Business context and reporting period
Benefit Street Partners Realty Trust, Inc. (the filing-era name; now Franklin BSP Realty Trust, Inc.) filed this unaudited Form 10-Q for the quarter and six months ended June 30, 2019. The externally managed REIT originates and invests in commercial real estate loans, CMBS and conduit loans intended for securitization.
On February 1, 2019, Franklin Resources and Templeton International acquired the Advisor. The filing says the transaction did not change the Advisory Agreement or the Company’s executive officers.
Financial performance and position
| Metric | Q2 2019 | Q2 2018 | Six months 2019 | Six months 2018 |
|---|---|---|---|---|
| Interest income | $48.2 million | $34.1 million | $94.7 million | $63.5 million |
| Interest expense | $25.9 million | $14.4 million | $46.2 million | $33.1 million |
| Net interest income | $22.4 million | $19.7 million | $48.5 million | $30.5 million |
| Net income | $14.5 million | $12.1 million | $34.4 million | $17.4 million |
| Net income applicable to common stock | $11.0 million | $12.1 million | $27.6 million | $17.4 million |
| Basic and diluted EPS | $0.27 | $0.38 | $0.68 | $0.55 |
- Net interest spread was 1.9% in Q2 versus 3.9% a year earlier, and 2.4% for the first half versus 2.0%. Q2 average asset yield was 7.3% and average financing cost 5.4%; the comparable 2018 figures were 8.0% and 4.1%.
- At June 30, total assets were $3.06 billion, including $2.55 billion of held-for-investment commercial mortgage loans, net of allowance. Cash and cash equivalents were $164.5 million; restricted cash was $13.7 million.
- Balance-sheet debt included $1.885 billion of CLOs, $132.9 million of loan repurchase agreements and $85.0 million of securities repurchase agreements. Total liabilities were $2.127 billion; redeemable convertible preferred stock was $160.8 million and stockholders’ equity was $771.4 million. The Company reported compliance with debt covenants.
- Six-month cash flow was $16.4 million provided by operations, $450.9 million used in investing and $408.4 million provided by financing. Cash, cash equivalents and restricted cash ended at $178.2 million.
- The common distribution rate was equivalent to $1.44 per share annually. First-half declared distributions totaled $28.7 million, of which $21.9 million was paid in cash and $6.9 million through the DRIP.
Material changes versus comparable periods
- Q2 interest income increased 41% year over year, chiefly reflecting higher average earning assets and LIBOR; average interest-earning assets rose $922.1 million. Interest expense also rose with higher LIBOR and $525.1 million more average interest-bearing liabilities.
- First-half net income nearly doubled, supported in part by conduit loan sale gains: $18.4 million versus $6.3 million in the prior-year period. Q2 conduit gains were $7.2 million versus $4.0 million.
- Q2 net income rose, but common EPS fell to $0.27 from $0.38, principally because preferred dividends increased to $3.49 million from $0.016 million and weighted-average common shares increased.
- Net held-for-investment loans increased from $2.21 billion at year-end to $2.55 billion. CMBS investments rose from $26.4 million to $133.8 million, and the allowance for loan losses increased from $4.8 million to $7.9 million.
- Debt expanded with the May issuance of the 2019-FL5 CLO; the Company issued approximately $714.8 million of notes backed by a $810.0 million mortgage-asset pool. It also called the 2017-FL1 CLO in April and recognized a $4.5 million non-cash deferred-financing-cost charge.
Outlook, risks and unusual items
- Management expects debt and equity financing and cash generated from operations to be adequate for anticipated capital needs. It expects to continue private placements in 2019 and describes a target leverage range of one to three times book equity; this target may be changed by the board. No specific earnings or portfolio guidance was provided.
- Key risks include borrower defaults and property performance, interest-rate movements, refinancing and access to capital, and collateral-value declines that could trigger margin calls under repurchase facilities. The portfolio is largely variable-rate and LIBOR-based; the filing’s sensitivity analysis estimates net interest income would decline 0.45% with a 25-basis-point rate decrease and rise 2.65% with a 50-basis-point increase.
- One loan with $16.8 million unpaid principal was more than 90 days past due and carried at $8.5 million after specific reserves; the six-month specific reserve was $2.4 million. The total portfolio allowance was $7.9 million. A separate loan had $57.1 million unpaid principal and no specific reserve.
- Unfunded loan commitments totaled $284.0 million. The filing reports no known material pending or contemplated legal or regulatory proceedings and no material change to previously disclosed risk factors.
- Fair values of $240.3 million in assets, including CMBS, conduit loans and other real estate investments, relied on Level III inputs. The Company warned that adoption of the expected-credit-loss accounting standard could increase and accelerate loan-loss provisions.
- The share repurchase program is limited by DRIP proceeds and board discretion; 1,227,747 requested shares were not fulfilled for the prior semester. The estimated $18.75 NAV per share was based on a September 30, 2018 valuation and was not a guaranteed sale value; GAAP book value was $18.49 per share at June 30.
- Subsequent to quarter-end, the Company issued $21.8 million of common stock and $31.3 million of preferred stock. Distributions are not assured and may be reduced or suspended by the board.
Most important facts for investors to verify
- Whether the loan more than 90 days past due, the separate $57.1 million loan and the growing allowance develop into further credit losses.
- Whether net interest spread and common earnings hold up as funding costs, LIBOR and portfolio leverage change.
- The terms, maturities, collateral and refinancing requirements of CLO and repurchase financing, including potential margin calls.
- Whether conduit loan sale profits and distributions are sustainable; note the distribution is partly reinvested through the DRIP.
- The valuation assumptions supporting Level III assets and the age and methodology of the stated NAV estimate.
- How outstanding equity purchase commitments, subsequent stock issuances and unfulfilled repurchase requests affect dilution and liquidity.