Business context and reporting period
Benefit Street Partners Realty Trust, Inc. (now identified in the request as Franklin BSP Realty Trust, Inc.) filed this unaudited Form 10-Q for the quarter and nine months ended September 30, 2018. The company is an externally managed REIT focused primarily on originating and acquiring commercial real estate loans, with additional CMBS investment and conduit-lending businesses. Unless noted otherwise, amounts are in U.S. dollars.
Financial performance and position
| Metric | Q3 2018 | Q3 2017 | Nine months 2018 | Nine months 2017 |
|---|---|---|---|---|
| Interest income | $42.9 million | $22.2 million | $106.5 million | $61.9 million |
| Interest expense | $17.1 million | $8.8 million | $50.2 million | $22.0 million |
| Net interest income | $25.8 million | $13.4 million | $56.3 million | $39.9 million |
| Net income | $19.0 million | $7.0 million | $36.4 million | $19.3 million |
| Net income per common share, diluted | $0.49 | $0.22 | $1.07 | $0.61 |
| Net interest spread, as reported | 3.6% | 2.7% | 2.6% | 2.9% |
Q3 revenue and earnings increased substantially year over year, reflecting a larger loan portfolio, higher one-month LIBOR and conduit loan-sale gains. Nine-month MFFO was $35.1 million versus $20.5 million; excluding the $6.4 million non-cash charge on the February CLO call, 2018 MFFO was $41.5 million. MFFO is a non-GAAP measure and is not equivalent to net income or cash available for distributions.
At September 30, 2018, total assets were $2.39 billion, up from $1.58 billion at December 31, 2017. Held-for-investment commercial mortgage loans, net, were $2.14 billion, with a $5.0 million allowance; fair-value held-for-sale loans were $106.0 million, and CMBS were $27.0 million. Total liabilities were $1.59 billion, including $983.5 million of CLO obligations and $587.6 million of repurchase agreements. Cash and cash equivalents were $55.5 million, plus $10.6 million of restricted cash. Stockholders’ equity was $702.3 million; $95.7 million of redeemable convertible preferred stock was presented outside permanent equity.
For the first nine months, operating cash flow was negative $37.1 million and investing cash flow was negative $747.9 million, primarily reflecting loan originations and purchases. Financing cash flow was positive $759.3 million. Cash, cash equivalents and restricted cash ended the period at $66.0 million. The company reported a 70.6% average leverage ratio for the nine-month period, compared with 60.0% in 2017.
Material changes and notable items
- Held-for-investment loans grew to 100 loans from 69 at year-end 2017. The portfolio’s weighted-average risk rating improved to 2.1 from 2.2, but one $16.8 million loan was non-performing, with a $12.1 million fair value. The company recorded a $4.1 million specific reserve on that loan during the nine months.
- In April, the company issued the 2018-FL3 CLO; third-party investors purchased $488 million of notes. The company called its 2015-FL1 CLO in February and recorded $6.4 million of non-cash deferred financing cost expense.
- The company raised $96.8 million through common-stock offerings and $96.5 million through Series A preferred-stock offerings during the period. Common shares outstanding rose to 37.5 million from 31.8 million at year-end.
- The annualized common distribution rate was $1.44 per share in Q3 2018, versus $2.0625 in Q3 2017. Nine-month distributions totaled $35.0 million, including $24.4 million paid in cash and $10.6 million reinvested through the DRIP.
- After quarter-end, subsidiaries issued approximately $868.4 million of 2018-FL4 securitization notes, primarily to repay facilities, fund future investments and support general corporate purposes. The transaction is reported as a subsequent event.
Outlook, risks and contingencies
Management stated that it believed available liquidity and capital resources, expected operating cash flows, and anticipated debt and equity financing would be adequate for investment funding, debt service, expenses and distributions. The board’s stated leverage target was one to three times book equity. No quantified earnings or revenue guidance was provided. Management cautioned that distributions depend on available funds and may be reduced or suspended by the board.
Key risks include borrower defaults and property or market deterioration; rising rates and the company’s exposure to LIBOR-based assets and borrowings; and repurchase-facility margin calls if pledged collateral values decline. The company disclosed $329.5 million of unfunded loan commitments. Repo maturities and extension conditions, refinancing access, and the ability to raise capital are also relevant liquidity considerations. Management reported compliance with debt covenants and no known material pending legal or regulatory proceedings. It reported effective disclosure controls and no material change in internal control over financial reporting.
The company’s estimated September 30 NAV was $18.74 per share, based on a valuation range of $17.94 to $19.52 and a midpoint of $18.75. Management emphasized that this estimate is assumption-dependent, is not a market price or realizable sale value, and does not reflect conversion of Series A preferred stock. Subsequent to quarter-end, the advisor agreed to be acquired by Franklin Templeton, with closing expected in early 2019; the filing said the transaction was not expected to change the advisory agreement or company executive officers.
Important facts for investors to verify
- Credit quality and recovery prospects for the non-performing $16.8 million loan, and whether further reserves or impairments are needed.
- Liquidity after the $329.5 million of unfunded loan commitments, including repo collateral requirements, maturities and extension conditions.
- Whether portfolio growth and financing costs support sustainable net interest income as LIBOR and borrowing costs change.
- Distribution coverage and the impact of common and preferred equity issuance, including potential preferred-stock conversion and dilution.
- The assumptions behind the $18.74 estimated NAV and the terms, collateral performance and cash-flow priorities of CLO and securitization financings.