Franklin BSP Realty Trust, Inc. (filed as Benefit Street Partners Realty Trust, Inc.) — Q2 2020 Form 10-Q
Business context and reporting period. The externally managed REIT originates and invests in commercial real estate loans and securities, with additional conduit-loan and real-estate-owned businesses. This unaudited filing covers the quarter and six months ended June 30, 2020; comparisons are with the corresponding 2019 periods unless noted.
Financial results and position
| Metric | Q2 2020 | Six months 2020 | Comparable 2019 |
|---|---|---|---|
| Total income | $28.9 million | $53.9 million | Q2: $22.4 million; six months: $48.5 million |
| Net interest income | $28.1 million | $51.5 million | Q2: $22.4 million; six months: $48.5 million |
| Net income (loss) | $7.8 million | $0.4 million | Q2: $14.5 million; six months: $34.4 million |
| Net income (loss) attributable to common stock | $4.4 million; $0.10 per share | $(7.6) million; $(0.17) per share | Q2: $11.0 million; $0.27 per share. Six months: $27.6 million; $0.68 per share |
| Net interest spread | 3.0% | 2.5% | Q2: 1.9%; six months: 2.4% |
| Cash from operations | Not separately provided here | $75.2 million | Six months 2019: $16.4 million |
Q2 interest income declined to $43.2 million from $48.2 million, primarily as lower LIBOR reduced loan yields; lower financing costs helped lift net interest income. Six-month results were pressured by increased credit-loss provisions, derivative losses, and reduced conduit-loan sale gains.
At June 30, total assets were $3.34 billion, down from $3.54 billion at year-end 2019. Cash and cash equivalents were $111.6 million, with $15.5 million restricted. Total liabilities were $2.38 billion and stockholders’ equity was $753.6 million; redeemable preferred stock totaled about $209.2 million. Debt balances included $1.70 billion of CLOs, $561.5 million of repurchase agreements, $40.2 million of mortgage notes, and $18.8 million of other financing. Cash, cash equivalents and restricted cash together were $127.1 million.
Six-month investing cash flow was positive $128.9 million, mainly reflecting loan repayments and securities-sale proceeds; financing cash flow was negative $186.1 million, including net repayments of debt and $23.7 million of cash distributions. Combined cash and restricted cash increased $18.0 million from the start of the year.
Material changes and portfolio developments
- Commercial mortgage loans held for investment, net of allowance, fell to $2.47 billion from $2.76 billion at year-end. The portfolio had 116 loans versus 122; multifamily loans represented 49.6% of par.
- The loan allowance rose to $26.2 million from $0.9 million at year-end. The six-month credit-loss increase was $18.6 million, with management citing COVID-19-related economic uncertainty. The weighted-average loan risk rating worsened to 2.2 from 2.1.
- Five loans with a total cost basis of $103.1 million were on nonaccrual at June 30, versus one loan of $57.1 million at year-end. Past-due loan balances also increased. The filing reports no specific reserves for the non-performing loans.
- CMBS fair value was $408.6 million, against $436.9 million amortized cost, leaving $28.3 million of unrealized losses in accumulated other comprehensive loss. The portfolio’s six-month unrealized loss was $27.3 million; Q2 included a $40.3 million unrealized gain as markets partly recovered.
- Real estate owned increased to $49.8 million across three properties. A March foreclosure converted a $14.4 million loan carrying value into a $14.0 million property and resulted in a $0.4 million impairment. One hotel property, valued at $14.0 million, was classified as held for sale.
Outlook, risks, and unusual items
- Management said COVID-19 materially affected borrowers, asset values, credit-loss estimates, and funding markets. It expected little to no conduit-loan activity in the near term; the filing provides no quantified earnings or revenue guidance.
- Market-value declines generated lender margin calls, which the company said it had met. Lower repurchase advance rates and possible renewed volatility could further constrain liquidity. Failure to meet future collateral calls could permit lenders to liquidate pledged assets.
- Management reported compliance with debt covenants. However, CLO coverage-test failures could redirect cash away from subordinate interests, and borrower delinquencies or defaults could reduce cash available for operations and distributions.
- The board moved common and preferred distributions from monthly to quarterly and declared a Q2 common dividend of $0.275 per share, equivalent to $1.10 annually. The board may reduce or suspend distributions. The filing states that 1,986,803 repurchase requests were not fulfilled for the second half of 2019 because program funding is limited.
- The board’s $18.57 estimated NAV per share was based on September 30, 2019 values and does not reflect the pandemic’s subsequent effects; GAAP book value was $16.97 per share at June 30, 2020. Management expected to announce an updated NAV in November 2020.
- The January 2020 call of a CLO generated a $4.5 million noncash charge for unamortized financing costs. Q2 also included a $5.3 million realized loss on sale of real estate securities. No material pending legal proceedings were reported.
Important facts for investors to verify
- Subsequent delinquency, nonaccrual, modification, and repayment trends—particularly for hospitality and retail exposures—and the adequacy of credit-loss reserves.
- Whether CMBS and other collateral values recover or weaken further, and the resulting effect on marks, margin requirements, and available liquidity.
- Near-term refinancing and repayment needs, repo-facility maturities and advance rates, and any changes in CLO coverage tests or financing access.
- Cash generation and distribution coverage after the shift to quarterly dividends, including whether future distributions or share repurchases are reduced or suspended.
- The updated NAV methodology and estimate, given the gap between the stale $18.57 estimate and June 2020 GAAP book value of $16.97 per share.