Franklin BSP Realty Trust(FBRT) - 2024 Q3 - Quarterly Report

Part I - Financial Information Consolidated Financial Statements and Notes Unaudited consolidated financial statements for Q3 2024 show increased total assets to $6.33 billion, a significant nine-month net income decrease to $62.2 million, and a decline in total equity to $1.52 billion Consolidated Balance Sheets Total assets increased to $6.33 billion as of September 30, 2024, driven by higher collateralized loan obligations, while total liabilities rose and total equity decreased Consolidated Balance Sheet Highlights (in thousands) | Metric | Sep 30, 2024 | Dec 31, 2023 | | :--- | :--- | :--- | | Total Assets | $6,334,976 | $5,955,180 | | Commercial mortgage loans, net | $5,077,476 | $4,989,767 | | Real estate owned, held for sale | $284,423 | $103,657 | | Total Liabilities | $4,720,994 | $4,279,223 | | Collateralized loan obligations | $4,097,668 | $3,567,166 | | Total Equity | $1,524,234 | $1,586,209 | - The allowance for credit losses on commercial mortgage loans increased significantly to $76.6 million as of September 30, 2024, from $47.2 million at the end of 2023, indicating rising credit risk concerns[4] Consolidated Statements of Operations Nine-month net interest income declined to $140.3 million, leading to a sharp drop in net income to $62.2 million and diluted EPS to $0.53, though Q3 showed stability Key Operating Results (in thousands, except per share data) | Metric | Nine Months Ended Sep 30, 2024 | Nine Months Ended Sep 30, 2023 | | :--- | :--- | :--- | | Net Interest Income | $140,311 | $196,123 | | Total Income | $154,507 | $209,190 | | Provision for Credit Losses | $(34,790) | $(28,363) | | Net Income | $62,235 | $114,478 | | Diluted EPS | $0.53 | $1.14 | Quarterly Operating Results (in thousands, except per share data) | Metric | Three Months Ended Sep 30, 2024 | Three Months Ended Sep 30, 2023 | | :--- | :--- | :--- | | Net Interest Income | $44,258 | $59,069 | | Net Income | $30,173 | $30,995 | | Diluted EPS | $0.30 | $0.30 | Consolidated Statements of Cash Flows Nine-month operating cash flow was $112.3 million, while investing activities reversed to a $420.4 million outflow, and financing activities provided a $318.3 million inflow Net Cash Flow Summary (in thousands) | Activity | Nine Months Ended Sep 30, 2024 | Nine Months Ended Sep 30, 2023 | | :--- | :--- | :--- | | Net Cash from Operating Activities | $112,322 | $141,462 | | Net Cash from Investing Activities | $(420,438) | $554,809 | | Net Cash from Financing Activities | $318,302 | $(468,666) | | Net Change in Cash | $10,186 | $227,605 | Notes to Consolidated Financial Statements Notes detail accounting policies, showing a commercial mortgage loan portfolio growth to $5.15 billion, increased credit loss allowance, a new $1.0 billion CLO issuance, and an extended share repurchase program - The commercial mortgage loan portfolio, held for investment, grew to 157 loans with a gross carrying value of $5.15 billion as of September 30, 2024, up from 144 loans and $5.04 billion at year-end 2023[27][29] - Multifamily properties represent the largest collateral type in the loan portfolio, accounting for 73.8% of the par value as of September 30, 2024[30] - As of September 30, 2024, the company had three non-performing loans with a total amortized cost of $67.9 million. Two of these loans, collateralized by office properties, had a combined specific allowance for credit losses of $28.7 million[37][38] - In September 2024, a subsidiary of the company issued a new Collateralized Loan Obligation (CLO), BSPRT 2024-FL11, with an approximate principal balance of $1.0 billion[72] - The company's board of directors authorized a $65 million share repurchase program. As of September 30, 2024, $31.1 million remained available under the program, which was extended to December 31, 2025[83] Management's Discussion and Analysis (MD&A) MD&A attributes the nine-month net income decline to lower net interest income and higher credit loss provisions, while the portfolio grew to $5.1 billion, liquidity remains strong, and leverage ratios increased Portfolio Analysis The portfolio comprises 157 commercial mortgage loans with a $5.1 billion carrying value, concentrated in multifamily properties and floating-rate loans, with a slightly improved risk rating Loan Portfolio by Collateral Type (Par Value) | Collateral Type | Sep 30, 2024 | Dec 31, 2023 | | :--- | :--- | :--- | | Multifamily | 73.8% | 76.8% | | Hospitality | 13.7% | 13.3% | | Industrial | 5.8% | 1.5% | | Office | 4.0% | 5.4% | | Other/Retail | 2.7% | 3.0% | - The company had three loans designated as non-performing with a total amortized cost of $67.9 million as of September 30, 2024[130] Results of Operations Nine-month net interest income decreased by $55.8 million due to lower interest income and higher interest expense, while credit loss provisions increased and operating expenses decreased Comparison of Nine Months Ended Sep 30 (in millions) | Metric | 2024 | 2023 | Change | | :--- | :--- | :--- | :--- | | Interest Income | $398.3 | $420.5 | $(22.2) | | Interest Expense | $257.9 | $224.3 | $33.6 | | Net Interest Income | $140.3 | $196.1 | $(55.8) | | Provision for Credit Losses | $34.8 | $28.4 | $6.4 | | Total Operating Expenses | $60.1 | $67.0 | $(6.9) | Liquidity and Capital Resources The company maintains strong liquidity with $1.13 billion in available sources, though net debt-to-equity and total leverage ratios increased to 2.7x and 2.9x, respectively Sources of Liquidity (in millions) | Source | Sep 30, 2024 | Dec 31, 2023 | | :--- | :--- | :--- | | Unrestricted cash | $346 | $338 | | CLO reinvestment available | $138 | $55 | | Financings available & in progress | $645 | $1,131 | | Total | $1,129 | $1,524 | Leverage Ratios | Ratio | Sep 30, 2024 | Dec 31, 2023 | | :--- | :--- | :--- | | Net debt-to-equity ratio | 2.7x | 2.3x | | Total leverage ratio | 2.9x | 2.5x | Non-GAAP Financial Measures Distributable Earnings, a non-GAAP measure, were negative $4.0 million for Q3 2024, a significant decline from Q3 2023, primarily due to realized loss adjustments Reconciliation to Distributable Earnings (in thousands) | Metric | Q3 2024 | Q3 2023 | | :--- | :--- | :--- | | GAAP Net Income | $30,173 | $30,995 | | Realized Gain/(Loss) Adj. on loans/REO | $(36,433) | $(1,571) | | Other Adjustments (Net) | $2,301 | $12,564 | | Distributable Earnings | $(3,959) | $41,988 | Distributable Earnings Per Share (Fully Converted) | Period | Per Share Amount | | :--- | :--- | | Q3 2024 | $(0.10) | | Q3 2023 | $0.43 | | Nine Months 2024 | $0.62 | | Nine Months 2023 | $1.53 | Market Risk Disclosures The company is exposed to credit, capital market, interest rate, and real estate risks, with interest rate sensitivity analysis showing a 1.72% net interest income increase for a 50 basis point rate rise Interest Rate Sensitivity Analysis (Impact on Net Interest Income) | Change in Interest Rates | Sep 30, 2024 | | :--- | :--- | | (-) 100 Basis Points | (2.44)% | | (-) 50 Basis Points | (1.58)% | | (+) 50 Basis Points | 1.72% | Controls and Procedures Management concluded that disclosure controls and procedures were effective as of September 30, 2024, with no material changes in internal control over financial reporting - The Chief Executive Officer and Chief Financial Officer concluded that the company's disclosure controls and procedures are effective as of the end of the reporting period[226] Part II - Other Information Legal Proceedings The company is pursuing civil remedies and selling foreclosed Walgreens properties due to sponsor fraud on a loan originated in April 2022 - The company is actively pursuing civil remedies following a sponsor's fraud and default on a loan secured by 24 Walgreens-leased properties. The company has foreclosed on all properties and is marketing them for sale[229] Risk Factors No material changes to the risk factors from the 2023 Annual Report on Form 10-K were reported - No material changes to the risk factors from the 2023 Form 10-K were reported[230] Unregistered Sales of Equity Securities and Use of Proceeds No shares were repurchased in Q3 2024, and the $65 million share repurchase program, with $31.1 million remaining, was extended to December 31, 2025 - The company's board extended the $65 million share repurchase program to December 31, 2025. As of early November 2024, $31.1 million remains available[231] - No shares were repurchased during the three months ended September 30, 2024[231] Exhibits Key exhibits include the Indenture for the new BSPRT 2024-FL11 CLO issuance and CEO/CFO certifications - Key exhibits filed with the report include the Indenture for the new CLO (BSPRT 2024-FL11) and CEO/CFO certifications[234]