Franklin BSP Realty Trust, Inc. — 2021 Form 10-K
Reporting period: Fiscal year ended December 31, 2021. The company originates and manages commercial real estate debt, operates a commercial loan conduit business, and holds real estate and securities. Its common stock began NYSE trading on October 19, 2021. The October 19 merger with Capstead Mortgage Corporation materially changed the company’s scale, portfolio, financing and reported results.
Financial performance and position
| Metric | 2021 | 2020 |
|---|---|---|
| Total income | $160.8 million | $117.6 million |
| Net interest income | $156.1 million | $113.3 million |
| Net income | $25.7 million | $54.7 million |
| Net income (loss) applicable to common stock | $(7.9) million | $39.8 million |
| GAAP diluted earnings per share | $(0.18) | $0.90 |
| Operating cash flow | $146.5 million | $115.3 million |
- Net interest income increased 38%, reflecting higher average interest-earning assets; interest income rose to $216.9 million from $179.9 million, while interest expense fell to $60.8 million from $66.6 million. The annual net interest spread was 3.4%, versus 3.0%.
- Net income fell 53%, principally reflecting $88.3 million of Capstead-related acquired-asset impairment and $34.8 million of trading losses on acquired agency mortgage securities. Preferred dividends of $33.6 million contributed to the loss applicable to common stock despite positive consolidated net income.
- Non-GAAP distributable earnings were $133.8 million, or $2.02 per fully converted share, versus $72.0 million, or $1.27, in 2020. This measure excludes or adjusts for specified items, including the acquisition impairment; it is not GAAP net income.
- Year-end assets were $9.47 billion, up from $3.19 billion; liabilities were $7.67 billion, up from $2.18 billion. Year-end debt included $4.18 billion of securities repurchase agreements, $1.02 billion of commercial-loan repurchase agreements, and $2.16 billion of CLO liabilities. Average leverage was 78.5%, compared with 75.1%.
- Cash and cash equivalents were $154.9 million, with another $13.3 million restricted. Cash flow from investing was $1.07 billion; financing used $1.14 billion. The company reported $458.1 million of unfunded loan commitments.
- Commercial mortgage loans held for investment, net of credit-loss allowance, were $4.21 billion across 165 loans, versus $2.69 billion across 130 loans. Multifamily represented 69.6% of loan par value. The allowance was $15.8 million, down from $20.9 million.
- Common book value was $16.75 per share, down from $17.94; fully converted book value was $17.25, versus $17.66.
Material changes and unusual items
- The Capstead acquisition added a large portfolio of agency adjustable-rate residential mortgage securities. Their year-end fair value was $4.57 billion; the company stated it intended to sell or run off the portfolio and reinvest proceeds in its core strategies.
- For the fourth quarter, the company reported $53.1 million of net interest income, compared with $35.8 million in the third quarter. Q4 also included the $88.3 million impairment and $34.8 million trading loss.
- After year-end, through February 18, 2022, the agency securities portfolio declined to $2.4 billion following $1.8 billion of sales and $265 million of principal payments. The company reported $38 million of net portfolio losses over that period, including trading losses partly offset by derivative gains.
- Conduit loan sale proceeds increased to $478.3 million from $328.1 million; realized gains were $24.2 million versus $15.9 million.
Outlook, risks and contingencies
- No specific earnings or investment-volume guidance is provided. Management expected to reinvest Capstead-related proceeds into its commercial real estate investment strategies and believed operating cash flow, asset sales and debt and equity financing would fund anticipated needs.
- The board’s stated target leverage range is one to three times book value of equity. The company intends to distribute 100% of REIT taxable income, while noting that dividends are discretionary and may not be maintained.
- Key risks include leverage and short-term repo refinancing, collateral margin calls, rising interest rates, commercial-property credit deterioration, COVID-19 impacts, LIBOR transition, and the ability to redeploy Capstead assets at targeted returns. The company also disclosed that lock-up restrictions covering about 94% of specified pre-merger common shares were due to expire April 19, 2022, potentially increasing selling pressure.
- Series F preferred shares were scheduled to convert one-for-one into common stock on April 19, 2022; Series C and D preferred shares were scheduled for conversion on October 19, 2022, subject to early-conversion rights. These conversions could materially increase common shares outstanding.
- Five lawsuits related to the Capstead merger were voluntarily dismissed without prejudice after supplemental proxy disclosures. The company said it was not involved in other material litigation outside the ordinary course. Management reported effective disclosure controls and effective internal control over financial reporting; the auditor did not attest to internal control effectiveness.
Important facts for investors to verify
- Whether post-year-end agency-security sales, realized losses and reinvestment proceeds align with management’s stated transition plan and affect book value or earnings.
- How the $88.3 million impairment and $34.8 million trading loss are reflected in GAAP results versus distributable earnings, and the sustainability of the latter measure.
- Loan credit quality and concentration, including the $57.1 million hospitality loan more than 120 days past due and the reported absence of a specific reserve for it.
- Repo maturities, collateral haircuts, margin-call capacity and refinancing terms, given the substantial increase in borrowings and short-maturity securities financing.
- Dividend coverage and common-share dilution following preferred-share conversions, including the effect on per-share book value and earnings.
- Execution of the Capstead integration and transition, as well as any resulting changes in portfolio risk, financing costs and returns.