Business context and reporting period
Benefit Street Partners Realty Trust, Inc. (now named Franklin BSP Realty Trust, Inc.) filed this Form 10-K for the fiscal year ended December 31, 2016. The company is an externally managed REIT focused on commercial real estate debt, with a smaller CMBS portfolio. On September 29, 2016, it replaced Realty Finance Advisor with Benefit Street Partners L.L.C. as its advisor. The primary share offering had ended in January 2016; there is no established public trading market for the shares.
Financial performance and position
Amounts below are in U.S. dollars; financial statement figures are in millions unless otherwise indicated.
| Metric | 2016 | 2015 |
|---|---|---|
| Interest income | $79.4 | $59.4 |
| Interest expense | $23.2 | $12.3 |
| Net interest income | $56.2 | $47.1 |
| Net income | $30.0 | $24.9 |
| Diluted earnings per share | $0.95 | $1.03 |
| Cash from operating activities | $35.0 | $25.4 |
| Total assets | $1,248.1 | $1,282.5 |
| Total liabilities | $614.5 | $628.2 |
| Stockholders’ equity | $633.7 | $654.3 |
- Net interest spread declined to 2.8% from 4.2%; average leverage rose to 52.2% from 47.8%. Weighted average asset yield fell to 6.4% from 7.4%, while average financing cost increased to 3.6% from 3.2%.
- At year-end, cash and cash equivalents were $118.0 million and restricted cash was $5.0 million. Debt included $278.5 million of CLOs and $324.3 million of repurchase agreements. Unfunded loan commitments totaled $79.2 million.
- The loan portfolio had 71 loans, with $1,046.6 million carrying value held for investment and $21.2 million of loans held for sale. Weighted average loan coupon was 6.1%, and weighted average life was 1.9 years. The general loan-loss allowance was $2.2 million; the company reported no past-due, non-accrual, or impaired loans.
- Cash from investing activities was $139.4 million, principally reflecting security and loan sale proceeds and loan repayments. Cash used in financing activities was $71.2 million. Year-end cash increased to $118.0 million from $14.8 million.
- Distributions were $2.06 per common share. Total distributions were $65.3 million, compared with operating cash flow of $35.0 million; 53.6% was covered by operating cash flow, 38.4% by shares issued through the DRIP, and 8.0% by cash on hand.
Material changes versus the prior year
- Interest income rose by $20.0 million, largely reflecting higher average portfolio balances. Net income increased by $5.1 million, but diluted earnings per share fell from $1.03 to $0.95 as weighted average shares increased.
- Higher average borrowings and financing costs contributed to interest expense increasing by $10.9 million. The filing cites higher LIBOR and repo extension fees; the net interest spread narrowed.
- Loans held for investment declined by $77.6 million, while CMBS fair value fell by $81.7 million, to $49.0 million. The company sold ten CMBS positions, recording a $1.9 million realized loss, and recognized $0.3 million of CMBS impairment losses.
- The company recorded a $1.3 million loan-loss provision, versus $0.3 million in 2015. The allowance increased from $0.9 million to $2.2 million.
- Operating expenses were $22.5 million versus $21.9 million. Asset management fees rose, while acquisition fees and expenses fell from $7.9 million to $0.8 million. Administrative services expenses were $4.4 million.
- Cash distributions increased from $47.1 million to $65.3 million, while operating cash flow rose from $25.4 million to $35.0 million. Distribution coverage by operating cash flow remained about 54%.
Outlook, risks, contingencies, and unusual items
- The company stated it believed available liquidity and capital resources were sufficient for anticipated needs. It provided no quantified earnings or portfolio guidance. The stated 2017 distribution rate remained equivalent to $2.0625 annually per share, but distributions may be reduced or suspended and are not assured.
- Management emphasized risks from leverage, short-term repo financing, collateral margin calls, refinancing access, interest-rate and credit-spread movements, borrower defaults, commercial property values, and the illiquidity of both investments and shares. The filing warns that distributions have historically exceeded operating cash flow and that this is not sustainable over the long term.
- The board-approved estimated NAV was $20.05 per share, based on asset and liability values as of September 30, 2016. It is not a guaranteed sale or liquidation value and may not reflect later changes. Shares are unlisted; the share repurchase program is limited, discretionary, and funded from DRIP proceeds.
- A securities-law action concerning the 2016 annual-meeting proxy was dismissed, but the plaintiff sought $750,000 in fees. The company recorded no accrual and estimated possible loss of $0 to $750,000.
- After year-end, 473,807 repurchase-requested shares were repurchased in January 2017 at an average $19.03 per share. Four CMBS securities were also sold after year-end, at or near par, according to the filing.
- The company reported no interest-rate hedging during the periods covered. Its CMBS positions moved from Level II to Level III fair-value classification in the fourth quarter of 2016 because relevant observable market data and broker quotes were limited.
Most important facts for investors to verify
- How sustainable the distribution is, given that operating cash flow covered only 53.6% of 2016 distributions and the balance relied on DRIP shares and cash on hand.
- Current collateral, maturity, covenant, and refinancing details for repo facilities and the CLO, including the potential effect of margin calls and rising financing costs.
- Updated portfolio credit quality, property and geographic concentrations, loan maturities, and loss-reserve adequacy; the 2016 filing reports no delinquent or impaired loans but a higher general allowance.
- The assumptions and valuation methods underlying the $20.05 estimated NAV, including subsequent changes in asset values and the difference between estimated NAV and realizable proceeds.
- The resolution of the $750,000 fee request in the dismissed litigation and the practical availability and limits of the share repurchase program.
- The filing reports $53.6 million of loan originations and purchases in its cash-flow statement, while its portfolio discussion says no loans were originated or acquired during 2016; clarify the classification and nature of that amount.