Business context and reporting period
This unaudited Form 10-Q covers the three months ended March 31, 2018, with comparisons to the same period in 2017. The registrant named in the filing is Benefit Street Partners Realty Trust, Inc. (the company identified in the request as Franklin BSP Realty Trust). It is an externally managed mortgage REIT that originates and acquires commercial real estate loans and also operates a conduit lending business through its taxable REIT subsidiary.
Key financial metrics
| Metric | Q1 2018 | Q1 2017 or comparison |
|---|---|---|
| Interest income | $29.4 million | $18.9 million |
| Interest expense | $18.7 million | $5.4 million |
| Net interest income | $10.7 million | $13.5 million |
| Total expenses | $9.1 million | $5.2 million |
| Net income | $5.3 million; $0.17 per diluted share | $6.0 million; $0.19 per diluted share |
| Net cash from operating activities | $(32.9) million | $20.3 million |
| Net cash used in investing activities | $(224.8) million | Net cash provided: $10.9 million |
| Net cash from financing activities | $233.8 million | Net cash used: $0.8 million |
- Net interest spread contracted to 0.5% from 3.2%; average leverage rose to 67.8% from 54.4%. The weighted-average levered yield was 7.6%, versus 8.5%.
- At March 31, total assets were $1.83 billion, liabilities $1.23 billion, and stockholders’ equity $600.2 million. Cash and cash equivalents were $57.7 million; restricted cash was $10.2 million.
- Debt included $690.8 million of collateralized loan obligations (CLOs), $501.3 million of commercial-loan repurchase agreements, and $20.6 million of other commercial-loan financing. The company reported compliance with debt covenants.
- Held-for-investment commercial mortgage loans, net, increased to $1.63 billion from $1.40 billion at year-end. The portfolio comprised 82 loans; the weighted-average coupon was 6.6% and weighted-average life was 1.5 years. No loans were past due, on non-accrual, or impaired; the weighted-average risk rating remained 2.2.
Material changes versus the prior period
- Interest income increased by $10.5 million, reflecting higher average earning assets and higher LIBOR. Interest expense rose by $13.2 million, driven by higher LIBOR, greater average borrowings, and a $6.4 million non-cash charge when the company called its RFT 2015-FL1 CLO.
- Net interest income fell by $2.7 million and net income declined by $0.8 million. Operating expenses increased by $3.9 million, chiefly from administrative services and professional fees; acquisition fees and expenses decreased.
- The loan portfolio expanded through $377.7 million of held-for-investment originations and acquisitions, partially offset by $149.7 million of principal repayments. Commercial loans held for sale at fair value increased to $69.5 million from $28.5 million.
- The company called the RFT 2015-FL1 CLO and repaid its outstanding notes; commercial securities repurchase-agreement borrowings of $39.0 million were also repaid. It reported no CMBS holdings at quarter-end.
Outlook, commentary, risks, and unusual items
- Management stated it believed liquidity and capital resources were sufficient for anticipated uses, including investment funding, debt service, and distributions. It expects to use additional debt financing and said the board intends to operate at leverage of one to three times book equity; this target may change.
- No earnings or revenue guidance was provided. The ongoing monthly distribution rate was $1.44 per share annualized, but distributions are subject to available funds and may be reduced or suspended. Q1 distributions totaled approximately $11.3 million, while operating cash flow was negative; management’s distribution-source analysis included cash on hand and DRIP-issued shares.
- Key risks include borrower and collateral credit deterioration, interest-rate changes, refinancing needs, and collateral-value declines that could trigger margin calls under repo facilities. The company reported 77 variable-rate investments and disclosed that a 100-basis-point rate increase was estimated to raise interest income net of interest expense by 6.04%, assuming the balance sheet remained unchanged.
- Unfunded loan commitments were $192.0 million. The filing reported no material pending legal or regulatory proceedings and no material change to the previously disclosed risk factors. Management reported effective disclosure controls and no material quarterly change in internal control over financial reporting.
- In February, investors—including officers and adviser-related investors—committed to purchase up to approximately $97.0 million of common stock under purchase agreements; no shares had been sold under those agreements as of May 14, 2018. The filing’s disclosures describe differing investor groups and pricing terms in separate sections, which warrant review.
Important facts for investors to verify
- Reconcile the decline in net interest income and the spread compression against higher asset yields, funding costs, and increased leverage.
- Assess the company’s ability to fund $192.0 million of commitments and maintain distributions given negative Q1 operating cash flow and reliance on financing and cash on hand.
- Review repo facility maturities, extension conditions, collateral requirements, and sensitivity to margin calls; the Credit Suisse facility was due to mature in August 2018.
- Confirm the final size, investor participation, price, and liquidity-related terms of the committed stock purchases, including the differing terms described in the filing.
- Evaluate the $6.4 million non-cash CLO call charge and distinguish it from recurring earnings and cash generation; the filing’s MFFO was $4.0 million, or $10.4 million excluding that charge, and MFFO is a non-GAAP measure.