Business context and reporting period
Benefit Street Partners Realty Trust, Inc. (the filing’s registrant name; formerly Realty Finance Trust, Inc.) filed this unaudited Form 10-Q for the quarter ended September 30, 2017. It is an externally managed mortgage REIT focused on originating, acquiring and managing commercial real estate debt, with additional CMBS and conduit-loan activity. The filing reports both the three and nine months ended September 30, 2017, compared with 2016.
Financial performance and position
| Metric | Q3 2017 | Nine months 2017 | Comparable 2016 |
|---|---|---|---|
| Interest income | $22.2 million | $61.9 million | $20.3 million and $60.8 million |
| Net interest income | $13.4 million | $39.9 million | $12.9 million and $43.3 million |
| Net income | $7.0 million | $19.3 million | $5.4 million and $23.7 million |
| Diluted earnings per share | $0.22 | $0.61 | $0.17 and $0.75 |
| Operating cash flow | Not provided as a quarterly figure in the summarized cash flow statement | $20.4 million | $27.6 million |
Q3 net interest income rose about 3% year over year, while nine-month net interest income fell about 8%. Nine-month interest income increased modestly, but interest expense rose to $22.0 million from $17.5 million. The reported net interest spread was 2.9% for the nine-month period, versus 2.8% in 2016; average leverage as a share of average interest-earning assets increased to 60.0% from 51.9%.
At September 30, total assets were $1.521 billion, liabilities $917.6 million and stockholders’ equity $603.5 million. Cash and cash equivalents were $72.3 million, restricted cash $7.8 million, and the $53.1 million loan-repayment receivable included $37.5 million held by a servicer for CLO loan payoffs. Debt included $515.5 million of CLOs, $319.4 million of commercial-loan repurchase agreements, $39.0 million of securities repurchase agreements and $30.0 million of other commercial-loan financing. The company reported compliance with debt covenants.
Commercial mortgage loans held for investment, net, increased to $1.285 billion from $1.047 billion at year-end 2016. The portfolio comprised 73 loans; the weighted-average coupon was 6.4% and weighted-average life 1.5 years. Management reported no past-due, non-accrual or impaired loans and a weighted-average risk rating of 2.2, compared with 2.1 at year-end. Allowance for loan losses was $2.0 million. The company held no CMBS at quarter-end, compared with $49.0 million at December 31, 2016.
Material changes versus the prior comparable period
- Net income increased 30% in Q3 but declined about 18% for the first nine months year over year.
- Assets expanded about 22% from year-end 2016, largely alongside loan originations and acquisitions. Nine-month investing cash outflow was $312.0 million; financing cash inflow was $245.9 million. Cash declined $45.8 million to $72.3 million.
- The company issued a new $339.5 million CLO in June 2017. CLO debt on the balance sheet rose to $515.5 million from $278.5 million at year-end; the company retains subordinated interests and bears first-loss exposure in the CLO structures.
- The company sold its remaining CMBS positions and added four conduit loans held for sale at fair value, totaling $61.0 million. The conduit segment reported a $591,000 loss for the first nine months.
- In September, aggregate investment purchases since the current advisory agreement reached $600 million, ending the 1% acquisition-fee obligation on subsequent investments. Expense reimbursements remain applicable.
Outlook, risks, contingencies and unusual items
Management said it believed liquidity and capital resources were sufficient for anticipated investment, debt-service and distribution needs, and expected to use additional debt financing. The board’s stated target was leverage of one to three times book equity, subject to change. The filing provides no earnings or revenue guidance. Management cautioned that interim results are not necessarily indicative of full-year results.
The board reduced the annualized distribution rate in August 2017 from $2.0625 to $1.44 per share. For the first nine months, total distributions were $47.7 million, including $31.3 million paid in cash and $16.3 million reinvested through the DRIP. Operating cash flow covered 42.8% of total distributions; the balance was funded by available cash and DRIP-issued shares. Distributions are not assured and may be reduced or suspended.
Key risks include collateral valuation declines and potential margin calls on repurchase facilities; refinancing and access to securitization or warehouse financing; retained first-loss exposure in CLOs; and interest-rate, credit-spread and hedging risks. The company reported $96.5 million in unfunded loan commitments. Conduit warehouse activity may expose the company to losses if planned securitizations do not close or collateral must be liquidated. The company paid $245,000 in July to settle a plaintiff’s attorneys’ fee request in a previously dismissed stockholder action; it reported no other known material pending or contemplated legal or regulatory proceedings.
The board-approved estimated NAV was $19.02 per share as of September 30, 2017, compared with GAAP book value of $19.07. The filing stresses that NAV is an estimate, is not a realizable trading or acquisition price, and should not alone guide a purchase or sale decision. Fair-value conduit loans were classified as Level III, relying on discounted-cash-flow models and significant unobservable inputs.
Important facts for investors to verify
- Whether loan growth, borrower performance and credit quality support the portfolio’s higher leverage; also review the modest deterioration in the weighted-average loan risk rating.
- How the company will refinance or otherwise manage CLO and repurchase debt, including collateral haircuts, margin-call exposure and maturity extensions.
- Whether operating cash generation can support distributions, particularly after the distribution-rate reduction and given the partial reliance on DRIP issuance and available cash.
- The valuation assumptions underlying the $19.02 estimated NAV and Level III held-for-sale loans, and the ultimate results of conduit loan sales or securitizations.
- The continuing costs and related-party terms under the external advisory agreement, including asset-management fees and expense reimbursements after acquisition fees ended on future investments.