Business context and reporting period
Franklin BSP Realty Trust, Inc. (NYSE: FBRT) is an externally managed REIT focused primarily on originating and managing commercial real estate debt. This unaudited Form 10-Q covers the quarter and nine months ended September 30, 2022. Amounts below are in U.S. dollars; financial statement amounts are in millions unless noted.
Financial performance and position
| Metric | Q3 2022 | Q3 2021 | Nine months 2022 | Nine months 2021 |
|---|---|---|---|---|
| Total income | $50.3 | $36.8 | $145.1 | $105.4 |
| Net interest income | $48.0 | $35.8 | $138.2 | $103.0 |
| Net income (loss) | $35.3 | $38.5 | ($13.0) | $98.7 |
| Net income (loss) applicable to common stock | $28.4 | $29.5 | ($47.8) | $75.9 |
| Basic earnings (loss) per share | $0.34 | $0.67 | ($0.70) | $1.72 |
- Margins and leverage: Net interest spread was 2.6% in Q3 versus 3.9% a year earlier; average leverage was 78.4% versus 73.4%. For the nine-month period, spread was 2.3% versus 3.9% and average leverage 79.6% versus 73.8%.
- Cash flows: Nine-month operating cash flow was $130.6 million, investing cash inflow $3.20 billion, and financing cash outflow $3.24 billion. Cash and restricted cash totaled $262.0 million at period-end, including $217.0 million of unrestricted cash.
- Balance sheet: Assets were $6.18 billion, down from $9.47 billion at year-end 2021. Commercial mortgage loans held for investment, net, rose to $5.28 billion from $4.21 billion. Total liabilities were $4.50 billion; major balances included $3.17 billion of CLOs, $699 million of commercial-loan repo financing, and $338 million of securities repo financing.
- Credit and portfolio: The 166 held-for-investment loans had $5.35 billion of par value, with a 7.1% weighted-average coupon and 1.5-year weighted-average remaining life, excluding non-performing loans. Multifamily represented 74.7% of loan par value. The allowance for credit losses was $46.8 million, including a $27.6 million specific reserve on a troubled retail loan.
- Shareholder measures: GAAP book value per common share was $15.78 versus $16.75 at December 31, 2021; fully converted book value was $15.84 versus $17.25. The Q3 common dividend was $0.355 per share.
Material changes versus comparable periods
- Q3 net interest income rose 34% year over year as average interest-earning assets expanded and benchmark rates increased. Interest expense also rose substantially, and the net interest spread narrowed.
- The nine-month net loss chiefly reflected $113.7 million of trading losses on the ARM Agency Securities portfolio and a $31.0 million credit-loss provision. The company recorded $98.7 million of net income in the prior-year period.
- The ARM Agency Securities portfolio acquired with Capstead contracted from $4.57 billion at year-end 2021 to $252.5 million, following $3.7 billion of sales and $468.9 million of principal paydowns. The company reported $113.7 million of related trading losses for the nine months.
- Commercial mortgage loans grew, while the Series F preferred stock converted into 39.7 million common shares in April 2022. The expanded common share count contributed to lower per-share earnings comparisons.
Outlook, commentary, risks and unusual items
- Management gave no specific earnings or portfolio guidance. It said it expects debt and equity financing, together with cash from operations, to fund anticipated needs, and stated a current target leverage range of one to three times book equity; the board may change that target.
- Management cited higher rates and a more pessimistic economic outlook as factors in rising borrowing costs and credit reserves. Repo facilities may require additional collateral or repayment if pledged-asset values fall; counterparties are not required to renew short-term financing.
- Two loans totaling $162.6 million were non-performing at quarter-end. One was a New York hotel loan; the other was a retail-property loan with a $27.6 million specific allowance and interest placed on cost-recovery status.
- A lawsuit alleges fraud in underwriting a $113.2 million loan secured by 24 Walgreens-leased properties. A Texas court entered a $158.6 million judgment plus exemplary damages on October 10, 2022. The company said collection of judgments is not currently determinable; after quarter-end it took title to seven collateral properties.
- After quarter-end, the company also took ownership of an office property securing a loan in maturity default. The financial impact of both property realizations was still under evaluation.
- The company declared that Q3 common and preferred dividends were paid in October. Future distributions remain subject to board declaration and available funds. Management reported effective disclosure controls and no material change in internal control over financial reporting.
Important facts for investors to verify
- Whether the company can recover value from the Walgreens collateral and collect the court judgment, and how foreclosure outcomes affect the loan reserve and reported results.
- Performance, collateral values and any further credit-loss provisions for the non-performing hotel and retail loans.
- Whether higher financing costs, repo renewals, collateral requirements or margin calls pressure liquidity and net interest spread.
- How the remaining ARM Agency Securities portfolio is managed and whether further trading or derivative losses occur.
- Whether cash generation supports distributions, contractual loan fundings and debt obligations, including near-term repo maturities and $532.6 million of unfunded loan commitments.