What changed in this filing

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Item 1A. Risk Factors

2022-02-25 compared with 2021-03-11 · 174 added, 78 removed, 352 unchanged (42% of the section changed)

Risks Related to an Investment in Benefit Street Partners Realty Trust, Inc.

The ongoing COVID-19 pandemic is materially and adversely affecting our financial condition, operating results and cash flows and the operations and financial performance of many of the borrowers underlying our real estate-related assets, and we expect the adverse impacts will continue in the future.

Risks Related to an Investment in Franklin BSP Realty Trust, Inc.

The COVID-19 pandemic continues to adversely impact our business and the business of many of our borrowers.

The COVID-19 pandemic has had, and another pandemic or public health crisis in the future could have, repercussions across domestic and global economies and financial markets.

The global impact of the COVID-19 outbreak evolved rapidly and many governmental authorities, including state and local governments in regions in which our borrowers own properties, have reacted by instituting government restrictions, border closings, quarantines, “shelter-in-place” orders and “social distancing” guidelines which have forced many of our borrowers to suspend or significantly restrict their business activities, and has resulted in a dramatic increase in national unemployment and corporate bankruptcies, with particularly adverse impacts on the retail, including restaurants, and hospitality sectors.

The COVID-19 pandemic is materially and adversely affecting our financial condition, operating results and cash flows and the operations and financial performance of many of the borrowers underlying our real estate-related assets, and we expect the adverse impacts will continue in the future.

Specifically, the COVID-19 pandemic has:

• significantly disrupted the financial markets for the assets in our real estate securities portfolio, resulting in significant decreases in market values for these assets and significant market volatility.

This has resulted in margin calls from our lenders, which we have thus far satisfied, and could result in future margin calls which, if not satisfied, could result in the liquidation of some of our assets at significant losses.

• resulted in a decline in the value of commercial real estate generally, and significant declines in certain assets classes, including hospitality and retail, which has negatively impacted the value of our commercial mortgage loan portfolio, and could continue to negatively impact the value in the future, potentially materially.

• negatively impacted the financial stability of many of our borrowers, which has and is expected to continue to result in an increase in the number of our borrowers who become delinquent or default on their loans, or who seek to defer payment on or to amend the terms of their loans.

Borrowers in the hospitality and retail sector have been particularly adversely impacted.

• increased the cost and decreased the availability of debt capital, including as a result of dislocations in the commercial mortgage-backed securities market, which has currently made raising capital through CDO or CLO securitizations impracticable, and as a result of lenders permitting significantly lower advance rates on our repurchase agreements.

• as a result of the decline in the market value of the loans in our CDOs and CLOs, we may not meet certain interest coverage tests, over-collateralization coverage tests or other tests that could result in a change in the priority of distributions, which could result in the reduction or elimination of distributions to the subordinate debt and equity tranches we own until the tests have been met or certain senior classes of securities have been paid in full.

The COVID-19 pandemic resulted in many governmental authorities, including state and local governments in regions in which our borrowers own properties, reacting by instituting government restrictions, border closings, quarantines, “shelter-in-place” orders and “social distancing” guidelines which forced many of our borrowers to suspend or significantly restrict their business activities.

The recent resurgences driven by variants, such as Delta and Omicron, have resulted in some of these restrictions, which had been lifted, being reimposed.

The economic consequences of the pandemic and government and individual responses to it resulted challenging operating conditions for many businesses, particularly in the retail (including restaurants) and hospitality sectors.

The COVID-19 pandemic has adversely affected our business in a number of respects, including:

• at the onset of the pandemic in March and April of 2020, the financial markets for the assets we then held in our real estate securities portfolio were significantly disrupted, resulting in significant decreases in market values for these assets and significant market volatility.

This resulted in margin calls from our lenders, which we satisfied, but similar disruptions in the future could result in additional margin calls, including with respect to the assets we acquired in the Capstead merger, which, if not satisfied, could result in the liquidation of some of our assets at significant losses.

• declines in the value of commercial real estate generally, and significant declines in certain assets classes, including office, hospitality and retail, which negatively impacted the value of our commercial mortgage loan portfolio, and could continue to negatively impact the value in the future, potentially materially.

• adverse impacts on the financial stability of many of our borrowers, which has and will continue to increase the prospects of borrower delinquencies, defaults, or requests for loan modifications.

• periodic increases in the cost and decreases in the availability of debt capital, including as a result of dislocations in the commercial mortgage-backed securities market, and as a result of lenders permitting significantly lower advance rates on our repurchase agreements.

• increases in the risk that we may not meet certain interest coverage tests, over-collateralization coverage tests or other tests related to our securitized debt that could result in a change in the priority of distributions, which could result in the reduction or elimination of distributions to the subordinate debt and equity tranches we own until the tests have been met or certain senior classes of securities have been paid in full.

Accordingly, we may experience a reduction in our cash flow from those interests which may adversely affect our liquidity and therefore our ability to fund our operations or address maturing liabilities on a timely basis.

• resulted in a general decline in business activity which if continued will result in a decline in demand for mortgage financing, which could adversely affect our ability to make new investments or to redeploy the proceeds from repayments of our existing investments.

The extent to which the COVID-19 pandemic impacts our or our borrowers’ operations will depend on future developments which are highly uncertain and cannot be predicted with confidence, including the scope, severity and duration of the pandemic, including any resurgences, the speed and effectiveness of vaccine and treatment developments and the direct and indirect economic effects of the pandemic and containment measures.

• periodic declines in business activity which if continued will result in a decline in demand for mortgage financing, which could adversely affect our ability to make new investments or to redeploy the proceeds from repayments of our existing investments.

The extent to which the COVID-19 pandemic impacts our or our borrowers’ operations will depend on future developments which are highly uncertain and cannot be predicted with confidence, including the scope, severity and duration of the pandemic, including any resurgences due to variants, such as the Delta and Omicron variants, the effectiveness of vaccines against variants such as the Delta and Omicron variants, the speed of vaccine (including booster) distribution, treatment developments and the direct and indirect economic effects of the pandemic and containment measures.

The inability of our borrowers to meet their loan obligations and/or borrowers filing for bankruptcy protection would reduce our cash flows, which would impact our ability to pay dividends to our stockholders.

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In certain prior periods, distributions have been in excess of cash flows from operations.

Distributions in excess of earnings will decrease the book value and NAV per share of common stock.

Distributions in excess of earnings will decrease the book value per share of common stock.

The Company cannot give any assurance that returns from the investments will be sufficient to maintain or increase cash available for distributions to stockholders.

Actual results may differ significantly from the assumptions used by the board of directors in establishing the distribution rate to stockholders.

The Company may not have sufficient cash from operations to make a distribution required to qualify for or maintain our REIT status, which may materially adversely affect the value of common stock or Series A Convertible Preferred Stock (the “Series A Preferred Stock”) or Series C Convertible Preferred Stock (the “Series C Preferred Stock”), and together with the Series A Preferred Stock, (the "Preferred Stock").

No established trading market for our shares currently exists, and as a result, it will be difficult for you to sell our shares.

If our shares are listed they may trade below our estimated NAV per share or our GAAP book value per share.

The Company's charter does not require the board of directors to seek stockholder approval to liquidate our assets by a specified date, nor does our charter require us to list our shares for trading on a national securities exchange by a specified date or otherwise pursue a transaction to provide liquidity to our stockholders.

There is no established trading market for our shares and our shares are not currently listed on a national securities exchange.

Until our shares are listed, if ever, our stockholders may have difficulty selling their shares.

If our shares are eventually listed, they may trade at prices significantly below our estimated NAV per share and our most recent GAAP book value due to, among other things, significant selling pressure from legacy stockholders that had previously been unable to sell or the market perception that such selling pressure will occur.

To address this risk the Company could delay the ability of legacy stockholders to sell all of their shares upon a successful listing.

Because of the illiquid nature of our shares, investors should purchase our shares only as a long-term investment and be prepared to hold them for an indefinite period of time.

Our share repurchase program (the "SRP"), which is subject to numerous restrictions, may be canceled at any time and should not be relied upon as a means of liquidity.

The Company has a SRP that may enable investors to sell their shares to us in limited circumstances.

Share repurchases are made at the sole discretion of the board of directors.

In its sole discretion, the board of directors could amend, suspend or terminate our SRP upon 30 days prior written notice to stockholders.

Further, the SRP includes numerous restrictions that would limit the ability to sell shares.

For example, the SRP has historically been limited to the proceeds from our DRIP which has frequently resulted in us not satisfying all SRP requests for a given semester.

Due to the foregoing, our SRP should not be relied upon as a means of liquidity.

The Company may not have sufficient cash from operations to make a distribution required to qualify for or maintain our REIT status, which may materially adversely affect the value of our securities.

Because we have a large number of stockholders subject to lock-up restrictions which expire six months after the effective time of the merger, there may be significant pent-up demand to sell shares of our common stock once applicable lock-up restrictions expire.

Significant sales of shares of our common stock, or the perception that significant sales of such shares could occur, may adversely impact the price of shares of our common stock.

Pursuant to certain lock-up agreements and the restructuring of our equity prior to the effective time of the merger with Capstead, approximately 94% of the shares of our common stock (including shares of common stock underlying preferred shares that will automatically convert to common stock) which were outstanding prior to the effective time of the merger are prohibited from being publicly traded for six months following the merger (i.e., until April 19, 2022).

Prior to its listing in connection with the closing of the merger on October 19, 2021, our common stock had never been listed on any national securities exchange and the ability of stockholders to liquidate their investments was limited.

As a result, there may be significant pent-up demand to sell shares of our common stock once the lock-up restrictions referenced above expire.

A large volume of sales of shares of our common stock could decrease the prevailing market price of shares of our common stock and could impair our ability to raise additional capital through the sale of equity securities in the future.

Even if actual sales volumes are not elevated, the mere perception of the possibility of these sales could depress the market price of shares of our common stock and have a negative effect on our ability to raise capital in the future.

Our business could suffer in the event our Advisor or any other party that provides us with services essential to our operations experiences system failures or cyber-incidents or a deficiency in cybersecurity.

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Although the Advisor and other parties that provide us with services essential to our operations intend to continue to implement industry-standard security measures, there can be no assurance that those measures will be sufficient, and any material adverse effect experienced by the Advisor and other parties that provide us with services essential to our operations could, in turn, have an adverse impact on us.

If we are unable to implement and maintain effective internal controls over financial reporting in the future, investors may lose confidence in the accuracy and completeness of our financial reports and the market price of our common stock may be negatively affected.

As a newly-listed public company, beginning with the 2022 fiscal year, our independent registered public accounting firm will be required to formally attest to the effectiveness of our internal controls over financial reporting on an annual basis.

The process of designing, implementing and testing the internal controls over financial reporting required to comply with this obligation is time consuming, costly and complicated.

If we identify material weaknesses in our internal controls over financial reporting, if we are unable to comply with the requirements of Section 404 of the Sarbanes-Oxley Act in a timely manner or to assert that our internal controls over financial reporting are effective or if the independent registered public accounting firm is unable to express an opinion as to the effectiveness of our internal controls over financial reporting, investors may lose confidence in the accuracy and completeness of our financial reports and the market price of our common stock could be negatively affected.

We could also become subject to investigations by the SEC or other regulatory authorities, which could require additional financial and management resources.

Risks Related to Conflicts of Interest

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We rely on the Advisor and the executive officers and other key real estate professionals at our Advisor to identify suitable investment opportunities for us.

Although there are restrictions in the Advisory Agreement we have entered into with the Advisor with respect to the Advisor’s ability to manage another REIT that competes with us, or to provide any services related to fixed-rate conduit lending to another person, the Advisor and its employees are not otherwise restricted from engaging in investment and investment management activities unrelated to us.

Some investment opportunities that are suitable for us may also be suitable for other investment vehicles managed by the Advisor or its affiliates.

Thus, the executive officers and real estate professionals of the Advisor could direct attractive investment opportunities to other entities or investors.

In addition, we have any may in the future engage in transactions with our Advisor or affiliates of our Advisor and these transactions may not be on terms as favorable as transactions with third parties.

Such events could result in us investing in assets that provide less attractive returns, which may reduce our ability to make distributions.

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In addition, the contracts of such entity would be unenforceable unless a court required enforcement, and a court could appoint a receiver to take control of the entity and liquidate its business.

Although our Advisor is responsible for calculating our estimated per share NAV, our Advisor will consider independent valuations of our investments, the accuracy of which our Advisor will not independently verify.

In calculating our estimated per share NAV, our Advisor will include the net value of our commercial real estate debt and other commercial real estate-related investments, taking into consideration valuations of investments obtained from our independent valuer.

Although our Advisor is responsible for the accuracy of the NAV calculation and will provide our independent valuer with our valuation guidelines, which have been approved by our board of directors, our Advisor will not independently verify the appraised value of our investments.

As a result, the appraised value of a particular investment may be greater or less than its potential realizable value, which would cause our estimated NAV to be greater or less than the potential realizable NAV.

The estimated per share NAV that we published does not reflect changes in our NAV since such date and does not represent the actual value of your shares on any given day.

The Company expects that our investments will only be valued annually for purposes of establishing our estimated per share NAV.

The Company may experience events affecting our investments that may have a material impact on our NAV.

For example, if a material borrower becomes insolvent or if investment conditions deteriorate generally, the value of an investment may materially change.

Our NAV per share as published will not reflect such subsequent events.

As a result, the NAV per share published after the announcement of a material event may differ significantly from our actual NAV per share.

The resulting potential disparity may benefit repurchasing or non-repurchasing stockholders, depending on whether NAV is overstated or understated.

Risks Related to Our Financing Strategy

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We may not be able to access financing sources on attractive terms, if at all, which could dilute our existing stockholders and adversely affect our ability to grow our business.

We will require outside capital to significantly grow our business.

We have and may continue to raise equity capital through private placements to institutions and other investors.

Because our common stock is not traded on a securities exchange, in order to consummate these private placements, we have and may continue to have to sell our common stock and Preferred Stock, on an as-converted basis, at prices that reflect a significant discount to our book value per share.

Sales of common stock at less than our book value per share and sales of Preferred Stock that is convertible at less than our book value per share will dilute the value of common stock held by our existing shareholders.

In addition, our business may be adversely affected by disruptions in the debt and equity capital markets and institutional lending market, including the lack of access to capital or prohibitively high costs of obtaining or replacing capital.

If we cannot obtain sufficient debt and equity capital on acceptable terms, our business and our ability to operate could be severely impacted.

Our ability to fund our loans and investments may be impacted by our ability to secure bank credit facilities (including term loans and revolving facilities), warehouse facilities and structured financing arrangements, public and private debt issuances (including through securitizations) and derivative instruments, in addition to transaction or asset specific funding arrangements and additional repurchase agreements on acceptable terms.

We may also rely on short-term financing that would be especially exposed to changes in availability.

Our access to sources of financing will depend upon a number of factors, over which we have little or no control, including:

• general economic or market conditions;

the market’s view of the quality of our assets;

• the market’s perception of our growth potential;

• our current and potential

• future earnings and cash distributions;

• the market price of the shares of our common stock and preferred stock.

We may need to periodically access the capital markets to, among other things, raise cash to fund new loans and investments.

Unfavorable economic conditions, such as those caused by the COVID-19 pandemic, or capital market conditions may increase our funding costs, limit our access to the capital markets or could result in a decision by our potential lenders not to extend credit.

An inability to successfully access the capital markets could limit our ability to grow our business and fully execute our business strategy and could decrease our earnings and liquidity.

In addition, any dislocation or weakness in the capital and credit markets could adversely affect our lenders and could cause one or more of our lenders to be unwilling or unable to provide us with financing or to increase the costs of that financing.

In addition, as regulatory capital requirements imposed on our lenders are increased, they may be required to limit, or increase the cost of, financing they provide to us.

In general, this could potentially increase our financing costs and reduce our liquidity or require us to sell assets at an inopportune time or price.

We cannot make assurances that we will be able to obtain any additional financing on favorable terms or at all.

We use short-term borrowings, such as credit facilities and repurchase agreements to finance our investments, which require us to provide additional collateral in the event the lender determines there is a decrease in the fair value of our collateral, and these calls for collateral could significantly impact our liquidity position.

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In a weakening economic environment, or in an environment of widening credit spreads, we would generally expect the value of the commercial real estate debt or securities that serve as collateral for our short-term borrowings to decline, and in such a scenario, it is likely that the terms of our short-term borrowings would require us to provide additional collateral or to make partial repayment, which amounts could be substantial.

These risks related to the use of repurchase agreements were significantly increased as a result of the assets acquired in, and the increase in our indebtedness resulting from, the Capstead merger and will continue to be heightened until we have completed the process of transitioning those acquired assets into our legacy investment strategies and returning to our traditional leverage levels.

Further, such borrowings may require us to maintain a certain amount of cash reserves or to set aside unleveraged assets sufficient to maintain a specified liquidity position that would allow us to satisfy our collateral obligations.

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Our operating results may be adversely affected by a number of risks generally incident to holding real estate debt, including, without limitation:

• natural disasters, such as hurricanes, earthquakes and floods;

• acts of war or terrorism, including the consequences of terrorist attacks;

• natural disasters, such as hurricanes, earthquakes and floods, which we expect to increase in strength and frequency due to climate change;

• acts of war or terrorism, or criminal violence, including the consequences of terrorist attacks;

• adverse changes in national and local economic and real estate conditions;

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These factors may have a material adverse effect on the ability of our borrowers to pay their loans and the ability of the borrowers on the underlying loans securing our securities to pay their loans, as well as on the value and the return that we can realize from assets we acquire and originate.

Our success depends on the availability of attractive investment opportunities and the Advisor’s ability to identify, structure, consummate, leverage, manage and realize returns on our investments.

Our operating results are dependent upon the availability of, as well as the Advisor’s ability to identify, structure, consummate, leverage, manage and realize returns on, our loans and other investments.

In general, the availability of attractive investment opportunities and, consequently, our operating results, will be affected by the level and volatility of interest rates, conditions in the financial markets, general economic conditions, the demand for investment opportunities in our target assets and the supply of capital for such investment opportunities.

We cannot assure you that the Advisor will be successful in identifying and consummating attractive investments or that such investments, once made, will perform as anticipated.

There can be no assurances that the U.S.

or global financial systems will remain stable, and the occurrence of another significant credit market disruption may negatively impact our ability to execute our investment strategy, which would materially and adversely affect us.

and global financial markets experienced significant disruptions in the past, during which times global credit markets collapsed, borrowers defaulted on their loans at historically high levels, banks and other lending institutions suffered heavy losses and the value of real estate declined.

During such periods, a number of borrowers became unable to pay principal and interest on outstanding loans as the value of their real estate declined.

After the 2008 Global Financial Crisis, liquidity eventually returned to the market and property values recovered to levels that exceeded those observed prior to the Global Financial Crisis.

However, declining real estate values due to the COVID-19 pandemic, or other factors, could in the future reduce the level of new mortgage and other real estate-related loan originations.

Instability in the U.S.

and global financial markets in the future could be caused by any number of factors beyond our control, including, without limitation, terrorist attacks or other acts of war and adverse changes in national or international economic, market and political conditions or another health pandemic.

Any future sustained period of increased payment delinquencies, foreclosures or losses could adversely affect both our net interest income from loans in our portfolio as well as our ability to originate and acquire loans, which would materially and adversely affect us.

Difficulty in redeploying the proceeds from repayments of our existing loans and other investments could materially and adversely affect us.

As our loans and other investments are repaid, we attempt to redeploy the proceeds we receive into new loans and investments and repay borrowings under our repurchase facilities and other financing arrangements.

It is possible that we will fail to identify reinvestment options that would provide a yield and/or a risk profile that is comparable to the asset that was repaid.

If we fail to redeploy the proceeds we receive from repayment of a loan or other investment in equivalent or better alternatives, we could be materially and adversely affected.

If we cannot redeploy the proceeds we receive from repayments into funding loans in property types or geographic markets that the Advisor has identified as priorities for us, such repayments may cause the composition of our loan portfolio to skew towards less favored property types or geographies and prevent us from achieving our portfolio construction objectives.

Delays in liquidating defaulted commercial real estate debt investments could reduce our investment returns.

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In the event of default by a borrower, these restrictions, among other things, may impede our ability to foreclose on or sell the property securing the loan or to obtain proceeds sufficient to repay all amounts due to us on the loan.

In addition, we may be forced to operate any foreclosed properties for a substantial period of time, which could be a distraction for our management team and may require us to pay significant costs associated with such property.

Subordinate commercial real estate debt that we originate or acquire could constitute a significant portion of our portfolio and may expose us to greater losses.

In addition, we have in the past and we may in the future be forced to operate any foreclosed properties for a substantial period of time, which could be a distraction for our management team and may require us to pay significant costs associated with such property.

Subordinate commercial real estate debt that we originate or acquire could expose us to greater losses.

We acquire and originate subordinate commercial real estate debt, including subordinate mortgage and mezzanine loans and participations in such loans.

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In connection with the servicing of the specially serviced mortgage loans, the related special servicer may, at the direction of the directing certificate holder, take actions that could adversely affect our interests.

We may invest in collateralized debt obligations ("CDOs") and such investments involve significant risks.

We may invest in CDOs, which are multiple class securities secured by pools of assets, such as CMBS, subordinate mortgage and mezzanine loans and REIT debt.

We invest in collateralized debt obligations ("CDOs") and such investments involve significant risks.

We invest in CDOs, which are multiple class securities secured by pools of assets, such as CMBS, subordinate mortgage and mezzanine loans and REIT debt.

Like typical securities structures, in a CDO, the assets are pledged to a trustee for the benefit of the holders of the bonds.

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Upon termination of the reinvestment period, the static pool functions very similarly to a CMBS where repayment of principal allows for redemption of bonds sequentially.

To the extent we invest in the equity securities of a CDO, we will be entitled to all of the income generated by the CDO after the CDO pays all of the interest due on the senior securities and its expenses.

When we invest in the equity securities of a CDO, we will be entitled to all of the income generated by the CDO after the CDO pays all of the interest due on the senior securities and its expenses.

However, there will be little or no income or principal available to the holders of CDO equity securities if defaults or losses on the underlying collateral exceed a certain amount.

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Any such imperfect correlation may prevent us from achieving the intended hedge and expose us to risk of loss.

Many of our investments are illiquid and we may not be able to vary our portfolio in response to changes in economic and other conditions, which may result in losses to us.

Many of our investments are illiquid.

Most of our investments are illiquid and we may not be able to vary our portfolio in response to changes in economic and other conditions, which may result in losses to us.

Most of our investments are illiquid.

As a result, our ability to sell commercial real estate debt, securities or properties in response to changes in economic and other conditions, could be limited, even at distressed prices.

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This differs significantly from the prior “incurred loss” model.

Any credit ratings assigned to our investments will be subject to ongoing evaluations and revisions and we cannot assure you that those ratings will not be downgraded.

Some of our investments may be rated by rating agencies.

Any credit ratings on our investments are subject to ongoing evaluation by credit rating agencies, and we cannot assure you that any such ratings will not be downgraded or withdrawn by a rating agency in the future if, in its judgment, circumstances warrant.

If rating agencies assign a lower-than-expected rating or reduce or withdraw, or indicate that they may reduce or withdraw, their ratings of FBRT’s investments in the future, the value and liquidity of our investments could significantly decline, which would adversely affect the value of our investment portfolio and could result in losses upon disposition or the failure of borrowers to satisfy their debt service obligations to us.

Changes to, or the elimination of, LIBOR may adversely affect our interest income, interest expense, or both.

In July 2017, the Financial Conduct Authority of the U.K.

(the “FCA”) announced its intention to cease sustaining LIBOR after 2021.

The FCA has statutory powers to require panel banks to contribute to LIBOR where necessary.

The FCA has decided not to ask, or to require, that panel banks continue to submit contributions to LIBOR beyond the end of 2021.

The FCA has indicated that it expects that the current panel banks will voluntarily sustain LIBOR until the end of 2021.

It is possible that the ICE Benchmark Administration Limited (formerly NYSE Euronext Rate Administration Limited) (the “IBA”), the current administrator of LIBOR, and the panel banks could continue to produce LIBOR on the current basis after 2021, if they are willing and able to do so, but we do not currently anticipate that LIBOR will survive in its current form, or at all.

Other jurisdictions have also indicated that they will implement reforms or phase-outs, which are currently scheduled to take effect at the end of calendar year 2021.

Federal Reserve, in conjunction with the Alternative Reference Rates Committee, a steering committee comprised of large U.S.

financial institutions, has identified the Secured Overnight Financing Rate (“SOFR”), a new index calculated by short-term repurchase agreements, backed by Treasury securities, as its preferred alternative for LIBOR.

At this time, it is not possible to predict how markets will respond to SOFR or other alternative reference rates as the transition away from LIBOR is anticipated in coming years.

As of December 31, 2021, the carrying value of our loan portfolio included $3.7 billion and $0.4 billion of floating rate loans for which the interest rate was tied to LIBOR or SOFR, respectively.

Additionally, we had $3.3 billion of floating rate debt tied to LIBOR.

Our financing arrangements generally provide for the adoption of a new index based upon comparable information if the current index is no longer available.

There is currently no definitive information regarding the future utilization of LIBOR or of any particular replacement rate.

In addition, any benchmark may perform differently during any phase-out period than in the past.

As such, the potential effect of any such event on our cost of capital and net interest income cannot yet be determined, and any changes to benchmark interest rates could increase our financing costs, which could impact our results of operations, cash flows and the market value of investments.

In addition, the elimination of LIBOR and/or changes to another index could result in mismatches with the interest rate of investments that we are financing, and the overall financial markets may be disrupted as a result of the phase-out or replacement of LIBOR;

however, we cannot reasonably estimate the impact of the transition at this time.

The transition from LIBOR to SOFR or other alternative reference rates may also introduce operational risks in our accounting, financial reporting, loan servicing, liability management and other aspects of its business.

Risks Related to the Conduit Segment of the Business

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These economic losses will be reflected in our results of operations, and our ability to fund these obligations will depend on the liquidity of our assets and access to capital at the time, and the need to fund these obligations could adversely impact our financial condition.

Risks Related to the Capstead Merger

We may not be able to realize the anticipated benefits of the merger on the anticipated timeframe or at all.

The merger involved the combination of two companies that operated as independent public companies.

We may encounter the following difficulties in integrating the acquired assets into our operations:

• we may not be able to convert Capstead’s securities portfolio into cash at the prices we expected when we entered into the merger agreement, or in the timeframe we expected;

• we may not be able to successfully redeploy the capital generated from Capstead’s assets into investments made pursuant to the Company’s traditional investment strategies at return thresholds consistent with our historical returns, or within the expected timetable;

• we may encounter unknown liabilities and unforeseen increased expenses, delays or conditions associated with the merger;

• we may experience performance shortfalls as a result of the diversion of management’s attention caused by the merger.

These challenges could result in the distraction of the Company’s management, the disruption of the Company’s ongoing business or inconsistencies in our operations, services, standards, controls, policies and procedures, any of which could adversely affect the Company’s ability to deliver investment returns to stockholders, to maintain relationships with our key stakeholders, to achieve the anticipated benefits of the merger, or could otherwise materially and adversely affect our business and financial results.

Changes in interest rates, whether increases or decreases, may adversely affect yields on the securities acquired in the merger.

The securities we acquired in the Capstead acquisition primarily consist of residential adjustable-rate mortgage (“ARM”) pass-through securities issued and guaranteed by government-sponsored enterprises or by an agency of the federal government.

Only a portion of coupon interest rates on the ARM loans underlying these securities reset each month and the terms of these ARM loans generally limit the amount of any increases during any single interest rate adjustment period and over the life of a loan.

During periods of relatively low short term interest rates, declines in the indices used to determine coupon interest rate resets for ARM loans may adversely affect yields on the Capstead ARM securities as the underlying ARM loans reset at lower rates.

An increase in prepayments may adversely affect the fair value of the Capstead portfolio.

Prepayment expectations are an essential part of pricing mortgage investments in the marketplace and the speed of prepayments can vary widely from month to month and across individual investments;

however, until we have liquidated the Capstead portfolio, prolonged periods of high mortgage prepayments could significantly reduce the expected life of the Capstead portfolio.

Therefore, actual yields we realize can be lower due to faster amortization of investment premiums, which can adversely affect earnings.

High levels of mortgage prepayments can also lead to larger than anticipated demands on our liquidity from our lending counterparties.

Additionally, periods of high prepayments can adversely affect pricing for most of Capstead’s mortgage investments and, as a result, book value per common share can be adversely affected due to declines in the fair value of the remaining Capstead portfolio.

Periods of illiquidity in the mortgage markets may reduce amounts available under secured borrowing arrangements due to declines in the perceived value of related collateral and may reduce the number of counterparties willing to lend to us and/or the amounts individual counterparties are willing to lend, both of which could adversely impact our liquidity, financial condition and earnings.

Capstead financed its portfolio by pledging individual securities as collateral under uncommitted secured borrowing arrangements.

If the perceived market value of the pledged collateral of the Capstead portfolio as determined by the lenders under these arrangements declines, we may be subject to margin calls wherein the lender requires us to pledge additional collateral to reestablish the agreed-upon margin percentage.

Because market illiquidity tends to put downward pressure on asset prices, we may be presented with substantial margin calls during such periods.

If we are unable or unwilling to pledge additional collateral, lenders can liquidate the collateral or seek other remedies, potentially under adverse market conditions, resulting in losses.

At such times we may determine that it is prudent to sell assets to improve our ability to pledge sufficient collateral to support our remaining secured borrowings, which could result in losses.

In addition, lower pricing levels for remaining investments will lead to declines in book value per common share.

Our ability to achieve our investment objectives depends on our ability to re-establish or roll maturing secured borrowings on a continuous basis and none of our counterparties are obligated to enter into new borrowing transactions at the conclusion of existing transactions.

During periods of market illiquidity or due to perceived credit deterioration of the collateral pledged or of us, a lender may require that less favorable asset pricing procedures be employed, margin requirements be increased and/or may choose to limit or completely curtail lending to us.

If a counterparty chooses not to roll a maturing borrowing, we must pay off the borrowing, generally with cash available from another secured borrowing arrangement entered into with another counterparty.

If we determine that we do not have sufficient borrowing capacity with our remaining counterparties, we could be forced to sell assets under potentially adverse market conditions, which could result in losses.

An industry-wide reduction in the availability of secured borrowings could adversely affect pricing levels for mortgage investments leading to declines in our liquidity and book value per common share.

Under these conditions, we may determine that it is prudent to sell assets to improve our ability to pledge sufficient collateral to support our remaining borrowings, which could result in losses.

In addition, lower pricing levels for remaining investments will lead to declines in book value per common share.

We incurred direct and indirect costs as a result of the merger with Capstead

We incurred substantial expenses in connection with and as a result of completing the merger with Capstead and expect to incur additional expenses in connection with integrating the acquired business.

Factors beyond our control could affect the total amount or timing of these expenses, many of which, by their nature, are difficult to estimate accurately.

We have a significant amount of indebtedness and may need to incur more in the future.

We have substantial indebtedness following completion of the Merger.

In addition, in connection with executing our business strategies following the Merger, we expect to evaluate the possibility of originating, funding, and acquiring additional commercial real estate debt and making other strategic investments, and we may elect to finance these endeavors by incurring additional indebtedness.

The amount of such indebtedness could have material adverse consequences, including:

• hindering our ability to adjust to changing market, industry or economic conditions;

• limiting our ability to access the capital markets to raise additional equity or refinance maturing debt on favorable terms or to fund acquisitions or emerging businesses;

• limiting the amount of cash flow available for future operations, acquisitions, dividends, stock repurchases or other uses;

• making us more vulnerable to economic or industry downturns, including interest rate increases;

• placing us at a competitive disadvantage compared to less leveraged competitors.

Moreover, we may be required to raise substantial additional capital to execute our business strategy.

Our ability to arrange additional financing will depend on, among other factors, our financial position and performance, as well as prevailing market conditions and other factors beyond our control.

If we are unable to obtain additional financing, our credit ratings could be further adversely affected, which could further raise our borrowing costs and further limit our future access to capital and our ability to satisfy our obligations under our indebtedness.

Risks Related to Taxation

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We intend to continue to meet the requirements for qualification and taxation as a REIT, but we cannot assure stockholders that we qualify as a REIT.

Qualification as a REIT involves the application of highly technical and complex Code provisions for which only a limited number of judicial and administrative interpretations exist.

Qualification as a REIT involves the application of highly technical and complex Internal Revenue Code provisions for which only a limited number of judicial and administrative interpretations exist.

Moreover, new tax legislation, administrative guidance or court decisions, in each instance potentially with retroactive effect, could make it more difficult or impossible for us to qualify as a REIT.

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Our qualification as a REIT depends on our satisfaction of certain asset, income, organizational, distribution, stockholder ownership and other requirements on a continuing basis:

If we were to fail to qualify as a REIT in any taxable year and are unable to avail ourselves of certain savings provisions set forth in the Code, we would be subject to U.S federal and applicable state and local income tax on our taxable income at regular corporate rates (including any applicable alternative minimum tax (which alternative minimum tax has been repealed for tax years after 2017)).

• Our compliance depends upon the characterization of our assets and income for REIT purposes, as well as the relative values of our assets, some of which are not susceptible to a precise determination and for which we typically do not obtain independent appraisals.

Moreover, we invest in certain assets with respect to which the rules applicable to REITs may be particularly difficult to interpret or to apply, including the rules applicable to financing arrangements that are structured as sale and repurchase agreements;

mezzanine loans;

and investments in real estate mortgage loans that are acquired at a discount, subject to work-outs or modifications, or reasonably expected to be in default at the time of acquisition.

If the IRS challenged our treatment of investments for purposes of the REIT asset and income tests, and if such a challenge were sustained, we could fail to qualify as a REIT.

• The fact that we own direct or indirect interests in an entity that will elect to be taxed as a REIT under the U.S.

federal income tax laws (a “Subsidiary REIT”), further complicates the application of the REIT requirements for us.

The Subsidiary REIT is subject to the various REIT qualification requirements that are applicable to us and certain other requirements.

If the Subsidiary REIT were to fail to qualify as a REIT, then (i) it would become subject to regular U.S.

federal corporate income tax, (ii) our interest in such Subsidiary REIT would cease to be a qualifying asset for purposes of the REIT asset tests, and (iii) it is possible that we would fail certain of the REIT asset tests, in which event we also would fail to qualify as a REIT unless we could avail ourselves of relief provisions.

If we were to fail to qualify as a REIT in any taxable year and are unable to avail ourselves of certain savings provisions set forth in the Internal Revenue Code, we would be subject to U.S federal and applicable state and local income tax on our taxable income at regular corporate rates (including any applicable alternative minimum tax (which alternative minimum tax has been repealed for tax years after 2017)).

Losing our REIT status would reduce our net income available for investment or distribution to stockholders because of the additional tax liability.

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federal corporate income tax on its taxable income, and non-arm’s length transactions between us and any TRS, could be subject to a 100% tax.

• We could, in certain circumstances, be required to pay an excise or penalty tax (which could be significant in amount) in order to utilize one or more relief provisions under the Code to maintain our qualification as a REIT.

• We could, in certain circumstances, be required to pay an excise or penalty tax (which could be significant in amount) in order to utilize one or more relief provisions under the Internal Revenue Code to maintain our qualification as a REIT.

Any of these taxes would decrease cash available for distribution to our stockholders.

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The “taxable mortgage pool” rules may increase the taxes that we or our stockholders incur, and may limit the manner in which we effect future securitizations .

Certain of our securitizations have resulted in the creation of "taxable mortgage pools" for U.S.

Securitizations in the form of bonds or notes secured principally by mortgage loans generally result in the creation of taxable mortgage pools (“TMPs”) for U.S.

federal income tax purposes.

As a REIT, so long as we own 100% of the equity interest in a taxable mortgage pool, we generally would not be adversely affected by the characterization as a taxable mortgage pool.

Certain categories of stockholders, however, such as non-U.S.

stockholders eligible for treaty or other benefits, stockholders with net operating losses, and certain tax-exempt stockholders that are subject to unrelated business income tax, will be subject to increased taxes on the portion of their dividend income from us that is attributable to any "excess inclusion income" that we have generated as a result of our securitization transactions, and may generate as a result of future securitization transactions.

In addition, to the extent that our common stock is owned by tax-exempt “disqualified organizations,” such as certain government-related entities and charitable remainder trusts that are not subject to tax on unrelated business income, we will incur a corporate-level tax on a portion of any excess inclusion income.

In that case, we may reduce the amount of our distributions to any disqualified organization whose stock ownership gave rise to the tax.

Moreover, we could face limitations in selling equity interests in these securitizations to outside investors, or selling any debt securities issued in connection with these securitizations that might be considered to be equity interests for tax purposes.

These limitations may prevent us from using certain techniques to maximize our returns from securitization transactions.

The debt securities issued by TMPs are sometimes referred to as “collateralized mortgage obligations” (“CMOs”).

We have issued CMOs through TMPs.

Unless a TMP is wholly-owned by a REIT, it is subject to taxation as a corporation.

However, so long as a REIT owns 100% of the equity interests in a TMP, the TMP will not be taxed as a corporation.

Instead, certain categories of the REIT’s stockholders, such as foreign stockholders eligible for treaty or sovereign benefits, stockholders with net operating losses, and generally tax-exempt stockholders that are subject to unrelated business income tax, may be subject to taxation, or to increased taxes, on any portion, known as “excess inclusions”, of their dividend income from the REIT that is attributable to the TMP, but only to the extent that the REIT actually distributes “excess inclusions” to them.

We intend not to distribute “excess inclusions”, but to pay the tax on “excess inclusions” ourselves.

Notwithstanding our intention to try to avoid distributions to our stockholders of “excess inclusions”, it is possible that some portion of our dividends to our stockholders may be so characterized.

In order to better control, and to attempt to avoid, the distribution of “excess inclusions” to our stockholders, as of January 1, 2022, our TMPs are wholly-owned by a Subsidiary REIT.

Our Subsidiary REIT is required to satisfy, on a stand-alone basis, the REIT asset, income, organizational, distribution, stockholder ownership and other requirements described above, and if it were to fail to qualify as a REIT, then (i) our Subsidiary REIT would face adverse tax consequences similar to those described above with respect to our qualification as a REIT and (ii) such failure could have an adverse effect on our ability to comply with the REIT income and asset tests and thus could impair our ability to qualify as a REIT unless we could avail ourselves of certain relief provisions.

Because our TMPs must at all times be owned by a REIT, we are restricted from selling equity interests in them, or selling any notes or bonds issued by them that might be considered to be equity for tax purposes, to other investors if doing so would subject them to taxation.

These restrictions limit the liquidity of our investment in our TMPs and may prevent us from incurring greater leverage on that investment in order to maximize our returns from it.

The prohibited transactions tax may limit our ability to engage in transactions, including certain methods of securitizing mortgage loans that would be treated as sales for U.S.

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Complying with REIT requirements may limit our ability to hedge effectively and may cause us to incur tax liabilities.

The REIT provisions of the Code may limit our ability to hedge our assets and operations.

The REIT provisions of the Internal Revenue Code may limit our ability to hedge our assets and operations.

Under these provisions, any income that we generate from hedging transactions will be excluded from gross income for purposes of the REIT 75% and 95% gross income tests if the instrument hedges:

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As a result, many of the terms of our debt and the mortgage loans underlying our securities may be modified to avoid taking title to a property.

Under the Code, if the terms of a loan are modified in a manner constituting a "significant modification," such modification triggers a deemed exchange of the original loan for the modified loan.

Under the Internal Revenue Code, if the terms of a loan are modified in a manner constituting a "significant modification," such modification triggers a deemed exchange of the original loan for the modified loan.

In general, under applicable Treasury Regulations if a loan is secured by real property and other property and the highest principal amount of the loan outstanding during a taxable year exceeds the fair market value of the real property securing the loan determined as of the date we agreed to acquire the loan or the date we significantly modified the loan, a portion of the interest income from such loan will not be qualifying income for purposes of the REIT 75% gross income test, but will be qualifying income for purposes of the REIT 95% gross income test.

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If the terms of our debt investments and the mortgage loans underlying our CMBS are "significantly modified" in a manner that does not qualify for the safe harbor in Revenue Procedure 2014-51 and the fair market value of the real property securing such loans has decreased significantly, we could fail the REIT 75% gross income test, the 75% asset test and/or the 10% Value Test.

Unless we qualified for relief under certain Code cure provisions, such failures could cause us to fail to continue to qualify as a REIT.

Unless we qualified for relief under certain Internal Revenue Code cure provisions, such failures could cause us to fail to continue to qualify as a REIT.

Unresolved Staff Comments.

Our headquarters are located in a leased space at 9 West 57th Street, Suite 4920, New York, New York 10019.

Legal Proceedings.

For a description of the Company’s legal proceedings, see “Note 10.

Commitments and Contingencies” to our consolidated financial statements included in this Annual Report on Form 10-K.

Mine Safety Disclosures.

Not applicable.

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 1A. Risk Factors