Franklin BSP Realty Trust, Inc. — Q3 2021 Form 10-Q
Reporting period: Three and nine months ended September 30, 2021; unaudited. The company was then known as Benefit Street Partners Realty Trust. Results below exclude the Capstead Mortgage Corporation merger, which closed October 19, 2021.
Business context
The company is an externally managed REIT focused primarily on originating, acquiring, and managing commercial real estate loans, with additional conduit lending and real estate ownership activities. At quarter-end it held 150 commercial mortgage loans, with $3.25 billion of held-for-investment loans, net of credit-loss allowance. Multifamily represented 56.7% of loan par value.
Financial performance and position
| Metric | Q3 2021 | Q3 2020 | Nine months 2021 | Nine months 2020 |
|---|---|---|---|---|
| Interest income | $47.7m | $44.4m | $139.0m | $135.5m |
| Interest expense | $12.0m | $15.1m | $36.0m | $54.7m |
| Net interest income | $35.8m | $29.3m | $103.0m | $80.8m |
| Net income | $38.5m | $21.5m | $98.7m | $21.9m |
| Net income applicable to common stock | $29.5m | $16.7m | $75.9m | $10.5m |
| Diluted EPS | $0.67 | $0.38 | $1.71 | $0.24 |
| Net interest spread | 3.9% | 3.4% | 3.9% | 2.8% |
At September 30, total assets were $3.64 billion, versus $3.19 billion at December 31, 2020. Cash and cash equivalents were $91.4 million, with $9.5 million restricted. Total liabilities were $2.56 billion; major reported borrowings included $1.79 billion of CLOs, $550.2 million of commercial-loan repurchase agreements, $46.5 million of securities repurchase agreements, $60.0 million of unsecured debt, and $37.4 million of other financing and loan participations. The company reported compliance with debt covenants.
For the first nine months, operating cash flow was $163.0 million, investing cash flow was negative $504.9 million, and financing cash flow was positive $350.6 million. Cash, cash equivalents, and restricted cash ended at $100.9 million. These cash-flow figures reflect substantial loan originations and financing activity.
Material changes and notable items
- Net income increased year over year, while net interest income rose and interest expense fell. Management attributed the nine-month expense decline primarily to lower LIBOR and noted $4.5 million of prior-year expense related to a CLO call.
- Commercial mortgage loans held for investment, net, grew to $3.25 billion from $2.69 billion at year-end. The allowance for credit losses fell to $15.5 million from $20.9 million; management cited a more positive economic outlook. The nine-month credit-loss provision was a $5.5 million benefit.
- Q3 results included $9.1 million of gains on conduit loan sales and $8.7 million of gains on sale of real estate owned. Nine-month conduit loan sale gains were $22.2 million. These gains, the reserve benefit, and increased incentive fees are important context when assessing earnings quality.
- Operating expenses were $15.1 million in Q3, up from $11.2 million, mainly due to asset-management and subordinated performance fees, including $4.3 million of incentive fees. Nine-month fees included $8.0 million of incentive fees.
- One $57.1 million hospitality loan was more than 120 days past due and on nonaccrual; no asset-specific credit-loss reserve was recorded. The portfolio’s weighted-average internal risk rating improved to 2.1 from 2.2 at year-end.
- Unfunded loan commitments totaled $429.4 million, compared with $228.7 million at year-end. The board declared a Q3 common dividend of $0.355 per share, paid in October; distributions are not assured.
Outlook, risks, and subsequent events
The filing provides no quantified earnings or investment guidance. Management said it expects debt and equity financing and operating cash generation to support anticipated capital needs, and described a target leverage range of one to three times book equity. The company intended to sell Capstead’s acquired assets over time and redeploy proceeds into its traditional strategies; management cautioned that transition timing, sale values, and reinvestment returns are uncertain.
After quarter-end, the Capstead merger added approximately $6.9 billion of agency adjustable-rate mortgage securities financed with approximately $6.4 billion of secured borrowings. Management identified interest-rate, spread, prepayment, liquidity, and collateral-margin-call risks for these assets and financings. Other key risks include COVID-19 effects on borrowers and property values, refinancing and capital-market access, LIBOR transition, credit losses, and REIT qualification. The filing also describes lawsuits concerning merger disclosures; the company said it believed the claims were without merit and did not expect material impact from the matters.
The company changed its name to Franklin BSP Realty Trust, effected a 1-for-10 reverse split, and completed the Capstead merger after quarter-end. The merger brought the common stock listing to the NYSE under FBRT and added Series E preferred stock. The company also terminated its share repurchase program upon merger closing.
Important facts for investors to verify
- How much of reported earnings is recurring net interest income versus conduit and property-sale gains, credit-reserve changes, and incentive-fee accruals.
- Credit performance of the $57.1 million nonaccrual hospitality loan, other watch-list exposures, and the assumptions supporting the allowance for credit losses.
- Liquidity available for $429.4 million of unfunded loan commitments, debt maturities, and potential collateral or margin calls; distinguish unrestricted cash from restricted and servicer-held cash.
- Actual sale proceeds and reinvestment returns on Capstead assets, and the effect of the acquired securities and borrowings on leverage, earnings, and book value.
- Dividend coverage and the potential effects of preferred-stock obligations, merger-related share issuance, and lock-up expirations.