Business context and reporting period
Benefit Street Partners Realty Trust, Inc. filed this Form 10-K for the fiscal year ended December 31, 2018. It is an externally advised REIT focused primarily on originating and acquiring commercial real estate loans, with smaller real estate securities and conduit-lending businesses. The filing predates the company’s current Franklin BSP name: Franklin Templeton acquired the advisor on February 1, 2019, after year-end.
Financial performance and position
| Metric | 2018 | 2017 |
|---|---|---|
| Interest income | $152.3 million | $89.6 million |
| Interest expense | $70.0 million | $32.4 million |
| Net interest income | $82.3 million | $57.2 million |
| Net income | $52.8 million | $33.8 million |
| Net income applicable to common stock | $49.2 million | $33.8 million |
| Basic and diluted earnings per share | $1.44 | $1.06 |
| Cash from operating activities | $7.1 million | $8.4 million |
Fourth-quarter 2018 net interest income was $26.0 million and net income applicable to common stock was $14.1 million, or $0.37 per share. The company reported a 7.6% weighted-average yield on interest-earning assets and 4.9% average financing cost; net interest spread was 2.7%, down from 3.0% in 2017. Average leverage, measured as average interest-bearing liabilities divided by average interest-earning assets, rose to 72.1% from 62.1%.
At year-end, total assets were $2.61 billion, total liabilities $1.73 billion, and stockholders’ equity $733.2 million. Cash and cash equivalents were $191.4 million, with another $13.0 million restricted; $73.7 million of receivables for loan repayments was cash held by a servicer related to CLO loans. Commercial mortgage loans held for investment, net, were $2.21 billion. CLO liabilities were $1.51 billion and repurchase-agreement borrowings totaled $194.0 million. The company had $318.4 million in unfunded loan commitments.
Material changes versus the prior year
- Loan growth drove the expansion: held-for-investment commercial mortgage loans, net, increased to $2.21 billion from $1.40 billion; total assets rose to $2.61 billion from $1.58 billion.
- Interest income and net income increased, reflecting higher average interest-earning assets, higher one-month LIBOR, and greater conduit activity. Interest expense also rose substantially as financing balances and rates increased.
- Two CLOs were issued in 2018, generating $1.16 billion of proceeds; reported CLO obligations increased to $1.51 billion from $826.2 million. The company also called its $145 million 2015-FL1 CLO notes and recorded a $6.4 million non-cash charge for remaining deferred financing costs.
- Private placements raised approximately $270.6 million in common and Series A preferred stock. Preferred dividends reduced income applicable to common shareholders by $3.6 million.
- The annual common distribution rate declined from $1.80 per share in 2017 to $1.44 in 2018. Total 2018 common distributions were $48.5 million, comprising $34.5 million cash and $14.0 million reinvested through the DRIP.
Outlook, risks and notable items
Management said it expected debt and equity financing and anticipated operating cash generation to be adequate for expected capital needs, and expected to continue private placements in 2019. The board’s stated target is leverage of one to three times book value of equity, but it may change that target. No specific earnings or distribution guidance was provided. Distributions remain subject to available funds and may be reduced or suspended.
- Credit quality: At year-end, one $16.8 million loan was non-performing, with a reported fair value of $12.0 million and a $4.1 million specific reserve. A separate $14.3 million loan had interest past due more than 90 days; the company continued accruing interest, citing cash reserves securing the loan. The total loan-loss provision was $3.4 million, versus a $0.7 million recovery in 2017.
- Funding and interest-rate exposure: Rising LIBOR increased financing costs. Repurchase lenders may require additional collateral if loan values fall, creating liquidity pressure; short-term facilities also expose the company to refinancing risk. The filing reports compliance with debt covenants at year-end.
- Distribution sustainability and liquidity: The filing warns that distributions historically exceeded cash flow from operations and may not be sustainable. The share repurchase program is restricted, funded from DRIP proceeds, and not a dependable source of investor liquidity.
- Valuation and marketability: There is no established public trading market. The estimated NAV of $18.75 per share was based on asset and liability values as of September 30, 2018; year-end GAAP book value was $18.66 per share. Neither amount guarantees realizable sale proceeds.
- Capital structure and conflicts: Series A preferred shares have priority over common shares for distributions and liquidation, and convert into common shares upon specified liquidity events, potentially diluting common holders. The externally managed structure entails related-party fees and transactions.
- Other risks: The company relies on its advisor, must maintain REIT and Investment Company Act compliance, and faces commercial real estate credit, concentration, securitization, cyber, and market risks. Management reported effective disclosure controls and effective internal control over financial reporting; no material legal proceedings were reported.
Important facts for investors to verify
- Loan-level status, collateral values, and subsequent developments for the non-performing $16.8 million loan and the $14.3 million loan with overdue interest.
- Cash available for distributions relative to declared distributions, including the impact of DRIP-funded distributions and preferred dividends.
- CLO terms, retained subordinate interests, upcoming financing maturities, collateral triggers, and capacity to meet the $318.4 million of unfunded commitments.
- How the September 30, 2018 NAV compares with later valuations and realizable values, given the illiquid shares and limited repurchase program.
- The potential dilution and distribution priority associated with Series A preferred stock, and the continuing fees, reimbursements, and related-party arrangements under the advisory agreement.