Business context and reporting period
Benefit Street Partners Realty Trust, Inc. (now Franklin BSP Realty Trust, Inc.) filed this unaudited Form 10-Q for the quarter and six months ended June 30, 2021. The externally managed REIT primarily originates and invests in commercial real estate debt, alongside a conduit lending business and real estate investments. Comparisons below are with the same 2020 periods unless stated otherwise.
Financial performance and position
| Metric | Q2 2021 | Six months 2021 |
|---|---|---|
| Total income | $37.1 million, versus $28.9 million | $68.6 million, versus $53.9 million |
| Net interest income | $36.3 million, versus $28.1 million | $67.2 million, versus $51.5 million |
| Net income | $30.0 million, versus $7.8 million | $60.2 million, versus $0.4 million |
| Net income (loss) applicable to common stock | $23.0 million, versus $4.4 million | $46.4 million, versus a loss of $7.6 million |
| Basic and diluted EPS | $0.52, versus $0.10 | $1.05, versus a loss of $0.17 |
| Net interest spread | 4.0%, versus 3.0% | 3.8%, versus 2.5% |
Net income benefited from lower credit-loss provisions, gains on conduit loan sales and lower financing costs; reported earnings also include fair-value and derivative results. The six-month credit-loss provision was a benefit of $3.8 million, compared with a $18.6 million provision in 2020. No conventional operating margin was presented.
At June 30, assets were $3.46 billion, including $3.11 billion of commercial mortgage loans held for investment, net of allowance. The loan portfolio had 148 loans, a 5.3% weighted-average coupon and a 1.7-year weighted-average remaining life. Total liabilities were $2.40 billion. Major financing balances included $1.96 billion of CLOs, $287.5 million of commercial mortgage-loan repurchase agreements, $46.5 million of securities repurchase agreements, and $29.2 million of mortgage debt. Redeemable preferred stock totaled approximately $224.2 million.
Cash and cash equivalents were $63.3 million and restricted cash was $14.3 million. For the six months, operating cash flow was $54.2 million, investing cash outflow was $258.8 million, and financing cash inflow was $190.1 million; cash, cash equivalents and restricted cash decreased $14.5 million to $77.6 million. Average leverage, measured as average interest-bearing liabilities divided by average interest-earning assets, was 75.9% for Q2 and 74.0% for the first half.
Material changes versus comparable periods
- Q2 net interest income rose as average interest-earning assets increased, while interest expense fell, principally due to substantially lower average securities repurchase borrowings. For the first half, interest expense declined $15.6 million, reflecting lower LIBOR and lower average interest-bearing liabilities, as well as a prior-year CLO call charge.
- Commercial mortgage loans held for investment, net, increased from $2.69 billion at year-end 2020 to $3.11 billion. The portfolio expanded to 148 loans from 130, with multifamily increasing to 51.4% of par value.
- The company sold all of its CMBS holdings during the first half; none remained at June 30, 2021, versus $171.1 million of fair value at year-end 2020. The sales generated a $1.4 million realized loss for the first half; related unrealized gains were reported in other comprehensive income.
- Debt growth included a new CLO issuance in March 2021. The company issued Series D preferred stock, including a $15.0 million new investment from Security Benefit Life, alongside an exchange of Series A preferred stock.
Outlook, risks and unusual items
No earnings or portfolio guidance was provided. Management said it expected debt and equity financing and cash from operations to be adequate for anticipated capital needs, and its board intended to operate at leverage of one to three times book value of equity. This is an intended range, not a guaranteed limit. Management cited COVID-19 and its potential effects on borrowers, property values, credit-loss estimates and markets as material uncertainties.
A $57.1 million hospitality loan was more than 120 days past due and on nonaccrual status; it had a risk rating of 4 and no loan-specific allowance. The overall weighted-average loan risk rating was 2.2. Repurchase lenders can demand additional collateral if collateral values decline, creating potential liquidity pressure. The Credit Suisse commercial-loan repo facility had $93.4 million outstanding and matured August 19, 2021; the filing reported covenant compliance at June 30. Unfunded loan commitments were $390.3 million.
After quarter-end, the company entered a definitive agreement to acquire Capstead Mortgage Corporation, subject to closing conditions including Capstead stockholder approval; completion was anticipated in Q4 2021, with no assurance it would close. The transaction includes a planned NYSE listing, a one-for-ten reverse split and a stock dividend dividing existing holders’ shares between Class A and Class B common stock. The filing identifies execution, integration, capital redeployment, transaction-cost and failure-to-close risks. The common dividend was $0.275 per share for Q2, payable in July. The DRIP was temporarily suspended, with management expecting reactivation for the Q3 dividend. The share repurchase program is to terminate if the merger closes.
The company reported no material litigation outside the ordinary course, no material changes in internal control, and effective disclosure controls. Its estimated NAV of $17.88 per common share was based on a September 30, 2020 valuation and management cautioned it is not a market price or current trading value.
Investor verification points
- Review the quality and recovery prospects of the $57.1 million nonaccrual hospitality loan and the adequacy of the overall credit allowance.
- Verify the Capstead merger’s approval, closing conditions, consideration mechanics, planned recapitalization and expected integration benefits and costs.
- Assess near-term financing maturities, collateral and margin-call exposure, and the company’s capacity to fund $390.3 million of unfunded commitments while maintaining liquidity.
- Reconcile reported earnings to recurring performance, given credit-reserve releases, conduit loan-sale gains, asset sales and derivative/fair-value movements.
- Confirm dividend and DRIP developments, and note that the $17.88 NAV estimate is dated and does not represent a publicly traded share price.