Business context and reporting period
Benefit Street Partners Realty Trust, Inc. filed this Form 10-K for the year ended December 31, 2017. The company, a REIT with no direct employees, originates, acquires and manages commercial real estate debt, principally mortgage loans; it also operates a conduit lending business through a taxable REIT subsidiary. Benefit Street Partners L.L.C. manages the company. Its estimated NAV of $19.02 per share was based on asset and liability values as of September 30, 2017; the company had no established public trading market.
Key financial metrics
| Metric | 2017 | 2016 |
|---|---|---|
| Interest income | $89.6 million | $79.4 million |
| Interest expense | $32.4 million | $23.2 million |
| Net interest income | $57.2 million | $56.2 million |
| Net income | $33.8 million | $30.0 million |
| Diluted earnings per share | $1.06 | $0.95 |
| Cash flow from operations | $8.4 million | $35.0 million |
| Total assets | $1,583.7 million | $1,248.1 million |
| Total liabilities | $973.3 million | $614.5 million |
| Stockholders’ equity | $610.3 million | $633.7 million |
| Cash and cash equivalents | $83.7 million | $118.0 million |
Net interest spread increased to 3.0% from 2.8%; average asset yield was 7.2% and average financing cost was 4.2%. Average leverage, measured as average interest-bearing liabilities to interest-earning assets, rose to 62.1% from 52.2%. At year-end, commercial mortgage loans held for investment were $1,402.0 million net of allowance, and loan-related CLOs were $826.2 million. Loan portfolio weighted-average coupon was 6.7%, with a 1.3-year remaining life. The allowance for loan losses was $1.5 million; the company reported no impaired, past-due or non-accrual loans.
Material changes versus the prior comparable period
- Net income increased 12.6%, while net interest income rose 1.7%. Interest income increased primarily with higher one-month LIBOR and loan growth; higher average borrowings and rates drove interest expense upward.
- Cash flow from operations fell to $8.4 million from $35.0 million. Investing used $332.8 million, principally reflecting $837.0 million in loan originations and purchases, partly offset by repayments and sales. Financing provided $290.1 million, including $700.9 million from two 2017 CLO issuances.
- Assets increased 26.9%, while equity declined 3.7%. CLO liabilities rose from $278.5 million to $826.2 million, and the company had no CMBS investments at year-end, compared with $49.0 million in 2016.
- Operating expenses increased to $29.5 million from $22.5 million, mainly reflecting administrative service expenses, acquisition costs and other expenses. The 2017 loan-loss provision was a $0.7 million recovery, versus a $1.3 million provision in 2016.
- Annual distributions per share were $1.80 versus $2.06. The board lowered the annualized distribution rate to $1.44 per share in August 2017.
Outlook, management commentary, risks and unusual items
Management stated it believed liquidity and capital resources were sufficient for anticipated needs and expected to use additional debt financing. The board’s intended leverage range was one to three times book equity, but it may change the target without stockholder approval. No earnings or distribution guidance was provided. Management cautioned that distributions may be reduced or suspended.
- Distributions totaled $58.9 million in 2017, compared with $33.8 million of net income and $8.4 million of operating cash flow. Coverage sources included $30.5 million of cash on hand and $20.1 million of DRIP share issuance; operations funded only 14.2% of distributions. The filing says distributions have historically exceeded operating cash flow and are not sustainable long term. Cumulative distributions since inception exceeded cumulative net income.
- Liquidity and refinancing risks include collateral calls on repurchase facilities, short-term financing exposure, rising interest rates and dependence on continued access to CLO and other funding markets. Unfunded loan commitments were $83.5 million at year-end. Management reported compliance with debt covenants.
- Real estate credit, collateral-value, borrower default, concentration, illiquidity and valuation risks remain significant. The company relies on its external advisor and faces potential conflicts of interest; related-party loan acquisitions require scrutiny.
- Shares are illiquid, and the share repurchase program is limited by available DRIP proceeds, annual caps and board discretion. In early 2018, 607,498 repurchase-requested shares were not fulfilled; 417,376 shares were repurchased at an average $18.56 per share.
- Subsequent events: the company entered stock purchase agreements for up to approximately $97 million of common stock at $16.87 per share; no closings had occurred as of filing. The agreements provide for a liquidity event, such as a listing, within three years, subject to restrictions. In February 2018, the company increased the JPMorgan repo facility from $300 million to $520 million and used added capacity to call the 2015 CLO.
- The January 2018 amended advisory agreement retained a 1.5% asset management fee and a 15% subordinated performance fee above a 6% annual hurdle, subject to limitations; it eliminated acquisition and disposition fees. The advisor and/or affiliates were required, subject to conditions, to acquire at least $10 million of company equity.
- The Tax Cuts and Jobs Act created tax changes that the company said remained provisional. Principal structural risks include maintaining REIT status and avoiding investment-company registration. The company disclosed no material pending legal proceedings; management concluded disclosure controls and internal control over financial reporting were effective.
Important facts for investors to verify
- How sustainable distributions are given the substantial gap between distributions, operating cash flow and net income, and the reliance on cash reserves and DRIP proceeds.
- Current loan credit quality, collateral and geographic/property-type concentrations, near-term loan maturities, and the adequacy of loss reserves.
- Debt maturities, CLO and repo funding terms, collateral requirements, and liquidity available to meet margin calls and unfunded commitments.
- The current NAV and book value per share relative to the $19.02 NAV estimate dated September 30, 2017, and the practical availability and pricing of share repurchases.
- Whether the committed equity offering closes, its dilution and use of proceeds, and progress toward the promised liquidity event.
- Advisor fee economics, related-party transactions, and the company’s ongoing REIT and Investment Company Act compliance.