Business context and reporting period
Benefit Street Partners Realty Trust, Inc. (the registrant named in this filing) filed this unaudited Form 10-Q for the quarter and nine months ended September 30, 2019. The company is an externally managed REIT focused on commercial real estate debt, with additional CMBS investments and a conduit business that originates and sells loans into securitizations. Franklin Templeton acquired the Advisor on February 1, 2019; the filing says this did not change the Advisory Agreement or the company’s executive officers. Unless stated otherwise, amounts below are in U.S. dollars.
Financial performance and condition
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Interest income | $50.4 million | $42.9 million | $145.2 million | $106.5 million |
| Net interest income | $28.3 million | $25.8 million | $76.8 million | $56.3 million |
| Total income, including REO revenue | $29.3 million | $25.8 million | $77.9 million | $56.3 million |
| Operating expenses | $15.1 million | $9.7 million | $37.0 million | $28.0 million |
| Net income | $25.9 million | $19.0 million | $60.3 million | $36.4 million |
| Net income applicable to common stock | $20.5 million | $17.3 million | $48.4 million | $35.1 million |
| Diluted EPS | $0.48 | $0.49 | $1.17 | $1.07 |
Q3 net interest spread was 3.0%, down from 3.6% a year earlier; for the nine-month period it was 2.6%, versus 2.5%. Average leverage was 76.6% in Q3 and 73.9% year to date, compared with 72.7% and 70.6%, respectively, in 2018.
At September 30, 2019, total assets were $3.19 billion, including $2.50 billion of commercial mortgage loans held for investment, $175.1 million of loans held for sale at fair value, and $232.2 million of CMBS. Total liabilities were $2.20 billion; redeemable Series A preferred stock was $192.1 million and stockholders’ equity was $798.5 million. Cash and cash equivalents were $34.1 million, with a further $18.6 million of restricted cash. The balance sheet also included $197.3 million due for loan repayments; the filing notes that $196.3 million of this was cash held by a servicer and pledged to CLOs.
Debt included $1.81 billion of CLO obligations, $111.9 million of commercial-loan repurchase agreements, and $244.3 million of securities repurchase agreements. Commercial-loan repo commitments totaled $1.275 billion, of which $111.9 million was outstanding. The company reported compliance with debt covenants. It had $260.9 million of unfunded loan commitments.
For the first nine months, operating cash flow was negative $35.8 million and investing cash flow was negative $621.9 million, principally reflecting loan originations and securities purchases, partly offset by loan repayments and loan-sale proceeds. Financing cash flow was positive $506.1 million. Cash, cash equivalents and restricted cash declined by $151.7 million to $52.7 million.
Material changes versus the prior comparable period
- Nine-month net income rose to $60.3 million from $36.4 million, while diluted EPS increased to $1.17 from $1.07. Common shares outstanding at quarter-end increased to 43.0 million from 39.3 million at year-end 2018.
- Growth in average interest-earning assets drove higher interest income, while increased average borrowings lifted interest expense. Q3 net interest spread narrowed year over year.
- Conduit loan-sale gains increased: realized gains on fair-value loans held for sale were $14.2 million in Q3 and $32.6 million for nine months, compared with $3.4 million and $9.8 million, respectively, in 2018.
- The portfolio expanded: held-for-investment loans grew to $2.50 billion from $2.21 billion at year-end 2018, and CMBS investments grew to $232.2 million from $26.4 million.
- Operating expenses increased, particularly asset-management and performance fees, administrative reimbursements, and Q3 expenses associated with newly acquired real estate owned.
Outlook, risks, contingencies and unusual items
- Management said it expected debt and equity financing and anticipated operating cash generation to be adequate for anticipated capital needs. The board’s stated target is leverage of one to three times book equity, but the board may change it. No earnings or revenue guidance was provided.
- The board maintained monthly common distributions equivalent to $1.44 per share annually. Distributions depend on available funds and may be reduced or suspended. For the first nine months, $44.1 million was distributed; the filing attributes 76.5% of distribution sources to net income and 23.5% to DRIP shares.
- Credit quality bears monitoring: one held-for-investment loan with $57.1 million of unpaid principal and carrying value had interest more than 90 days past due, with no asset-specific reserve recorded. The company also took a property through deed in lieu of foreclosure, exchanging a loan carried at $14.9 million for REO valued at $8.1 million and recording a $0.5 million additional loan-loss provision at transfer. Nine-month loan-loss provision was $2.8 million.
- Repo financing can require additional collateral if collateral values fall, potentially pressuring liquidity. The portfolio is exposed to borrower defaults, real estate conditions, interest-rate changes, and financing and refinancing risk. The company uses derivatives for economic risk management but does not apply hedge accounting.
- The company called a CLO in April 2019 and recognized $4.5 million of remaining deferred financing costs as interest expense, a non-cash charge. Management expected adoption of the new credit-loss accounting standard to increase and accelerate recognition of loan-loss provisions; the ultimate impact was still under evaluation.
- The company reported no material pending legal or regulatory proceedings and no material changes to the risk factors in its 2018 Form 10-K. It reported effective disclosure controls and no material change in internal control over financial reporting during the quarter.
- After quarter-end, the company issued $8.2 million of common stock and $5.0 million of Series C convertible preferred stock. The board set estimated September 30 NAV at $18.57 per share; the filing cautions that this is not a market price or a realizable sale value and excludes a liquidity discount and conversion of Series A preferred stock.
Important facts for investors to verify
- Whether the $57.1 million delinquent loan cures, is restructured, or requires a reserve or further loss, and how the REO property performs.
- How much of reported cash and loan-payoff proceeds is available for general liquidity, given restricted cash and CLO-pledged servicer funds.
- Whether conduit loan-sale gains and margins are repeatable, and how earnings perform excluding these gains and the CLO call charge.
- Funding and refinancing needs, repo collateral and margin-call exposure, CLO performance, and the company’s leverage relative to its stated target.
- The sustainability of distributions, reliance on DRIP issuance, and the limits on share repurchases; the filing says 1,934,369 requested shares were not fulfilled in the June 2019 semester.
- The assumptions and valuation range behind the estimated $18.57 NAV, including the filing’s stated $18.07–$19.15 range and the lack of public-market liquidity.