Franklin BSP Realty Trust, Inc. — Q3 2023 Form 10-Q
Reporting period: Three and nine months ended September 30, 2023. The company is an externally managed REIT focused primarily on originating, acquiring and managing commercial real estate debt. Unless noted, amounts below are U.S. dollars.
Financial performance and position
| Metric | Q3 2023 | Comparable period / balance |
|---|---|---|
| Interest income | $137.0 million | $94.1 million in Q3 2022 |
| Interest expense | $78.0 million | $46.2 million in Q3 2022 |
| Net interest income | $59.1 million | $48.0 million in Q3 2022 |
| Net interest spread | 3.1% | 2.6% in Q3 2022 |
| Net income | $31.0 million | $35.3 million in Q3 2022 |
| Net income applicable to common stock / diluted EPS | $25.0 million / $0.30 | $28.4 million / $0.34 in Q3 2022 |
For the nine months, net interest income was $196.1 million versus $143.3 million; net income was $114.5 million versus a $13.0 million loss; and diluted EPS was $1.14 versus a $0.70 loss. Nine-month net interest spread was 3.2%, compared with 2.5% in 2022. Distributable Earnings, a company-defined non-GAAP measure, were $150.2 million for the nine months, or $1.53 per fully converted share; the filing cautions this is not a substitute for GAAP results.
Operating cash flow was $141.5 million for the nine months. Investing activities provided $554.8 million, while financing activities used $468.7 million. Cash and cash equivalents were $411.4 million at quarter-end; cash, cash equivalents and restricted cash totaled $418.1 million.
Total assets were $5.88 billion and total liabilities $4.19 billion at September 30. Commercial mortgage loans held for investment, net, were $4.91 billion; reported collateralized loan obligations were $3.48 billion, commercial-loan repo/revolver borrowings $249.3 million, securities repos $240.0 million, and other listed debt included $24.0 million of mortgage notes, $23.7 million of other financings and $81.3 million of unsecured debt. Net debt-to-equity was 2.2x, down from 2.5x at year-end; total leverage was 2.4x, down from 2.6x. The company reported compliance with debt covenants.
Material changes and portfolio developments
- Interest income rose sharply year over year, principally as average SOFR and equivalent rates increased; interest expense also rose substantially for the same reason. Q3 net income nevertheless declined year over year, reflecting higher funding costs and other losses.
- The held-for-investment loan portfolio decreased to 145 loans from 161 at year-end 2022; net carrying value fell to $4.91 billion from $5.23 billion. Multifamily represented 77.8% of portfolio par value. The weighted-average coupon, excluding non-performing loans, was 9.1%, and weighted-average remaining contractual maturity was 1.0 year.
- Three loans with $56.0 million amortized cost were designated non-performing at quarter-end; all were secured by multifamily properties. No specific credit-loss allowance was recorded for those three loans. One was foreclosed on after quarter-end.
- The credit-loss provision was $28.4 million for the nine months. The allowance on held-for-investment loans was $37.5 million at quarter-end; the filing also reports total allowance including unfunded commitments of $42.9 million.
- The company disposed of its remaining ARM Agency Securities in August. It also issued the 2023-FL10 CLO, with approximately $896.6 million of collateralized notes, including $573.8 million purchased by third parties; it called the 2019-FL5 CLO in July.
- Walgreens Portfolio foreclosure activity resulted in 23 retail properties classified as held for sale. The company recorded a $4.0 million impairment in Q3; quarter-end assets and liabilities held for sale were $103.7 million and $12.3 million, respectively.
Liquidity, outlook and risks
Management identified unrestricted cash, CLO reinvestment capacity and financing availability as liquidity sources. Its stated near-term liquidity total of $1.795 billion includes $1.359 billion of financing “available and in progress,” so it is not equivalent to cash on hand. Unfunded loan commitments were $387.7 million. The board’s stated target leverage range is one to three times book value of equity; management said it expects financing and operating cash flow to cover anticipated capital needs. The filing provides no specific earnings or dividend guidance.
The common dividend was $0.355 per share quarterly ($1.42 annualized); the Series E preferred dividend was $0.46875 per share for the quarter. Future dividends remain subject to board declaration. The company repurchased no common shares during Q3; $39.3 million remained under its authorization at quarter-end. Subsequent to quarter-end it repurchased 137,444 shares at a weighted-average $12.55 per share.
Key risks include credit deterioration and losses on commercial real estate loans, high and changing interest rates, refinancing and capital-market access, and collateral-value declines that could trigger margin calls under repo facilities. The company notes that failure to meet margin calls could permit lenders to exercise remedies against pledged assets. It also has $240.0 million of securities repo borrowings with short-term maturities and $23.7 million of other financings with a weighted-average contractual maturity in December 2023. Management reported no material change in previously disclosed risk factors and stated disclosure controls were effective.
In the Walgreens-related loan fraud matter, the company is marketing foreclosed collateral and pursuing civil remedies; collectability of any legal judgments is not determinable. The company said routine litigation is not expected to have a material impact. It also disclosed $123.7 million of loans to affiliates of its advisor, an important related-party exposure.
Important facts for investors to verify
- Whether non-performing loans, past-due balances and the credit-loss allowance change, including outcomes from the post-quarter foreclosure.
- Actual availability, conditions and collateral requirements for the $1.359 billion of financing capacity cited in liquidity sources, and the near-term maturity/refinancing schedule.
- Sale proceeds and realized losses for the 23 Walgreens properties, and any recoveries from the related fraud litigation.
- How higher funding costs, loan repayments and credit performance affect net interest income, distributable earnings and dividend coverage.
- Terms and performance of CLO financing, repo collateral and margin-call exposure, as well as the company’s advisor-related loans and fees.