Franklin BSP Realty Trust(FBRT) - 2020 Q4 - Earnings Call Transcript

Financial Data and Key Metrics Changes - The company reported a GAAP net income of $23.3 million for Q4 2020, or $0.19 per diluted common share, while core earnings were $19.7 million, or $0.15 per diluted common share [14] - Book value decreased by $0.04 per share during the fourth quarter, ending at $6.76 per common share, with a three-month economic return of 1.6% or 6.5% annualized [11][15] - The company achieved an annualized return on common equity of 8.85% for Q4 2020 and 9% for the entire year [9] Business Line Data and Key Metrics Changes - Portfolio yields averaged 1.55% during the quarter, a decrease of 30 basis points from the previous quarter's 1.85% [15] - Portfolio-related borrowing costs averaged 0.37% during Q4, which is 30 basis points lower than the prior quarter, leading to a slight improvement in net interest spreads [16] Market Data and Key Metrics Changes - The yield curve steepened significantly during Q4, with 10-year yields increasing by 23 basis points while two-year yields declined by about one basis point [17] - New issue RMBS originations were at their lowest level of the year at roughly $1 billion due to the transition from LIBOR to SOFR indexes [18] Company Strategy and Development Direction - The company is being judicious in deploying liquidity to build flexibility for potential opportunities in the coming quarters [12] - Management is optimistic about not experiencing market disruptions similar to those in March 2020, given lower leverage levels and the Fed's bond-buying programs [12] Management's Comments on Operating Environment and Future Outlook - Management expects mortgage prepayments to moderate over time as run-offs are replaced with slower-paying new production [12] - There is uncertainty regarding the sustainability of the current dividend due to various moving parts affecting earnings, but the company aims to maintain the dividend level if the decline in core earnings is temporary [50] Other Important Information - The company is the only mortgage REIT that has maintained its dividend through the pandemic, contrasting with peers whose dividends have been significantly reduced [10] - The company has seen a $0.69 increase in book value since the pandemic-induced fixed income disruption in March [11] Q&A Session Summary Question: What is the minimum ROE hurdle for investing new cash? - Management indicated that they will not invest unless they can achieve an 8% level of return, with current leverage ranging from 7.25 to 9 times [22] Question: Can you quantify the yield adjustment in Q4? - The yield adjustment was consistent at around seven basis points, and adjustments may be made in the first quarter based on prepayment speeds [30] Question: How should we think about the sustainability of the current dividend? - Management acknowledged the uncertainty in earnings and indicated they would strive to maintain the dividend level if the decline in core earnings is deemed temporary [50] Question: What are the margins and caps for new SOFR ARMs? - New SOFR ARMs have margins around 212, with a cap structure allowing for significant resets [52]