Franklin BSP Realty Trust, Inc. quarterly report, Q2 FY2017

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Business context and reporting period

Benefit Street Partners Realty Trust, Inc. (the filing registrant; the request metadata names Franklin BSP Realty Trust, Inc.) filed this unaudited Form 10-Q for the quarter and six months ended June 30, 2017. It is an externally managed mortgage REIT that originates and acquires commercial real estate loans and invests in commercial real estate securities. Its portfolio was primarily U.S. commercial mortgage debt.

Financial performance and position

  • Second-quarter results: Interest income was $20.8 million, interest expense $7.7 million, and net interest income $13.1 million. Net income was $6.3 million, or $0.20 per diluted share, versus $8.9 million, or $0.28 per share, in Q2 2016.
  • Six-month results: Interest income was $39.7 million and net interest income $26.6 million, compared with $40.5 million and $30.4 million, respectively, in the first half of 2016. Net income was $12.3 million, or $0.39 per diluted share, versus $18.3 million, or $0.58 per share.
  • Spread and financing costs: Q2 net interest spread was 2.8%, down from 3.1%; average financing cost rose to 4.4% from 3.3%. For the six months, the spread was 2.9% versus 3.3%, while average financing cost rose to 4.1% from 3.1%.
  • Assets and liquidity: Total assets were $1.42 billion at June 30, up from $1.25 billion at year-end 2016. Cash and cash equivalents were $133.3 million, with restricted cash of $5.5 million. Stockholders’ equity was $616.4 million, down from $633.7 million.
  • Portfolio: Loans held for investment, net, were $1.248 billion; loans held for sale were $9.4 million; and real estate securities were $15.3 million. The portfolio included 70 loans. Weighted-average loan coupon was 6.2% and weighted-average life 1.7 years. The weighted-average loan risk rating was 2.2; the company reported no past-due, non-accrual, or impaired loans.
  • Debt: Reported financing balances totaled about $793.0 million: $530.8 million in CLOs, $177.5 million in commercial-loan repo agreements, $35.6 million in other commercial-loan financing, and $49.1 million in securities repo agreements. The filing said it was compliant with debt covenants.
  • Cash flow, six months: Operating activities provided $16.1 million, investing activities used $155.7 million, and financing activities provided $154.8 million. Cash and cash equivalents increased $15.2 million to $133.3 million.
  • Distributions: The declared annualized rate during the first half was $2.0625 per share. Of $32.6 million in distributions, $21.2 million was paid in cash and $11.4 million reinvested through the DRIP. Operating cash flow covered 49.3% of first-half distributions, with the balance funded by cash on hand and DRIP shares.

Material changes versus comparable periods

  • Q2 net income fell 29% year over year and first-half net income fell 33%. Net interest income declined despite higher interest income in Q2, as interest expense increased.
  • Management attributed higher interest expense to rising one-month LIBOR and higher debt issuance-cost amortization. First-half interest expense rose $3.0 million year over year; average borrowing costs also increased.
  • Loan balances expanded: held-for-investment loans, net, rose from $1.047 billion at year-end to $1.248 billion. First-half originations and acquisitions were $396.9 million, partly offset by repayments and transfers to held-for-sale.
  • CMBS exposure fell from six positions valued at $49.0 million at year-end to one position valued at $15.3 million. The company sold $34.9 million of securities in the first half.
  • Financing mix changed materially, including issuance of a new $339.5 million CLO in late June and $36.2 million of Pacific Western Bank financing. Total liabilities rose to $805.4 million from $614.5 million at year-end.

Outlook, commentary, risks and unusual items

  • Management said it believed available liquidity and capital were sufficient for anticipated needs and expected to use additional debt financing. It described a target leverage range of 1 to 3 times book equity; the board could change that target. Charter amendments removing the existing indebtedness limitation were expected in August 2017.
  • In August 2017, after quarter-end, the board declared a lower annualized distribution of $1.44 per share, described as 7.5% of June 30 book value per share. Distribution payments remain subject to available funds and board discretion.
  • Repo lenders may demand additional collateral if pledged assets decline in value; resulting margin calls could pressure liquidity. The company also highlighted exposure to LIBOR changes: a 100-basis-point increase was estimated to increase net interest income by 8.03%, while a 25-basis-point decrease was estimated to reduce it by 2.01%, assuming the balance sheet remained unchanged and no mitigating actions were taken. No interest-rate hedging was in place.
  • Q2 included a $1.7 million realized loss on loans sold, partly offset by a $1.6 million unrealized gain on loans held for sale and a $0.2 million realized gain on securities. The six-month loan-loss provision was $0.4 million; no loans were identified as impaired.
  • A shareholder litigation fee matter was settled for $245,000 in July 2017; the amount was accrued in the June 30 financial statements. Unfunded loan commitments were $102.3 million, up from $79.2 million at year-end.
  • Related-party arrangements remain material: the advisor receives management, acquisition, and expense-reimbursement fees. First-half acquisition fees and expenses were $6.0 million, and total related-party fees and reimbursements were $12.5 million.
  • The filing reported no material change to the risk factors in the 2016 Form 10-K, no off-balance-sheet arrangements, and effective disclosure controls. It provided no specific earnings or portfolio growth guidance.

Important facts for investors to verify

  • Confirm the registrant’s identity: this 2017 filing is for Benefit Street Partners Realty Trust, Inc., while the request metadata identifies Franklin BSP Realty Trust, Inc.
  • Assess whether earnings and cash generation can support distributions, particularly after the post-quarter reduction in the annualized distribution and given first-half operating cash flow coverage of less than half of distributions.
  • Review debt terms, CLO structures, leverage targets, collateral requirements, and liquidity exposure to margin calls and rising LIBOR.
  • Evaluate portfolio credit concentration, risk-rating migration, loan-to-value metrics, and the valuation assumptions for Level III CMBS and held-for-sale loans.
  • Track the funding schedule for $102.3 million of unfunded loan commitments and the impact of related-party fees on returns.