Franklin BSP Realty Trust(FBRT) - 2019 Q2 - Earnings Call Transcript

Financial Data and Key Metrics Changes - The company incurred a GAAP net loss of $63.5 million this quarter, equating to $0.80 per diluted common share, while core earnings were reported at $14.8 million or $0.12 per diluted common share [13] - Portfolio yields averaged 2.82% during the quarter, an increase of 7 basis points from the previous quarter's 2.75% [14] - Book value increased by $0.50 per share during the second quarter, ending at $8.93 per common share [16] Business Line Data and Key Metrics Changes - The company increased its common dividend by 50% to $0.12 per share this quarter, reflecting confidence in producing strong risk-adjusted returns [7] - Portfolio-related borrowing costs increased by 12 basis points over the prior quarter, primarily due to higher hedging costs [15] Market Data and Key Metrics Changes - The company holds $7.5 billion in swap balances, representing 70% of outstanding repo balances, which positions it to benefit from anticipated Fed rate cuts [8] - The market is currently recalibrating expectations for Fed rate cuts, with projections shifting from 125 basis points to as much as 75 basis points this year [6] Company Strategy and Development Direction - The company aims to manage its borrowing costs effectively through the use of interest rate swaps, which have improved net interest margins [10] - The management is focused on maintaining a conservative approach to hedging while also being prepared for potential market fluctuations [29] Management's Comments on Operating Environment and Future Outlook - Management anticipates that prepayment speeds will remain elevated through the summer but expects a decline in the fourth quarter, contingent on the Fed's actions [18] - The company is confident in its ability to produce strong returns regardless of the pace of Fed rate cuts, indicating a robust risk management strategy [7] Other Important Information - The company experienced a decline in the value of its swap book on a mark-to-market basis due to a slight decline in rates this quarter [11] - The management has been working to improve the estimation process for prepayments to mitigate the impact of cyclicality and seasonality [25] Q&A Session Summary Question: When do you expect prepayment speeds to slow? - Management expects prepayment speeds to remain elevated this summer and to start receding in the fourth quarter, depending on the Fed's aggressiveness in cutting rates [18] Question: What is the expected prepayment speed? - Management indicated that current ARM speeds are in the mid-20s, with expectations of a decline to the low-20s over time [22] Question: How does the company estimate prepayment speeds? - The company uses multiple models to estimate prepayment speeds, considering both the forward curve and static curve [59] Question: What assumptions go into the prepayment estimates? - Management considers various factors, including the shape of the mortgage curve and the impact of Fed rate changes on prepayment speeds [60] Question: Is there a specific figure for the EPS impact of a 1% shift in CPR? - Management stated that they cannot provide a specific figure as it varies with the level of prepayments and amortization [38]