Franklin BSP Realty Trust, Inc. — Q2 2023 Form 10-Q
Reporting period: Three and six months ended June 30, 2023; balance-sheet comparisons are to December 31, 2022. The company is an externally managed REIT focused primarily on originating, acquiring and managing commercial real estate debt.
Key financial results
| Metric | Q2 2023 | Q2 2022 | Six months 2023 | Six months 2022 |
|---|---|---|---|---|
| Total income | $84.0 million | $39.7 million | $146.8 million | $94.8 million |
| Net interest income | $77.6 million | $37.4 million | $137.1 million | $90.2 million |
| Net income (loss) | $39.6 million | $(25.7) million | $83.5 million | $(48.2) million |
| Net income (loss) applicable to common stock | $32.9 million | $(32.7) million | $69.9 million | $(76.2) million |
| Diluted EPS | $0.39 | $(0.43) | $0.83 | $(1.27) |
| Net interest spread | 4.1% | 1.9% | 3.5% | 2.3% |
Interest income rose substantially, reflecting higher LIBOR/SOFR rates, a larger average real estate debt balance and $20.4 million of additional proceeds from the Brooklyn hotel sale recognized as interest income. Interest expense also increased with rates and CLO balances. Credit-loss provision was $21.6 million in Q2 and $26.0 million for the first half.
- Cash flow: First-half operating cash provided was $78.4 million; investing activities provided $280.5 million; financing activities used $317.2 million. Cash, cash equivalents and restricted cash totaled $232.1 million at June 30, including $224.7 million of cash and cash equivalents.
- Portfolio and equity: Commercial mortgage loans held for investment were $5.024 billion net of allowance, against $5.229 billion at year-end. Total assets were $5.985 billion and total equity was $1.600 billion. Book value per common share was $15.79, versus $15.72 at year-end.
- Debt and liquidity: Listed debt balances totaled approximately $4.205 billion, including $3.032 billion of CLOs, $695.0 million of commercial-loan repurchase agreements, $290.0 million of securities repurchase agreements, $82.3 million of other financing, $81.2 million of unsecured debt and a $24.0 million mortgage note. The company reported compliance with debt covenants. It targets leverage of one to three times book equity and said financing sources and anticipated operating cash flows are expected to cover anticipated capital uses.
- Distributions: The board declared a Q2 common dividend of $0.355 per share and a Series E preferred dividend of $0.46875 per share, paid in July. The $65 million repurchase authorization had $39.3 million remaining at June 30.
Material changes and unusual items
- Higher interest rates lifted reported interest income, but also drove higher funding costs. First-half average interest-earning asset yield was 10.5%, versus 4.3% a year earlier; average financing cost was 7.0%, versus 2.0%.
- The company recovered its full loan principal and approximately $20 million of additional proceeds following the April sale of the Brooklyn hotel in bankruptcy; the proceeds materially boosted Q2 interest income.
- The company foreclosed on the remaining 14 properties in the 24-property Walgreens portfolio, bringing its owned properties to 24. In June, it amended the leases to provide tenants a 15-month rent abatement beginning July 1, 2023.
- A Portland office loan was placed on cost-recovery status and assigned the highest risk rating. After an $11.9 million specific allowance was charged off, its amortized cost basis was $20.4 million; no Q2 interest income was recognized on it. One loan was non-performing at quarter-end.
- The company recorded a $1.9 million impairment on a St. Louis office property held for sale and a $1.2 million loss on the sale of a New Rochelle multifamily property.
- It repurchased $17.5 million face value of unsecured debt at 75% of par, recognizing a $4.4 million gain. On July 17, 2023, it called the remaining $122.0 million of notes in its 2019-FL5 CLO; it expected a $2.9 million non-cash deferred-financing-cost charge in Q3.
Outlook, risks and contingencies
The filing provides no specific earnings or dividend guidance. Management described an intended leverage range of one to three times book equity and expects financing and operating cash generation to support anticipated uses of capital. Future dividends remain subject to board declaration and available funds.
- Management identifies credit deterioration, real estate values and performance, interest rates, financing availability and refinancing as key risks. Repo lenders may demand additional collateral or repayment after collateral-value declines; failure to meet margin calls could trigger remedies, including liquidation of pledged assets.
- All commercial mortgage loans indexed to LIBOR had transitioned to SOFR by June 30. The filing estimates net interest income would change by approximately +3.04% for a 50-basis-point rate increase, +6.09% for a 100-basis-point increase, and −1.55% for a 25-basis-point decrease, assuming no balance-sheet or portfolio changes.
- The company is involved in litigation relating to the Walgreens loan and foreclosure. It says the outcome and collectability of legal judgments are not determinable; it believes the proceedings will not materially affect its financial condition, results or cash flows.
- Management reported no material change to the risk factors in its 2022 Form 10-K and concluded disclosure controls were effective.
Distributable Earnings, a non-GAAP measure, were $63.5 million for Q2 and $108.3 million for the first half; fully converted Distributable Earnings per share were $0.66 and $1.10, respectively. These measures are not GAAP net income and depend on company-defined adjustments.
Important facts for investors to verify
- Performance and repayment prospects for the Portland office loan and the impact of the higher credit-loss provision.
- Walgreens portfolio rent collection and operations during the 15-month abatement, as well as the status and potential recovery from related litigation.
- Near-term financing maturities, CLO refinancing and reinvestment capacity, and sensitivity to collateral haircuts and margin calls.
- Whether recurring earnings and cash generation support distributions, given the company’s non-GAAP adjustments and REIT distribution requirements.
- Timing and terms of the Series H preferred stock’s scheduled January 2024 conversion and its effect on share count and per-share measures.