Franklin BSP Realty Trust, Inc. quarterly report, Q1 FY2020

Full document

Franklin BSP Realty Trust, Inc. (then Benefit Street Partners Realty Trust, Inc.) — Q1 2020 Form 10-Q

Reporting period: Three months ended March 31, 2020; filed May 14, 2020. The company is an externally managed commercial real estate finance REIT investing primarily in commercial mortgage loans, CMBS, conduit loans and foreclosed real estate. Amounts below are in U.S. dollars.

Financial performance and position

  • Income: Interest income was $47.9 million, up from $46.5 million a year earlier, while interest expense increased to $24.5 million from $20.4 million. Net interest income declined to $23.4 million from $26.1 million; the net interest spread was 2.0%, versus 2.9%.
  • Earnings: Total income was $25.0 million. The company recorded a net loss of $7.4 million, compared with net income of $19.9 million in Q1 2019. Net loss applicable to common stock was $11.9 million, or $0.27 per share, versus net income of $16.1 million, or $0.40 per share.
  • Key loss items: The period included a $14.6 million increase in credit-loss provision, $11.5 million of realized and unrealized derivative losses, and a $67.6 million after-tax unrealized loss on available-for-sale securities reported in other comprehensive income. The company also recorded a $4.5 million noncash charge for calling a CLO.
  • Cash flow: Operating cash flow was $37.4 million, compared with cash used of $3.8 million a year earlier. Investing cash flow was positive $3.6 million, versus negative $115.9 million; financing cash flow was positive $29.0 million, versus positive $12.0 million. Cash, cash equivalents and restricted cash totaled $179.2 million at quarter-end, including $90.2 million restricted.
  • Portfolio and credit: Net commercial mortgage loans held for investment were $2.641 billion, down from $2.762 billion at year-end. The allowance for credit losses rose to $21.7 million from $0.9 million, including the adoption adjustment for the new expected-credit-loss standard. The weighted-average portfolio risk rating worsened to 2.3 from 2.1. Two loans totaling $102.4 million were on nonaccrual status; the filing reports $57.1 million more than 120 days past due and $45.3 million 1–29 days past due.
  • Debt and leverage: Balance-sheet obligations included $1.739 billion of CLOs, $731.4 million of repurchase agreements, a $40.2 million mortgage note and $15.2 million of other loan-participation financing. Total liabilities were $2.571 billion. Average leverage was 77.1%, compared with 71.7% in Q1 2019. Management’s stated target was leverage of one to three times book equity.
  • Equity and liquidity: Total assets were $3.502 billion and stockholders’ equity was $721.3 million at March 31. The company reported $88.96 million of cash and cash equivalents, in addition to restricted cash. It had $280.1 million of unfunded loan commitments.
  • Distributions: Common distributions were declared at an annualized $1.44 per share during Q1. Total distributions were $15.8 million, funded with $12.3 million in cash and $3.6 million of DRIP shares; the filing’s distribution-coverage table shows no Q1 net income allocated as a source. The board later changed payment timing from monthly to quarterly, effective April 22, 2020; preferred dividends continue to accrue monthly.

Material changes versus comparable periods

  • Net income swung from $19.9 million to a $7.4 million loss, while net interest income fell 10.7% as interest expense grew faster than interest income.
  • Operating expenses rose to $14.8 million from $10.8 million, chiefly reflecting costs and depreciation associated with foreclosed real estate.
  • CMBS fair value declined to $441.2 million from $386.3 million at year-end despite additional purchases; the portfolio’s unrealized loss widened to $68.6 million from $1.0 million.
  • Real estate owned increased to $49.3 million from $35.3 million, including a Knoxville hotel received in foreclosure during the quarter. The transfer followed a $14.4 million loan write-off against property valued at $14.0 million, with a $0.4 million impairment loss.
  • Average interest-earning assets and interest-bearing liabilities increased to $3.209 billion and $2.473 billion, respectively, from $2.518 billion and $1.806 billion a year earlier. The weighted-average levered yield declined to 12.7% from 14.7%.

Outlook, risks and unusual items

  • COVID-19: Management said pandemic-related market disruption materially affected credit-loss estimates, property values, borrower operations and the CMBS portfolio. Hospitality and retail borrowers were particularly exposed. Management warned that future defaults, delinquencies, payment deferrals and loan amendments could reduce cash flows; it also expected near-term conduit loan activity to decline. Limited loan modifications made in April were not classified as troubled debt restructurings.
  • Liquidity and funding risk: Declining securities prices led to lender margin calls, which the company said it had met with additional cash. Lower repo advance rates also reduced liquidity and expected returns. Management warned that renewed market disruption could trigger further calls, and said market dislocation had made new CLO/CDO securitizations more difficult. Failure to satisfy calls could allow lenders to liquidate collateral.
  • Valuation and capital structure: The $18.57 estimated NAV per share was based on September 30, 2019 valuations and did not reflect COVID-19 impacts; the company cautioned investors not to rely on it. GAAP book value per share at March 31 was $16.25. A $100 million secured lending commitment with Security Benefit Life Insurance Company was available, but had no balance outstanding at quarter-end.
  • Shareholder liquidity: The company temporarily suspended its DRIP on March 26, limiting funds available for share repurchases. The share repurchase program is subject to caps and available DRIP proceeds; 11,496 requested shares from the prior semester were not fulfilled.
  • Other: The company called the outstanding notes of one CLO in January, recording the noncash financing-cost charge. It reported compliance with debt covenants and no material pending legal proceedings. No quantitative earnings or distribution guidance was provided.

Most important facts for investors to verify

  • Subsequent loan delinquencies, nonaccruals, modifications, defaults and changes in portfolio risk ratings—especially in hospitality and retail.
  • Further credit-loss allowances and whether the $21.7 million allowance adequately reflects pandemic-related borrower and collateral risk.
  • CMBS marks, realized losses, margin calls, repo advance rates and available unrestricted liquidity.
  • Cash generation relative to cash distributions, unfunded commitments, debt maturities and the company’s ability to refinance or securitize assets.
  • Availability of share repurchases after the DRIP suspension, and the timing and sustainability of common and preferred distributions.
  • Updated NAV or other valuation information: the disclosed $18.57 NAV predates the quarter’s market disruption and is not a current-quarter valuation.