Franklin BSP Realty Trust, Inc. (filed as Benefit Street Partners Realty Trust, Inc.) — 2020 Form 10-K
Reporting period: Fiscal year ended December 31, 2020; the filing also reports fourth-quarter results. The company is a non-listed commercial real estate finance REIT, primarily originating and managing commercial mortgage loans, with additional CMBS, conduit lending and real estate activities. It is externally managed by Benefit Street Partners, an affiliate of Franklin Templeton.
Financial and operating highlights
| Metric | 2020 | 2019 |
|---|---|---|
| Interest income | $179.9 million | $195.3 million |
| Net interest income | $113.3 million | $104.9 million |
| Total income | $117.6 million | $108.1 million |
| Net income | $54.7 million | $83.9 million |
| Net income attributable to common stock | $39.8 million | $66.9 million |
| Basic and diluted EPS | $0.90 | $1.60 |
| Net cash provided by operating activities | $115.3 million | $45.4 million |
Net interest income rose despite lower interest income, as interest expense fell to $66.6 million from $90.4 million. The weighted-average net interest spread increased to 3.0% from 2.7%. The company recorded a $13.3 million provision for credit losses, a $10.1 million realized loss on securities sales, and a $7.3 million unrealized loss on available-for-sale securities. Conduit loan sale gains fell to $15.9 million from $37.8 million as sale proceeds declined to $328.1 million from $1.013 billion.
Fourth-quarter 2020 net income was $32.8 million, versus $23.6 million in fourth-quarter 2019; common-stock EPS was $0.58 versus $0.44. Full-year net income nevertheless declined year over year.
Portfolio, debt and liquidity
- At year-end, total assets were $3.190 billion, total liabilities $2.182 billion, and stockholders’ equity $798.4 million. Cash and cash equivalents were $82.1 million, with another $10.1 million in restricted cash.
- Major reported debt balances included $1.625 billion of CLOs, $276.3 million of commercial mortgage loan repurchase agreements, $186.8 million of securities repurchase agreements, a $29.2 million mortgage note and $31.4 million of other loan financing. CLO notes are consolidated; the company held some CLO notes that are eliminated in consolidation.
- Commercial mortgage loans held for investment totaled $2.694 billion net of a $20.9 million allowance. The portfolio included 130 loans; multifamily represented 44.2% of par, office 19.0%, and hospitality 14.8%. The weighted-average coupon was 5.5% and remaining life 1.7 years.
- Two loans with a combined carrying value of $94.9 million were past due, including one more than 120 days past due; both were on nonaccrual status. The filing reports no specific reserves for these loans.
- Net cash provided by investing activities was $240.7 million and net cash used in financing activities was $373.0 million. Financing outflows included CLO repayments, securities repo repayments, distributions and share repurchases. The company reported compliance with debt covenants at year-end.
Changes, distributions and outlook
- COVID-19 disruptions drove market-value declines, lender margin calls and increased expected credit losses. The company said it met the margin calls received in 2020 and substantially reduced its securities portfolio, lowering related mark-to-market exposure. It cautioned that securitization financing remained more difficult.
- The loan portfolio’s weighted-average risk rating worsened from 2.1 to 2.2, and the amortized cost of past-due loans increased by $37.8 million to $94.9 million. The company made limited borrower modifications; it said these did not qualify as troubled debt restructurings.
- Effective with the second quarter of 2020, the common dividend shifted from monthly to quarterly payments and was reduced from an annualized $1.44 to $1.10 per share. Total common distributions were $45.7 million, down from $59.7 million in 2019. The board may reduce or suspend distributions.
- The company adopted the CECL expected-credit-loss standard in 2020, recording a $7.8 million opening cumulative-effect adjustment. Management’s stated leverage target was one to three times book equity; it anticipated financing and operating cash flows would meet expected capital needs. No specific earnings or dividend guidance was provided.
- The board-approved estimated NAV was $17.88 per share, based on September 30, 2020 values. GAAP book value was $17.94 per share at year-end. The company cautioned that NAV is an estimate, is not a realizable sale price, and does not reflect a liquidity discount. No public trading market existed for the shares.
Key risks and unusual items
- COVID-19-related borrower stress, particularly in hospitality and retail, could further increase delinquencies, defaults, credit losses and pressure on cash available for distributions.
- Short-term repurchase financing exposes the company to additional collateral demands and forced asset sales if collateral values fall. Rising interest rates could also increase borrowing costs relative to income on fixed-rate assets.
- Common shares are illiquid; the share repurchase program is restricted, funded by DRIP proceeds, subject to board discretion and not a dependable source of liquidity.
- A $4.5 million non-cash charge for unamortized financing costs followed the January 2020 call of a CLO. The company also reported foreclosure-related real estate activity, including asset sales and a $0.4 million impairment charge.
- The company depends on its external advisor and faces potential conflicts of interest. It also cited REIT qualification and Investment Company Act compliance as material regulatory risks.
Important facts for investors to verify
- Current status and performance of the $94.9 million of nonaccrual/past-due loans, and whether the year-end allowance adequately reflects expected losses.
- Subsequent changes in borrower conditions, collateral values, margin requirements and access to refinancing or securitization markets.
- Whether operating cash flow supports the current dividend after debt service, unfunded loan commitments and other capital needs.
- The assumptions and valuation date behind the $17.88 estimated NAV, and the practical limits and funding of the share repurchase program.
- Near-term maturities and extension terms of financing facilities, as well as the company’s effective leverage and available unrestricted liquidity.