What changed in this filing

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Item 1A. Risk Factors

2023-03-16 compared with 2022-02-25 · 160 added, 204 removed, 322 unchanged (53% of the section changed)

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 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.

• 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.

The rapid development and fluidity of this situation precludes any prediction as to the full adverse impact of the COVID-19 pandemic.

Moreover, many risk factors set forth in this Annual Report on Form 10-K should be interpreted as heightened risks as a result of the impact of the COVID-19 pandemic.

We may be unable to maintain or increase cash distributions over time, or may decide to reduce the amount of distributions for business reasons.

There are many factors that can affect the amount and timing of cash distributions to stockholders.

The amount of cash available for distributions is affected by many factors, such as the cash provided by the Company's investments and obligations to repay indebtedness as well as many other variables.

There is no assurance that the Company will be able to pay or maintain the current level of distributions or that distributions will increase over time.

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

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 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.

Despite system redundancy, the implementation of security measures and the existence of a disaster recovery plan for the internal information technology systems of our Advisor and other parties that provide us with services essential to our operations, these systems are vulnerable to damage from any number of sources, including computer viruses, unauthorized access, energy blackouts, natural disasters, terrorism, war and telecommunication failures.

Any system failure or accident that causes interruptions in our operations could result in a material disruption to our business.

A cyber-incident is considered to be any adverse event that threatens the confidentiality, integrity or availability of information resources.

More specifically, a cyber-incident is an intentional attack or an unintentional event that can result in third parties gaining unauthorized access to systems to disrupt operations, corrupt data or steal confidential information.

As reliance on technology in our industry has increased, so have the risks posed to the systems of our Advisor and other parties that provide us with services essential to our operations, both internal and outsourced.

In addition, the risk of a cyber-incident, including by computer hackers, foreign governments and cyber terrorists, has generally increased as the number, intensity and sophistication of attempted attacks and intrusions from around the world have increased.

Even the most well protected information, networks, systems and facilities remain potentially vulnerable because the techniques used in such attempted attacks and intrusions evolve and generally are not recognized until launched against a target, and in some cases are designed not to be detected and, in fact, may not be detected.

The remediation costs and lost revenues experienced by a victim of a cyber-incident may be significant and significant resources may be required to repair system damage, protect against the threat of future security breaches or to alleviate problems, including reputational harm, loss of revenues and litigation, caused by any breaches.

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

The Advisor faces conflicts of interest relating to purchasing commercial real estate-related investments, and such conflicts may not be resolved in our favor, which could adversely affect our investment opportunities.

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 and do engage in these activities.

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.

The Advisor and its employees face competing demands relating to their time, and this may cause our operating results to suffer.

The Advisor and its employees are engaged in investment and investment management activities unrelated to us.

Because these persons have competing demands on their time and resources, they may have conflicts of interest in allocating their time between our business and these other activities.

If this occurs, the returns on our investments may suffer.

Risks Related to Our Corporate Structure

The limit on the number of shares a person may own may discourage a takeover that could otherwise result in a premium price to our stockholders.

The Company's charter, with certain exceptions, authorizes the board of directors to take such actions as are necessary and desirable to preserve our qualification as a REIT.

Unless exempted by the board of directors, no person or entity may own more than 7.9% in value of the aggregate of our outstanding shares of stock or more than 7.9% (in value or in number of shares, whichever is more restrictive) of any class or series of shares of our stock determined after applying certain rules of attribution.

This restriction may have the effect of delaying, deferring or preventing a change in control of us, including an extraordinary transaction (such as a merger, tender offer or sale of all or substantially all our assets) that might provide a premium price for holders of our common stock.

Certain provisions of Maryland law could inhibit a change in control of our Company.

Certain provisions of the Maryland General Corporation Law (“MGCL”) may have the effect of inhibiting a third party from making a proposal to acquire us or of impeding a change in control under circumstances that otherwise could provide the holders of shares of our common stock with the opportunity to realize a premium over the then-prevailing market price of such shares, including:

• “business combination” provisions that, subject to limitations, prohibit certain business combinations between us and an “interested stockholder” (defined generally as any person who beneficially owns 10% or more of our then outstanding voting power of our shares or an affiliate or associate of ours who, at any time within the two-year period prior to the date in question, was the beneficial owner of 10% or more of our then outstanding voting shares) or an affiliate thereof for five years after the most recent date on which the stockholder becomes an interested stockholder, and thereafter imposes special appraisal rights and special stockholder voting requirements on these combinations;

• “control share” provisions that provide that “control shares” of our company (defined as shares which, when aggregated with other shares controlled by the stockholder, entitle the stockholder to exercise one of three increasing ranges of voting power in electing directors) acquired in a “control share acquisition” (defined as the direct or indirect acquisition of ownership or control of “control shares”) have no voting rights except to the extent approved by our stockholders by the affirmative vote of at least two-thirds of all the votes entitled to be cast on the matter, excluding all interested shares.

Pursuant to the MGCL, our board of directors has exempted any business combination involving our Advisor or any affiliate of our Advisor.

Consequently, the five-year prohibition and the super-majority vote requirements will not apply to business combinations between us and our Advisor or any affiliate of our Advisor.

In addition, the Company's bylaws contain a provision exempting from the control share provisions any and all acquisitions of our stock by any person.

There can be no assurance that this provision will not be amended or eliminated at any time in the future.

In addition, the “unsolicited takeover” provisions of Title 3, Subtitle 8 of the MGCL permit the Board, without shareholder approval and regardless of what is currently provided in the charter or bylaws, to implement certain takeover defenses, including adopting a classified board or increasing the vote required to remove a director.

Such takeover defenses may have the effect of inhibiting a third-party from making an acquisition proposal for us or of delaying, deferring or preventing a change in control of us under the circumstances that otherwise could provide our common stockholders with the opportunity to realize a premium over the then-current market price.

The value of our common stock may be reduced if we are required to register as an investment company under the Investment Company Act.

We are not registered, and do not intend to register ourselves, our operating partnership or any of our subsidiaries, as an investment company under the Investment Company Act.

If we become obligated to register ourselves, our operating partnership or any of our subsidiaries as an investment company, the registered entity would have to comply with a variety of substantive requirements under the Investment Company Act imposing, among other things, limitations on capital structure and restrictions on specified investments.

Although we monitor the portfolio of the Company, the operating partnership and its subsidiaries periodically and prior to each acquisition and disposition, any of these entities may not be able to maintain an exclusion from the definition of investment company.

If the Company, the operating partnership or any subsidiary is required to register as an investment company but fails to do so, the unregistered entity would be prohibited from engaging in our business, and criminal and civil actions could be brought against such entity.

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.

Risks Related to Our Financing Strategy

The Company uses leverage in connection with our investments, which increases the risk of loss associated with our investments.

We finance the origination and acquisition of a portion of our investments with repurchase agreements, collateralized loan obligations ("CLO") and other borrowings.

Although the use of leverage may enhance returns and increase the number of investments that we can make, it may also substantially increase the risk of loss.

Our ability to execute this strategy depends on various conditions in the financing markets that are beyond our control, including liquidity and credit spreads.

Risk Related to Our Financing Strategy

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

We have substantial indebtedness.

In connection with executing our business strategies, 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.

Our business strategy depends on us being able to earn returns on loans we make in excess of the interest we pay on our borrowings.

We try to generate financial returns by making and investing in loans and debt securities that generate returns in excess of our cost of capital.

Our ability to execute this strategy depends on various conditions in the financing markets that are beyond our control, including liquidity, fluctuations in prevailing interest rates and credit spreads.

Interest rate and credit spread fluctuations resulting in our interest and related expense exceeding interest and related income would result in operating losses for us.

Changes in the level of interest rates and credit spreads also may affect our ability to make loans or investments, the value of our loans and investments and our ability to realize gains from the disposition of assets.

Increases in interest rates and credit spreads may also negatively affect demand for loans and could result in higher borrower default rates.

We may be unable to obtain additional financing on favorable terms or, with respect to our debt and other investments, on terms that parallel the maturities of the debt originated or other investments acquired, if we are able to obtain additional financing at all.

If our strategy is not viable, we will have to find alternative forms of long-term financing for our assets, as secured revolving credit facilities and repurchase facilities may not accommodate long-term financing.

This could subject us to more restrictive recourse borrowings and the risk that debt service on less efficient forms of financing would require a larger portion of our cash flows, thereby reducing cash available for distribution, for our operations and for future business opportunities.

If alternative financing is not available, we may have to liquidate assets at unfavorable prices to pay off such financing or pay significant fees to extend our financing arrangements.

The return on our investments and cash available for distribution may be reduced to the extent that changes in market conditions cause the cost of our financing to increase relative to the income that we can derive from the assets we originate or acquire.

We utilize short-term borrowings to finance many of our investments and subsequently rely on the availability of collateralized debt and loan obligation securitization markets to provide long-term financing.

We rely on short-term borrowings, such as repurchase agreements and our secured revolving credit facilities, to initially fund our investments.

The term of these short-term borrowing facilities is generally shorter than the term of our investments and therefore we typically intend to refinance these short-term borrowings with long-term match-funded financing through issuances of CDO’s and CLO’s.

There have been times in the past when the CDO and CLO securitization markets have effectively been closed or are only available at a cost of capital that is not practicable.

If our current financing strategy became no longer viable, we would have to find alternative forms of long-term financing for our assets.

This could subject us to more restrictive recourse borrowings and subject us to a cost of capital that could significantly reduce or eliminate the spread between our cost of capital and the returns on our investments.

If alternative financing is not available, we may have to liquidate assets at unfavorable prices to pay off our short-term borrowings or pay significant fees to extend these financing arrangements.

Lenders may require us to enter into restrictive covenants relating to our operations, which could limit our ability to make distributions.

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• the market’s perception of our growth potential;

• our current and potential

• future earnings and cash distributions;

• 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.

Unfavorable economic conditions 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.

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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 commercial real estate debt investments are subject to the risks typically associated with commercial real estate.

Our commercial real estate debt and commercial real estate securities generally are directly or indirectly secured by a lien on real property.

Our commercial real estate debt and real estate securities generally are directly or indirectly secured by a lien on real property.

The occurrence of a default on a commercial real estate debt investment could result in our acquiring ownership of the property.

We do not know whether the values of the properties ultimately securing our commercial real estate debt and loans underlying our securities will remain at the levels existing on the dates of origination of these loans and the dates of origination of the loans ultimately securing our securities, as applicable.

If the values of the properties drop, our risk will increase because of the lower value of the security and reduction in borrower equity associated with such loans.

In addition, our borrowers could engage in fraudulent efforts to inflate the values of the underlying properties.

If the values of the properties drop or are fraudulently inflated, our risk will increase because of the lower value of the security and reduction in borrower equity associated with such loans.

In this manner, real estate values could impact the values of our debt and security investments.

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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.

During such periods, such as the 2008 Global Financial Crisis, the financing available for real estate finance companies was significantly adversely effected.

Instability in the U.S.

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Jurisdictions with one action or security first rules or anti-deficiency legislation may limit the ability to foreclose on the property or to realize the obligation secured by the property by obtaining a deficiency judgment.

In the event of any default under our commercial real estate debt investments and in the loans underlying our commercial real estate securities, we bear the risk of loss of principal and nonpayment of interest and fees to the extent of any deficiency between the value of the collateral and the principal amount of the loan.

In the event of any default under our commercial real estate debt investments and in the loans underlying our real estate securities, we bear the risk of loss of principal and nonpayment of interest and fees to the extent of any deficiency between the value of the collateral and the principal amount of the loan.

Certain states in which the collateral securing our commercial real estate debt and securities is located may have laws that prohibit more than one judicial action to enforce a mortgage obligation, requiring the lender to exhaust the real property security for such obligation first or limiting the ability of the lender to recover a deficiency judgment from the obligor following the lender’s realization upon the collateral, in particular if a non-judicial foreclosure is pursued.

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However, there are certain types of losses, generally of a catastrophic nature, such as earthquakes, floods and hurricanes that may be uninsurable or not economically insurable.

Climate change may exacerbate the frequency and severity of these types of events.

We may not require borrowers to obtain certain types of insurance if it is deemed commercially unreasonable.

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Under such circumstances, the insurance proceeds, if any, might not be adequate to restore the economic value of the property, which might impair our security and decrease the value of the property.

We invest in CMBS, which may include subordinate securities, which entails certain risks.

We invest in a variety of CMBS, which may include subordinate securities that are subject to the first risk of loss if any losses are realized on the underlying mortgage loans.

CMBS entitle the holders thereof to receive payments that depend primarily on the cash flow from a specified pool of commercial or multifamily mortgage loans.

Consequently, CMBS will be adversely affected by payment defaults, delinquencies and losses on the underlying commercial real estate loans.

Furthermore, if the rental and leasing markets deteriorate, it could reduce cash flow from the loan pools underlying our CMBS investments.

The CMBS market is dependent upon liquidity for refinancing and will be negatively impacted by a slowdown in the new issue CMBS market.

Additionally, CMBS is subject to particular risks, including lack of standardized terms and payment of all or substantially all of the principal only at maturity rather than regular amortization of principal.

We invest in CMBS and CRE CLO Bonds, which may include subordinate securities, which entails certain risks.

We invest in a variety of CMBS and CRE CLO Bonds, which may include subordinate securities that are subject to the first risk of loss if any losses are realized on the underlying mortgage loans.

CMBS and CRE CLO Bonds entitle the holders thereof to receive payments that depend primarily on the cash flow from a specified pool of commercial or multifamily mortgage loans.

Consequently, CMBS and CRE CLO Bonds will be adversely affected by payment defaults, delinquencies and losses on the underlying commercial real estate loans.

Furthermore, if the rental and leasing markets deteriorate, it could reduce cash flow from the loan pools underlying our CMBS and CRE CLO Bonds investments.

The CMBS and CRE CLO Bonds market is dependent upon liquidity for refinancing and will be negatively impacted by a slowdown in the new issue CMBS and CRE CLO Bonds market.

Additionally, CMBS and CRE CLO Bonds is subject to particular risks, including lack of standardized terms and payment of all or substantially all of the principal only at maturity rather than regular amortization of principal.

Additional risks may be presented by the type and use of a particular commercial property.

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Furthermore, the net operating income from and value of any commercial property are subject to various risks.

The exercise of remedies and successful realization of liquidation proceeds relating to CMBS may be highly dependent upon the performance of the servicer or special servicer.

The exercise of remedies and successful realization of liquidation proceeds relating to CMBS and CRE CLO Bonds may be highly dependent upon the performance of the servicer or special servicer.

Expenses of enforcing the underlying commercial real estate loans (including litigation expenses) and expenses of protecting the properties securing the commercial real estate loans may be substantial.

Consequently, in the event of a default or loss on one or more commercial real estate loans contained in a securitization, we may not recover a portion or all of our investment.

The CMBS in which we may invest are subject to the risks of the mortgage securities market as a whole and risks of the securitization process.

The value of CMBS may change due to shifts in the market’s perception of issuers and regulatory or tax changes adversely affecting the mortgage securities market as a whole.

The CMBS and CRE CLO Bonds in which we may invest are subject to the risks of the mortgage securities market as a whole and risks of the securitization process.

The value of CMBS and CRE CLO Bonds may change due to shifts in the market’s perception of issuers and regulatory or tax changes adversely affecting the mortgage securities market as a whole.

Due to our investment in subordinate CMBS, we are also subject to several risks created through the securitization process.

Our subordinate CMBS are paid interest only to the extent that there are funds available to make payments.

To the extent the collateral pool includes delinquent loans, there is a risk that the interest payment on subordinate CMBS will not be fully paid.

Subordinate CMBS are also subject to greater credit risk than those CMBS that are senior and generally more highly rated.

We may not control the special servicing of the mortgage loans underlying the CMBS in which we invest and, in such cases, the special servicer may take actions that could adversely affect our interests.

Overall control over the special servicing of the underlying mortgage loans of the CMBS may be held by a directing certificate holder, which is appointed by the holders of the most subordinate class of such CMBS.

Our subordinate CMBS and CRE CLO Bonds are paid interest only to the extent that there are funds available to make payments.

To the extent the collateral pool includes delinquent loans, there is a risk that the interest payment on subordinate CMBS and CRE CLO Bonds will not be fully paid.

Subordinate CMBS and CRE CLO Bonds are also subject to greater credit risk than those CMBS and CRE CLO Bonds that are senior and generally more highly rated.

We may not control the special servicing of the mortgage loans underlying the CMBS and CRE CLO Bonds in which we invest and, in such cases, the special servicer may take actions that could adversely affect our interests.

Overall control over the special servicing of the underlying mortgage loans of the CMBS and CRE CLO Bonds may be held by a directing certificate holder, which is appointed by the holders of the most subordinate class of such CMBS and CRE CLO Bonds.

We ordinarily do not have the right to appoint the directing certificate holder.

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In addition, the equity securities of CDOs are generally illiquid and often must be held by a REIT and because they represent a leveraged investment in the CDO’s assets, the value of the equity securities will generally have greater fluctuations than the values of the underlying collateral.

Adjustable-rate commercial real estate loans may entail greater risks of default to us than fixed-rate commercial real estate loans.

Adjustable-rate commercial real estate loans we originate or acquire or that collateralize our commercial real estate securities may have higher delinquency rates than fixed-rate loans.

Borrowers with adjustable-rate mortgage loans may be exposed to increased monthly payments if the related interest rate adjusts upward from the initial fixed-rate or a low introductory rate, as applicable, in effect during the initial period of the loan to the rate computed in accordance with the applicable index and margin.

This increase in borrowers’ monthly payments, together with any increase in prevailing market interest rates, after the initial fixed-rate period, may result in significantly increased monthly payments for borrowers with adjustable-rate loans, which may make it more difficult for the borrowers to repay the loan or could increase the risk of default of their obligations under the loan.

Changes in interest rates could negatively affect the value of our investments, which could result in reduced income or losses and negatively affect the cash available for distribution.

Interest rates increased significantly during 2022 and may continue to increase.

We may invest in fixed-rate CMBS and other fixed-rate investments.

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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.

The Internal Revenue Code also places limits on our ability to sell properties held for fewer than four years.

The Internal Revenue Code also places limits on our ability to sell properties held for fewer than two years.

These considerations could make it difficult for us to dispose of any of our assets even if a disposition were in the best interests of our stockholders.

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This process is particularly important and subjective with respect to newly organized or private entities because there may be little or no information publicly available about the entity.

Even if we conduct extensive due diligence on a particular investment, there can be no assurance that this diligence will uncover all material issues relating to such investment, or that factors outside of our control will not later arise.

If our due diligence fails to identify issues specific to investment, we may be forced to write-down or write-off assets, restructure our operations or incur impairment or other charges that could result in our reporting losses.

Even if we conduct extensive due diligence on a particular investment, there can be no assurance that this diligence will uncover all material issues relating to such investment, that the information provided by the borrower is truthful or accurate, or that factors outside of our control will not later arise.

If our due diligence fails to identify material issues, we may have to write-down or write-off assets, restructure our investment or incur impairment or other charges that could result in our reporting losses.

Charges of this nature could contribute to negative market perceptions about us or our shares of common stock.

Refer to "Part I, Item 3.

Legal Proceedings" for additional for a summary of the Company’s legal proceedings.

We may be unable to restructure loans in a manner that we believe maximizes value, particularly if we are one of multiple creditors in large capital structures.

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This means that we will seek to align the maturities of our liabilities with the maturities on our assets in order to manage the risks of being forced to refinance our liabilities prior to the maturities of our assets.

We may fail to appropriately employ match-funded structures on favorable terms, or at all.

We may fail to appropriately employ match-funded structures on favorable terms, or at all, including as a result of the unavailability of CDO and CLO financing options.

We may also determine not to pursue a match-funded structure with respect to a portion of our financings for a variety of reasons.

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Our estimates and judgments may not be correct and, therefore, our results of operations and financial condition could be severely impacted.

Since the start of 2020 we have been subject to the FASB’s Accounting Standards Update (“ASU”) 2016-13, Financial Instruments-Credit Losses (Topic 326):

Measurement of Credit Losses on Financial Instruments.

The new standard, known as the Current Expected Credit Loss (“CECL”) model, significantly changed how entities measure credit losses for most financial assets and certain other instruments that are not measured at fair value through net income.

CECL amended the existing credit loss model to reflect a reporting entity's current estimate of all expected credit losses, not only based on historical experience and current conditions, but also by including reasonable and supportable forecasts incorporating forward-looking information.

This measurement takes place at the time the financial asset is first added to the balance sheet and updated quarterly thereafter.

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

In addition, our methodology for determining credit losses may differ from the methodologies employed by other companies, and may not be comparable with the credit loss allowances reported by other companies.

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.

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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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The securitization market is subject to a regulatory environment that may affect certain aspects of these activities.

As a result of the dislocation of the credit markets, the securitization industry has become subject to additional regulation.

As a result of the dislocation of the credit markets in prior years, the securitization industry has become subject to additional regulation.

In particular, pursuant to the Dodd-Frank Wall Street Reform and Consumer Protection Act, various federal agencies have promulgated a rule that generally requires issuers in securitizations to retain 5% of the risk associated with the securities.

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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.