Franklin BSP Realty Trust, Inc. annual report, FY2019

Franklin BSP Realty Trust, Inc. — 2019 Form 10-K Summary

Filing identity: The supplied 10-K is for Benefit Street Partners Realty Trust, Inc., for the fiscal year ended December 31, 2019. The filing describes a non-traded commercial real estate finance REIT managed by Benefit Street Partners L.L.C., an affiliate of Franklin Resources (Franklin Templeton).

Business context and reporting period

The company originates, acquires and manages commercial real estate loans, invests in commercial mortgage-backed securities (CMBS), and originates fixed-rate conduit loans for sale into CMBS securitizations through its taxable REIT subsidiary. It also held real estate acquired through foreclosure or purchase. The company has no direct employees and relies on its external advisor for management and operating services. It elected REIT tax treatment beginning in 2013.

Financial and operating highlights

Metric	2019	2018
Total assets	$3.541 billion	$2.606 billion
Total liabilities	$2.515 billion	$1.727 billion
Stockholders’ equity	$816.8 million	$733.2 million
Interest income	$195.3 million	$152.3 million
Interest expense	$90.4 million	$70.0 million
Net interest income	$104.9 million	$82.3 million
Net income	$83.9 million	$52.8 million
Net income attributable to common stock	$66.9 million	$49.2 million
Basic and diluted EPS	$1.60	$1.44
Net cash from operating activities	$45.4 million	$7.1 million

• Net interest income spread was 2.7% in both years. Average interest-earning assets increased to $2.768 billion from $1.999 billion; average leverage, measured as average interest-bearing liabilities divided by average interest-earning assets, rose to 74.6% from 72.1%.
• At year-end, cash and cash equivalents were $87.2 million and restricted cash was $21.9 million. The balance sheet also included $89.3 million receivable for loan repayments, described as cash held by the CLO servicer.
• Year-end debt included $1.803 billion of CLO obligations, $646.9 million of repurchase agreements, and a $29.2 million mortgage note. The company’s stated leverage target was one to three times book equity; the board may change it.
• Commercial mortgage loans held for investment, net, were $2.762 billion; the company also held $386.3 million of CMBS and $112.6 million of loans held for sale at fair value. Multifamily represented 53.9% of held-for-investment loan par value.
• The company paid $1.44 per common share in distributions for the year. Common distributions totaled $59.7 million, including $45.8 million paid in cash and $13.9 million reinvested through the DRIP. The filing attributes 76.7% of common distributions to net income and 23.3% to DRIP share issuance.

Material changes versus 2018

• Assets grew 36%, while net income increased about 59% and EPS rose from $1.44 to $1.60. Growth in average interest-earning assets drove much of the increase in interest income; interest expense also rose as financing expanded.
• The conduit business recorded $37.8 million in realized gains on sales of held-for-sale loans, compared with $11.3 million in 2018. Loan-sale proceeds through CMBS securitizations were $1.013 billion versus $567.4 million.
• CMBS holdings increased to 21 positions with a $386.3 million fair value, from two positions valued at $26.4 million. Two positions had unrealized losses lasting more than twelve months; aggregate unrealized losses were $1.0 million.
• The company issued a new CLO, raising $639.9 million from third-party investors, and called the remaining $45.6 million of notes in a prior CLO. That call resulted in a $4.5 million non-cash charge for unamortized financing costs.
• The company acquired or took control of two real estate assets, reporting $35.3 million of real estate owned at year-end. A deed-in-lieu transfer involved a $14.9 million loan and an $8.1 million property value.
• The loan-loss allowance declined to $0.9 million from $4.8 million after $6.9 million in charge-offs. One loan with a $57.1 million unpaid principal balance was on non-accrual and more than 90 days past due, versus one $14.3 million loan a year earlier.
• Common distributions remained $1.44 per share, while cash common distributions increased. The share repurchase program bought back 741,853 shares; the company says 1,934,369 requested shares were not repurchased in the June 2019 semester because repurchases were limited to DRIP proceeds.

Outlook, risks and notable items

• Management expected debt and equity financing and cash from operations to be adequate for anticipated capital needs, and expected to continue raising capital through private placements in 2020. No earnings, portfolio-growth or distribution guidance is provided.
• The board intended to maintain a $1.44 annualized common distribution rate, but distributions are discretionary, depend on available funds and may be reduced or suspended. The filing notes that distributions in some prior periods exceeded operating cash flow.
• Common shares had no established public trading market, and the company reported no immediate plan to list them. The board-approved estimated NAV was $18.57 per share, based on September 30, 2019 valuations; it is not a guaranteed sale price and does not reflect preferred-stock conversion.
• Liquidity is constrained: share repurchases are capped, funded by DRIP proceeds, subject to board discretion and may not satisfy all requests. The SRP should not be relied on as an exit mechanism.
• Key risks include borrower defaults and property-value declines; leverage, refinancing and short-term repo margin calls; interest-rate and credit-spread movements; illiquid investments; dependence on the advisor; related-party conflicts; maintaining REIT and Investment Company Act exemptions; and competition for assets and financing. The filing also identifies COVID-19 as a potential real estate and economic risk.
• The company had $262.3 million of unfunded loan commitments, including $90.5 million due or expiring within one year. Repo facilities may require additional collateral if pledged asset values decline. The company reported compliance with debt covenants at year-end.
• Effective January 1, 2020, the company expected CECL adoption to reduce accumulated equity by approximately $7.8 million, or $0.18 per share; it did not expect a material CECL impact on available-for-sale debt securities.
• Auditors gave an unqualified opinion on the financial statements. Management concluded disclosure controls and internal control over financial reporting were effective; the auditor was not engaged to opine on internal-control effectiveness. No material pending litigation or unresolved SEC staff comments were reported.

Investor verification priorities

• Confirm the registrant’s identity and name history: this source filing is under Benefit Street Partners Realty Trust, Inc., despite the request metadata naming Franklin BSP Realty Trust, Inc.
• Assess the $57.1 million non-accrual loan, the $6.9 million in charge-offs, and the valuation and operating prospects of the foreclosed or acquired properties.
• Review CLO and repo maturities, borrowing costs, collateral eligibility, covenant terms and potential margin-call exposure; distinguish restricted and servicer-held cash from immediately available liquidity.
• Evaluate the quality and repeatability of conduit loan-sale gains and the company’s dependence on securitization markets to finance asset growth.
• Test distribution sustainability against operating cash generation, preferred dividends, debt service, unfunded commitments and the portion of distributions funded through DRIP share issuance.
• Review the assumptions underlying the September 2019 NAV, preferred-stock conversion and dilution terms, private-placement pricing, and the limited repurchase program.