Franklin BSP Realty Trust, Inc. — Q1 2022 Form 10-Q
Reporting period: Three months ended March 31, 2022. The company is an externally managed REIT focused primarily on commercial real estate debt. The figures below are unaudited; dollar amounts are in millions unless stated otherwise.
Financial and operating highlights
| Metric | Q1 2022 | Comparable period / prior date |
|---|---|---|
| Total income | $55.1 | $31.6 in Q1 2021 |
| Net interest income | $52.8 | $30.9 in Q1 2021 |
| Net income (loss) | $(22.5) | $30.1 in Q1 2021 |
| Net loss applicable to common stock; EPS | $(43.5); $(0.99) per share | $23.4; $0.53 per share in Q1 2021 |
| Operating cash flow | $(32.3) | $4.4 provided in Q1 2021 |
| Cash, cash equivalents and restricted cash | $129.5 | $168.2 at Dec. 31, 2021 |
| Total assets / total liabilities | $7,112.2 / $5,362.7 | $9,474.7 / $7,666.6 at Dec. 31, 2021 |
| Commercial mortgage loans held for investment, net | $4,530.5 | $4,211.1 at Dec. 31, 2021 |
Average net interest spread was 2.5%, down from 3.6% in Q1 2021; average leverage, measured as interest-bearing liabilities divided by interest-earning assets, was 85.9%, versus 72.2%. The company reported non-GAAP distributable earnings of $12.1 million, or $0.08 per fully converted share, and run-rate distributable earnings of $40.1 million, or $0.39 per fully converted share. These measures are not GAAP earnings.
Material changes and notable items
- Income and net interest income rose year over year, largely reflecting larger average real estate debt and securities portfolios following the October 2021 Capstead acquisition.
- The company recorded an $88.4 million trading loss on its ARM Agency Securities portfolio, including losses from sales, market-value changes and mortgage prepayments. A $34.0 million realized gain on derivatives partly offset the impact. Real estate securities fell to $1.95 billion from $4.57 billion at year-end as the company sold securities and received principal paydowns.
- Commercial mortgage loans held for investment increased to $4.53 billion. Multifamily loans represented 71.6% of portfolio par value. One $57.1 million hospitality loan was more than 120 days past due and on nonaccrual; the company reported no specific credit-loss reserve for it. The weighted-average risk rating was 2.1, unchanged from year-end.
- Allowance for credit losses on held-for-investment loans declined by $0.9 million; management attributed the reduction primarily to an improved economic outlook. The quarter included $1.9 million in loan-workout charges, described by the company as likely recoverable and nonrecurring.
- Operating expenses increased to $20.1 million from $11.9 million, including higher professional fees, which management attributed in part to legal costs related to asset recovery.
- Book value per share was $15.24, down from $16.75 at year-end; fully converted book value per share was $16.50, down from $17.25.
Debt, liquidity and capital
At March 31, financing included $2.88 billion of collateralized loan obligations (CLOs), $1.71 billion of repurchase agreements secured by real estate securities, $522.9 million of repurchase agreements secured by commercial mortgage loans, $98.6 million of unsecured debt, and smaller financing balances. The company issued approximately $1.1 billion of principal in its 2022-FL8 CLO during the quarter; $960 million was purchased by third-party investors. It reported compliance with debt covenants.
Cash from investing activities was $2,262.9 million, principally reflecting $2,190.1 million of real estate securities sale and repayment proceeds, partly offset by $636.5 million of commercial loan originations and purchases. Financing activities used $2,269.2 million, mainly from net repayments on securities repurchase agreements. Unfunded commercial loan commitments were $400.7 million. The company’s stated leverage objective was one to three times book equity; it said it expected financing sources and operating cash to meet anticipated capital needs.
Outlook, risks and contingencies
- No specific earnings or portfolio guidance was provided. The company said it did not intend to continue investing in ARM Agency Securities and expected to reinvest proceeds into other business segments. After quarter-end, it reported the ARM portfolio was valued at $649 million as of May 3, 2022, with a $6.9 million loss from April 1 through May 3.
- Management highlighted interest-rate and market-value volatility, credit and property risks, refinancing and funding access, and potential margin calls on repurchase financing. Lenders may require additional collateral or repayment if pledged assets decline in value; counterparties are not obligated to renew short-term repurchase agreements.
- COVID-19 effects, inflation, changing rates, economic conditions, and the ability to refinance debt, fund investments and maintain distributions were identified as uncertainties. The company said its risk factors had not materially changed from its 2021 Form 10-K.
- The board declared a quarterly common-stock dividend of $0.355 per share, paid in April. Future distributions are subject to board approval and available funds. The filing states that distributions are not assured.
- On April 19, 2022, all 39.7 million Series F preferred shares converted one-for-one into common shares. The company reported no material litigation outside the ordinary course and said routine litigation was not expected to materially affect results.
Important facts for investors to verify
- How the rapid liquidation of ARM Agency Securities, including post-quarter losses and proceeds, affects earnings, liquidity and reinvestment returns.
- The performance and collateral outlook for the $57.1 million nonaccrual hospitality loan, and any subsequent change in its reserve or repayment status.
- Near-term refinancing, renewal and margin-call exposure, particularly for securities repurchase agreements maturing within 90 days and commercial-loan facilities with 2022 maturities.
- The sustainability of distributions relative to GAAP results, distributable earnings, cash generation and preferred-stock obligations.
- The effect of the Series F conversion on common shares outstanding, per-share measures and common-stockholder dilution; the filing reports 83,691,399 common shares outstanding on April 29, 2022.