Franklin BSP Realty Trust (FBRT) Q3 2026 Earnings Call: Aktienrückkäufe und Bereinigung von Altlasten

Der Franklin BSP Realty Trust (FBRT) wies für das dritte Quartal einen Verlust aus, da zusätzliche Rückstellungen für Altkredite im Mehrfamilienhaussektor die Erträge aus dem neueren Portfolio sowie von NewPoint zehrten. Das Management konzentrierte sich vorrangig auf die Bewältigung problematischer Vermögenswerte, das Kapital-Recycling und den Rückkauf von Aktien mit einem Abschlag auf den Buchwert.

Wichtigste Erkenntnisse

• FBRT verzeichnete einen GAAP-Nettoverlust von 27 Mio. US-Dollar bzw. 0,36 US-Dollar je voll gewandelter Aktie, einschließlich einer CECL-Rückstellung von 37,7 Mio. US-Dollar auf sein Kernportfolio.
• Der ausschüttungsfähige Gewinn belief sich auf 3,3 Mio. US-Dollar bzw. minus 0,02 US-Dollar je voll gewandelter Aktie nach Anpassungen für Stammaktien. Vor realisierten Verlusten lag der ausschüttungsfähige Gewinn bei 26 Mio. US-Dollar bzw. 0,24 US-Dollar je voll gewandelter Aktie.
• Der voll gewandelte Buchwert blieb mit 14,26 US-Dollar je Aktie stabil – ein Plus von 0,02 US-Dollar gegenüber dem Vorquartal trotz erfasster Kreditkosten.
• FBRT kaufte 7,4 Millionen Aktien für rund 60 Mio. US-Dollar zu einem Durchschnittspreis von 8,14 US-Dollar zurück, was einen Buchwertzuwachs von 0,55 US-Dollar je Aktie generierte.
• Rund 300 Mio. US-Dollar an Eigenkapital waren in notleidenden Krediten, unterdurchschnittlich entwickelten Krediten und REO-Objekten gebunden. Das Management bezeichnete die Bereinigung und das Kapital-Recycling als seine höchste Priorität.
• NewPoint erwirtschaftete einen ausschüttungsfähigen Gewinn von rund 11 Mio. US-Dollar, während das Neugeschäft mit Agency- und FHA-Darlehen im Vergleich zum Vorquartal um 68 % auf 670 Mio. US-Dollar stieg.

Wichtige Finanzdaten

Geschäfts- und operative Entwicklung

Das Kernkreditportfolio von FBRT schloss das Quartal bei rund 4,1 Mrd. US-Dollar verteilt auf 175 Kredite ab, mit einer durchschnittlichen Kreditgröße von etwa 23 Mio. US-Dollar. Der Anteil von Mehrfamilienhäusern stieg auf mehr als 83 %, verglichen mit 80 % im Vorquartal und 77 % Ende 2025. Das Büroimmobilien-Engagement verharrte bei 1 %.

Rund 82 % des Kreditportfolios wurden nach Beginn des Zinserhöhungszyklus vergeben, verglichen mit 77 % im Vorquartal und 68 % Ende 2025. Laut Management werden die Erträge zunehmend durch Kredite jüngeren Datums generiert, während sich die Kreditkosten weiterhin auf Altinvestitionen konzentrieren.

FBRT schloss 17 neue Kredite mit einem Zusagevolumen von 249 Mio. US-Dollar und einem gewichteten durchschnittlichen Aufschlag von 266 Basispunkten ab. Rund 97 % des Neugeschäfts entfielen auf Mehrfamilienhäuser. Das Unternehmen erklärte, angesichts enger Kreditspannen und der Volatilität am US-Anleihemarkt weiterhin selektiv vorzugehen.

Die durchschnittliche Risikobewertung des Portfolios blieb bei 2,4. FBRT beendete den September mit 13 Krediten auf der Beobachtungsliste im Gesamtwert von 334 Mio. US-Dollar bzw. rund 8 % des Kreditportfolios, verglichen mit 10 % im Vorquartal. Sieben Kredite auf der Beobachtungsliste wiesen die Risikostufe 5 und sechs die Stufe 4 auf.

Durch Zwangsvollstreckung übernommene Immobilien (REO) stiegen im Vergleich zum Vorquartal um rund 140 Mio. US-Dollar auf 10 Objekte mit einem Gesamtbuchwert von 340 Mio. US-Dollar. Für zwei Objekte lagen unterzeichnete Kaufverträge vor, und eine Mehrfamilienhaus-Immobilie in Houston wurde nach Quartalsende verkauft. Weitere Objekte wurden vermarktet, fertiggestellt oder vor potenziellen Verkäufen stabilisiert.

Das Neugeschäft von NewPoint mit Agency- und FHA-Darlehen erreichte 670 Mio. US-Dollar, ein Plus von 68 % gegenüber dem zweiten Quartal. Der Geschäftsbereich erwirtschaftete einen ausschüttungsfähigen Gewinn von rund 11 Mio. US-Dollar sowie eine zweistellige Rendite auf das Investment von FBRT. Das Management merkte an, dass eine ungewöhnlich starke HUD-Aktivität die Erträge aus Veräußerungsgewinnen stützte, jedoch über dem aufs Jahr hochgerechneten erwarteten Niveau lag.

Risiken und zu beobachtende Bereiche

• Höhere Zinssätze haben Immobilientransaktionen verlangsamt, Bewertungen beeinträchtigt und Refinanzierungsaktivitäten verzögert. Weniger Rückzahlungen verringern zudem das Tempo des Kapital-Recyclings und könnten Aktienrückkäufe einschränken.
• Altkredite im Mehrfamilienhaussektor bleiben die Hauptursache für Kreditdruck. Die Einzelwertberichtigungen spiegelten sowohl schwächere Fundamentaldaten der Immobilien als auch Bewertungsanpassungen infolge höherer Kapitalisierungssätze wider.
• Rund 300 Mio. US-Dollar an Eigenkapital bleiben in problematischen Krediten und REO-Objekten gebunden, während die durch Zwangsvollstreckung übernommenen Immobilien im Laufe des Quartals erheblich stiegen.
• Die Märkte für Mehrfamilienhäuser in Texas und Arizona weisen in einigen Gebieten weiterhin ein Überangebot auf. Das Management sieht jedoch in ausgewählten Teilmärkten eine Erholung der Mietentwicklung und erwartet, dass die begrenzte künftige Bautätigkeit die Marktintegration im Zeitverlauf unterstützen wird.
• Die Bruttozinseinnahmen von FBRT könnten sinken, da Kredite auf Leistungsausfall (nonaccrual) umgestellt werden und das Portfolio schrumpft, um Aktienrückkäufe zu finanzieren. Das Management erklärte, dass die Kennzahlen je Aktie eine relevantere Messgröße darstellen als die nominale Größe des Portfolios.
• Das Verhalten der Kreditnehmer sowie der Zeitpunkt von Rückzahlungen und Verkäufen von Vermögenswerten bleiben schwer vorhersehbar.

Highlights der Analysten-Fragerunde

REO-Verkäufe und Zinssätze: Das Management identifizierte die Rendite 10-jähriger US-Staatsanleihen als wesentliche Variable für das Transaktionsvolumen. Brian Buffone erklärte, eine stabile Rendite nahe 5 % könne Käufern und Kreditnehmern eine höhere Bewertungssicherheit bieten, während eine Rückkehr in Richtung 4,5 % die Aktivität erheblich steigern könnte. Ein Anstieg in Richtung 5,5 % könnte zu einer weiteren Verschiebung von Krediten von der Beobachtungsliste in den REO-Status führen.

Strategie bei Asset-Verkäufen: Richard Byrne führte aus, dass der durch Aktienrückkäufe erzielbare Buchwertzuwachs FBRT mehr Flexibilität verleihe, angemessene Abschläge beim Verkauf von Altimmobilien zu akzeptieren. Die Erlöse könnten anschließend wieder in Rückkäufe oder in neue Kredite mit höherem Renditepotenzial reinvestiert werden.

Kreditrückstellungen: Das Management führte die höheren Einzelwertberichtigungen auf veränderte Objektbewertungen, eine geringere Marktaktivität und eine Verschlechterung bestimmter zugrundeliegender Immobilien-Fundamentaldaten zurück. Das Unternehmen gab an, Bewertungsanpassungen proaktiv vorzunehmen, anstatt bis zur Zwangsversteigerung oder endgültigen Abwicklung zu warten.

Neuaufnahmen des Jahrgangs 2025 auf der Beobachtungsliste: Die beiden Kredite aus dem Jahr 2025, die neu auf die Beobachtungsliste gesetzt wurden, wurden als Einzelfälle beschrieben. In beiden Fällen handelte es sich um ehemalige REO-Objekte, die 2025 mit neuer Finanzierung verkauft worden waren, deren ursprüngliches Engagement jedoch aus der Hochphase des Kreditmarktes im Jahr 2021 stammte.

NewPoint-Volumen: Die Vergabetätigkeit war im letzten Monat des Quartals am stärksten. Das Management erklärte, dass einige Kreditnehmer Transaktionen trotz höherer Zinsen durchführten, wozu auch der Quartalsendspurt beitrug. Das HUD-Volumen war ein überdurchschnittlich starker Treiber, von dem nicht erwartet wird, dass er sich auf das Jahr hochgerechnet auf demselben Niveau wiederholt.

Vollständiges Transkript der Telefonkonferenz

Vollständiges Transkript der Telefonkonferenz

Ausführungen des Managements

Operator

Good day, and welcome to the Franklin BSP Realty Trust Third Quarter of 2026 Earnings Conference Call.

[Operator Instructions] 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. Good morning, everyone, and welcome to FBRT's Third Quarter 2026 Earnings Call. Thanks for joining us today. As the operator mentioned, I'm Lindsey Crabbe. With me on the call today are Richard Byrne, Chief Executive Officer of FBRT; Jerry Baglien, Co-President, Chief Financial Officer and Chief Operating Officer of FBRT; and Brian Buffone, Co-President of FBRT.

Before we begin, I want to mention that some of today's comments are forward-looking statements and are based on certain assumptions. Those comments and assumptions are subject to inherent risks and uncertainties as described in our most recently filed SEC periodic reports and actual future results may differ materially. The information conveyed on this call is current only as of the date of this call, October 29, 2026. The company assumes no obligation to update any statements made during this call, including any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by law.

Additionally, we will refer to certain non-GAAP financial measures, which are reconciled to GAAP figures in our earnings release and supplementary slide deck, each of which are available on our website at www.fbrtreit.com. We will refer to the supplementary slide deck on today's call.

With that, I'll turn the call over to Rich Byrne.

Richard Byrne

Great. Thanks, Lindsey, and good morning, everyone. Before Jerry and Brian take you through the quarter in some good detail, I want to spend a few minutes on where we are today and maybe most importantly, on what we're focused on going forward.

First, as you know, we've announced a leadership transition. We did that in September. I want to emphasize that FBRT has a very deep and experienced team. Jerry, Brian and I, just for example, have worked together for more than a decade, and we've been certainly through a lot of different market environments together. But also FBRT is a giant and very important part of Benefit Street Partners, our firm's approximately $17 billion real estate credit platform. We're supported by 90 real estate professionals across Benefit Street Partners as well as -- 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 a 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's 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'll hear more about this in detail from -- especially from Brian. But 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're making progress across our 5 rated watch list loans, our foreclosure REO, and we're also focusing on our equity investment portfolio. Many of these assets are currently actively in a sale process right now. Again, you'll hear a little bit more about this from Brian.

We expect to make good progress in the coming quarters as we work through these resolutions. 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 is -- will, of course, fluctuate. A lot of variables at play here, of course, is the stock price, also the repayment speed of our existing portfolio, in other words, how much cash we have to spend and our available liquidity.

Importantly, these 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, third priority, protecting and growing book value. Despite the credit costs recognized this quarter, our fully converted book value remained 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 NewPoint. We continue to be very pleased with this investment and are focused on its continued integration and growth. The acquisition brought really important capabilities to FBRT and added stable recurring stream of income through its servicing business. Also, the MSR portfolio also provided another source of book value stability and growth for the other point we made about book value stability. Although wide -- although market-wide volumes have been very slow recently, we believe NewPoint will continue to be an important part of FBRT's long-term value proposition.

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: one, resolve legacy assets, recycle capital, repurchase shares when the economics are compelling, protect book value and continue to demonstrate the value of NewPoint. There's still a lot of work to do, but we know what the priorities are, and we have the right team and resources in place to execute that.

So with that, I'll turn the rest of the call over to Jerry and Brian. Jerry, first to discuss financial results and the current market environment. Over to you, Jerry.

Jerome Baglien

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

I think it is important to distinguish today's environment from the initial rate shock several years ago. The market has now had several years to adjust to higher borrowing costs. Property values, financing structures and borrower expectations have all moved considerably from where they were in 2021 and '22. 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 '20s. The double hit of rates and stagnant or declining incomes makes that a challenging vintage, thus our emphasis on trying to put the last of that behind us. In regard to that, approximately 82% of our current loan portfolio was originated following the rate hiking cycle compared with 77% last quarter and 68% at the end of 2025. That continued transition is important when looking at our results this quarter. We are generating earnings from predominantly newer vintage, higher-quality portfolio while also recognizing the costs associated with resolving the legacy investments.

Now I'm going to turn to results for the third quarter. FBRT reported a GAAP net loss of $27 million or $0.36 per fully converted share. Distributable earnings were $3.3 million or negative $0.02 per fully converted share after adjustments to common, reflecting approximately $22 million of net realized loss adjustments. Before realized losses, distributable earnings were $26 million or $0.24 per fully converted share.

The quarter included a $37.7 million CECL provision on our core portfolio. This is driven by increased specific reserve on a number of legacy multifamily assets to reflect current market conditions and deterioration in underlying property fundamentals. As Rich discussed, resolving the legacy portfolio and monetizing REO is our highest priority. At quarter end, we had approximately $300 million of equity tied up in 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 don't 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, and we ended the quarter with approximately $407 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 don't 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 expect on an annualized basis.

And with that, I'll 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's 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've seen in the treasury market. We are focused on experienced sponsors, appropriate leverage and transactions where we believe we are adequately being compensated 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 watch list declined to $334 million. That's approximately 8% of our total loan portfolio and down from 10% last quarter. Of the watch list loans, 7 are risk rated of 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 asset book value. That is up approximately $140 million versus last quarter, primarily reflecting the transition of assets from the watch list to REO. Several REO assets are currently being marketed for sale. Two are currently under signed PSAs, and our Houston asset, multifamily asset was sold during the quarter -- or, I'm 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 watch list and REO portfolio represent a measurable progress towards resolving these legacy issues.

With that, I'll turn it back to the operator for questions.

Operator

[Operator Instructions] Our first question here will come from Matthew Erdner with Jones.

Fragen und Antworten

Matthew Erdner

Rich, nice to hear from you again. I'd 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's a better way to, kind of, frame it just overall about the transaction environment we're in today, it seems like that's slowed down quite a bit. And what would it take for, I guess, the transaction market to get a little more velocity behind it, which in turn, I think would 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

Yes, I'll take that one. Thanks for the question. We've talked about it on multiple earnings calls now. And I think the biggest headwind we're seeing now is in what's happening in the treasury market. And 6 months ago, when we were sitting at a 4.5% 10-year, I would have expected a lot more transactional 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 5.25% and now, kind of, settling in, hopefully around 5%. So I think that that's the biggest unknown on a going-forward basis. If we finally settle in and get some stability in the 10-year, even if it's at 5%, I think that, that will give borrowers and buyers a clear -- a more clear outlook on what's happening in the borrowing environment. And so they'll be able to value their properties a little bit more accurately, and then we'll be able to have additional transactional volume to then clear out the REO book.

So it's really a function of where we end up in the 10-year. If we drop back down to the 4.5% range where we were 6 months ago, I'd expect transactional volume to increase pretty significantly at that level. If we continue to go higher to 5.5% or again, you just -- you could see that rotation from watch list into REO. And while we resolve the REO positions and start to clean that up, you could still see some properties coming in on the back end. So it's really a function of the 10-year, but we are cautiously optimistic that we've got these 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 Byrne

Matt, it's Rich. 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 it sort of changes your religion around defending book value marks and what you truly think assets are worth and sort of seeing through the stabilization of, sort of, the priced 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 using any of those proceeds to go buy back shares at what they -- where they trade.

So it's 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's hard to do when the market when there's nothing going on. But if you have a little bit of price flexibility beyond what you've had in the past, it could help speed things up materially. So that's one way where we plan to keep our foot on the gas pedal.

Matthew Erdner

Right. That's helpful. I appreciate the color there, Rich 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.

Brian Buffone

Go ahead, Jerry. Go ahead.

Jerome Baglien

Yes, I'll start. I'll let you chime in on the market there a little bit. But I would say it's 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's what can you do from a return perspective with that capital. So would we evaluate it? 100%, we're evaluating it. But you've got to weigh that with the same backdrop that Brian just mentioned, right, with valuation changes in the market, it's 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.

One is potentially a drag. The other is just underdeployed, if you will, versus maybe a stock repurchase or a new investment today. So if you're thinking about prioritization, that's probably secondary to moving on the other stuff. But in terms of the high-level calculus, yes, you're 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 one last one for me, and then I'll hop out. Interest income kind of declined a good bit quarter-over-quarter. Was that just due largely to timing of when you guys pull some of these assets through?

Jerome Baglien

Yes, partially. I think there's a couple of things going on. You had some loans go to nonaccrual. That's sort of the watch list transition there. But we're 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've 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're looking at that, that will go down.

I think what we're trying to preserve is what is it on a per share basis because that functional amount is actually the focus. As you take down your equity, you're obviously going to take down your loan book, too. So the focus isn't really on that larger number, but what's the effective allocation of that number on a per share basis. That's really the better way to look at it on a go forward.

Operator

And our next question will come from Chris Muller with Citizens Capital Markets.

Chris, your line is a bit muffled?

Christopher Muller

Is that better?

Operator

Yes, we can hear you now.

Christopher Muller

So I guess on the specific reserves, can you guys just 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've only had one rate hike materialize. So I guess what is driving the stress at this time?

Jerome Baglien

I can start with the stress and specifics. Maybe, Brian, you can jump in on some of these. But I mean, there's clear valuation moves in terms of how assets are valued from the end of second quarter to the end of third quarter, right? You had a pretty decent move in the 10-year, like Brian mentioned, that flows through to the cap rate that you're going to apply to the assets. 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, and we've seen that through retrades on either stuff that we're financing or stuff that we've been selling or actively pursuing on other parts of our real estate business, the market is in flux. And I think when that's happening, it has a direct flow-through to valuation.

So in terms of how you're getting to specifics, those things are going to have specific impacts to the things that we're in the process of working out. So you're applying those market dynamics, which have moved over the course of the quarter to the assets that are in a distressed position where you're taking specific reserves.

Brian, I don't know if there's any one you want to point to specifically that maybe exemplify that, but that's kind of the broader reason we're seeing those changes.

Brian Buffone

I wouldn't say anything specifically. We're trying to be proactive on the risk rated 5s on our watch list. And so instead of waiting for a resolution and then taking a write-down at that time, we're trying to be open about it and upfront about it and show that in the quarters where we think that even prior to it becoming an REO, that there is a new valuation on that asset. And so I don't think anything -- any asset specifically, it's more just a -- I mean, we have taken, obviously, it on individual assets because it's a specific allowance.

But I just -- again, we're trying to be proactive and message to the market that here's where we are. And hopefully, we don't 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're 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're starting to see some rent growth. And so we'll have strategic discussions internally on when and what markets to get back into. But you're -- a lot of these MSAs have been on headlines for being oversupplied and rent declines, and that's 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're constantly reviewing and strategizing about those markets.

And even in the markets that were generally oversupplied, and we don't need to go through the list. I think we're probably all familiar with them. There's still a fundamental population growth happening and in the foreseeable future, a lack of new supply coming online. And so we're 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 don't have any new supply coming on the market.

And so we're 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've got a potential tailwind because of no new construction coming online. So those are the markets that we're focused on. Even in some of the oversupplied markets, the larger MSA within that market, you can still find pockets that make sense.

Operator

[Operator Instructions] Our next question will come from Timothy D'Agostino with B. Riley Securities.

Timothy D'Agostino

Just kind of thinking about different vintages. I noticed that there was two 2025s added to the watch list. And I believe there was one last quarter that was removed. I guess those 2 that were added, are those loan specific? Or are you starting to see anything in that 2025 vintage?

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're looking at that distress again. So there's 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's helpful color. And then just looking at the remaining core portfolio, especially within that risk rating 3, I guess, could you just provide maybe like a general temperature check of that $750 million of 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.

Brian Buffone

I'll start, Jerry, if you want to 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're showing and putting out to the -- in these decks, we're very comfortable with those as we stand today. We're focused on continuing to monitor. And as a risk rating increases, that obviously demands an increased focus. But what you're seeing there today is a very true snapshot of where we view the portfolio as a whole. And so we're not expecting unless there's a change in the market overall or in the underlying business plans as we continue to monitor these assets and these loans, we're, again, true -- very true snapshot, and we're extremely focused on it, again, with monitoring on a larger basis quarterly and specifically as the loans increase into a 4 or 5 on a weekly basis.

Jerome Baglien

Yes. I think that's generally right. And I would say just to add a couple of things. We've been very active in the market, clearly with -- we 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 in the current market state, we're 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 3s are the ones where we see headwinds. And if you have complete failure of borrower behavior or a move in a particular market, I mean, that stuff can still change, and that's the stuff that we're keeping a close eye on. That's how I would categorize 3s, is stuff that you're still actively monitoring. And like Brian said, for us, that's a weekly occurrence to make sure we're ahead of all the stuff. I mean the other key part of this is you have to be extremely proactive, not just on your 4s and 5s, but everything that's at 3 and things that are maturing in the next year or 2 and trying to get ahead of all the potential issues that might be coming down the road. So it's not just it's point in time for risk rating, but it's very active from sort of the process that we manage that stuff day-to-day.

Operator

[Operator Instructions] Our next question will come from Gabe Poggi with Raymond James.

David Farnum

It's David Farnum on for Gabe. I 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 Baglien

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's always a little end of quarter rush regardless. So that's kind of how the origination shook out within the quarter.

In terms of volumes, yes, like I mentioned in the script, HUD was outsized for the quarter. I think it's 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 one had a particularly good one. And 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'd 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.