Franklin BSP Realty Trust, Inc. (then Benefit Street Partners Realty Trust, Inc.) — Q3 2020 Form 10-Q
Reporting period: Three and nine months ended September 30, 2020. The company is an externally managed commercial real estate finance REIT, primarily originating and holding commercial mortgage loans, with additional CMBS, conduit lending and foreclosed real estate businesses. Figures below are in U.S. dollars; financial statement amounts are generally in millions unless stated otherwise.
Key financial metrics
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Interest income | $44.4 | $50.4 | $135.5 | $145.2 |
| Interest expense | $15.1 | $22.2 | $54.7 | $68.4 |
| Net interest income | $29.3 | $28.3 | $80.8 | $76.8 |
| Total income | $30.3 | $29.3 | $84.2 | $77.9 |
| Net income | $21.5 | $25.9 | $21.9 | $60.3 |
| Net income applicable to common stock | $16.7 | $20.5 | $10.5 | $48.4 |
| Basic and diluted EPS | $0.38 | $0.48 | $0.24 | $1.17 |
- Margins: Net interest spread was 3.4% for Q3 versus 3.0% a year earlier; for the first nine months it was 2.8% versus 2.6%. Management attributed lower interest income mainly to lower one-month LIBOR and lower interest expense to lower LIBOR on financing.
- Cash flow: Nine-month operating cash flow was $195.4 million, investing cash flow was $237.9 million, and financing cash flow was negative $437.9 million. Cash, cash equivalents and restricted cash totaled $104.5 million at September 30, 2020, versus $52.7 million a year earlier.
- Balance sheet and debt: Total assets were $3.11 billion, down from $3.54 billion at December 31, 2019; total liabilities were $2.12 billion, down from $2.51 billion. Reported borrowings comprised $1.66 billion of CLOs, $184.2 million of mortgage-loan repurchase agreements, $177.5 million of securities repurchase agreements, $40.6 million of mortgage notes and $23.0 million of other financing. The company reported compliance with debt covenants.
- Portfolio and credit: Net commercial mortgage loans held for investment were $2.60 billion, with an allowance for credit losses of $22.8 million versus $0.9 million at year-end 2019. Two loans with a combined carrying value of $69.6 million were non-accrual and more than 120 days past due. The weighted-average internal risk rating moved to 2.2 from 2.1.
- Distributions: The board declared a Q3 common dividend of $0.275 per share, equivalent to $1.10 annualized, paid in October. The filing says the board reduced the regular common dividend beginning in Q2 and changed payments from monthly to quarterly. Distribution payments are not assured.
Material changes versus comparable periods
- Q3 net income fell to $21.5 million from $25.9 million; nine-month net income fell to $21.9 million from $60.3 million. The nine-month comparison reflects a $14.9 million credit-loss provision increase, $10.1 million realized loss on CMBS sales, reduced conduit activity and other results. The company also recorded a $4.5 million non-cash charge from calling a CLO in January.
- For Q3, a $3.7 million decrease in the credit-loss provision partially offset other losses. Real estate securities recorded a $4.4 million realized loss in earnings but an $18.7 million unrealized gain in other comprehensive income; the unrealized gain reflected market recovery and reversal of losses associated with securities sold.
- Commercial mortgage loans held for investment declined from $2.76 billion at year-end 2019, reflecting principal repayments, transfers to foreclosed real estate and the allowance increase. CMBS holdings declined from 21 positions valued at $386.3 million to 9 positions valued at $169.8 million.
- The company acquired or took possession of real estate through foreclosure or negotiated collateral transfers; real estate owned was $58.1 million at quarter-end versus $35.3 million at year-end 2019. One Minneapolis property, valued at $21.4 million, was classified as held for sale.
Outlook, risks and unusual items
- COVID-19: Management said the pandemic materially affected borrowers, credit estimates, asset values and financing markets. Hospitality and retail borrowers were particularly exposed. The duration and full impact were uncertain; the filing gives no earnings or revenue guidance.
- Liquidity and financing risk: Market dislocation led to securities-related margin calls, which the company said it met, and lenders reduced advance rates. Further declines in collateral values could trigger additional margin calls or lender remedies. The company had reduced its securities portfolio, lowering—but not eliminating—mark-to-market exposure. New CLO/CDO financing was described as difficult.
- Borrower performance: The company reported limited loan modifications in Q2 and Q3, none classified as troubled debt restructurings. It had $258.6 million in unfunded loan commitments. Management warned that defaults, payment deferrals or bankruptcies could reduce cash flow and distributions.
- Share repurchases: The share repurchase program is limited by DRIP proceeds and other terms. The company did not fulfill requests for 1.68 million shares submitted for the first half of 2020; 1.99 million shares requested for the second half of 2019 were also not fulfilled.
- NAV: Subsequent to quarter-end, the board approved estimated NAV of $17.88 per share as of September 30, based on third-party valuation work. The filing cautions that this is an estimate, is not a market price or liquidation value, and does not reflect conversion of preferred stock.
- The company said it had no material litigation outside the ordinary course, no material changes to internal controls, and no off-balance-sheet arrangements. Disclosure controls were deemed effective.
Important facts for investors to verify
- Whether pandemic-related borrower distress, especially in hospitality and retail, changes non-accrual balances, risk ratings or the $22.8 million credit allowance.
- Available liquidity after distinguishing unrestricted cash from restricted cash and the $134.0 million of servicer-held payoff cash pledged to CLOs; also review margin-call and collateral terms.
- Near-term refinancing and maturity exposure, including repurchase facilities and the short-term securities repurchase transactions; note that the JPM facility maturity was extended after quarter-end.
- Coverage of the reduced dividend by recurring earnings and cash generation, and the extent to which distributions rely on cash on hand or DRIP issuance.
- Unfulfilled repurchase requests, the program’s funding limits, and how the estimated NAV and GAAP book value affect repurchase and DRIP prices.