Franklin BSP Realty Trust(FBRT) - 2022 Q1 - Earnings Call Transcript

Financial Data and Key Metrics Changes - The company reported distributable earnings of $40.1 million or $0.39 per share, representing a 9.3% return on equity (ROE) [5][12] - The fully converted book value declined from $1,725 at the end of Q4 to $1,650, primarily due to trading losses in the agency ARM portfolio [12][13] - The net leverage decreased to 2.95 times, with recourse leverage at 1.3 times, while leverage on the core book remained at 2.5 times [13] Business Line Data and Key Metrics Changes - The total core portfolio ended the quarter at $4.6 billion, with a well-diversified book and only one loan on the watch list [7][8] - The company reduced its residential ARMs exposure by $2.6 billion during the quarter, ending with a principal balance of $1.9 billion [9][10] - The company closed $603 million in loan commitments during the quarter, with a net portfolio growth of $319 million [14][15] Market Data and Key Metrics Changes - The company experienced significant trading losses of $88.4 million related to the ARMs portfolio, with a hedging gain of $30 million, resulting in a net effect of $58 million [18] - The market value of the ARMs portfolio decreased from $4.6 billion at year-end to $1.9 billion by the end of Q1 [17][18] Company Strategy and Development Direction - The company is transitioning from residential ARMs to commercial loans, aiming for higher earnings potential and lower volatility [10][11] - The company plans to continue its active issuance in the CLO market, having closed its largest deal to date at $1.2 billion [8][15] - The focus remains on high-quality, newer vintage MultiFamily assets while exploring opportunities in non-MultiFamily sectors [22][23] Management's Comments on Operating Environment and Future Outlook - Management expressed confidence in the transition from ARMs to commercial real estate, expecting to liquidate the ARMs portfolio ahead of schedule [10][11] - The company noted a slowdown in transactional activity in the MultiFamily sector due to rising interest rates, leading to negative leverage [26][22] - Management highlighted a strong credit culture with no credit losses on loans originated over the past 22 quarters [23] Other Important Information - The manager, Benefit Street Partners, has been actively buying shares, spending approximately $21 million to purchase about 1.5 million shares [11] - The company plans to initiate a $65 million stock purchase program once the current program is completed, aimed at supporting the stock price [41] Q&A Session Summary Question: Market reception to higher rates and MultiFamily assets - Management noted a slowdown in transactional activity in the MultiFamily sector, with buyers experiencing negative leverage [26] Question: Drawdown schedule for outstanding commitments - The projected funding range for future commitments is between $45 million to $75 million, depending on project execution [28] Question: Collateral mix of origination activity - The company is looking to diversify into non-MultiFamily assets, including industrial and retail, while maintaining a focus on credit quality [30] Question: Impact of stock purchase plans on balance sheet - The company plans to support the stock as long as it trades below book value, focusing on maintaining shareholder value [41]