for joining us today. Welcome to the Southwest IDEAS Conference in Dallas. I'm Phillip Kupper, Managing Director at Three Part Advisors. Our next presentation comes from one of our investor relations clients, Franklin BSP Realty Trust. They're a leading real estate finance company. Franklin BSP originates, acquires, and manages a diversified portfolio of commercial real estate debt. They're traded on the New York Stock Exchange under the ticker symbol FBRT. Today, from the company, we have Lindsey Crabbe, Director of Investor Relations, and Jerry Baglien, Chief Financial Officer and Chief Operating Officer. Jerry.
Thank you.
Good morning, everybody. Thanks for coming in today. Looking forward to walking through what we call FBRT with you. I'll start high level before I get into the vehicle itself, just to give you some background on the manager. So Franklin, or FBRT, the mortgage REIT itself, is an externally managed vehicle. So the vehicle has no employees. We are all employees of Franklin Templeton. And this is a vehicle we manage externally. So our team works on this vehicle, gives it the benefit of a whole lot of firepower without having the expense drag of an entire internalized team on our vehicle. Benefit Street, the direct team that manages it, is part of Franklin Templeton. Franklin Templeton, as you can see here, is almost 1.7 trillion in assets under management. We have 1,500 people within the company.
So there's a lot of firepower behind this smaller Real Estate Investment Trust. Within Franklin, we operate as Benefit Street Partners. So Benefit Street Partners is one of the alternative solutions in Franklin Templeton. We focus on two primary categories: real estate and corporate debt. Real estate is about $11 billion of that amount, and the balance is corporate debt. And that's split about 50/50 between the U.S. and Europe. We have a team of almost 500 people that works across all those business lines. About 180 of them are focused on the investment side. Specifically on the real estate team, this is the group that manages FBRT. We have 92 people today. This is one of the largest teams on the street dedicated to this investment strategy.
Again, the benefit of the external structure is this vehicle in itself could never bear the cost of so many people focused on this. But due to the structure that we have, we have a team of 53 people that originate and underwrite the deals in this. We're a direct sourcing originator, meaning that we don't participate with others. We don't buy loans from banks. We don't do NPLs. We do it the old-fashioned way. We're effectively a banking shop. We go out and we source our own transactions. We underwrite those transactions in-house, and we manage them in-house. Besides the public vehicle, we manage some opportunistic funds. Those are closed-end fund structures, typical five to seven-year funds. We run a non-traded REIT, so a semi-liquid vehicle, somewhat similar to FBRT, but a slightly more diverse product base.
And then we manage $2 billion worth of direct real istate investments as well. Like I said before, we have a very large team in place. A lot of that is because of the way that we originate. We really like going out and finding and understanding our credits. I think it's an important part of our success. We've had no realized losses to date on our positions. At some point, we certainly will. And this is a turbulent time, so I don't think anyone's getting through the next couple of years completely unscathed. But I think a lot of our success has been from the fact that we have a good idea of what we like. We know how to find it. We know how to understand it. We also know how to manage it.
One of the beauties of having that larger team is actually having two separate asset management teams. I've an equity asset management team, so people that run and operate real estate every day, and I have a debt asset management team. Those are the folks that work on our existing loans in the portfolio, manage those relationships. So just monitoring everything, approving all the fundings on those, and keeping an eye on progress towards completion of whatever the transition plan may be. Just to give you a flavor of what we invest in in the vehicle, we've kind of broken this down into a few high-level boxes. The majority of what we do in this vehicle is senior lending, and really across our entire platform.
Our strong preference has always been to be at the top of the capital stack, put some leverage on a senior loan, and achieve our targeted return. The vehicle today is just over $6 billion in assets. Our equity value is about $1.6 billion, and we run at a debt-to-equity ratio of about 2.7 times. I would say traditionally, we've kind of run the vehicle at 2, 2.5 times, just slightly higher at the end of the quarter because we did a recent debt deal. It'll normalize back down over the next couple of quarters as some of that pays down and we stabilize the balance sheet. The yield on the book today is just over 9%, so it pays a pretty strong current dividend. There's a number of things that we think of as differentiators in our company. I mentioned the team already. I won't belabor that point.
But we do have a nice diversified pool of loans. The area that we play in the market, we call middle market, which is a term that's thrown around all the time. But for functional purposes, I think of that as sort of the $25 million-$100 million loan size. The average position on our book is closer to $30 million. And diversification of positions is a big strength on our balance sheet. I think if you look at the space, the mortgage REIT space in general, there's a lot of larger loan lenders. So our loan count is generally 2-4 times what most of the comp set is. You get nice geographic diversity. You get sponsor diversity, diversity in assets themselves. And I think when you think about the strength of that, it's a big plus. No one position is going to keep me up at night.
You can have a bad day on it, but it's not going to hurt your yield, and it's not going to hurt your portfolio. In terms of our returns, if you look at our net interest margin or our spread, that's effectively how we make money in this vehicle, what we earn on our assets less what we pay on the debt. We've been one of the strongest, if not the strongest performer in the entire space. A lot of that goes to the sector that we play in, that mid-size market. When you're competing in a large loan market, we'd be going up against Blackstone, Apollo, KKR. There's just less alpha to be gained in that portion of the market. We found a very nice niche in that middle market space. There's definitely a lot of competition out there, but we find it's very diverse or very specialized.
People who only do hospitality or only do subordinate or only work in the Southwest or the Southeast. We have a big national footprint. We can lend anywhere on anything, and we can lend up and down the capital stack and even in equity positions across everything that we manage. It gives us a lot of touch points with people. I built this business with the idea that if we find a real estate asset we like, we can find a way to participate in that either through credit or equity if we're comfortable with that basis, if we're comfortable with the location and the long-term return perspective. That allows you to capture a lot of relationships. And at the end of the day, that's our goal.
I want to build strong relationships with people who are good real estate operators and have them come back to us again and again and again. The conservative and flexible balance sheet that we talk about here, I think about this in a couple of ways. One, just the leverage profile. We've generally run with a turn to two turns less leverage than a lot of the rest of the space. We can do that because we get better margin, like I just talked about. When you have better margin, you don't have to lever up to get that return. A lot of the rest of the space where it's bid down, you don't have a choice. You have to go four or five times leverage to match the same kind of target returns that we're getting.
In terms of the flexibility, that really speaks to what we can do in this vehicle. We're certainly senior loan focused, and that's senior loan floating rate transitional lending. That's the bread and butter of what we do in this vehicle. We lend to people who are buying an asset with the intent to improve that asset and grow the net income over the course of three to five years, typically a three-year initial term, two one-year extensions based upon a bunch of metrics that they have to get to get those extensions. The other thing that we run in this vehicle is a conduit or a CMBS shop, so that means we're writing 10-year fixed-rate debt, and you do that on stabilized assets. What we do is we try to pair those products together.
The idea being, if you execute on the first part of your business plan, improve your asset, stabilize the operations, on the back end of that, we can also provide the stabilized loan. So if all goes well, you know you can get the first part and the second part from us. I would say we don't generally end up writing the back end of a lot of those deals, particularly in multifamily where we focus, since that's dominated by agencies. But putting that ability out there is a major differentiator. And people like to have that security blanket, if you will, on the back end. For us, it's an additional profit center. So there's a lot of just standalone REITs that only do the transitional part. There's only a couple that have the conduit part paired with us with the transitional lending portion.
What that allows you to do on the back end of deals is you can waive your exit fee. We usually get 0.5-1 point on payoff. I can say, "Look, I'll write that fixed-rate debt for you on the back end. I'll just waive that fee for you," and then I'll write that 10-year fixed-rate loan, and I'll sell it to somebody else, and I'll make 3% on that trade, so for us, it's extremely accretive to run this business at the same time as adding a little extra profitability within the structure. I mentioned the credits before. I think our losses speak to our credit culture. The background of a lot of our senior team is probably split about 50/50 between lending and actual kind of brick-and-mortar real estate experience.
Everyone says, "Would you like to own an asset?" I think we actually live that a little more than some of the comp set. And we literally run equity as well day to day. So I think our ability to do it on the front end, just in terms of how we view credits, but also on the back end if things don't go right, we've worked through a number of transactions where we've had to own, operate, improve things, stabilize them, sell them down the road, and executed in the history of our company for a pretty nice profit on all of those transactions. So we're not one to just go out and sell a loan if something goes south and take a couple of points of loss. I'd actually like to turn it into an upside opportunity when that happens.
It's not going to be perfect on everyone, but on the ones where you've kind of nailed it, you can pick up a few million dollars in extra income from things that look like lemons. I sort of mentioned the middle market, but there's a couple of names up here. I mean, the names on the right side are probably the ones that people are most familiar with. These are a lot of the large asset managers. Like I said before, there's really no benefit to us competing in that market. I literally tell my originators, if they walk into a room and they see these people, they should walk out of that room because there's no upside to us. All we're going to do is just match their price at best. I'd much rather compete in the middle section.
There's plenty of quality names here, and there's some good operators. But like I said before, it's much more diverse. I would say beyond sort of the asset managers that we have on this page, the bulk of my competition is actually small and regional banks. And that is an ever-revolving door on who's actually in the room on any given transaction. I would say today I've got a pipeline of about $1.5 billion of deals that we're looking at or have signed applications on. And maybe a handful of them actually have overlapping competition that we had to beat to win a deal. It's extraordinarily rare in this space that you actually go head-to-head with people all the time. That gives you a lot of pricing and structuring power. So I'll give you a few minutes just kind of on how we performed in this vehicle.
This is our most recent quarter and the highlights. Our performance was about $30 million in terms of what we target, a little bit lower than the normal. Some of that's just timing on assets in terms of what we're putting on and what we're getting off. Our coverage ratio is just under 100% on this quarter. If you look back over the last 12 months, we've more or less kind of been on coverage. So you're up and down a little bit just depending on natural turnover in the portfolio. I think one of the best and worst things about the vehicle that we run is our repayments have actually been a lot higher than kind of the industry standard. One of the major focuses of our vehicle is where we lend by an asset class. We've focused a lot on multifamily.
It's been about 75% of our book throughout our history, and if you look at the distress in real estate, it hasn't been as centered in multi. It's been much more acute in office, and we barely have any office on our book. What that's meant for us is that multi repayments have actually remained fairly strong. We had almost $500 million last quarter, which is a blessing and a curse. You get $500 million paid off. You have to get $500 million back on to rebuild the book. The tricky part in the market today is just the uncertainty around that timing. People can always qualify for agency financing if they hit the right levels. The trick is getting to those levels. A lot of the loans that were written in 2021, early 2022, are pretty broken from a balance sheet perspective. Operationally, they're running okay. Occupancy looks good.
Profitability looks good, but what moved were cap rates and interest rates, and the valuation change put a lot of people underwater. At the highs, people were buying at three caps. The market today is a five, five-and-a-half cap, so when you're looking at a refi, it's pretty tough to do without either injecting cash into deals or selling and crystallizing a loss. For us, it's been, how do you understand that? How do you project that? We've seen both behaviors. Some people have just sold, taken whatever money they can get left. Other people have recapitalized. It's sort of a protect your best assets environment right now in the real estate space, which makes sort of lining up the replacement of loans a little bit tricky. In terms of capitalization, not a lot of changes.
Our book value is relatively flat, kind of quarter over quarter. With a mortgage REIT, you generally don't see any book value appreciation. By nature, we pay out 100% of our income. So book value is always going to remain relatively stable outside of any losses that you incur on your portfolio. In terms of deployment, we committed about $380 million. Didn't fund quite that much in terms of actual dollars out the door. Our typical loans are structured with a future funding commitment on almost everything that we do. So we'll fund X amount on day one, and then we'll fund the project cost to improve assets over the course of the term of the loan that they'll use to put into the asset and improve it. In terms of the portfolio itself, it's about $5.2 billion of loans. It's 157 different positions.
Like I said, that's a lot more diverse than a lot of the comp set in space in terms of number of positions. Our focus is also quite a bit different. 75% multifamily almost is a much higher percentage than you're going to see on other books out there. I would say that the typical mortgage REIT has something like 10%-30% in office, more retail, and generally a little more industrial exposure. It's a little bit of a harder fit for us to do those asset classes. Industrial just has been priced down. A little more interesting this year than the last couple, but from a total return perspective, it's tightened quite a bit even now, and office has never been something that we wanted in our portfolio. Never been a big believer in office in general.
That turned out to be a very fortuitous choice over the last couple of years. In terms of the portfolio construction itself, a couple of things that I'll point out here. I mentioned senior focus already. Even the small amount of MES that we have is much more structural than actual reach for yield. Our approach on MES is to add MES debt when we make loans in certain markets. So if I'm lending in a New York, a California, a New Jersey, I almost always have MES debt there or some kind of guarantee from sponsors. Foreclosing in the States is extremely difficult and time-consuming. So even the MES that we do have, I would say, is not MES from a risk and reach for return standpoint, but just to make sure that if something goes wrong, I can get the asset back.
In terms of the rate type, virtually all of what we do is floating. I'd actually be happy to write a little bit more fixed-rate debt today, but people are actively avoiding it to probably no one's surprise. Equity borrowers are eternally optimistic in terms of how the market is going to go, and everyone thinks rates are going to drop precipitously. I'm not very inclined to agree with that. But we're going to keep the portfolio mostly floating, it looks like, for a long time to come, which has been a benefit. We float on both sides, too, in terms of our assets and our debt. So for us, and when I think about the portfolio, I'm not managing necessarily to a fixed asset and fixed debt cost, but really the margin in terms of spread between those two things. That's how we achieve our profitability.
Collateral focus, I kind of mentioned this already, but we're very heavy in the multi side. Hospitality is our next largest, followed by industrial. We have a small amount of office on our book and then a mix of other things. In terms of where we focus, we've been big Sunbelt investors. That, particularly for multi, I don't see changing anytime soon. When you're lending on residential, you want to be where business growth remains strong, where people want to move to. If you get those things right, you're generally going to end up in a pretty good spot on multifamily. I would say it's going to slow down in a lot of those markets for the next 12 to 24 months in different specific city cases based on a lot of supply that has flowed into markets. Places like Austin, Nashville, Phoenix have been greatly oversupplied with construction.
The interesting thing is that I think we've seen absorption rates the last year at one of the highest on record, which is really fascinating. It's kind of put a damper on rent. In fact, it's declined rent in a number of those markets. Occupancy has ticked down a little bit, too, but we're eating through it a lot faster than I thought we would, so from an operator side, I think it's a very difficult market, but when I'm writing new loans today, I'm looking out a couple of years into maturity three years from now, and I actually think we're going to go into a really nice market. The flip side to all the distress we've seen in real estate is that it's extremely difficult today to get a construction loan. The construction loan market is dominated by banks.
They're 90% plus of the construction lending market, and banks are not lending at all right now, so while there's a lot of oversupply today, once you burn through that, you're actually going to hit the flip side in a year and a half, two years because nothing's being built right now, and so I actually think that there's going to be some real tailwinds and some opportunity for growth. Equity might get interesting again in a couple of years. I have no interest in going that side of the table today because you don't get paid for it. You're actually negative arbitrage, but from a lending side, I think when you look out to maturity and you're thinking about where you're going to get that stabilized debt yield down the road, it could look even a little bit better than we underwrite.
In terms of capitalization, I think this is one thing that makes us very unique in the market. I have a philosophy in how I like to run our company. I target a debt-to-equity ratio of less than one times on our recourse leverage. That's leverage that's exposed to any sort of mark-to-market or non-matched term, essentially bank financing. So when we close a loan, initially a senior loan for, say, $100, I'll pledge that loan to a bank and get an advance rate of, say, 60%. And that's my initial financing on that loan, and you'll earn your net interest margin. We'll target a 14%-15% return on that asset. The bank lines typically have some level of mark-to-market on them. So if there's volatility on the underlying asset, they can take my advance rate from 60% to 50%, and you effectively have a margin call.
I'm okay with some exposure to that on the vehicle. But what we really try to do is structure the majority of our liabilities, in this case, virtually all of them, through the use of securitizations. So we package our loans together in pools of $800 million-$1 billion, and we'll issue bonds against those. So we create a different kind of liability. The benefit of that is it's matched term and it's non-mark-to-market. There's a couple of other bells and whistles that we put on there, like reinvestment, and we put ramp on some of the deals when we launch them, which means you can kind of build a bigger pool before you have all the loans. But that insulates you from volatility and the real risk of mortgage REITs, which has never been just defaults and bad assets.
The risk with mortgage REITs has always been liquidity concerns. If you have a levered vehicle, it's not necessarily losing money on just the loan. It's the cascading effect of being able to protect those assets in the leverage structure you have. So what we've tried to do is build a vehicle that doesn't have that aspect to it, or it's so muted that you have way more liquidity than you'd ever need to protect those positions. Because that's really the key in a downside scenario. I think in terms of structure, there's no vehicle out there that's anywhere close to this insulated from that. That's as insulated from volatility. This is just another overview of how we're financed a bunch of the securitization deals that we've done. They sort of roll on generally a three to four-year term, functionally. Our loan term on average is about 30 months.
So the useful life of most of our deals is about three to four years, and then we'll reissue a new one to put that structure back in place. That said, we also run with a lot of extra capacity on the banking side. Probably more than we need, but I've found that through periods of volatility and when things get tougher, you want a few different partners to call. You never know who's going to get skittish or who has problems on their balance sheet and might just say, "I can't do anything." So we actually run with a lot of different banking partners and a lot of extra capacity. This is effectively insurance for the same sort of thing. I mean, we underwrite for the downside, we structure for the downside, and then we try to outperform along the way.
But you got to have a lot of flexibility in where you can go when things potentially get bumpy. Speaking of liquidity, this is a quick overview of our effective liquidity on this vehicle. Today, we have over $1 billion of available liquidity. Cash on hand is just about $350 million. We have reinvestment in our CLOs. The CLO structures that we have allow us to put loans back into deals. If a loan in there pays off, we define a box to prolong the use of those structures. So if $100 million pays off in a deal, I can contribute another deal in for $100 million. It provides another inherent liquidity switch within the way we can manage the portfolio.
That's really all I had.
I wanted to leave 10 minutes or so for questions if anyone's curious about this or would like to know more about what we do. Anything about the market? I'm happy to chat about any of it. Yeah?
Where's the biggest risk when your portfolio's so safe in office because you have very little office? But where would you say the biggest risk is? Yeah.
I mean, definitionally, it's the multi bucket because it's the largest portion of what we do. I don't think office is that material to what we have at this point, and we've reserved very heavily on our office loans as well. I think if the rest of the mortgage REIT space was as honest about their reserves on office, you'd have a much different landscape, and banks did it. You'd have a lot of bank failures.
But in multi, I would say it's just a question of time as much as anything. Time and decision-making. It kind of goes back to what I said. I think the risk is trying to get ahead of resolutions. The stuff we underwrote in 2021, we underwrote that at probably 60%-65% LTVs. I would say today, the majority of that's probably a 90% LTV. So it's really understanding what your borrowers are going to do. I have a cushion left. They do not. They've lost a lot of money. So the question is, are you going to put in more capital? Do you want to buy time? And if I like your asset and you've been a good borrower and a good sponsor, I might give you another year to work on your asset, but you're going to need to pay down the loan $2 million.
You can have another year to keep going to NOI and trying to earn your way out of it. If you're undercapitalized or overwhelmed by the situation, which we do see at times, we're going to probably move towards a foreclosure and sale because I'd rather take it back, sell it now, and move on. So I'd say the risk is more operational than anything else and just understanding the portfolio. This is really an asset manager's time to shine.
How connected are you to Franklin Templeton or how? What happened at Franklin? Are you connected to Franklin BSP and getting sound on that?
Yes, to some extent. I mean, day to day, I'm within Benefit Street Partners. We operate as Benefit Street Partners. That's technically the asset manager. So we're what we call essentially a subcompany of Franklin Templeton.
So I'm connected in some respects, certainly strategically when we work on things.
Realistically, I would think we would spin out in that kind of situation. We're not essentially financed or dependent upon them economically. If you look at our business on a standalone perspective, alternatives in general are far more, I would say, profitable and certainly a longer-term growth trajectory than kind of their traditional business. If you listen to the Franklin Templeton earnings calls, their biggest focus is on growing our lines of business. I mean, they've specifically talked about our group on the last couple of calls and how they're endeavoring to put more money into what we do because Franklin's business is inherently not sticky. It's a lot of mutual funds and open-ended funds where people can redeem constantly.
The beauty of what we do is it's long-term. It's generally locked up or much stickier capital than they're used to managing. So I actually think there's going to continue to be quite a bit of focus in growing their non-core alternative versus what they've done in the past. Yes?
Could you talk about the stress testing of the portfolio and the financing? Are there extreme cases of an interest rate-based or economic base where a liquidity crunch could emerge on the financing side for them?
Not really with the book today. I mean, we have 0.1% or 0.1 times recourse financing, which means virtually none of our book is recourse financing effectively. You're talking about $200 million or something like that. In an apocalyptic scenario where there's just not cash flow from your loan, just everyone stops paying.
What happens is those securitization vehicles essentially lock up and they become standalone entities, and they just amortize down the bonds. So we have no cash flow to the company, but the company's not out of business. I mean, you obviously have no yield to pay out to everybody. You kind of sit there, but no one thing blows you up. You've actually insulated it into separate pools, and each pool stands independently. So most likely, you don't have issues in even all of them in a real downside scenario. It might be one or two, but again, you've kind of walled those off and protected the whole. That's the idea of the entire structure.
And is it purely servicing of the loans that drives that, or is there also a loan-to-value type of vehicle says the loan-to-value exceeded?
Yeah, you can have a. There's a collateralization test, like the value of the collateral. So if you have a material change in value of an asset, usually it comes through in some form of default. That's how it's going to arise. Yes, you could have a similar situation where a pool could lock up, if you will. Realistically, I don't think we've ever run into one of those. It's pretty tough. I would say you've had some the comp set has run into that where you've got an office component that's 25%-30%. You do have sort of a real valuation change. I mean, that market moved 50%-70% in some areas. That's material, and everyone knows it. So that's tougher. I mean, multi is probably down 20%-30% by asset class and market from the highs of 2021, fourth quarter of 2021.
Thank you for that.
Just to build on that, so if cap rates and multi go up and there's valuation pressure, would you feel compelled to have people add equity to their deals or?
They're not going to have a choice. I mean, you're going to get to maturity, and they're either going to have to or extension, the end of their initial term, and they don't qualify for all of our extensions. You have a five-year term in theory, but a year three or year two, depending on your business plan, we have a test point. So do you have the coverage? Do you have a valuation test? You might have both.
If they're going to fail that, and we have a pretty good idea because we monitor their financials every month, you're going to talk to them six months before and say, "You have no chance of making this," which is literally everyone today because value's moved. So you're talking to everyone saying, "Look, you've got a decision to make. You can either put money in, go to market now, or you can wait six months, and I'll have foreclosure documents FedEx to you the next day, and I'm going to sell your assets." That's all there is to do. Yes?
You guys have a soft cap on that, call it REO component within your book where you would say, "You don't really want to own, run a business of making loans, recycling capital back out at attractive financing terms." So I understand maybe the collateral back and you're getting it at a lower basis than the loan you're making, but that's a different business a little bit than your core business here. So your thoughts on what percentage you want that part of the portfolio to be at any given time?
No more than 5%-10% ever. Unless we're holding some for potential upside. But on a long-term basis, no, I don't think we have any interest in doing that. I mean, we want to be a lender, not an equity manager. Yes?
Just to rip into the cap rate discussion, maybe on a macro level, go ahead and your projection for interest rates and it seems like the short-term rates go down, cap rates also go down. What is your base case?
I'm not sure cap rates come down that much anytime soon. Looking at trades in the market, I mean, we see trades around five, just inside five for really nice stuff. I'm not sure they should be a whole lot lower than that. Certainly not with where the 10-year is at today. I think to trade back down to a four, you're going to need a 10-year that's more like three. I just don't see that happening anytime soon. I think people are way too optimistic on rates going down in the near term. There's a lot more pressure the other way, in my opinion.
I think it's more likely we widen in the next year than tighten much. So I don't think they compress much. I just don't. I think people are already looking for that compression and have priced it in with where the bids in the market have been. Everyone's buying with that idea in mind. I don't think there's a lot of people are saying it's down 30%. This is a good time to buy. I think pricing has just gone back to where it should have been in the first place. This isn't a bargain. This is a correction to what I think it should have been at all along.
Good. Done. All right. Thank you.