Franklin BSP Realty Trust, Inc. — Q1 2023 Form 10-Q
Reporting period: Three months ended March 31, 2023. The company is an externally managed REIT focused primarily on originating, acquiring, and managing commercial real estate debt, with additional real estate securities, conduit lending, and owned-property businesses. Financial statements are unaudited.
Financial results and position
- Income and earnings: Total income was $62.8 million, up from $55.1 million in Q1 2022. Net interest income increased to $59.5 million from $52.8 million. Net income was $43.8 million, versus a $22.5 million net loss; net income applicable to common stock was $37.1 million, or $0.44 per diluted share, versus a $43.5 million common-stock loss, or $0.99 per share.
- Interest spread: Average yield on interest-earning assets was 9.6% and average financing cost was 6.7%; net interest spread was 2.9%, compared with 2.5% a year earlier. Management attributed higher interest income and expense primarily to higher LIBOR/SOFR rates and changes in average balances.
- Operating expenses and credit: Operating expenses were $22.3 million versus $20.1 million. Credit-loss provision was $4.4 million, compared with a $1.0 million benefit in Q1 2022.
- Cash flow and liquidity: Operating activities provided $33.3 million; investing activities provided $422.8 million; financing activities used $409.3 million. Cash and cash equivalents were $230.4 million and restricted cash was $6.9 million at quarter end. Investing inflows included loan repayments and sales/paydowns of securities; financing outflows included debt repayments and $36.3 million of distributions paid.
- Assets and equity: Total assets were $5.84 billion, down from $6.20 billion at year-end 2022. Commercial mortgage loans held for investment were $5.02 billion net of allowance. Stockholders’ equity was $1.57 billion; reported book value was $15.73 per share, versus $15.72 at year-end.
- Debt: Quarter-end balances included $3.05 billion of collateralized loan obligations (CLOs), $604.4 million of commercial mortgage repurchase agreements, $228.9 million of securities repurchase agreements, $79.1 million of other financing/participations, $81.2 million of unsecured debt, and a $24.0 million mortgage note. The company reported compliance with debt covenants.
- Portfolio and credit quality: The held-for-investment loan portfolio comprised 157 loans, with $5.08 billion par value; multifamily represented 75.9% of par. The weighted-average risk rating was 2.1. Two loans totaling $83.5 million amortized cost were non-performing; $83.5 million was more than 120 days past due, and no interest income was recognized on those loans in the quarter.
Material changes and unusual items
- Interest income rose $55.2 million year over year, while interest expense rose $48.6 million, reflecting higher rates and changes in average asset and financing balances.
- Q1 2023 results included a $4.8 million gain on extinguishment of debt after repurchasing $17.5 million face value of unsecured debt at 75% of par, and a $3.0 million trading gain on ARM Agency Securities. Q1 2022 included an $88.4 million trading loss and a $34.0 million realized derivative gain, making the year-over-year earnings comparison notably affected by market-related items.
- The company continued reducing the ARM Agency Securities portfolio: its fair value declined to $133.7 million from $235.7 million at year-end, including $95.5 million of sales during the quarter. Management said it does not intend to hold this portfolio long term.
- The $5.0 million Series I convertible preferred stock automatically converted into 299,200 common shares in January 2023. The Series H mandatory conversion date was extended to January 19, 2024.
- The company repurchased 313,411 common shares for $3.7 million at an average price of $11.70. The $65 million authorization had $44.8 million remaining at quarter end.
Outlook, risks, and contingencies
- Outlook and liquidity: No specific earnings or revenue guidance was provided. Management said it expects debt and equity financing and operating cash generation to be adequate for anticipated uses of capital, and its board intends to operate at leverage of one to three times book equity. This is an intention, not a guarantee.
- Commitments and funding: Unfunded loan commitments totaled $491.3 million. The company also expects to meet debt service, operating costs, and distributions; future dividends remain subject to board declaration and available funds. The common dividend declared for Q1 was $0.355 per share, payable in April.
- Credit and real estate exposure: The company increased its general credit reserve, citing a more pessimistic macroeconomic outlook. A retail loan secured by the Walgreens portfolio was risk-rated 5 and had a $26.4 million carrying value after a $15.1 million specific-allowance charge-off. The company reported foreclosure or deed transfers for all 24 collateral properties and ongoing related litigation; recoverability of legal judgments is not determinable.
- Subsequent recovery: The Williamsburg Hotel sale closed on April 18, 2023 for $96 million, comprising cash and new indebtedness. The company reported recovery of the full loan principal and approximately $20 million of additional proceeds after closing expenses; it may pursue further remedies.
- Funding and market risks: Floating-rate assets and borrowings expose the company to interest-rate changes. Repo lenders may require additional collateral or repayment after collateral-value declines, and are not obligated to renew facilities. The filing also identifies refinancing, capital-market, property-value, borrower-default, and distribution-funding risks. A $58.7 million participation financing matures June 9, 2023; the company extended its Barclays revolver maturity to September 20, 2024 after quarter end.
- Controls: Management concluded disclosure controls were effective at quarter end and reported no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Performance excluding debt-extinguishment, trading, derivative, and credit-reserve items; the company’s distributable earnings measures are non-GAAP and are not substitutes for GAAP results.
- Progress and recoveries on the Walgreens-related loan, foreclosures, litigation, and any remaining legal claims or costs.
- Realization of the reported Williamsburg Hotel proceeds and any further recovery or remedies.
- Loan delinquencies, risk-rating migration, the adequacy of CECL reserves, and exposure to office, retail, and hospitality property markets.
- Upcoming financing maturities, repo renewal terms, collateral requirements, margin-call capacity, and the ability to fund $491.3 million of loan commitments.
- Whether earnings and cash generation support distributions, and the effect of preferred stock conversion, share repurchases, and the remaining ARM portfolio runoff.