Franklin BSP Realty Trust, Inc. (then Realty Finance Trust, Inc.) — 2015 Form 10-K
Reporting period: Fiscal year ended December 31, 2015. The filing was signed March 11, 2016. The company was an externally managed, non-traded mortgage REIT focused on originating and acquiring commercial real estate loans and investing in CMBS. It had no direct employees. The filing’s registrant name is Realty Finance Trust, Inc.; it does not use the current company name in the supplied text.
Key financial results and position
| Metric | 2015 | 2014 |
|---|---|---|
| Interest income | $59.4 million | $15.5 million |
| Interest expense | $12.3 million | $2.2 million |
| Net interest income | $47.1 million | $13.3 million |
| Total expenses | $22.2 million | $7.8 million |
| Net income | $24.9 million | $5.4 million |
| Basic and diluted earnings per share | $1.03 | $0.75 |
| Net cash from operating activities | $25.4 million | $2.7 million |
| Distributions declared per common share | $2.06 | $2.06 |
- Net interest spread was 4.2%, up from 3.6%; weighted average asset yield was 7.4% versus 6.9%, while the average financing cost was 3.2% versus 3.3%.
- Net income was about 42% of interest income. This is a simple ratio, not a separately reported operating margin.
- At year-end, total assets were $1.282 billion, total liabilities $628.2 million and equity $654.3 million. Cash was $14.8 million and restricted cash $5.4 million.
- Reported debt included $287.2 million of collateralized loan obligations (CLOs), $206.2 million of loan repurchase agreements and $117.2 million of securities repurchase agreements.
- The portfolio’s net commercial mortgage loans were $1.124 billion; CMBS had a fair value of $130.8 million. The company reported a weighted-average loan coupon of 6.1% and weighted-average life of 2.7 years.
Changes versus the prior year
- Portfolio growth drove interest income to $59.4 million from $15.5 million. Year-end loan carrying value increased from $456.9 million to $1.124 billion, and CMBS fair value rose from $50.2 million to $130.8 million.
- Net income increased to $24.9 million from $5.4 million. Operating expenses rose to $22.2 million from $7.8 million, including higher acquisition fees, advisor fees and professional fees.
- Total borrowings increased substantially; average leverage rose to 47.8% from 29.5%. The company also completed its first CLO securitization in October 2015.
- Cash distributions were $47.1 million, compared with $12.6 million in 2014. Operations funded 54.0% of 2015 distributions; DRIP shares funded 42.8% and new stock issuance funded 3.2%. Thus, distributions exceeded both net income and operating cash flow.
Outlook, risks and notable items
- The company terminated its primary offering in January 2016. Management expected new investment activity to decrease significantly unless additional equity capital could be raised.
- Management said widening credit spreads and limited liquidity in the commercial mortgage securitization market could affect the value of CMBS holdings and the timing or execution of a further CLO.
- Liquidity and refinancing risks include short-term repurchase financing, collateral margin calls and upcoming facility maturities. The Barclays loan repo facility had been extended to March 3, 2016, with extension options remaining; the JPM loan repo facility’s initial maturity was June 18, 2016. The filing reported compliance with debt covenants at year-end.
- In the CLO, the company retained preferred equity and approximately $56.0 million of Class C notes; it would absorb first losses through the preferred equity. CLO notes had a stated maturity in 2030.
- The filing identifies significant risks from leverage, rising interest rates, real estate credit losses, illiquid shares, reliance on the external advisor, related-party fees and conflicts of interest, and continued REIT and Investment Company Act compliance.
- The company’s shares had no established public trading market. The board-approved estimated NAV was $25.27 per share, based on September 30, 2015 values; the filing cautions that NAV is not a guaranteed sale or liquidation value.
- The amended share repurchase program was effective February 28, 2016, but is limited by available DRIP proceeds and annual caps, and the board may reject requests. Of 1,584,392 shares requested for repurchase for 2015, 274,921 were approved and 1,309,471 were not fulfilled.
- RCS Capital Corporation, parent of the former dealer manager and certain service providers, filed for Chapter 11 in January 2016. The transfer agent subsequently withdrew, and the company entered into an agreement with DST Systems to provide transfer agency services.
- No material pending legal proceedings were reported. The auditor gave an unqualified opinion on the 2015 and 2014 financial statements; management concluded internal control over financial reporting was effective as of December 31, 2015.
Guidance: The filing provides no numerical earnings, distribution or portfolio guidance.
Investor verification priorities
- Confirm the company’s current legal name and how this 2015 filing relates to the present-day Franklin BSP Realty Trust.
- Reconcile distribution sustainability: $47.1 million distributed versus $25.4 million of operating cash flow and $24.9 million of net income.
- Review post-offering capital sources, loan repo renewals, collateral requirements and actual investment activity after January 2016.
- Assess CLO and repurchase-agreement exposure, including retained first-loss interests, refinancing terms and sensitivity to collateral valuation declines.
- Validate the $25.27 NAV methodology and determine how subsequent valuations compare with realizable proceeds and share repurchase pricing.
- Review the unfulfilled repurchase requests, advisor compensation and conflicts, and the operational transition following the former service providers’ financial distress.