Those were unique situations. So those were previous REO positions that we sold and then rewrote a loan to a borrower. And so those were REOs in 2025, sold in 2025, new loan put on. And then we are looking at that distress again. So there is still I would still qualify them as peak market loans from originally the original origination being in 2021. But then recycled and, unfortunately, now coming back.

Timothy D'Agostino: Okay. that is helpful color. And then just looking at the remaining core portfolio, especially within that risk-rate rating 3, I guess, can you just provide maybe like a general temperature check of that $750 million principal balance? Like, what might what would you need to see happen in order for maybe the needle to move and you see some of those downgraded to 4? Just trying to get an understanding of that category of risk ratings. Thank you.

Brian Buffone: Awesome. I will start, Jerry, if you can. If you wanna add in. We run through our risk ratings in a very detailed meeting on a quarterly basis. And have implemented weekly watch list discussions with senior management. And so the risk ratings that we are that we are showing and putting out to the. In these decks we are very comfortable with those as we stand today. We are focused on continuing to monitor. And as a risk rating increases, that obviously demands an increased focus. But what you are seeing there is a is a very true snapshot of where we view the portfolio as a whole.

And so we are not we are not expecting unless there is a change in the market overall. Or in the underlying business plans as we continue to monitor these assets and these loans. We are we are know, again, true, very true snapshot, and we are we are extremely focused on it. Again, with monitoring on a larger basis quarterly and specific as the loans increase into a 4 or 5 on a weekly basis.

Jerome Stephen Baglien: Yeah. I think that is generally right. And I would say, just to add a couple things. You know, we have been very active in the market clearly with mentioned we have a number of stuff in the sales process today. So I think we have a sense of liquidity in the market. And sort of valuations where they are. So based on that information, we kind of run that through the risk rating process. So I think you know, in the current market state, we are pretty comfortable with that. But just to be clear, I mean, borrower behavior is still idiosyncratic at times. Maybe the nicest way to put it.

And predicting all of that perfectly is just impossible. So you know, threes are the ones where we see headwinds. And if you have you know, complete failure of borrower behavior or move in a particular market, I mean, that stuff can still change. And that is the stuff that we are keeping a close eye on. that is how I would categorize threes and stuff that you are still actively monitoring and like Brian said, for us, that is a weekly occurrence to make sure we are ahead of all this stuff.

I mean, the other key part of this is you have to be extremely proactive, not just on your fours and fives, but everything that is a 3, you know, and things that are maturing in the next year or 2 trying to get ahead of all the potential issues that might be coming down the road. So it is not just it is point in time for risk rating, but it is very active from sort of the process that we manage that stuff day-to-day.

Timothy D'Agostino: Okay. I appreciate the additional color. Thanks for taking the questions.

Operator: Our next question will come from Gabe Vogey with Raymond James. Please go ahead.

Gabriel Poggi: Hey, guys. it is David Bonom on for Gabe. Wanted to touch on the NewPoint business, which had pretty healthy origination activity in the quarter. Can you talk to the cadence of how those volumes progressed And is that momentum sustainable in the current higher interest rate environment? And then I think you mentioned the HUD business was stronger in the quarter. How much did that contribute?

Jerome Stephen Baglien: Hi. Happy to dive in there. If you mean cadence in terms of when things were originated throughout the quarter, I think the last month of the quarter was actually our busiest month. And I think some of that was people finally just deciding to transact with rates where they were at and just make a decision with the potential for things maybe running higher And then there is always, a little end-of-quarter rush regardless. So that is kind of how they. How the origination shook out. Within the quarter. In terms of volumes, yeah, like I mentioned in the script, HUD was outsized for the quarter. I think it is a little bit larger than we would typically expect.

Hard to predict how things will fall throughout the course of the year for any given product. But that 1 had a particularly good 1. I would say it was a pretty significant driver, particularly in the gain on sale portion of the business. HUD, just as a quick refresher, generally has a greater margin on sales. So having a bigger volume is going to drive a greater portion of our gain on sale income. So yes, that really helps kind of as a tailwind on our overall DE for that segment.

Operator: And this concludes our question and answer session. I would like to turn the conference back over to Lindsey Crabbe for any closing remarks.

Lindsey Crabbe: We appreciate you joining us today. Please reach out if you have any further questions. Thanks and have a great day.

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

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