Business context and reporting period
Unaudited Form 10-Q for the quarter and six months ended June 30, 2018. The filing issuer is Benefit Street Partners Realty Trust, Inc. (formerly Realty Finance Trust, Inc.). It is an externally managed mortgage REIT focused on commercial real estate debt, conduit lending through a taxable REIT subsidiary (TRS), and real estate securities.
Financial performance and position
| Metric | Three months ended June 30 | Six months ended June 30 |
|---|---|---|
| Interest income | $34.1 million, versus $20.8 million in 2017 | $63.5 million, versus $39.7 million |
| Net interest income | $19.7 million, versus $13.1 million | $30.5 million, versus $26.6 million |
| Net income | $12.1 million, versus $6.3 million | $17.4 million, versus $12.3 million |
| Net income per diluted share | $0.38, versus $0.20 | $0.55, versus $0.39 |
| Net interest spread | 3.9%, versus 2.8% | 2.0%, versus 2.9% |
At June 30, total assets were $2.148 billion, up from $1.584 billion at December 31, 2017. Held-for-investment commercial mortgage loans, net, were $1.908 billion, compared with $1.402 billion; held-for-sale loans measured at fair value were $102.3 million, compared with $28.5 million. The company also held $26.8 million of CMBS, with none reported at year-end.
Total liabilities were $1.518 billion and stockholders’ equity was $618.1 million; redeemable Series A preferred stock of $11.3 million is presented outside permanent equity. Balance-sheet debt included $1.173 billion of CLOs, $305.0 million of commercial-loan repurchase agreements and $10.6 million of securities repurchase agreements. Cash and cash equivalents were $39.2 million, with $9.8 million restricted cash. Separately, $48.2 million of loan-payoff cash held by a servicer was reported as a receivable.
For the first half, operating cash flow was negative $49.7 million and investing cash flow was negative $519.0 million, mainly reflecting loan originations and purchases. Financing cash flow was positive $526.1 million, primarily from borrowings. Cash, cash equivalents and restricted cash declined $42.7 million to $49.0 million.
Material changes versus the prior comparable period
- Growth in the loan portfolio and higher one-month LIBOR increased interest income. The company attributed higher interest expense to LIBOR and increased average borrowings, including CLO issuance.
- Quarterly net interest spread improved year over year, but the six-month spread narrowed as average financing cost rose to 5.3% from 4.1%, while average leverage increased to 71.6% from 56.9%.
- The TRS conduit business, formed in September 2017, contributed $2.6 million of quarterly interest income and a $4.0 million realized gain on loan sales in the quarter; the first-half realized gain was $6.3 million.
- Operating expenses rose to $9.3 million for the quarter and $18.3 million for the half year, with higher administrative-services and professional fees associated with growth and origination activity.
- The company called the RFT 2015-FL1 CLO in February and recorded $6.4 million of remaining deferred financing costs as a noncash interest expense. Management’s MFFO reconciliation excludes this charge; MFFO was $13.4 million for the quarter and $17.4 million for the half year, or $19.8 million and $23.8 million excluding the charge.
Outlook, risks and unusual items
Management stated it believes liquidity and capital resources are sufficient for anticipated investments, debt service, expenses and distributions. The board’s stated leverage target is one to three times book equity, but may be changed without shareholder approval. The company had $151.0 million of remaining committed common and preferred equity purchases at June 30. After quarter-end, it issued $27.4 million of common stock and $22.6 million of preferred stock on July 13. It also reported subsequent increases in facility commitments: Credit Suisse from $250 million to $300 million and Barclays from $75 million to $100 million.
Unfunded loan commitments totaled $244.5 million. Repurchase lenders may demand additional collateral if collateral values decline, which could pressure liquidity. Other stated risks include credit losses, interest-rate changes, financing availability and refinancing; the company reported that it was in compliance with debt covenants at June 30. Its interest-rate sensitivity analysis estimated that a 100-basis-point increase would raise net interest income by 6.14%, while a 25-basis-point decrease would reduce it by 1.54%, assuming the balance sheet remained unchanged.
One loan with $16.8 million unpaid principal and $13.7 million fair value was non-performing at June 30. The company recorded a $2.8 million asset-specific reserve on it; the total loan-loss allowance was $3.9 million, versus $1.5 million at year-end. The portfolio’s weighted-average risk rating remained 2.2. The company reported no material pending legal or regulatory proceedings and no material changes to the risk factors in its 2017 Form 10-K.
Common distributions were declared at an annualized rate of $1.44 per share, down from $2.0625 in the 2017 comparable period. First-half total distributions were $22.8 million, including $15.7 million cash and $7.1 million reinvested through the DRIP. The filing notes distributions depend on available funds and may be reduced or suspended. The company reported no subordinated performance fees in either 2018 comparable period.
Most important facts for investors to verify
- Performance and loss exposure of the non-performing loan, including the adequacy of the specific reserve and any subsequent recovery.
- Whether the $151.0 million of equity commitments closes as expected, and the dilution, redemption, conversion and liquidity-event terms of the preferred stock.
- Liquidity available after considering restricted cash, servicer-held payoff funds, $244.5 million of unfunded loan commitments and potential repo margin calls.
- Funding costs, leverage and CLO structure as borrowings expand, including the noncash $6.4 million CLO call charge and recurring financing-cost trends.
- Distribution sustainability: first-half total distributions exceeded GAAP net income, and a portion was funded through DRIP shares; cash distributions were lower than net income.
- Valuation assumptions for Level III held-for-sale loans and CMBS, and related-party transactions and expenses involving the external advisor.