Franklin BSP Realty Trust, Inc. annual report, FY2023

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Franklin BSP Realty Trust, Inc. — FY2023 Form 10-K

Reporting period: Fiscal year ended December 31, 2023; filed February 26, 2024. Franklin BSP Realty Trust (NYSE: FBRT) is an externally managed commercial real estate finance REIT that originates and invests primarily in commercial real estate loans, with smaller securities, conduit lending and owned-property businesses.

Financial performance and position

  • Income: Interest income was $552.5 million, up from $357.7 million in 2022. Interest expense rose to $305.6 million from $160.5 million, leaving net interest income of $246.9 million, compared with $197.2 million.
  • Earnings: GAAP net income was $144.5 million, versus $14.2 million in 2022. Net income attributable to common stock was $118.2 million, or $1.42 per diluted share; 2022 common shareholders had a $27.3 million loss, or $0.38 loss per share. The 2023 result included $20.4 million of coupon and default interest related to a Brooklyn hotel loan collateral sale.
  • Non-GAAP measure: Distributable Earnings were $189.5 million, or $1.92 per fully converted share, compared with $116.1 million, or $1.07, in 2022. The company cautions this measure is not GAAP net income and may not be comparable across companies.
  • Margins and funding costs: Average net interest spread increased to 2.9% from 2.5%; average asset yield rose to 10.3% from 5.8%, while average financing cost increased to 7.4% from 3.3%. Average leverage was 77.7% of interest-earning assets, down from 79.2%.
  • Credit and portfolio: The company recorded a $33.7 million credit-loss provision, versus $36.1 million in 2022. At year-end, 144 commercial mortgage loans had $4.99 billion net carrying value; multifamily represented 76.8% of loan par. The allowance for credit losses was $47.2 million. Two loans totaling $78.2 million were designated non-performing, with no specific allowance recorded for them.
  • Cash flow: Operating cash flow was $197.4 million, investing cash flow was $380.8 million, and financing cash flow was negative $425.0 million. Cash, cash equivalents and restricted cash increased $153.2 million to $343.7 million.
  • Debt and leverage: Year-end net debt-to-equity was 2.3x versus 2.5x in 2022; total leverage was 2.5x versus 2.6x. Recourse net debt-to-equity was 0.2x, down from 0.7x. CLOs were the largest borrowing category, with $3.57 billion reported on the balance sheet.
  • Liquidity: Unrestricted cash was $337.6 million. Management reported $1.52 billion of near-term liquidity sources, including $55 million of CLO reinvestment capacity and $1.13 billion of financing capacity available or in progress; these amounts are not all cash on hand. Management stated liquidity and access to additional liquidity should cover obligations for the next 12 months and beyond.
  • Equity and distributions: Common book value was $15.71 per share, broadly unchanged from $15.72. The 2023 common dividend was $1.42 per share. The fourth-quarter common dividend was $0.355 per share, paid in January 2024.

Material changes and notable items

  • Higher interest income reflected an approximately 330-basis-point increase in average SOFR and equivalent rates; interest expense also rose substantially as rates increased.
  • The company fully disposed of the ARM Agency securities portfolio acquired in the Capstead transaction by the third quarter of 2023. The prior-year comparison included $119.2 million of trading losses and a $44.2 million net derivative gain; 2023 trading losses were $0.6 million and net derivative gain was $0.9 million.
  • The loan portfolio declined to 144 loans from 161, while net carrying value fell to $4.99 billion from $5.23 billion. Real estate owned held for sale increased to 23 properties with a $103.7 million carrying value, primarily the Walgreens portfolio.
  • The Walgreens loan fraud/default resulted in foreclosure on 24 retail properties; 23 remained held for sale at year-end. The company recorded a $4.0 million impairment on that portfolio and is marketing the properties and pursuing civil remedies. The collectability of legal judgments is undetermined.
  • A Portland, Oregon office loan was restructured and placed on cost-recovery status before foreclosure by deed-in-lieu; the property became real estate owned. The company also recorded a $12.3 million specific credit-loss provision during 2023, primarily related to this office loan, before writing off the specific allowance in the second quarter.
  • The company issued the 2023-FL10 CLO and reported $689.3 million outstanding at year-end. Its Series H preferred stock’s mandatory conversion date was extended in January 2024 to January 21, 2025.

Outlook, risks and contingencies

The filing gives no specific earnings or dividend guidance. Management’s stated objective is to provide risk-adjusted returns through a stable dividend and capital growth; it expects to use debt and equity financing and currently intends to operate at leverage of one to three times book value, subject to change.

  • Key exposures include commercial property performance and valuations, borrower defaults, refinancing availability, high or volatile interest rates, credit spreads, and competition for investments.
  • Short-term repurchase financing can require additional collateral when pledged assets decline in value, potentially pressuring liquidity. The company relies on CLO and securitization markets for longer-term funding.
  • Loan-loss allowances and certain property values rely on estimates and assumptions. The auditors identified the allowance for credit losses on commercial mortgage loans as a critical audit matter. The financial statement and internal-control audits received unqualified opinions.
  • Other risks include the ability to maintain REIT qualification and distributions, external-advisor conflicts, and cybersecurity and natural-disaster risks. The company reported no material cybersecurity incidents affecting it in the prior three years.
  • The filing says routine litigation is not expected to materially affect results. It reports no off-balance-sheet arrangements as of year-end and through the filing date.

Important facts for investors to verify

  • How the two non-performing loans, past-due balances and the $47.2 million credit-loss allowance evolve, including subsequent collections and recoveries.
  • Progress, sale proceeds and any further impairments for the 23 remaining Walgreens properties, and the outcome and collectability of related legal claims.
  • Near-term loan maturities and refinancing, particularly given the portfolio’s 0.9-year weighted-average remaining life and the company’s reliance on secured and CLO financing.
  • Whether reported financing capacity remains accessible under stressed collateral values, and how margin calls or facility changes affect liquidity.
  • Whether recurring earnings and cash generation support the $1.42 annual common dividend; compare GAAP earnings, distributable earnings and cash flows rather than relying on the non-GAAP measure alone.
  • Related-party exposure, including $124.1 million of loans to Advisor affiliates and $50.7 million of fees and reimbursements incurred in 2023.