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Operator
Good morning and welcome to the Franklin BSP Realty Trust fourth quarter 2021 earnings conference call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing star then zero on your telephone keypad. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then one on your telephone keypad. To withdraw your question, please press star then two. Please note this event is being recorded. I would now like to turn the conference over to Lindsey Crabb, Vice President of Investor Relations. Please go ahead.
Lindsey Crabb
Good morning. Thank you, Andrew, for hosting our call today. Welcome to the Franklin BSP Realty Trust Fourth Quarter Earnings Conference Call. As the operator mentioned, I'm Lindsay Kraub, VP of Investor Relations. With me on the call today are Richard Byrne, Chairman and CEO of FBRT, Jerry Baglian, Chief Financial Officer and Chief Operating Officer, Mike Camperano, Head of Commercial Real Estate, and Roy Kim, Managing Director of our Capital Markets Group. Before we start today's conversation, I want to mention that some of today's comments from the team could be considered 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 Form 10Q filed with the FCC, and actual future results may differ materially. The information conveyed on this call is current only as the date of this call, February 24, 2022. 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, which are available on our website at www.sbrtreet.com. We will refer to the supplementary slide deck on today's call. With that, I'll turn the call over to Richard Byrne.
Andrew
Great. Thanks, Lindsay. Good morning, everyone, and thanks for joining us. I'm Rich Byrne. I'm the Chairman and CEO of Franklin BSP Realty Trust, or as we call it, FBRT. There's clearly a lot going on in the markets right now, so we appreciate all of you making time for our call today. As Lindsay mentioned, our earnings release and supplemental deck are published on our website, and they're available now. They were published yesterday evening. For this call, we're going to review fourth quarter results and highlights and walk you through the current status of our portfolio. We will also update you on what has occurred since the end of the year, specifically on our residential arms portfolio. You know, after that, we're going to open up the call for your questions. The supplemental deck also provides more information than we can cover today. But, you know, hopefully you'll find it useful to look at that information in addition to what we go through. You'll note that our Q421 is the first time, this is the first quarter, we're able to show fully consolidated financials following the closing of our merger with Capstate. Remember that occurred mid-quarter on October 19th, 2021. As a reminder, prior to our merger, we were a commercial mortgage REIT operating as a non-public, non-listed REIT since 2016. The opportunity to merge with Capstead represented a strategic transaction for our future growth prospects. It gave the predecessor read immediate scale and additional liquidity, and it represented an opportunity for the Capstead shareholders to transition out of a lower ROE business into a historically higher ROE business. Jerry will cover the financial highlights in a few minutes, and Mike will discuss the portfolio. But before that, I will provide some greater market color And I wanted to go through FBRT's current position and the progress we've made in our first few months of being publicly traded. I'll start all that on slide four. Looking at our commercial real estate platform, Q4 was indeed a record-breaking quarter that led to a record-breaking year for FBRT. Our origination business was strong in the fourth quarter, and it was also very strong throughout the entirety of 2021. we brought our CRE portfolio or our core portfolio to 4.2 billion of loans at year end. This is up approximately $1 billion from Q3 and $1.5 billion from where it was at the beginning of the year. Our ability to achieve such strong origination numbers was due to our ability to make significant progress selling the residential arms book we acquired through the merger. To give a bit more context on that, the merger closed on October 19th, as I mentioned. From that period through year end, the ARMS portfolio decreased by approximately $2.3 billion from both strategic sales and runoff. The ARMS portfolio at year end was $4.6 billion. This compares to $7.1 billion at 9.30. The truth is we exceeded our own expectations on the pace of this disposition It was a great time also to test our ability to redeploy the assets, which we clearly did. We originated 1.6 billion of new commitments in Q4, which is roughly three times our normal origination volume. That has continued in Q1, as evidenced by our strong pipeline. Something many of you will be interested to know is our progress on the arms sales in the first quarter as well. Our progress has been great. The arms portfolio has been further reduced by another $2.2 billion. Now, our total arms portfolio stands at $2.4 billion. That's a 66 percent decrease versus last quarter. Jerry will go through this in more detail and also mention that we've been very pleased with our execution, selling these bonds at very close to their marks. Let me just take another second to put that into context. On 930, as I mentioned before, the arms portfolio that we inherited was $7.1 billion in size. And our core portfolio was just a little bit over $3 billion. Today, our arms portfolio, as I mentioned, is $2.4 billion, and our core portfolio, or our commercial portfolio, is $4.2 billion. In other words, we've completely turned upside down the ratio of... you know, what this company consists of. And our objective is to continue the rapid pace of transition from residential arms to commercial loans given the higher earnings potential and lower historical volatility and also the lower leverage of our commercial or core portfolio. I would also like to provide an update on the company and manager buyback programs. We continue to have the full 100 million buyback available to us. This includes the first $35 million from BSP and Franklin Templeton, followed by $65 million from the company. Since December 15th, we have been blacked out from trading due to legal restrictions, so we have not been permitted to use any of our dedicated buyback proceeds during the market volatility since then. With yesterday's release of earnings, those restrictions will be lifted starting this Monday. Given the significant discount in our stock, especially at its price to book value, it is our intention and the company's intention to support the FBRT shares. This can be accomplished through open market purchases as well as a 10B51 plan that will permit us and the company to continue to buy when the company's trading window is closed. Before I turn it over to Jerry, I just want to say a few words about 2021 because it really was a historic year for the company. When BSP took over the REIT in 2016, we had two primary goals. First, we wanted to stabilize the business and turn it into a best-in-class middle market commercial mortgage rate. Second, we wanted to provide our shareholders with the liquidity of that. As we look back on the five-year period, we're very proud of what we have accomplished. Clearly, we've achieved both goals. In the five-year period, we have increased the company's revenues by approximately 190%. We've increased our core book of originations from basically zero to $4.2 billion today, or at year end, and increased distributable earnings by approximately 350%. In our five years of running this business, we have never had a credit loss on a BSP-originated loan. We have built, in our opinion, one of the top middle market commercial real estate origination platforms in the business. And we're very proud of that. And of course, in 2021, we delivered a liquidity event through this merger. As we continue to transition Capstead's asset base into our CRE portfolio, we are extremely excited about the opportunity in front of us. With that, let me now turn it over to Jerry to go over our financial highlights for the quarter. Jerry.
Lindsay
Great. Thanks, Rich. Appreciate that.
Rich
Hello, everyone. I'm Jerry Bagley, and I'm the Chief Financial Officer and Chief Operating Officer of FBRT. I appreciate everyone calling in today. Moving on to the results, let's start on slide five if you're following along. The first thing I want to start with, in Q4, FBRT generated distributable earnings of $34.6 million, or $0.36 a share, and that's on a fully converted share basis, so assuming all the conversion of the preferreds that we have. That represents an 8.2% distributable ROE. A full walkthrough of how we get to distributable earnings to GAAP, that can be found in the earnings release in the details. In terms of the distributable earnings number, it includes $107.5 million of adjustments, and that's driven primarily by the $88 million relating to the merger. Specifically, there's a $40 million adjustment embedded in that. And that represents a change in value between the end of the quarter, 930 to 1019, a change in fair market value from the date we kind of struck the merger to the date we actually took over. So a significant component of that is mark-to-market. Another important thing to note is that on our core portfolio, our quarterly distributable ROE was 10.2%. And if you look at that on a full-year basis, it's 11.9%. In terms of dividends, we paid an aggregate common stock amount of 35.5 cents per share for the quarter. That represents a yield of 8.2% on our fully converted book value of $17.25 a share. Our leverage was at 4.1 times on a net basis at the end of the quarter, and our non-recourse leverage ended the quarter at 2.9 times. As we continue to transition out of the armed securities, we expect our net leverage to continue to decrease coming back into a more normalized range for us somewhere around two and a half times. If we move on to slide seven, you can see that we closed $1.6 billion of loan commitments in the quarter. On a net portfolio growth basis, that's $970 million of additional growth in our core portfolio and takes us up to $4.2 billion over 165 different positions. Moving on to slide eight, You can see that in December we issued a $900 million CLO. That was our seventh CLO and our largest to date. It continues our focus on non-recourse, non-mark-to-market funding for our core book. Following that, we announced last week that we surpassed that record in Q1 with a new CLO that was $1.2 billion in size. This was another transaction that was very well received by the market and included both new and existing investors. Another point I want to mention on the liabilities, in conjunction with the merger and the growth of our size, we upsized the balance of a number of our warehouse facilities, and we now have agreements with five separate counterparties. Moving on to slide 10, we can dive a bit into the ARM portfolio. At the end of the year, the fair market value of the ARM portfolio stood at $4.6 billion compared to the $7.1 billion at $9.30 So we've made excellent progress in terms of our liquidation. If we go on to slide 11, I can give a little bit of an update in terms of where we're at for the first quarter. So we've continued to make progress on redirecting the residential ARM book through sales and paydowns. We sold an additional $1.8 billion in January and February so far. And through February 18th, the current fair market value of the residential ARM portfolio was $2.4 billion which is roughly a 66% decline from the date of the acquisition. The reduction of the value of the ARM agency's secured portfolio is due to two things, primarily two things, 265 million of principal payments on the portfolio and another 1.8 billion of sales. In the first quarter, in terms of change in value, we've experienced losses of roughly 38.1 million relating to the ARM portfolio. This is driven by changes in value in addition to pay down, sales, and hedging, so a total net number across all those items. With that, I'll turn it over to Mike to give you an update of what we saw in the market during fourth quarter.
Lindsay
Thanks, Jerry. Good morning, everyone. I'm Mike Camperotto, head of commercial real estate. Appreciate your being on the call today, and I want to reiterate that our thoughts and prayers are with the Ukrainian people. I'm going to start on slide 12. Q4 was a record quarter of originations for our team. we were easily able to put the capital generated from the Capstead residential arm sales to work in new originations this quarter. We originated 38 loans during the quarter and are looking at a robust pipeline today that is in excess of 1 billion in size. Generally, we expect to have a similar pace of originations in 2022 as we did in 2021. Multifamily continued to be our largest ad this quarter with over 93% of originations in the multifamily sector. Going to slide 13, it shows our exposure to multifamily at year end is up to 70% of our core loan portfolio. We continue to find multifamily an attractive sector to invest with strong loan demand and excellent credit performance in our portfolio. That being said, we remain concerned with the complacency in the multifamily markets. The lack of cap rate tiering between major markets, secondary markets, and even tertiary markets continues to be cause for concern. The lack of cap rate tiering for materially different vintages within the same market is also cause for concern. We do not believe this to be a healthy market dynamic and more so not a healthy dynamic in what we believe to be a rising interest rate environment. Accordingly, if you look at our multifamily originations over the last several quarters, you will notice that our focus has been on higher quality, newer vintage assets and strong primary markets. We believe in a multifamily valuation pullback higher quality, newer vintage assets in primary markets will be less volatile, have stronger value retention, and be more liquid. While our focus for most of 2021 was in multifamily lending, the DNA of our company remains very much the same as it has always been. We are looking for value-add investments with the appropriate credit and risk metrics. While higher quality, newer vintage multifamily assets located in primary markets was a sector of choice in Q4, we are actively looking to increase exposure to non-multifamily assets if we can achieve what we believe to be the correct risk-adjusted returns. Our geographic footprint remains in line with where it was in Q3. We're still finding strong opportunities in the southwest and southeast regions while selectively investing in other markets. Our risk rating remains unchanged for the quarter with only one loan on non-approval or watch list status. All in all, it was an exceptional quarter and year for the commercial real estate portfolio, and I believe the portfolio is stronger than it has ever been. I briefly want to provide an update on the team. We ended the year with 75 professionals, and of that have 17 managing directors with deep relationships and decades of experience. Over 50% of the loans we originate are with repeat borrowers and or brokers, and we are well positioned to continue to grow this portfolio. Lastly, and very importantly, To reiterate what Rich mentioned earlier, Q4 2021 represents the 21st consecutive quarter that we've been managing the REIT and have not experienced a single credit loss on any loan originated by BSP. Of all of our achievements, certainly through a global pandemic, we believe this to be the most important. This no-loss performance highlights a strong credit culture and a robust, experienced internal asset management team. We're incredibly proud of that performance and the team. And with that, Excuse me. And with that, I would like to turn it back over to the operator to begin the Q&A session.
Operator
We will now begin the question and answer session. To ask a question, you may press star then one on your telephone keypad. If you are using a speakerphone, please pick up your handset before pressing the keys. If at any time your question has been addressed and you would like to withdraw your question, please press star then two. At this time, we will pause momentarily to assemble our roster. The first question comes from Steve Delaney with JMP Securities. Please go ahead.
Steve Delaney
Good morning, everyone, and I share the sharing thoughts and prayers for Ukraine this morning. Shame we all had to wake up to that news. While it's obviously a little hard to focus on our own real estate markets right now, I was wondering, Rich, if you had any kind of high-level thoughts about what is going on in Europe, how it might impact our Fed and any decision, the decision that we expected that they would make to raise interest rates.
Andrew
Mike, do you want to start that off?
Lindsay
Sure. Hey, Steve. Hey, Steve. Thanks for the question. Look, I think the Fed has been remarkably open about their plans going forward. Clearly, battling inflation and clearly in a hawkish position. I think there's been a lot of debate of late between the 25 or 50 basis points coming in the March meeting. This probably gives them cover to only raise 25 pretty easily. I don't believe that this will change the long-term position of the Fed overall. Obviously, we're in the very early hours of this whole development. So that, that remains to be subject to, um, but as it stands today, you know, short of major further escalation, uh, I would not expect them to change the long-term path.
Steve Delaney
Hey, that makes, yes, yes. Go ahead. I was just going to say, please go. Oh, okay. So, you know, lower from your borrower's perspective, I would think lower for longer would certainly be viewed as a positive, um, in terms of their cost of borrowing. But from the way you manage your portfolio and you look at FBRT, it would appear that you should be somewhat agnostic regarding interest rates. Am I correct on that comparison between your borrowers and your own portfolio? It's a job with your views.
Rich
This is Jerry. Maybe I'll let somebody else jump in. Sure. To some extent, certainly. I mean, I think you've seen the floors that we had, you know, dominate the portfolio, you know, six to 12 months ago. A lot of that has gone down significantly. So, you know, the net benefit from those have kind of burned off. So I think we are much more agnostic now than we were, you know, a year ago, which is probably the norm that we're seeing across the space with everybody.
Lindsay
Yeah, and I would just point out, Steve, I think that applies to the core portfolio. Obviously, our conduit business is much smaller than the overall core business, but higher rates we actually think would help our conduit business net-net for a few different reasons. But, again, that's a smaller piece of what we're doing overall.
Andrew
And, Steve, just in broader context, I mean, we have shrunk our arms portfolio by $4.7 billion. The 2.4 today, as you've heard, a lot of those sales took place in Q4, sort of ahead of this recent downdraft. So I think the easiest, most non-controversial prediction is volatility. And just given the higher leverage and more historical volatility of the agency, I mean, one of the good things is on the ARM side, you know, duration is generally shorter, so you're not going to see maybe quite as much vol as you see in some of the more traditional agency guys. Also, I mean, I'll just add, you didn't ask, but, you know, we've deployed what we consider a more conservative hedging strategy. You know, we're thinking about hedging as short-term owners, not as, you know, hedging a portfolio over a long period of time, trying to match duration and other things. Understood. We think on the combination of how aggressively we've hedged, the sales we've made, I mean, you know, we sort of avoided, you know, a lot of, you know, what's occurred. I mean, if you think about it, other than the March quarter of 2020, you know, the COVID quarter, this has been sort of the worst period, you know, for, you know, on the resi side, certainly. And I don't know, probably as long as you've been covering it, Steve. So, yeah. you know, we're pleased that we've made such progress on lowering the book. And just given the volatility ahead, you know, we're just excited where we actually think we have, in many cases, the opportunity to redeploy into, you know, potentially even wider spread, you know, commercial lending opportunities.
Steve Delaney
Yeah. No, I understood. And the short duration definitely helps. We've seen book value losses going back to the last couple months of of 21 the first month or two this year of double-digit, 10% to 12% for some highly levered residential mortgage REITs. So your portfolio has obviously benefited, held up much better. Jerry, just to close out with you, I think you mentioned that the fair value marks thus far in 1Q22 were $38 million on the RM portfolio. Is that correct?
Rich
Yeah, that's net of hedging, correct.
Steve Delaney
Right. Okay. So that, with 90 million shares, that's going to be about $0.40 that we should expect to see a decline in book value. How will that flow through? I assume we'll see that in distributable earnings. And would that item have any impact on your dividend payout here in the next quarter or two? How do you view the fair value loss?
Rich
Sure. First part, yeah, I mean, that'll just come through as a trading loss. But we don't really consider that a run rate loss from thinking about our distributable. Okay, sure. The cost to wind down more than a cost of operations. That's kind of how we interpret that. But in terms of earning power, I don't think we're uncomfortable with the level we've set it at. And if you think back to kind of what I said on what the core portfolio is earning, if you look at that just distributable amount, you know, that is higher than the dividend rate that we're paying on the totality of the company. So, you know, a lot of this is predicated on the shift out of arms and into the core where we see, you know, much better returns, clearly. Okay.
Steve Delaney
So just the cost, you know, sort of a one-time item, cost of winding down that portfolio, but other than that, whatever the actual hit is to book value here, From a distributable earnings dividend standpoint going forward, it doesn't sound like there'll be any material impact.
Rich
That's how we see it right now, correct.
Andrew
And, Steve, just to pile on there, you probably remember when we announced our merger, we had sort of said we were very comfortable with the 35.5 cents that we were paying, just to echo what Jerry said, you know, for the at least, you know, intermediate future as we manage through this transition. Obviously, we're earning or have historically been earning a higher ROE on our core book, but the blend between that and the arms, you know, lower ROE arms portfolio, we feel comfortable, you know, continuing with that 35.5 cents. As you saw, we earned 36 cents, so we're covering it. But that's the plan.
Steve Delaney
Thank you each for your question, your comments. I appreciate it.
Operator
The next question comes from Jason Stewart with Jones Trading. Please go ahead.
Jason Stewart
Hey, good morning. Thanks for taking the questions. I wanted to ask about the comments on the multifamily and the competition there, and maybe you could give us some other, maybe more specifics in terms of either geography or asset class that you think looks interesting, and maybe if you could just put a finer point on sort of where to expect margins going forward in multifamily if they continue to compress or, you know, sort of how that economic picture has changed from an origination standpoint?
Lindsay
Yeah, thanks, Jason. I think if you look at the, you know, for better or worse, the core business or the floating rate business has become highly tethered to capital markets and CRE-CLO execution. So I think you're going to see asset spreads you know, very much trend and follow what we're seeing in the CRE CLO market. And clearly, you know, those spreads, along with all the other spreads that we've been, you know, watching in the marketplace have been going wider. So I think if you look back to Q3 of last year, kind of the tightest pricing that we were seeing from a spread standpoint was probably in the high 200s, maybe, you know, 275. I think, you know, before this morning's news, we were seeing that wider by 50 to 60 basis points. So, you know, kind of hearing multifamily spreads are going to be in the 325, 350 range for your generic kind of 75% loan to cost multifamily bridge loan today.
Jason Stewart
Okay, and so assuming that that is following financing spreads in the CLO market, I'm guessing that doesn't change your decision or appetite to move into other asset classes where you can get better risk-adjusted returns. Maybe you could just put a little bit more color in. Is it office? Is it a geographic area that's interesting? What sort of should we expect that portfolio to look like in terms of originations over 2Q, 3Q this year?
Lindsay
Yeah, I think we're pretty bullish on leisure-oriented hospitality. We have been. We've been focusing on origination in that space. We're also selectively looking for some retail opportunities, not enclosed malls, but open-air centers in good demographic areas of the country. Office, we're still... hesitant on from a macro standpoint. We believe the long-term ramifications of COVID and work from home have yet to work their way through the system, and we just are uncertain of the long-term demand for office space. So we're not opposed to office, but that's probably where we have the highest credit bar today. And then I think you'll see also some esoteric investments from us, as we've always done, whether it's you know, condo inventory loans or multifamily construction loans, things of that nature that, you know, we're usually able to find very nice pricing.
Jason Stewart
Got it. Okay. That's helpful. Thank you. And then one more just in terms of your thought process from origination to just, you know, this gestation period from origination to CLO execution. Nice job pricing, the last one. But a billion two is a big CLO. How do you balance that time period with this volatility and spreads that is expected to continue, the size of the CLO getting the proper scale versus that time period of risk that you have to take? How do you think about those two?
Lindsay
Obviously something we're always thinking about and managing to the best of our ability. Speed is always our friend. Speed is always everybody's friend. So we were looking at our forward pipeline in the beginning of Q4, and we started the process of our FL8 CLO very, very early. So we were closing loans in Q4 while we were going through the rating agency underwriting process for FL8, the price in January. So if you look at the aggregate exposure of loans on our warehouse facilities, I would actually say from closing date to the issuance of FL8, it was probably the shortest aggregation period we've ever had. And to that point, we just priced approximately $1.6, $1.7 billion of liabilities in December and January with two-year reinvestment on both. We think we've positioned the company really well on the liability side of the balance sheet and should be able to take advantage of some of the volatility that we're seeing today.
Jason Stewart
Great. Thanks for the call. I appreciate it.
Operator
This concludes our question and answer session. I would like to turn the conference back over to Lindsay Crabb for any closing remarks.
Lindsey Crabb
Thank you for your time today. If you have any further questions, please give us a call. We look forward to speaking with you next quarter.
Operator
The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.
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