Franklin BSP Realty Trust, Inc. annual report, FY2022

Franklin BSP Realty Trust, Inc. — 2022 Form 10-K

Reporting period: Fiscal year ended December 31, 2022; filed March 16, 2023. FBRT is an externally managed commercial real estate finance REIT. It primarily originates and manages commercial real estate loans, with additional securities, conduit lending, and real estate owned businesses.

Financial performance and position

Metric	2022	2021
Total income	$201.7 million	$160.8 million
Interest income	$357.7 million	$216.9 million
Interest expense	$165.7 million	$60.8 million
Net interest income	$192.0 million	$156.1 million
Net income	$14.2 million	$25.7 million
Net income attributable to common shareholders	$(27.3) million	$(7.9) million
GAAP diluted EPS	$(0.38)	$(0.18)
Operating cash flow	$152.5 million	$146.5 million

• The net interest spread was 2.4%, down from 3.4%; weighted-average levered yield was 14.9%, versus 17.5%. Average interest-earning assets increased to $6.2 billion from $4.1 billion, while average financing cost rose to 3.4% from 1.9%.
• At year-end, total assets were $6.20 billion, down from $9.47 billion. Cash and cash equivalents were $179.3 million, plus $11.2 million restricted cash. Commercial mortgage loans held for investment were $5.23 billion net of allowance.
• Debt balances totaled approximately $4.44 billion at year-end, compared with $7.57 billion in 2021, reflecting the reduction in financing associated with the Agency RMBS portfolio. This includes $3.12 billion of CLOs, $680.9 million of commercial mortgage repurchase agreements, $440.0 million of securities repurchase agreements, and other borrowings. The filing reports compliance with debt covenants.
• The allowance for credit losses increased to $40.8 million from $15.8 million; 2022 provision expense was $36.1 million, versus a $5.2 million benefit in 2021.
• Common book value per share was $15.72, down from $16.75. Distributable Earnings, a company-defined non-GAAP measure, were $116.1 million ($1.07 per fully converted share), versus $133.8 million ($2.02 per share) in 2021. Run-Rate Distributable Earnings were $137.8 million ($1.31 per fully converted share). These measures are not substitutes for GAAP results.
• Cash flow from investing was $3.10 billion, primarily reflecting RMBS sales and loan repayments; financing used $3.23 billion, principally from net repayments on repurchase agreements and stockholder distributions.

Material changes versus 2021

• FBRT substantially wound down the Capstead-acquired Agency RMBS portfolio: its year-end fair value fell to $235.7 million from $4.57 billion, following $3.8 billion of sales and $480.2 million of principal paydowns. Management said it does not intend to continue investing in these securities and plans to redeploy proceeds into other businesses.
• The RMBS portfolio generated $119.2 million of trading losses, partly offset by $37.9 million of related derivative gains, for a reported net portfolio loss of $81.3 million. Management cautioned that these losses were not considered indicative of future results.
• Commercial mortgage loans held for investment increased to $5.23 billion net from $4.21 billion. Multifamily loans represented 76.1% of loan par value, up from 69.6%; Southeast exposure rose to 42.2% from 26.2%.
• Interest expense rose substantially as both average borrowings and short-term rates increased. Net income fell, while common shareholders recorded a larger GAAP loss, including preferred dividends.
• Operating expenses fell to $77.5 million from $143.0 million, mainly because 2021 included $88.3 million of Capstead-related acquired-asset impairment. Professional fees rose to $22.6 million, including legal costs related to loan workouts and recovery efforts.

Outlook, risks, and unusual items

• No specific earnings or dividend guidance is provided. The board’s stated leverage target is between one and three times book equity, subject to change. Management expects debt and equity financing and cash from operations to fund anticipated needs.
• The common quarterly dividend was $0.355 per share at year-end. The company warns that distributions are discretionary and may be reduced; it also states that distributions exceeded earnings in certain prior periods, including 2022.
• Two loans totaling $117.4 million were designated non-performing. The $57.1 million New York hotel loan remained on non-accrual, with no interest income recognized in 2022. The $63.6 million Walgreens-collateralized loan was placed on cost-recovery status and had a $14.2 million specific allowance.
• In the Walgreens matter, FBRT alleged forged and falsified underwriting documents and obtained a $158.6 million judgment, plus exemplary damages. It had taken title to 14 of the 24 collateral properties by the filing date and continued foreclosure and other recovery efforts. The company states that collectability of the judgments is not determinable.
• The Williamsburg Hotel bankruptcy court approved a $96 million sale in January 2023. FBRT’s expected recovery is subject to subordinate participation, expenses, closing timing, and other factors.
• Key risks include rising rates and borrowing costs, refinancing and securitization-market access, collateral margin calls, commercial property values and borrower defaults, loan concentration, valuation uncertainty, and maintaining REIT and Investment Company Act status. The company had $466.0 million of unfunded loan commitments.
• Auditors issued an unqualified opinion on the financial statements and concluded internal control over financial reporting was effective. The allowance for credit losses was identified as a critical audit matter involving judgmental forecasts and collateral valuations.

Most important facts for investors to verify

• Progress and recoveries from the Walgreens litigation and foreclosures, including the valuation and operating results of acquired properties.
• Recovery timing and amount for the Williamsburg Hotel loan and the remaining non-performing exposure.
• Loan-level credit trends, CECL assumptions, and the effect of further property-value declines on allowances and collateral coverage.
• Ability to refinance short-term facilities, manage rising funding costs and margin calls, and fund the $466.0 million in commitments.
• Whether recurring earnings and cash generation support the common dividend, given GAAP losses attributable to common shareholders and lower Distributable Earnings per share.
• Portfolio concentration in multifamily and the Southeast, and the transition away from the remaining Agency RMBS assets.