Franklin BSP Realty Trust, Inc. (then Benefit Street Partners Realty Trust, Inc.) — Q1 2017 10-Q
Reporting period: Three months ended March 31, 2017; filed May 12, 2017. The company is an externally managed commercial real estate finance REIT investing primarily in mortgage loans and commercial mortgage-backed securities (CMBS).
Financial performance and position
| Metric | Q1 2017 / March 31, 2017 | Prior comparable period / December 31, 2016 |
|---|---|---|
| Interest income | $18.9 million | $20.3 million in Q1 2016 |
| Interest expense | $5.4 million | $4.8 million in Q1 2016 |
| Net interest income | $13.5 million | $15.5 million in Q1 2016 |
| Net income; diluted EPS | $6.0 million; $0.19 | $9.4 million; $0.30 in Q1 2016 |
| Cash from operating activities | $8.5 million | $10.1 million in Q1 2016 |
| Total assets | $1.255 billion | $1.248 billion |
| Total liabilities; stockholders’ equity | $634.0 million; $621.3 million | $614.5 million; $633.7 million |
| Cash and cash equivalents | $148.4 million | $118.0 million |
| Interest-bearing debt on balance sheet | $622.2 million | $602.8 million |
Interest margin narrowed: the reported net interest spread was 3.2%, versus 3.4% in Q1 2016. Average financing cost rose to 3.6% from 3.0%, while average leverage increased to 54.4% from 50.8% of interest-earning assets. Management attributed lower interest income mainly to a smaller portfolio following loan payoffs and sales and CMBS sales; higher investment yields, including from rising LIBOR, partly offset that decline. Higher LIBOR also raised borrowing costs.
At quarter-end, loans held for investment were $1.009 billion net of a $2.8 million allowance; loans held for sale were $53.3 million. The company held two CMBS positions valued at $25.7 million. Loan weighted-average coupon and life were 6.2% and 1.7 years. Management reported no loans past due, on non-accrual, or impaired at March 31; the weighted-average loan risk rating was 2.2, compared with 2.1 at year-end.
Operating cash flow was $8.5 million, investing cash flow was $22.7 million, and financing cash flow was a use of $0.9 million; cash increased by $30.3 million. Investing inflows included loan repayments and proceeds from loan and securities sales, partly offset by $93.9 million of loan originations and purchases. Financing included $49.5 million of CLO repayments and $9.5 million of share repurchases.
Material changes and notable items
- Net income declined about 36% year over year, while interest income fell about 7% and interest expense increased about 14%.
- The loan portfolio held for investment declined from $1.047 billion at year-end to $1.009 billion; the company transferred $45.5 million of loans to held-for-sale and recognized $1.35 million of unrealized losses on those loans.
- The allowance for loan losses rose from $2.2 million to $2.8 million, reflecting a $0.6 million provision. No charge-offs were reported.
- CMBS holdings fell from six positions valued at $49.0 million at year-end to two positions valued at $25.7 million. Q1 included $24.7 million of securities-sale proceeds and a $29,000 realized loss; securities generated a $1.4 million unrealized gain in other comprehensive income.
- Common distributions totaled $16.1 million, including $10.4 million paid in cash and $5.7 million reinvested through the DRIP. Operating cash flow funded 53.0% of distributions; available cash funded 11.4% and DRIP shares 35.6%. The quarterly distribution remained at an annualized $2.0625 per share. The filing says distributions may be reduced or suspended and are not assured.
Outlook, risks, and contingencies
- Management stated it believed liquidity and capital resources were sufficient for anticipated investments, debt service, operating costs, and cash distributions. No quantified earnings or investment guidance was provided.
- The JPMorgan commercial-loan repurchase facility, with up to $300 million in advances, matured June 17, 2017. Goldman Sachs’ facility had up to $250 million in advances and an initial maturity in December 2018. The company reported compliance with debt covenants at March 31. Both facilities allow lenders to demand additional collateral if collateral values decline, potentially pressuring liquidity.
- On May 9, 2017, after quarter-end, the servicer reported a maturity default on a mezzanine loan whose borrower had been current through April. Management was evaluating next steps and preliminarily did not expect principal loss.
- Unfunded loan commitments were $73.3 million at quarter-end. A dismissed 2016 shareholder lawsuit remained subject to a plaintiff request for $750,000 in fees and expenses; no accrual was recorded, and the company estimated possible loss of $0 to $750,000.
- The company had no interest-rate hedges during the periods presented and disclosed sensitivity to LIBOR changes. Its CMBS fair values were classified as Level III and relied on limited, non-binding broker quotes. Management reported no material change in risk factors from its 2016 Form 10-K and no off-balance-sheet arrangements.
Important facts for investors to verify
- Whether the June 2017 JPMorgan repo facility was renewed, refinanced, or repaid, and the effect on liquidity and borrowing costs.
- The outcome and recovery prospects for the post-quarter mezzanine-loan maturity default, including any later impairment or reserve.
- Whether distributions remain supported by recurring cash generation, given that Q1 operating cash flow covered only 53% of declared distributions.
- The valuation and sale outcomes for held-for-sale loans and Level III CMBS, and any further realized or unrealized losses.
- How rising LIBOR, collateral-value changes, and potential repo margin calls affect net interest income and liquidity.