フランクリンBSPリアルティ・トラスト（FBRT）2026年第3四半期決算説明会：自社株買いとレガシー資産の解消

フランクリンBSPリアルティ・トラスト（FBRT）が発表した第3四半期決算は、旧ヴィンテージの集合住宅向け融資に対する追加引当金が、より新しいヴィンテージのポートフォリオやニューポイント（NewPoint）からの収益を相殺し、赤字となりました。経営陣は、問題資産の解決、資本の再投資（リサイクリング）、および1株当たり純資産を下回る割引価格での自社株買いを最優先課題として掲げました。

主なポイント

• FBRTが計上したGAAP純損失は2,700万ドル（完全変換後1株当たり0.36ドル）で、これにはコアポートフォリオに対する3,770万ドルのCECL引当金が含まれています。
• 分配可能利益は330万ドル（普通株式への調整後で完全変換後1株当たりマイナス0.02ドル）となりました。実現損控除前の分配可能利益は2,600万ドル（完全変換後1株当たり0.24ドル）でした。
• 完全変換後1株当たり純資産は14.26ドルと安定して推移し、認識された信用コストにもかかわらず、前四半期比で0.02ドル増加しました。
• FBRTは740万株を約6,000万ドル（平均取得価格8.14ドル）で買い戻し、1株当たり0.55ドルの純資産増加をもたらしました。
• 約3億ドルの自己資本が不渡融資、不振融資、およびREO（回収不動産）資産に固定化されています。経営陣は問題解決と資本のリサイクリングを最優先課題に挙げています。
• ニューポイントは約1,100万ドルの分配可能利益を創出し、エージェンシーおよびFHAローンの実行額は前四半期比68%増の6億7,000万ドルに増加しました。

主要財務データ

事業および業績ハイライト

FBRTのコア融資ポートフォリオは四半期末時点で約175件・41億ドルとなり、平均融資規模は約2,300万ドルでした。集合住宅向け比率は83%超に上昇し（前四半期は80%、2025年末は77%）、オフィス向け比率は1%にとどまりました。

およそ融資ポートフォリオの82%が利上げサイクル以降に実行された案件であり、前四半期の77%および2025年末の68%から増加しました。経営陣は、最新ヴィンテージの融資が収益の主軸となりつつある一方で、信用コストは過去の投資案件に集中し続けていると語りました。

FBRTは17件の新規融資を実行し、コミットメント額は2億4,900万ドル、加重平均スプレッドは266ベーシスポイントでした。新規実行額の約97%が集合住宅向けでした。同社は、貸出スプレッドの縮小と国債市場の変動が続く中、慎重な案件選別を継続したと説明しました。

ポートフォリオの平均リスク評価は2.4を維持しました。FBRTの9月末時点のウォッチリスト融資は13件・総額3億3,400万ドルで、これは融資ポートフォリオの約8%に相当し、前四半期の10%から低下しました。ウォッチリスト融資のうち7件はリスク評価5、6件は評価4でした。

差し押さえREOは前四半期比で約1億4,000万ドル増加し、計10物件・帳簿価格総額3億4,000万ドルとなりました。2物件は売買契約を締結済みで、ヒューストンの集合住宅物件は四半期末以降に売却されました。その他の物件は、売却に向けたマーケティング、完了、または安定化を図っている段階です。

ニューポイントのエージェンシーおよびFHAローン実行額は6億7,000万ドルに達し、第2四半期から68%増加しました。同事業は約1,100万ドルの分配可能利益を生み出し、FBRTの投資に対して2桁のリターンをもたらしました。経営陣は、異例に好調だったHUDの活動が売却益収入を押し上げたものの、年換算で予想される水準を上回っていたと述べました。

リスクおよび注視すべき点

• 金利上昇により不動産取引が減速し、資産評価に影響が及ぶとともに、借換活動が遅れています。返済件数の減少も資金リサイクリングのペースを鈍化させ、自社株買いを制限する可能性があります。
• 旧ヴィンテージの集合住宅資産が引き続き信用プレッシャーの主な要因となっています。個別引当金には、不動産ファンダメンタルズの悪化と、キャップレートの上昇に伴う評価変動の両方が反映されています。
• 約3億ドルの自己資本が問題融資やREOに固定化されたままであり、当四半期中に差し押さえREOが大幅に増加しました。
• テキサス州やアリゾナ州の集合住宅市場の一部では、供給過剰傾向が続いています。それでも経営陣は、一部の地域で賃料トレンドの改善が見られるとし、今後の建築件数の制限が時間の経過とともに需給吸収を支援すると期待しています。
• 融資の無利息手形化や自社株買いの資金確保に伴うポートフォリオの縮小により、FBRTの受取利息総額は減少する可能性があります。経営陣は、ポートフォリオの名目上の規模よりも1株当たりの収益性がより重要な指標であると述べました。
• 借り手の動向、ならびに返済や資産売却のタイミングは引き続き予測が困難です。

アナリストQ&Aの要点

REO売却と金利：経営陣は10年物国債利回りを取引高に影響を与える主要な変数と位置付けました。ブライアン・バフォーネ氏は、利回りが5%近辺で安定すれば買い手や借り手にとって評価の透明性が高まる一方、4.5%に向けた低下は取引活動を大幅に活性化させる可能性があると述べました。5.5%への上昇はウォッチリストからREOへのさらなる移行を引き起こす可能性があります。

資産売却戦略：リチャード・バーン氏は、自社株買いによる純資産増加効果により、FBRTは過去資産の売却において妥当な割引を受け入れる柔軟性が高まると述べました。売却代金は自社株買いや、より高いリターンが見込める新規融資へ再投資できます。

信用引当金：経営陣は、個別引当金の増加要因として、資産評価の変動、市場参加者の減少、および対象不動産のファンダメンタルズ悪化を挙げました。同社は差し押さえや最終解決を待つのではなく、評価の変動を先回りして認識していると述べました。

2025年ヴィンテージのウォッチリスト追加物件：ウォッチリストに追加された2025年実行の融資2件は、特殊な事例であると説明されました。いずれも2025年に新規融資を伴って売却された元REO資産ですが、その元々のエクスポージャーは市場のピーク期であった2021年の融資条件に遡ります。

ニューポイントの取扱高：融資実行活動は当四半期の最終月に最も強まりました。経営陣によると、高金利にもかかわらず取引を進めた借り手がいたことや、四半期末のタイミングも寄与しました。HUDの取扱高が大きな要因となりましたが、これが年換算で同水準で再現することは見込まれていません。

決算説明会文字起こし全文

決算説明会の完全なトランスクリプト

経営陣による説明

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.

質疑応答

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.