Scott Kennedy’s mREIT Earnings Series: Assessing Franklin BSP Realty’s And Two Harbor’s Performance For Q1 2024
Summary
This earnings assessment article reviews FBRT’s and TWO’s BV and core earnings/EAD performance during Q1 2024 and compares results to my expectations. Earnings remain a key driver to stock performance.
FBRT’s BV slightly outperformed my/our expectations (within range) while its core earnings/EAD was a modest outperformance. Watch list loans remained unchanged but non-accrual loans net increased by 2.
No change in FBRT’s percentage recommendation ranges or risk/performance rating. As previously anticipated, FBRT should outperform the company’s commercial whole loan sub-sector peers this credit/interest rate cycle.
TWO’s BV slightly outperformed my/our expectations (within range) while its core earnings/EAD was a notable outperformance (though only slightly positive). A good overall quarter for TWO but sub-sector headwinds remain.
No change in TWO’s percentage recommendation ranges or risk/performance rating. TWO is currently deemed appropriately valued (HOLD). Prior to an upgrade, I want continued notable improvement in core earnings/EAD.
Formatting Change to this Article Series
We have recently changed the format of this earnings-related article series (less wording, more visual images). This process remains ongoing and future changes will likely occur.
1) FBRT:
Commentary
Quarterly BV Fluctuation: Minor Outperformance (1.8% Variance).
Core Earnings/EAD: Modest Outperformance.
A pretty good quarter regarding BV fluctuation for Franklin BSP Realty Trust FBRT 0.00%↑ in my opinion. FBRT recorded a very minor quarterly BV decrease versus my expected minor decrease. FBRT recorded a quarterly net increase to the company’s CECL reserves of only ($3) million (increases are bad). In comparison, I projected a quarterly net increase of ($25) million so a less severe quarterly increase. This directly led to a BV outperformance of $0.24 per share which was the vast majority of the company’s overall quarterly BV outperformance of $0.28 per share.
FBRT’s modest core earnings/EAD outperformance was mainly due to the fact the company continued to originate a good deal of loans during the quarter. This has been rare within the commercial whole loan mREIT sub-sector. FBRT funded $270 and $487 million in loans during Q4 2023 and Q1 2024, respectively. Simply put, a modest increase whereas I assumed quarterly funded loans of only $250 million. This directly led to the quarterly increase in core earnings/EAD due to a larger investment portfolio size. This was not correctly anticipated on my end. FBRT also keep operational costs in check (slightly lower amount of expenses versus my expectations).
A risk/performance rating of 4 for FBRT remains appropriate in the current environment/over the foreseeable future (“higher-for-longer” regarding rates/yields).