Franklin BSP Realty Trust, Inc. (filed as Benefit Street Partners Realty Trust, Inc.) — Q1 2019 Form 10-Q
Reporting period: Three months ended March 31, 2019; unaudited. The company is a REIT and externally managed, primarily originating, acquiring and managing commercial real estate debt, with additional CMBS investment and loan-conduit businesses. Franklin Templeton acquired the Advisor on February 1, 2019; the filing says the transaction did not change the advisory agreement or the company’s executive officers.
Financial results and position
| Metric | Q1 2019 / March 31, 2019 | Comparable period / prior year-end |
|---|---|---|
| Interest income | $46.5 million | $29.4 million in Q1 2018 |
| Net interest income | $26.1 million; net interest spread 2.9% | $10.7 million; 0.5% in Q1 2018 |
| Net income | $19.9 million; $16.1 million applicable to common stock | $5.3 million in Q1 2018 |
| Basic and diluted EPS | $0.40 | $0.17 in Q1 2018 |
| Total assets | $2.640 billion | $2.606 billion at December 31, 2018 |
| Commercial mortgage loans held for investment, net | $2.325 billion | $2.207 billion at December 31, 2018 |
| Cash and restricted cash | $96.7 million | $204.4 million at December 31, 2018 |
| Debt and financing | $1.708 billion in CLOs, repo agreements and other loan financing | $1.709 billion at December 31, 2018 |
| Net cash from operations / investing / financing | $(3.8) million / $(115.9) million / $12.0 million | $(32.9) million / $(224.8) million / $233.8 million in Q1 2018 |
Operating expenses were $10.8 million, up from $9.1 million. The allowance for loan losses increased to $7.3 million from $4.8 million. Stockholders’ equity was $751.1 million; the balance sheet also reported $160.8 million of redeemable convertible preferred stock outside permanent equity.
Material changes versus the comparable period
- Net income rose to $19.9 million from $5.3 million. The increase reflected higher net interest income as average interest-earning assets grew by $903.3 million, alongside a larger conduit-loan sale gain.
- The TRS recorded an $11.2 million realized gain on sales of fair-value loans, versus $2.3 million in Q1 2018; sale proceeds were $183.3 million versus $81.7 million. This materially contributed to reported earnings.
- Interest expense increased to $20.4 million from $18.7 million as average interest-bearing liabilities and LIBOR increased. The company attributed about $644.5 million of the increase in average liabilities to two CLOs issued in 2018.
- Commercial real estate securities increased to $66.7 million from $26.4 million at year-end 2018. The investment portfolio included 100 held-for-investment loans and three CMBS positions at quarter-end.
- Financing and capital activity included $19.4 million of common-stock issuance, $15.0 million of preferred-stock issuance and $7.2 million of common-stock repurchases. CLO repayments were $200.4 million.
Outlook, risks and notable items
- Outlook: No specific earnings or revenue guidance is provided. Management expected debt and equity financing and cash generated from operations to cover anticipated capital needs, and expected to continue raising private-placement capital in 2019. The board’s stated target leverage range was one to three times book equity, subject to change.
- Credit exposure: One loan with $16.8 million unpaid principal was more than 90 days past due; its reported fair value was $9.4 million and the company recorded a $2.4 million specific reserve during the quarter. The filing also describes a separate $11.3 million non-performing loan on which interest continued to accrue because it was considered well secured.
- Commitments and liquidity: Unfunded loan commitments totaled $296.3 million. Repo lenders may demand additional collateral if pledged assets decline in value, potentially worsening liquidity. Commercial-loan repo balances rose to $370.9 million from $149.4 million at year-end, while cash and restricted cash fell to $96.7 million.
- Interest-rate risk: Most investments and repo borrowings are LIBOR-based. The filing estimates that a 25-basis-point rate decrease would reduce net interest income by 1.68%, while increases of 50 and 100 basis points would increase it by 3.36% and 6.71%, respectively, assuming no balance-sheet changes or management action.
- Distributions: The common distribution rate remained equivalent to $1.44 per share annually. Distribution payments depend on available funds and may be reduced or suspended. Q1 distributions totaled $14.0 million, including $3.4 million reinvested through the DRIP.
- Non-GAAP and valuation: Modified funds from operations was $22.5 million, versus $4.0 million in Q1 2018; the filing says the 2018 amount included a $6.4 million non-cash CLO call charge and would have been $10.4 million excluding it. The estimated $18.75 NAV per share was based on a September 30, 2018 valuation, not a current-quarter valuation; there is no public trading market for the shares.
- The company reported compliance with debt covenants, no material pending legal or regulatory proceedings known to it, no material changes to reported risk factors, and effective disclosure controls. Management noted that interim results are not necessarily indicative of full-year results.
Key facts for investors to verify
- How much of earnings growth is repeatable net interest income versus conduit-loan sale gains, and how sale margins and volumes develop.
- The status, collateral value and reserve adequacy for the $16.8 million past-due loan and the separate $11.3 million non-performing loan.
- Liquidity available to fund $296.3 million of unfunded commitments while meeting repo margin calls, debt service and distributions.
- Changes in leverage, borrowing costs and interest-rate sensitivity, including dependence on LIBOR-based assets and funding.
- Whether distributions remain supported by recurring earnings and cash generation; Q1 operating cash flow was negative despite positive net income.
- The terms and potential dilution or senior claims associated with redeemable convertible preferred stock, and the limits on the share repurchase program.