Franklin BSP Realty Trust, Inc. - Quarter Report: 2017 September (Form 10-Q)
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One) | |
x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended September 30, 2017
OR
¨ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 |
Commission file number: 000-55188
BENEFIT STREET PARTNERS REALTY TRUST, INC.
(Exact name of registrant as specified in its charter)
Maryland | 46-1406086 | |
(State or Other Jurisdiction of Incorporation or Organization) | (I.R.S. Employer Identification No.) | |
9 West 57th Street, Suite #4920 New York, New York | 10019 | |
(Address of Principal Executive Office) | (Zip Code) | |
(212) 588-6770
(Registrant’s Telephone Number, Including Area Code)
(Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report)
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).Yes x No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of "large accelerated filer," "accelerated filer," "smaller reporting company," and "emerging growth company" in Rule 12b-2 of the Exchange Act. (check one):
Large accelerated filer o | Accelerated filer o |
Non-accelerated filer (Do not check if a smaller reporting company) x | Smaller reporting company o |
Emerging growth filer o | |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o | |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No x
The number of shares of the registrant's common stock, $0.01 par value, outstanding as of October 31, 2017 was 31,704,950.
TABLE OF CONTENTS
Page | |
PART I | |
PART II | |
i
PART I
Item 1. Consolidated Financial Statements.
BENEFIT STREET PARTNERS REALTY TRUST, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands, except for share and per share data)
September 30, 2017 | December 31, 2016 | ||||||
ASSETS | (Unaudited) | ||||||
Cash and cash equivalents | $ | 72,262 | $ | 118,048 | |||
Restricted cash | 7,754 | 5,021 | |||||
Commercial mortgage loans, held for investment, net of allowance of $1,959 and $2,181 | 1,285,106 | 1,046,556 | |||||
Commercial mortgage loans, held-for-sale | 31,180 | 21,179 | |||||
Commercial mortgage loans, held-for-sale, measured at fair value | 60,950 | — | |||||
Real estate securities, available-for-sale, at fair value | — | 49,049 | |||||
Derivative instruments, at fair value | 960 | — | |||||
Receivable for loan repayment (1) | 53,077 | 401 | |||||
Accrued interest receivable | 6,603 | 5,955 | |||||
Prepaid expenses and other assets | 3,210 | 1,916 | |||||
Total assets | $ | 1,521,102 | $ | 1,248,125 | |||
LIABILITIES AND STOCKHOLDERS' EQUITY | |||||||
Collateralized loan obligations | $ | 515,500 | $ | 278,450 | |||
Repurchase agreements - commercial mortgage loans | 319,385 | 257,664 | |||||
Other financing - commercial mortgage loans | 29,956 | — | |||||
Repurchase agreements - real estate securities | 39,035 | 66,639 | |||||
Derivative instruments, at fair value | 1,003 | — | |||||
Interest payable | 1,302 | 897 | |||||
Distributions payable | 3,766 | 5,591 | |||||
Accounts payable and accrued expenses | 3,110 | 1,170 | |||||
Due to affiliates | 4,583 | 4,064 | |||||
Total liabilities | $ | 917,640 | $ | 614,475 | |||
Commitment and Contingencies (See Note 8) | |||||||
Preferred stock, $0.01 par value, 50,000,000 authorized, none issued and outstanding as of September 30, 2017 and December 31, 2016 | — | — | |||||
Common stock, $0.01 par value, 949,999,000 shares authorized, 31,641,275 and 31,884,631 shares issued and outstanding as of September 30, 2017 and December 31, 2016, respectively | 316 | 319 | |||||
Additional paid-in capital | 700,362 | 704,500 | |||||
Accumulated other comprehensive income (loss) | — | (500 | ) | ||||
Accumulated deficit | (97,216 | ) | (70,669 | ) | |||
Total stockholders' equity | 603,462 | 633,650 | |||||
Total liabilities and stockholders' equity | $ | 1,521,102 | $ | 1,248,125 | |||
(1) Includes $37.5 million of cash held by servicer related to CLO loan payoffs as of September 30, 2017
The accompanying notes are an integral part of these unaudited consolidated financial statements.
-1
BENEFIT STREET PARTNERS REALTY TRUST, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except for share and per share data)
(Unaudited)
Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||
2017 | 2016 | 2017 | 2016 | ||||||||||||
Interest income: | |||||||||||||||
Interest income | $ | 22,195 | $ | 20,250 | $ | 61,917 | $ | 60,763 | |||||||
Less: Interest expense | 8,845 | 7,317 | 21,990 | 17,478 | |||||||||||
Net interest income | 13,350 | 12,933 | 39,927 | 43,285 | |||||||||||
Expenses: | |||||||||||||||
Asset management and subordinated performance fee | 2,299 | 1,066 | 6,952 | 7,091 | |||||||||||
Acquisition fees and acquisition expenses | 1,685 | 255 | 4,175 | 635 | |||||||||||
Administrative services expenses | 1,480 | 2,480 | 3,285 | 3,835 | |||||||||||
Professional fees | 1,348 | 2,154 | 3,320 | 4,226 | |||||||||||
Other expenses | 1,411 | 686 | 2,773 | 2,092 | |||||||||||
Total expenses | 8,223 | 6,641 | 20,505 | 17,879 | |||||||||||
Other (income)/loss: | |||||||||||||||
Loan loss (recovery)/provision | (641 | ) | (113 | ) | (222 | ) | 721 | ||||||||
Realized (gain) loss on commercial mortgage loans held-for-sale | (378 | ) | — | 1,587 | — | ||||||||||
Realized (gain) loss on sale of real estate securities | — | 1,032 | (172 | ) | 1,032 | ||||||||||
Unrealized (gain) loss on commercial mortgage loans held-for-sale | 27 | — | (220 | ) | — | ||||||||||
Unrealized (gain) loss on derivatives | (583 | ) | — | (583 | ) | — | |||||||||
Realized (gain) loss on derivatives | 18 | — | 18 | — | |||||||||||
Total other (income)/loss | $ | (1,557 | ) | $ | 919 | $ | 408 | $ | 1,753 | ||||||
Income (loss) before taxes | 6,684 | 5,373 | 19,014 | 23,653 | |||||||||||
Income tax expense (benefit) | (291 | ) | — | (291 | ) | — | |||||||||
Net income | $ | 6,975 | $ | 5,373 | $ | 19,305 | $ | 23,653 | |||||||
Basic net income per share | $ | 0.22 | $ | 0.17 | $ | 0.61 | $ | 0.75 | |||||||
Diluted net income per share | $ | 0.22 | $ | 0.17 | $ | 0.61 | $ | 0.75 | |||||||
Basic weighted average shares outstanding | 31,741,679 | 31,516,876 | 31,778,169 | 31,622,796 | |||||||||||
Diluted weighted average shares outstanding | 31,756,503 | 31,523,911 | 31,790,267 | 31,629,070 | |||||||||||
The accompanying notes are an integral part of these unaudited consolidated financial statements.
-2
BENEFIT STREET PARTNERS REALTY TRUST, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In thousands)
(Unaudited)
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
2017 | 2016 | 2017 | 2016 | |||||||||||||
Net income | $ | 6,975 | $ | 5,373 | $ | 19,305 | $ | 23,653 | ||||||||
Unrealized gain/(loss) on available-for-sale securities | (448 | ) | 2,608 | 500 | 35 | |||||||||||
Comprehensive income attributable to Benefit Street Partners Realty Trust, Inc. | $ | 6,527 | $ | 7,981 | $ | 19,805 | $ | 23,688 | ||||||||
The accompanying notes are an integral part of these unaudited consolidated financial statements.
-3
BENEFIT STREET PARTNERS REALTY TRUST, INC.
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
(In thousands, except for share data)
(Unaudited)
Common Stock | |||||||||||||||||||||||
Number of Shares | Par Value | Additional Paid-In Capital | Accumulated Other Comprehensive Income | Accumulated Deficit | Total Stockholders' Equity | ||||||||||||||||||
Balance, December 31, 2016 | 31,884,631 | $ | 319 | $ | 704,500 | $ | (500 | ) | $ | (70,669 | ) | $ | 633,650 | ||||||||||
Common stock repurchases | (1,072,708 | ) | (11 | ) | (20,536 | ) | — | — | (20,547 | ) | |||||||||||||
Common stock issued through distribution reinvestment plan | 823,368 | 8 | 16,342 | — | — | 16,350 | |||||||||||||||||
Share-based compensation | 5,984 | — | 56 | — | — | 56 | |||||||||||||||||
Net income | — | — | — | — | 19,305 | 19,305 | |||||||||||||||||
Distributions declared | — | — | — | — | (45,852 | ) | (45,852 | ) | |||||||||||||||
Other comprehensive income | — | — | — | 500 | — | 500 | |||||||||||||||||
Balance, September 30, 2017 | 31,641,275 | $ | 316 | $ | 700,362 | $ | — | $ | (97,216 | ) | $ | 603,462 | |||||||||||
The accompanying notes are an integral part of these unaudited consolidated financial statements.
-4
BENEFIT STREET PARTNERS REALTY TRUST, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
Nine Months Ended September 30, | |||||||
2017 | 2016 | ||||||
Cash flows from operating activities: | |||||||
Net income | $ | 19,305 | $ | 23,653 | |||
Adjustments to reconcile net income to net cash provided by operating activities: | |||||||
Premium amortization and (discount accretion), net | (1,617 | ) | (1,761 | ) | |||
Accretion of deferred commitment fees | (1,887 | ) | (1,169 | ) | |||
Amortization of deferred financing costs | 3,735 | 2,989 | |||||
Share-based compensation | 56 | 27 | |||||
Change in unrealized losses on commercial mortgage loans held-for-sale | (220 | ) | — | ||||
Change in unrealized losses on real estate securities | — | 1,032 | |||||
Change in unrealized losses on derivative instruments | (583 | ) | — | ||||
Realized loss on sale of commercial mortgage loans | 1,587 | — | |||||
Loan loss (recovery)/provision | (222 | ) | 721 | ||||
Deferred income taxes | (291 | ) | — | ||||
Changes in assets and liabilities: | |||||||
Accrued interest receivable | 1,240 | 1,213 | |||||
Prepaid expenses and other assets | (4,717 | ) | 49 | ||||
Accounts payable and accrued expenses | 3,084 | 1,415 | |||||
Due to affiliates | 519 | (1,529 | ) | ||||
Interest payable | 405 | 913 | |||||
Net cash provided by operating activities | $ | 20,394 | $ | 27,553 | |||
Cash flows from investing activities: | |||||||
Origination and purchase of commercial mortgage loans, held for investment | $ | (565,094 | ) | $ | (42,236 | ) | |
Origination of commercial mortgage loans, held-for-sale, measured at fair value | (60,950 | ) | — | ||||
Receivable for loan repayment | (52,676 | ) | — | ||||
Proceeds from sale of real estate securities | 34,888 | — | |||||
Principal repayments received on real estate securities | 15,000 | 2,218 | |||||
Purchase of derivative instruments | (383 | ) | — | ||||
Proceeds from sale of commercial mortgage loans, held for sale | 88,352 | 69,957 | |||||
Principal repayments received on commercial mortgage loans, held for investment | 228,814 | 48,906 | |||||
Net cash (used in)/provided by investing activities | $ | (312,049 | ) | $ | 78,845 | ||
Cash flows from financing activities: | |||||||
Common stock repurchases | $ | (20,546 | ) | $ | (19,026 | ) | |
Borrowings under collateralized loan obligations | 339,500 | — | |||||
Repayments of collateralized loan obligations | (97,470 | ) | — | ||||
Borrowings on repurchase agreements - commercial mortgage loans | 368,745 | 104,626 | |||||
Repayments of repurchase agreements - commercial mortgage loans | (307,024 | ) | (68,997 | ) | |||
Borrowings on repurchase agreements - real estate securities | 343,151 | 1,019,598 | |||||
Repayments of repurchase agreements - real estate securities | (370,754 | ) | (1,064,111 | ) | |||
Borrowings on other financing - commercial mortgage loans | 36,200 | — | |||||
Repayments on other financing - commercial mortgage loans | (5,274 | ) | — | ||||
Increase (decrease) in restricted cash related to financing activities | (2,733 | ) | 366 | ||||
Payments of deferred financing costs | (6,598 | ) | (2,836 | ) | |||
Distributions paid | (31,328 | ) | (29,952 | ) | |||
-5
BENEFIT STREET PARTNERS REALTY TRUST, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
(In thousands)
(Unaudited)
Nine Months Ended September 30, | |||||||
2017 | 2016 | ||||||
Net cash (used in) provided by financing activities | $ | 245,869 | $ | (60,332 | ) | ||
Net change in cash and cash equivalents | $ | (45,786 | ) | $ | 46,066 | ||
Cash and cash equivalents, beginning of period | 118,048 | 14,807 | |||||
Cash and cash equivalents, end of period | $ | 72,262 | $ | 60,873 | |||
Nine Months Ended September 30, | |||||||
2017 | 2016 | ||||||
Supplemental disclosures of cash flow information: | |||||||
Interest paid | $ | 17,850 | $ | 13,576 | |||
Supplemental disclosures of non-cash flow information: | |||||||
Distributions payable | $ | 3,766 | $ | — | |||
Common stock issued through distribution reinvestment plan | 16,349 | 19,099 | |||||
Loans transferred to commercial real estate loans, held-for-sale, transferred at fair value | 31,207 | — | |||||
The accompanying notes are an integral part of these unaudited consolidated financial statements.
-6
BENEFIT STREET PARTNERS REALTY TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2017
(Unaudited)
Note 1 - Organization and Business Operations
Benefit Street Partners Realty Trust, Inc. (the "Company"), formerly known as Realty Finance Trust, Inc., is a real estate finance company that primarily originates, acquires and manages a diversified portfolio of commercial real estate debt investments secured by properties located within and outside the United States. The Company was incorporated in Maryland on November 15, 2012 and commenced business operations on May 14, 2013.
The Company made a tax election to be treated as a real estate investment trust ("REIT") for U.S. federal income tax purposes commencing with its taxable year ended December 31, 2013. The Company believes that it has qualified as a REIT and intends to continue to meet the requirements for qualification and taxation as a REIT. In addition, the Company, through certain of its subsidiaries which are treated as taxable REIT subsidiaries (each a “TRS”), is indirectly subject to U.S. federal, state and local income taxes. Substantially all of the Company's business is conducted through Benefit Street Partners Realty Operating Partnership, L.P. (the “OP”), a Delaware limited partnership. The Company is the sole general partner and directly or indirectly holds all of the units of limited partner interests in the OP.
The Company has no direct employees. Benefit Street Partners L.L.C. serves as the Company's advisor (the "Advisor") pursuant to an advisory agreement executed on September 29, 2016 (the “Advisory Agreement”). The Advisor, an investment adviser registered with the U.S. Securities and Exchange Commission (“SEC”), is a credit-focused alternative asset management firm. Established in 2008, the Advisor's credit platform manages funds for institutions and high-net-worth investors across various credit funds and complementary strategies including high yield, levered loans, private / opportunistic debt, liquid credit, structured credit and commercial real estate debt. These strategies complement each other as they all leverage the sourcing, analytical, compliance, and operational capabilities that encompass the platform. The Advisor is in partnership with Providence Equity Partners L.L.C., a global private equity firm. The Advisor manages the Company's affairs on a day-to-day basis. The Advisor receives compensation and fees for services related to the investment and management of the Company's assets and the operations of the Company. Prior to September 29, 2016, Realty Finance Advisor, LLC ("Former Advisor") was the Company's advisor. The Former Advisor was controlled by AR Global Investments, LLC ("AR Global").
The Company invests in commercial real estate debt investments, which may include first mortgage loans, subordinated mortgage loans, mezzanine loans and participations in such loans. The Company also originates conduit loans which the Company intends to sell through its TRS into commercial mortgage-backed securities ("CMBS") securitization transactions at a profit.
The Company may also invest in commercial real estate securities. Real estate securities may include CMBS, senior unsecured debt of publicly traded REITs, debt or equity securities of other publicly traded real estate companies and collateralized debt obligations ("CDOs").
Realty Capital Securities, LLC, (the “Former Dealer Manager”) served as the dealer manager of the public offering of common stock conducted by the Company until January 2016. The Former Advisor and Former Dealer Manager are under common control with AR Global, the parent of American Realty Capital VIII, LLC (the "Former Sponsor"). As a result they are related parties and each of them received compensation and fees for services related to such offering, the investment and management of the Company's assets and the operations of the Company.
Note 2 - Summary of Significant Accounting Policies
Basis of Accounting
The accompanying consolidated financial statements and related footnotes are unaudited and have been prepared on the accrual basis of accounting in conformity with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial statements and pursuant to the requirements for reporting on Form 10-Q and Regulation S-X, as appropriate. Accordingly, the consolidated financial statements may not include all of the information and notes required by GAAP for annual consolidated financial statements. GAAP requires management to make estimates and assumptions that affect the reported amount of assets and liabilities as of the date of the financial statements and the reported amounts of income and expenses during the reported periods. Changes in the economic environment, financial markets and any other parameters used in determining these estimates could cause actual results to differ materially. In the opinion of management, the interim data includes all adjustments, of a normal and recurring nature, necessary for a fair statement of the results for the periods presented. The current period’s results of operations will not necessarily be indicative of results that ultimately may be achieved for the entire year or any subsequent interim periods.
-7
BENEFIT STREET PARTNERS REALTY TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2017
(Unaudited)
These financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto as of, and for the year ended December 31, 2016, which are included in the Company's Annual Report on Form 10-K filed with the SEC on March 29, 2017. There have been no significant changes to the Company's significant accounting policies during the three months ended September 30, 2017.
Certain prior-period amounts have been reclassified to conform with current presentation. In the opinion of management, all normal recurring adjustments considered necessary for a fair statement of the results of the interim periods have been included. The operating results for the three and nine months ended September 30, 2017 are not necessarily indicative of the results that may be expected for the full year.
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of the Company, the OP and its subsidiaries. All intercompany accounts and transactions have been eliminated in consolidation. In determining whether the Company has a controlling financial interest in a joint venture and the requirement to consolidate the accounts of that entity, management considers factors such as ownership interest, authority to make decisions and contractual and substantive participating rights of the other partners or members as well as whether the entity is a variable interest entity ("VIE") for which the Company is the primary beneficiary. The Company has determined the OP is a VIE of which the Company is the primary beneficiary. Substantially all of the Company's assets and liabilities are held by the OP.
The Company consolidates all entities that it controls through either majority ownership or voting rights. In addition, the Company consolidates all VIEs of which the Company is considered the primary beneficiary. VIEs are entities in which equity investors (i) do not have the characteristics of a controlling financial interest and/or (ii) do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support from other parties. The entity that consolidates a VIE is its primary beneficiary and is generally the entity with (i) the power to direct the activities that most significantly affect the VIE’s economic performance and (ii) the right to receive benefits from the VIE or the obligation to absorb losses of the VIE that could be significant to the VIE.
The accompanying consolidated financial statements include the accounts of collateralized loan obligations ("CLOs") issued and securitized by wholly owned subsidiaries of the Company. The Company has determined the CLOs are VIEs of which the Company's subsidiary is the primary beneficiary. The assets and liabilities of the CLOs are consolidated in the accompanying consolidated balance sheet in accordance with ASC 810, Consolidation.
Acquisition Fees and Acquisition Expenses
The Company incurs acquisition fees and acquisition expenses payable to the Advisor. The Company pays the Advisor an acquisition fee based on the principal amount funded by the Company to originate or acquire commercial mortgage loan investments or on the anticipated net equity funded by the Company to acquire real estate securities. Acquisition fees and acquisition expenses paid to the Company's Advisor in connection with the origination and acquisition of commercial mortgage loan investments and acquisition of real estate securities are evaluated based on the nature of the expense to determine if they should be expensed in the period incurred or capitalized and amortized over the life of the investment. The Company capitalizes certain direct costs relating to the loan origination activities and the cost is amortized over the life of the loan. The Advisor receives an acquisition fee of 1.0% of the principal amount funded by the Company to originate or acquire commercial mortgage loans (or anticipated net equity funded by the Company in the case of acquisition of real estate securities) and receives reimbursement for insourced acquisition expenses of 0.5%; provided, however, that if and when the aggregate purchase price for all investments acquired after the date of the Advisory Agreement reaches $600,000,000, the Company’s obligation to pay acquisition fees to the Advisor shall terminate. There is no such limitation on the acquisition expense reimbursements. In September 2017, the Company's aggregate purchase price for all investments acquired reached $600,000,000, and concurrently terminated the 1.0% acquisition fee payments to the Advisor for all investments subsequent to the limit being reached.
Commercial Mortgage Loans
Held-for-Investment - Commercial mortgage loans that are held for investment purposes and are anticipated to be held until maturity, are carried at cost, net of unamortized acquisition expenses, discounts or premiums and unfunded commitments. Commercial mortgage loans, held for investment purposes that are deemed to be impaired are carried at amortized cost less a specific allowance for loan losses. Interest income is recorded on the accrual basis and related discounts, premiums and acquisition expenses on investments are amortized over the life of the investment using the effective interest method. Amortization is reflected as an adjustment to interest income in the Company’s consolidated statements of operations. Guaranteed loan exit fees payable by the borrower upon maturity are accreted over the life of the investment using the effective
-8
BENEFIT STREET PARTNERS REALTY TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2017
(Unaudited)
interest method. The accretion of guaranteed loan exit fees is recognized in interest income in the Company's consolidated statements of operation.
Held-for-Sale - Commercial loans that are intended to be sold in the foreseeable future are reported as held-for-sale and are transferred at fair value and recorded at the lower of cost or fair value with changes recorded through the statements of operations. Unamortized loan origination costs for commercial mortgage loans held-for-sale that carried at the lower of cost or fair value are capitalized as part of the carrying value of the loans and recognized upon the sale of such loans. Amortization of origination costs ceases upon transfer of commercial mortgage loans to held-for-sale.
Held-for-Sale, Accounted for Under the Fair Value Option - The fair value option provides an option to elect fair value as an alternative measurement for selected financial assets, financial liabilities, unrecognized firm commitments, and written loan commitments. As of September 30, 2017, the Company has elected to measure commercial mortgage loans held-for-sale in the Company's TRS under the fair value option to better reflect those commercial mortgage loans that are part of securitization warehousing activity. These commercial mortgage loans are included in the Commercial mortgage loans, held-for-sale, measured at fair value in the consolidated balance sheet. Interest income received on Commercial mortgage loans held-for-sale is recorded on the accrual basis of accounting and is included in interest income in the consolidated statements of operations.
As of September 30, 2017, the fair value carrying amount and the contractual principal outstanding of commercial mortgage loans accounted for under the fair value option was $61.0 million. None of the Company's commercial mortgage loans accounted for under the fair value option are in default or greater than ninety days past due. For the three and nine months ended September 30, 2017, there were no gains or losses relating to the Company's commercial mortgage loans that are accounted for under the fair value option. Acquisition expenses on originating these investments are expensed when incurred. As of December 31, 2016, the Company did not account for any of its commercial mortgage loans under the fair value option.
Allowance for Loan Losses
The allowance for loan losses reflects management's estimate of loan losses inherent in the loan portfolio as of the balance sheet date. The reserve is increased through the loan loss provision on the Company's consolidated statements of operations and is decreased by charge-offs when losses are confirmed through the receipt of assets, such as cash in a pre-foreclosure sale or upon ownership control of the underlying collateral in full satisfaction of the loan upon foreclosure or when significant collection efforts have ceased. The Company uses a uniform process for determining its allowance for loan losses. The allowance for loan losses includes a general, formula-based component and an asset-specific component.
General reserves are recorded when (i) available information as of each balance sheet date indicates that it is probable a loss has occurred in the portfolio and (ii) the amount of the loss can be reasonably estimated. The Company estimates loss rates based on historical realized losses experienced in the industry, given the fact the Company has not experienced any losses, and takes into account current collateral and economic conditions affecting the probability and severity of losses when establishing the allowance for loan losses. The Company performs a comprehensive analysis of its loan portfolio and assigns risk ratings to loans that incorporate management's current judgments about their credit quality based on all known and relevant internal and external factors that may affect collectability. The Company considers, among other things, payment status, lien position, borrower financial resources and investment in collateral, collateral type, project economics and geographic location as well as national and regional economic factors. This methodology results in loans being segmented by risk classification into risk rating categories that are associated with estimated probabilities of default and principal loss. Ratings range from "1" to "5" with "1" representing the lowest risk of loss and "5" representing the highest risk of loss.
The asset-specific reserve component relates to reserves for losses on individual impaired loans. The Company considers a loan to be impaired when, based upon current information and events, it believes that it is probable that the Company will be unable to collect all amounts due under the contractual terms of the loan agreement. This assessment is made on an individual loan basis each quarter based on such factors as payment status, lien position, borrower financial resources and investment in collateral, collateral type, project economics and geographical location as well as national and regional economic factors. A reserve is established for an impaired loan when the present value of payments expected to be received, observable market prices or the estimated fair value of the collateral (for loans that are dependent on the collateral for repayment) is lower than the carrying value of that loan.
For collateral dependent impaired loans, impairment is measured using the estimated fair value of collateral less the estimated cost to sell. Valuations are performed or obtained at the time a loan is determined to be impaired and designated non-performing, and they are updated if circumstances indicate that a significant change in value has occurred. The Advisor generally will use the income approach through internally developed valuation models to estimate the fair value of the collateral for such loans. In more limited cases, the Advisor will obtain external "as is" appraisals for loan collateral, generally when third
-9
BENEFIT STREET PARTNERS REALTY TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2017
(Unaudited)
party participations exist.
A loan is also considered impaired if its terms are modified in a troubled debt restructuring ("TDR"). A TDR occurs when a concession is granted and the debtor is experiencing financial difficulties. Impairments on TDR loans are generally measured based on the present value of expected future cash flows discounted at the effective interest rate of the original loans.
The Company designates non-performing loans at such time as (i) loan payments become 90-days past due; (ii) the loan has a maturity default; or (iii) in the opinion of the Company, it is probable the Company will be unable to collect all amounts due according to the contractual terms of the loan. Income recognition will be suspended when a loan is designated non-performing and resumed only when the suspended loan becomes contractually current and performance is demonstrated to have resumed. A loan will be written off when it is no longer realizable and legally discharged.
Derivatives and Hedging Activities
In the normal course of business, the Company is exposed to the effect of interest rate changes and may undertake a strategy to limit these risks through the use of derivatives. The Company uses derivatives primarily to economically hedge against interest rates, CMBS spreads and macro market risk in order to minimize volatility. The Company may use a variety of derivative instruments that are considered conventional, such as Treasury note futures and credit derivatives on various indices including CMBX and CDX.
The Company recognizes all derivatives on the consolidated balance sheets at fair value. The Company does not designate derivatives as hedges to qualify for hedge accounting for financial reporting purposes and therefore any net payments under, or fluctuations in the fair value of these derivatives have been recognized currently in gain/(loss) on derivative instruments in the accompanying consolidated statements of operations. The Company records derivative asset and liability positions on a gross basis with any collateral posted with or received from counterparties recorded separately on the Company’s consolidated balance sheets. Certain derivatives that the Company has entered into are subject to master netting agreements with its counterparties, allowing for netting of the same transaction, in the same currency, on the same date.
Per Share Data
The Company calculates basic earnings per share by dividing net income attributable to the Company for the period by the weighted-average number of shares of common stock outstanding for that period. Diluted earnings per share reflects the potential dilution that could occur from shares issuable in connection with the restricted stock plan and if convertible shares were exercised, except when doing so would be anti-dilutive.
Reportable Segments
The Company has determined that it has three reportable segments based on how the chief operating decision maker reviews and manages the business. The three reporting segments are as follows:
• | The real estate debt business which is focused on originating, acquiring and asset managing commercial real estate debt investments, including first mortgage loans, subordinate mortgages, mezzanine loans and participations in such loans. |
• | The real estate securities business which is focused on investing in and asset managing commercial real estate securities primarily consisting of CMBS and may include unsecured REIT debt, CDO notes and other securities. |
• | The conduit operated business through the Company's TRS, which is focused on originating and subsequently selling fixed-rate commercial real estate loans into the CMBS securitization market at a profit. |
See Note 13 - Segment Reporting for further information regarding the Company's segments.
Recently Issued Accounting Pronouncements
In March 2016, the Financial Accounting Standards Board ("FASB") issued guidance which requires an entity to determine whether the nature of its promise to provide goods or services to a customer is performed in a principal or agent capacity and to recognize revenue in a gross or net manner based on its principal/agent designation. This guidance is effective for public business entities for fiscal years, and for interim periods within those fiscal years, beginning after December 15, 2017. Early adoption is permitted. The Company is currently evaluating the impact of this new guidance.
-10
BENEFIT STREET PARTNERS REALTY TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2017
(Unaudited)
In June 2016, the FASB issued guidance that changes how entities measure credit losses for financial assets carried at amortized cost. The update eliminates the requirement that a credit loss must be probable before it can be recognized and instead requires an entity to recognize the current estimate of all expected credit losses. Additionally, the update requires credit losses on available-for-sale debt securities to be carried as an allowance rather than as a direct write-down of the asset. The amendments become effective for reporting periods beginning after December 15, 2019. The amendments may be adopted early for reporting periods beginning after December 15, 2018. The Company is currently evaluating the impact of this new guidance.
In August 2016, the FASB issued guidance on how certain transactions should be classified and presented in the statement of cash flows as either operating, investing or financing activities. Among other things, the update provides specific guidance on where to classify debt prepayment and extinguishment costs, payments for contingent consideration made after a business combination and distributions received from equity method investments. The revised guidance is effective for reporting periods beginning after December 15, 2017. Early adoption is permitted. The Company is currently evaluating the impact of this new guidance.
In October 2016, the FASB issued guidance where a reporting entity will need to evaluate if it should consolidate a VIE. The amendments change the evaluation of whether a reporting entity is the primary beneficiary of a VIE by changing how a single decision maker of a VIE treats indirect interests in the entity held through related parties that are under common control with the reporting entity. The revised guidance is effective for reporting periods beginning after December 15, 2016. The Company adopted this guidance on January 1, 2017. The application of this guidance does not have a material impact on the Company’s consolidated financial statements.
In November 2016, the FASB issued guidance on the classification of restricted cash in the statement of cash flows. The amendment requires restricted cash to be included in the beginning-of-period and end-of-period total cash amounts. Therefore, transfers between cash and restricted cash will no longer be shown on the statement of cash flows. The guidance is effective for reporting periods beginning after December 15, 2017. Early adoption is permitted. We do not expect this guidance to have a material impact on the Company’s consolidated financial statements.
Note 3 - Commercial Mortgage Loans
The following table is a summary of the Company's commercial mortgage loans, held-for-investment, carrying values by class (in thousands):
September 30, 2017 | December 31, 2016 | ||||||
Senior loans | $ | 1,254,879 | $ | 901,907 | |||
Mezzanine loans | 32,186 | 136,830 | |||||
Subordinated loans | — | 10,000 | |||||
Total gross carrying value of loans | 1,287,065 | 1,048,737 | |||||
Less: Allowance for loan losses | 1,959 | 2,181 | |||||
Total commercial mortgage loans, held for investment, net | $ | 1,285,106 | $ | 1,046,556 | |||
The following table presents the activity in the Company's allowance for loan losses (in thousands):
Nine Months Ended September 30, 2017 | Nine Months Ended September 30, 2016 | ||||||
Beginning of period | $ | 2,181 | $ | 888 | |||
Provision for loan losses | (222 | ) | 721 | ||||
Charge-offs | — | — | |||||
Recoveries | — | — | |||||
Ending allowance for loan losses | $ | 1,959 | $ | 1,609 | |||
As of September 30, 2017 and December 31, 2016, the Company's total commercial mortgage loan portfolio, excluding commercial mortgage loans accounted for under the fair value option, comprised of 73 and 71 loans, respectively.
-11
BENEFIT STREET PARTNERS REALTY TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2017
(Unaudited)
September 30, 2017 | December 31, 2016 | |||||||||||||
Loan Type | Par Value | Percentage | Par Value | Percentage | ||||||||||
Office | $ | 433,110 | 32.7 | % | $ | 340,944 | 31.6 | % | ||||||
Multifamily | 441,431 | 33.4 | % | 329,203 | 30.6 | % | ||||||||
Hospitality | 126,673 | 9.6 | % | 143,582 | 13.3 | % | ||||||||
Retail | 223,315 | 16.9 | % | 154,684 | 14.4 | % | ||||||||
Mixed Use | 45,235 | 3.4 | % | 56,136 | 5.2 | % | ||||||||
Industrial | 53,208 | 4.0 | % | 52,688 | 4.9 | % | ||||||||
Total (1) | $ | 1,322,972 | 100.0 | % | $ | 1,077,237 | 100.0 | % | ||||||
(1) Excludes $60.95 million in commercial mortgage loans held-for-sale, measured at fair value in the Company's TRS segment | ||||||||||||||
As of September 30, 2017 and December 31, 2016, the Company's total commercial mortgage loans, held for sale, measured at fair value comprised of 4 and 0 loans, respectively.
September 30, 2017 | December 31, 2016 | |||||||||||||
Loan Type | Par Value | Percentage | Par Value | Percentage | ||||||||||
Industrial | $ | 11,600 | 19.1 | % | $ | — | — | % | ||||||
Mixed Use | 14,150 | 23.2 | % | — | — | % | ||||||||
Multifamily | 7,200 | 11.8 | % | — | — | % | ||||||||
Retail | 28,000 | 45.9 | % | — | — | % | ||||||||
Total | $ | 60,950 | 100.0 | % | $ | — | — | % | ||||||
Credit Characteristics
As part of the Company's process for monitoring the credit quality of its commercial mortgage loans, excluding those held-for-sale, measured at fair value, it performs a quarterly loan portfolio assessment and assigns risk ratings to each of its loans. The loans are rated on a 5-point scale as follows:
Investment Rating | Summary Description | |
1 | Investment exceeding fundamental performance expectations and/or capital gain expected. Trends and risk factors since time of investment are favorable. | |
2 | Performing consistent with expectations and a full return of principal and interest expected. Trends and risk factors are neutral to favorable. | |
3 | Performing investments requiring closer monitoring. Trends and risk factors show some deterioration. | |
4 | Underperforming investment with the potential of some interest loss but still expecting a positive return on investment. Trends and risk factors are negative. | |
5 | Underperforming investment with expected loss of interest and some principal. | |
All commercial mortgage loans, excluding commercial mortgage loans, held-for-sale, measured at fair value, are assigned an initial risk rating of 2.0. As of September 30, 2017 and December 31, 2016, the weighted average risk rating of loans was 2.2 and 2.1, respectively. As of September 30, 2017 and December 31, 2016, the Company did not have any loans that were past due on their payments, in non-accrual status or impaired.
For the nine months ended September 30, 2017 and September 30, 2016, the activity in the Company's commercial mortgage loans, held-for-investment portfolio was as follows (in thousands):
-12
BENEFIT STREET PARTNERS REALTY TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2017
(Unaudited)
Nine Months Ended September 30, 2017 | Nine Months Ended September 30, 2016 | ||||||
Balance at Beginning of Year | $ | 1,046,556 | $ | 1,124,201 | |||
Acquisitions and originations | 566,490 | 42,236 | |||||
Dispositions | (68,514 | ) | — | ||||
Principal repayments | (228,814 | ) | (48,127 | ) | |||
Discount accretion and premium amortization* | 1,604 | 1,704 | |||||
Loans transferred to commercial real estate loans, held-for-sale, at fair value | (31,207 | ) | — | ||||
Fees capitalized into carrying value of loans | (1,231 | ) | — | ||||
Provision for loan losses | 222 | (721 | ) | ||||
Balance at End of Period | $ | 1,285,106 | $ | 1,119,293 | |||
________________________
* Includes amortization of capitalized acquisition fees and expenses.
Note 4 - Real Estate Securities
The following is a summary of the Company's real estate securities, CMBS (in thousands):
Weighted Average | ||||||||||||||||
Number of Investments | Interest Rate | Maturity | Par Value | Fair Value | ||||||||||||
September 30, 2017 | — | — | % | n/a | $ | — | $ | — | ||||||||
December 31, 2016 | 6 | 5.8 | % | February 2020 | 50,000 | 49,049 | ||||||||||
The Company classified its CMBS as available-for-sale as of September 30, 2017 and December 31, 2016. These investments are reported at fair value in the consolidated balance sheets with changes in fair value recorded in "accumulated other comprehensive income or loss". The following table shows the amortized cost, unrealized gains/losses and fair value of the Company's CMBS investments as of September 30, 2017 and December 31, 2016 (in thousands):
Amortized Cost | Unrealized Gains | Unrealized Losses | Fair Value | |||||||||||||
September 30, 2017 | $ | — | $ | — | $ | — | $ | — | ||||||||
December 31, 2016 | 49,548 | — | (499 | ) | 49,049 | |||||||||||
As of September 30, 2017, the Company held no CMBS positions. As of December 31, 2016, the Company held 6 CMBS positions with an aggregate carrying value of $49.5 million, and an unrealized loss of $0.5 million, of which 2 positions had a total unrealized loss of $0.2 million for a period greater than 12 months.
The Company has recognized a gain of $0.2 million for the nine months ended September 30, 2017 and recognized a loss of approximately $1 million for the three and nine months ended September 30, 2016, recorded within the realized (gain) loss on sale of real estate securities in the consolidated statements of operations. The Company did not have any realized gains or losses during the three months ended September 30, 2017.
The following table provides information on the amounts of gains (losses) on the Company's real estate securities, CMBS, available-for-sale:
-13
BENEFIT STREET PARTNERS REALTY TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2017
(Unaudited)
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
2017 | 2016 | 2017 | 2016 | |||||||||||||
Unrealized gains (losses) available-for-sale securities | $ | (448 | ) | $ | 1,449 | $ | 19 | $ | (1,124 | ) | ||||||
Reclassification of net (gains) losses on available-for-sale securities included in net income (loss) | — | 1,159 | 481 | 1,159 | ||||||||||||
Unrealized gains (losses) available-for-sale securities, net of reclassification adjustment | $ | (448 | ) | $ | 2,608 | $ | 500 | $ | 35 | |||||||
The amounts reclassified for net (gain) loss on available-for-sale securities are included in the realized (gain) loss on sale of real estate securities in the Company's consolidated statements of operations. | ||||||||||||||||
Note 5 - Debt
Repurchase Agreements - Commercial Mortgage Loans
The Company entered into repurchase facilities with JPMorgan Chase Bank, National Association (the "JPM Repo Facility"), Goldman Sachs Bank USA (the "GS Repo Facility"), U.S. Bank National Association (the "USB Repo Facility"), Barclays Bank PLC (the "Barclays Facility") and Credit Suisse AG (the "CS Repo Facility" and together with JPM Repo Facility, GS Repo Facility, USB Repo Facility, Barclays Facility, the "Repo Facilities").
The JPM Repo Facility has a maturity date of June 12, 2019 plus a one-year extension at the Company's option and provides up to $300.0 million in advances. The GS Repo Facility has a maturity date of December 27, 2018, with a one-year extension at the Company’s option, which may be exercised upon the satisfaction of certain conditions, and provides up to $250.0 million in advances. The USB Repo Facility matures on July 15, 2020, with two one-year extensions at the option of an indirect wholly-owned subsidiary of the Company, which may be exercised upon the satisfaction of certain conditions, and provides up to $100.0 million in advances. The CS Repo Facility matures on August 30, 2018 and provides up to $250.0 million in advances. Prior to the end of each calendar quarter, the Company may request an extension of the termination date for an additional 364 days from the end of such calendar quarter subject to the satisfaction of certain conditions and approvals. The Repo Facilities are all subject to various adjustments.
Advances under the JPM Repo Facility currently accrue interest at per annum rates generally equal to the sum of (i) the applicable LIBOR index rate plus (ii) a margin of 2.40%. Borrowings under the GS Repo Facility accrue interest at per annum rates generally equal to the sum of (i) a spread over LIBOR of between 2.35% to 2.85%, depending on the attributes of the purchased asset, and (ii) 0.50%. Borrowings under the USB Repo Facility accrue interest at per annum rates generally equal to the sum of (i) the applicable LIBOR index rate plus (ii) a margin between 2.25% to 3.00%, depending on the attributes of the purchased assets. Borrowings under the CS Repo Facility accrue interest at per annum rates generally equal to the sum of (i) the applicable LIBOR index rate plus (ii) a margin of 2.50% depending on the attributes of the purchased assets.
We expect to use advances from these repo facilities to finance the acquisition or origination of eligible loans, including first mortgage loans, subordinated mortgage loans, mezzanine loans and participation interests therein.
As of September 30, 2017 and December 31, 2016, the Company had $137.5 million and $257.7 million outstanding under the JPM Repo Facility with weighted average interest rates on advances of 3.36% and 3.08%, respectively. The Company incurred $7.1 million and $3.4 million in interest expense on the JPM Repo Facility for the nine months ended September 30, 2017 and 2016, respectively, including amortization of deferred financing cost.
As of September 30, 2017, the Company had $138 million outstanding under the GS Repo Facility with a weighted average interest rate on advances of 3.58%. The Company incurred $3.2 million of interest expense on the GS Repo Facility for the nine months ended September 30, 2017, including amortization of deferred financing cost. The Company had no advances under the GS Repo Facility as of December 31, 2016. The Company did not incur any interest expense on the GS Repo Facility during the nine months ended September 30, 2016.
-14
BENEFIT STREET PARTNERS REALTY TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2017
(Unaudited)
As of September 30, 2017, the Company had $12.3 million outstanding under the USB Repo Facility with a weighted average interest rate on advances of 4.16%. The Company incurred $0.2 million of interest expense on the USB Repo Facility for the nine months ended September 30, 2017, including amortization of deferred financing cost.
As of September 30, 2017, the Company had $31.6 million outstanding under the CS Repo Facility with a weighted average interest rate on advances of 3.73%. The Company incurred $57.6 thousand of interest expense on the CS Repo Facility for the nine months ended September 30, 2017, including amortization of deferred financing cost. The Company had no advances under the CS Repo Facility as of December 31, 2016. The Company did not incur any interest expense on the CS Repo Facility during the nine months ended September 30, 2016
The Repo Facilities generally provide that in the event of a decrease in the value of the Company's collateral, the lenders can demand additional collateral. Should the value of the Company’s collateral decrease as a result of deteriorating credit quality, resulting margin calls may cause an adverse change in the Company’s liquidity position. As of September 30, 2017 and December 31, 2016, the Company is in compliance with all debt covenants.
The Company entered into the Barclays Facility on September 19, 2017 The Barclays Facility provides for a senior secured $75 million revolving line of credit and bears interest at per annum rates equal to one of two base rates plus an applicable margin. The Barclays Facility has a maturity of September 19, 2019, subject to an extension term of one year, and provides for quarterly interest-only payments, with all principal and interest outstanding being due on the maturity date. The Barclays Facility may be prepaid from time to time and at any time, in whole or in part, without premium or penalty. The Company expects to use advances on the Barclays Facility to finance the origination of eligible loans, including first lien mortgage loans, junior mortgage loans, mezzanine loans, and participation interests therein. As of September 30, 2017, the Company had no advances under the Barclays Facility.
Other financing - Commercial Mortgage Loans
The Company entered into a financing arrangement with Pacific Western Bank for term financing (“PWB Financing”) on May 17, 2017. The PWB Financing provided the Company with $36.2 million and is collateralized by a portfolio asset of $54.2 million. The PWB Financing currently accrues interest at per annum rates equal to the sum of (i) the applicable LIBOR index rate plus (ii) a margin of 4.00%. The PWB Financing initially matures on June 9, 2019, with two one-year extension options at the Company’s option. As of September 30, 2017, the Company had $30.5 million outstanding under the PWB Financing. The Company incurred $0.7 million of interest expense on the PWB Financing for the nine months ended September 30, 2017, including amortization of deferred financing cost.
Repurchase Agreements - Real Estate Securities
The Company has entered into various Master Repurchase Agreements (the "MRAs") that allow the Company to sell real estate securities while providing a fixed repurchase price for the same real estate securities in the future. The repurchase contracts on each security under an MRA generally mature in 30 to 90 days and terms are adjusted for current market rates as necessary. As of September 30, 2017, the Company pledged Tranche C of RFT 2015-FL1 under its MRAs. As of December 31, 2016, the Company pledged Tranche C of RFT 2015-FL1 and its real estate securities available for sale under its MRAs.
Below is a summary of the Company's MRAs as of September 30, 2017 and December 31, 2016 (in thousands):
Weighted Average | |||||||||||||||||
Counterparty | Amount Outstanding | Accrued Interest | Fair Value Collateral Pledged (*) | Interest Rate | Days to Maturity | ||||||||||||
As of September 30, 2017 | |||||||||||||||||
J.P. Morgan Securities LLC | $ | 39,035 | $ | 74 | $ | 55,764 | 2.97 | % | 6 | ||||||||
Total/Weighted Average | $ | 39,035 | $ | 74 | $ | 55,764 | 2.97 | % | 6 | ||||||||
As of December 31, 2016 | |||||||||||||||||
J.P. Morgan Securities LLC | $ | 59,122 | $ | 96 | $ | 92,658 | 2.55 | % | 6 | ||||||||
Citigroup Global Markets, Inc. | 3,879 | 1 | 4,850 | 2.11 | % | 26 | |||||||||||
Wells Fargo Securities, LLC | 3,638 | 4 | 4,850 | 2.05 | % | 13 | |||||||||||
Total/Weighted Average | $ | 66,639 | $ | 101 | $ | 102,358 | 2.50 | % | 8 | ||||||||
-15
BENEFIT STREET PARTNERS REALTY TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2017
(Unaudited)
* Includes $55.8 and $53.3 Tranche C of Company issued CLO held by the Company, which eliminates within the real estate securities, at fair value line of the consolidated balance sheets as of September 30, 2017 and December 31, 2016, respectively.
Collateralized Loan Obligation
On October 19, 2015, RFT 2015-FL1 Issuer, Ltd. (the “2015 Issuer”) and RFT 2015-FL1 Co-Issuer, LLC (the “2015 Co-Issuer”), both wholly owned indirect subsidiaries of the Company, entered into an indenture with the OP, as advancing agent, U.S. Bank National Association as note administrator and U.S. Bank National Association as trustee, which governs the issuance of approximately $350.2 million principal balance secured floating rate notes (the “Notes”). In addition, concurrently with the issuance of the Notes, the 2015 Issuer also issued 78,188,494 Preferred Shares, par value of $0.001 per share and with an aggregate liquidation preference and notional amount equal to $1,000 per share (the “Preferred Shares”), which were not offered as part of closing the indenture. For U.S. federal income tax purposes, the 2015 Issuer and 2015 Co-Issuer are disregarded entities.
On June 29, 2017, BSPRT 2017-FL1 Issuer, Ltd. (the “2017 Issuer”) and BSPRT 2017-FL1 Co-Issuer, LLC (the “2017 Co-Issuer”), both wholly owned indirect subsidiaries of the Company, entered into an indenture with the OP, as advancing agent, U.S. Bank National Association as note administrator and U.S. Bank National Association as trustee, which governs the issuance of approximately $339.5 million principal balance secured floating rate notes (the “Notes”). In addition, concurrently with the issuance of the Notes, the 2017 Issuer also issued 78,561,345 Preferred Shares, par value of $0.001 per share and with an aggregate liquidation preference and notional amount equal to $1,000 per share (the “Preferred Shares”), which were not offered as part of closing the indenture. For U.S. federal income tax purposes, the 2017 Issuer and 2017 Co-Issuer are disregarded entities.
As of September 30, 2017 and December 31, 2016, the CLO Notes issued in 2015 are collateralized by interests in a pool of 17 and 27 mortgage assets having a total principal balance of $321.8 million and $419.3 million, respectively, (the “Mortgage Assets”) originated by a subsidiary of the Company. The sale of the Mortgage Assets to the 2015 Issuer is governed by a Mortgage Asset Purchase Agreement dated as of October 19, 2015, between the Company and the 2015 Issuer. In connection with the securitization, the 2015 Issuer and 2015 Co-Issuer offered and sold the following classes of Notes to third parties: Class A, Class B and Class C. A wholly owned subsidiary of the Company retained approximately $56.0 million of the total $76.0 million of Class C and all of the preferred equity in the Issuer. The retained Class C and its related interest income and the preferred equity are eliminated in the Company's consolidated financial statements. The Company, as the holder of preferred equity in the 2015 Issuer, will absorb the first losses of the CLO, which may have a negative impact to the Company's result of operations. The issuance of the CLO also results in an increase in interest expense within the Consolidated Statements of Operations.
As of September 30, 2017 the CLO Notes issued in 2017 are collateralized by interests in a pool of 23 mortgage assets having a total principal balance of $418.1 million (the “Mortgage Assets”) originated by a subsidiary of the Company. The sale of the Mortgage Assets to the 2017 Issuer is governed by a Mortgage Asset Purchase Agreement dated as of June 29, 2017, between the Company and the 2017 Issuer. In connection with the securitization, the 2017 Issuer and 2017 Co-Issuer offered and sold the following classes of Notes to third parties: Class A, Class B and Class C. A wholly owned subsidiary of the Company retained all of the preferred equity in the 2017 Issuer. The Company, as the holder of preferred equity in the 2017 Issuer, will absorb the first losses of the CLO, which may have a negative impact to the Company's result of operations. The issuance of the CLO also results in an increase in interest expense within the Consolidated Statements of Operations.
-16
BENEFIT STREET PARTNERS REALTY TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2017
(Unaudited)
The following tables represent the terms of the 2015 and 2017 CLOs issued, respectively.
2015 Facility ($000s) | Par Value Issued | Par Value Outstanding (*) | Interest Rate | Maturity Date | ||||||||
As of September 30, 2017 | ||||||||||||
Tranche A | $ | 231,345 | $ | 124,690 | 1M LIBOR + 175 | 8/1/2030 | ||||||
Tranche B | 42,841 | 42,841 | 1M LIBOR + 388 | 8/1/2030 | ||||||||
Tranche C | 76,044 | 20,000 | 1M LIBOR + 525 | 8/1/2030 | ||||||||
$ | 350,230 | $ | 187,531 | |||||||||
As of December 31, 2016 | ||||||||||||
Tranche A | $ | 231,345 | $ | 222,195 | 1M LIBOR + 175 | 8/1/2030 | ||||||
Tranche B | 42,841 | 42,841 | 1M LIBOR + 388 | 8/1/2030 | ||||||||
Tranche C | 76,044 | 20,000 | 1M LIBOR + 525 | 8/1/2030 | ||||||||
$ | 350,230 | $ | 285,036 | |||||||||
________________________
* Excludes $56.0 million and $56.0 million of Tranche C of Company issued CLO held by the Company, which eliminates within the collateralized loan obligation line of the consolidated balance sheets as of September 30, 2017 and December 31, 2016, respectively.
2017 Facility ($000s) | Par Value Issued | Par Value Outstanding | Interest Rate | Maturity Date | ||||||||
As of September 30, 2017 | ||||||||||||
Tranche A | $ | 223,600 | $ | 223,600 | 1M LIBOR + 135 | 7/1/2027 | ||||||
Tranche B | 48,000 | 48,000 | 1M LIBOR + 240 | 7/1/2027 | ||||||||
Tranche C | 67,900 | 67,900 | 1M LIBOR + 425 | 7/1/2027 | ||||||||
$ | 339,500 | $ | 339,500 | |||||||||
The below table reflects the total assets and liabilities of the Company's two CLOs. The CLOs are considered VIEs and are consolidated into the Company's consolidated financial statements as of September 30, 2017 and December 31, 2016 as the Company is the primary beneficiary of the VIEs. The Company is the primary beneficiary of the CLOs because (i) the Company has the power to direct the activities that most significantly affect the VIEs' economic performance and (ii) the right to receive benefits from the VIEs or the obligation to absorb losses of the VIEs that could be significant to the VIEs.
-17
BENEFIT STREET PARTNERS REALTY TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2017
(Unaudited)
Assets ($000s) | September 30, 2017 | December 31, 2016 | ||||||
Cash (1) | $ | 37,615 | $ | 5 | ||||
Commercial mortgage loans, held for investment, net of allowance of $1,431 and $1,017 (2) | 699,928 | 417,057 | ||||||
Accrued interest receivable | 1,899 | 1,101 | ||||||
Total assets | $ | 739,442 | $ | 418,163 | ||||
Liabilities | ||||||||
Notes payable (3)(4) | $ | 571,303 | $ | 334,246 | ||||
Interest payable | 980 | 564 | ||||||
Total liabilities | $ | 572,283 | $ | 334,810 | ||||
________________________
(1) Includes $37.5 million of cash held by the servicer related to CLO loan payoffs as of September 30, 2017.
(2) The balance is presented net of allowance for loan loss of $1.4 million and $1.0 million as of September 30, 2017 and December 31, 2016, respectively.
(3) Includes $55.8 million and $55.8 million of Tranche C of Company issued CLO held by the Company, which eliminates within the Collateral loan obligations line of the consolidated balance sheets as of September 30, 2017 and December 31, 2016, respectively.
(4) The balance is presented net of deferred financing cost and discount of $11.5 million and $6.8 million as of September 30, 2017 and December 31, 2016, respectively.
Note 6 - Net Income Per Share
Basic earnings per common share (“EPS”) is computed by dividing net income of the Company by the weighted-average number of common shares outstanding. Diluted EPS is computed in the same manner as basic EPS, except the number of shares is increased to include additional common shares that would have been outstanding if potential common shares with a dilutive effect had been issued. Potential common shares consist primarily of share-based compensation awards calculated using the treasury stock method. As of September 30, 2017 and September 30, 2016, the Company did not have any anti-dilutive common shares outstanding. The following table is a summary of the basic and diluted net income per share computation for the three and nine months ended September 30, 2017 and 2016, respectively:
Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||
2017 | 2016 | 2017 | 2016 | ||||||||||||
Net income (in thousands) | $ | 6,975 | $ | 5,373 | $ | 19,305 | $ | 23,653 | |||||||
Basic weighted average shares outstanding | 31,741,679 | 31,516,876 | 31,778,169 | 31,622,796 | |||||||||||
Unvested restricted shares | 14,824 | 7,035 | 12,098 | 6,274 | |||||||||||
Diluted weighted average shares outstanding | 31,756,503 | 31,523,911 | 31,790,267 | 31,629,070 | |||||||||||
Basic net income per share | $ | 0.22 | $ | 0.17 | $ | 0.61 | $ | 0.75 | |||||||
Diluted net income per share | $ | 0.22 | $ | 0.17 | $ | 0.61 | $ | 0.75 | |||||||
Note 7 - Common Stock
As of September 30, 2017 and December 31, 2016, the Company had 31,641,275 and 31,884,631 shares of common stock outstanding, respectively, including shares issued pursuant to the Dividend Reinvestment Plan ("DRIP") and unvested restricted shares.
On December 30, 2014, the Company filed with the Maryland State Department of Assessments and Taxation articles supplementary to its charter that reclassified 1,000 authorized but unissued shares of the Company’s common stock as shares of convertible stock and set the terms of such convertible shares. The Company then issued 1,000 convertible shares to the Former Advisor for $1.00 per share. The convertible shares automatically converted to shares of common stock upon the first occurrence of certain triggering events, including the termination of the Advisory Agreement with the Former Advisor and the
-18
BENEFIT STREET PARTNERS REALTY TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2017
(Unaudited)
Company, with payouts dependent on the achievement of certain stockholder total return thresholds. Subsequent to September 30, 2016, the Company determined that as a result of the termination of the advisory agreement between the Former Advisor and the Company a triggering event had occurred. Based on the Company’s determination of the enterprise value of the Company on the date of the triggering event, the total distributions paid to the Company’s stockholders through the date of the triggering event, and the sum of the Company's stockholders’ invested capital as of the date of the triggering event, that the convertible shares converted into a number of common shares equal to zero. As a result, the convertible shares that were issued to the Former Advisor have been extinguished and no common shares were issued in connection with the conversion and the par value of the shares was transferred to Additional Paid In Capital upon extinguishment.
Distributions
In order to maintain its election to qualify as a REIT, the Company must currently distribute, at a minimum, an amount equal to 90% of its taxable income, without regard to the deduction for distributions paid and excluding net capital gains. The Company must distribute 100% of its taxable income (including net capital gains) to avoid paying corporate U.S. federal income taxes.
On May 13, 2013, the Company's board of directors authorized and declared a distribution calculated daily at a rate of $0.00565068493 per day, which is equivalent to $2.0625 per annum, per share of common stock. In March 2016, the Company's board of directors ratified the existing distribution amount equivalent to $2.0625 per annum for calendar year 2016. On November 10, 2016 the Company’s board of directors changed the DRIP offer price to $20.05, which is equal to the estimated per-share NAV as of September 30, 2016 approved by the board of directors. In August 2017, the Company’s board of directors authorized and declared a distribution calculated daily at a rate of $0.00394521 per day, which is equivalent to $1.44 per annum, per share of common stock. The price change was applied to the reinvestment of distributions commencing with the October 2016 distributions. On May 10, 2017, the Company’s board of directors changed the methodology used to determine the DRIP offer price to be the lesser of (i) the Company’s most recent estimated per-share NAV, as approved by the Company’s board of directors from time to time, and (ii) the Company’s book value per share, computed in accordance with GAAP. Based on this new methodology, the DRIP offer price for May 2017, June 2017 and July 2017 was $19.62 per share, which was the GAAP book value per share as of March 31, 2017. The DRIP offer price for September 2017, October 2017 and November 2017 was $19.29 per share, which was the GAAP book value per share as of June 30, 2017. Starting December 2017 the DRIP offer price will be $19.02 per share, which is the Company's estimated per share NAV as of September 30, 2017.
The Company's distributions are payable by the fifth day following each month end to stockholders of record at the close of business each day during the prior month. Distribution payments are dependent on the availability of funds. The Company's board of directors may reduce the amount of distributions paid or suspend distribution payments at any time, and therefore, distributions payments are not assured. The Company distributed $47.6 million during the nine months ended September 30, 2017, comprised of $31.3 million in cash and $16.3 million in shares of common stock issued under the DRIP. The Company distributed $49.0 million during the nine months ended September 30, 2016, comprised of $30.0 million in cash and $19.1 million in shares of common stock issued under the DRIP.
Share Repurchase Program
The Company's board of directors unanimously approved an amended and restated share repurchase program (the “SRP”), which became effective on February 28, 2016. The SRP enables stockholders to sell their shares to the Company. Subject to certain conditions, stockholders that purchased shares of the Company's common stock or received their shares from us (directly or indirectly) through one or more non-cash transactions and have held their shares for a period of at least one year may request that the Company repurchase their shares of common stock so long as the repurchase otherwise complies with the provisions of Maryland law. Repurchase requests made following the death or qualifying disability of a stockholder will not be subject to any minimum holding period.
On August 10, 2017, the Company's board of directors amended the SRP to provide that the repurchase price per share for requests will be equal to the lesser of (i) the Company’s most recent estimated per-share NAV, as approved by the Company’s board of directors from time to time, and (ii) the Company’s book value per share, computed in accordance with GAAP, multiplied by a percentage equal to (i) 92.5%, if the person seeking repurchase has held his or her shares for a period greater than one year and less than two years; (ii) 95%, if the person seeking repurchase has held his or her shares for a period greater than two years and less than three years; (iii) 97.5%, if the person seeking repurchase has held his or her shares for a period greater than three years and less than four years; or (iv) 100%, if the person seeking repurchase has held his or her shares for a period greater than four years or in the case of requests for death or qualifying disability.
-19
BENEFIT STREET PARTNERS REALTY TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2017
(Unaudited)
The Company’s most recent estimated per-share NAV is $19.02 and the Company’s GAAP book value per share as of September 30, 2017 is $19.07. These amendments will begin to apply to repurchases made pursuant to the SRP for the fiscal semester ended December 31, 2017.
Repurchase requests related to death or a qualifying disability must satisfy certain conditions, each of which are assessed by and at the sole discretion of the Company, including the following conditions. In the case of death, the shareholder must be a natural person (or a revocable grantor trust) and the Company must receive a written notice from the estate of the shareholder, the recipient of the shares through bequest or inheritance, or the trustee in the case of a revocable grantor trust. In the case of a “qualifying disability”, the shareholder must be a natural person (or a revocable grantor trust) and the Company must receive a written notice from the shareholder, or the trustee in the case of a revocable grantor trust, that the condition was not pre-existing on the date the shares were acquired. In order for a disability to be considered a “qualifying disability”, the shareholder must receive and provide evidence (the shareholder application and the notice of final determination) of disability based upon a physical or mental condition or impairment made by a government agency responsible for reviewing and determining disability retirement benefits (e.g. the Social Security Administration).
Repurchases pursuant to the SRP, when requested, generally will be made semiannually (each six-month period ending June 30 or December 31, a “fiscal semester”). Repurchases for any fiscal semester will be limited to a maximum of 2.5% of the weighted average number of shares of common stock outstanding during the previous fiscal year, with a maximum for any fiscal year of 5.0% of the weighted average number of shares of common stock outstanding during the previous fiscal year. Funding for repurchases pursuant to the SRP for any given fiscal semester will be limited to proceeds received during that same fiscal semester through the issuance of common stock pursuant to any DRIP in effect from time to time, provided that the Company's board of directors has the power, in its sole discretion, to determine the amount of shares repurchased during any fiscal semester as well as the amount of funds to be used for that purpose. Any repurchase requests received during such fiscal semester will be paid at the price, computed as described above on the last day of such fiscal semester. Due to these limitations, the Company cannot guarantee that the Company will be able to accommodate all repurchase requests made during any fiscal semester or fiscal year. However, a stockholder may withdraw its request at any time or ask that the Company honors the request when funds are available. Pending repurchase requests will be honored on a pro rata basis. The Company will generally pay repurchase proceeds, less any applicable tax or other withholding required by law, by the 31st day following the end of the fiscal semester during which the repurchase request was made.
When a stockholder requests redemption and the redemption is approved, the Company will reclassify such obligation from equity to a liability based on the settlement value of the obligation. Shares repurchased under the SRP will have the status of authorized but unissued shares.
The following table reflects the number of shares repurchased under the SRP cumulatively through September 30, 2017:
Number of Requests | Number of Shares Repurchased | Average Price per Share | ||||||||
Cumulative as of December 31, 2016 | 985 | 918,683 | $ | 23.94 | ||||||
January 1 - March 31, 2017 | 502 | 496,678 | 19.04 | |||||||
April 1 - June 30, 2017 | 2 | 327 | 20.08 | |||||||
July 1 - September 30, 2017 | 636 | 575,703 | 19.24 | |||||||
Cumulative as of September 30, 2017 | 2,125 | 1,991,391 | $ | 21.37 | ||||||
Note 8 - Commitments and Contingencies
Unfunded Commitments for Commercial Mortgage Loans
As of September 30, 2017 and December 31, 2016, the Company had the below unfunded commitments to the Company's borrowers.
-20
BENEFIT STREET PARTNERS REALTY TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2017
(Unaudited)
Funding Expiration | September 30, 2017 | December 31, 2016 | ||||||
2016 | $ | — | $ | — | ||||
2017 | 4,766 | 7,794 | ||||||
2018 | 44,180 | 62,368 | ||||||
2019 | 27,705 | 9,072 | ||||||
2020 | 19,856 | — | ||||||
Total | $ | 96,507 | $ | 79,234 | ||||
Litigation and Regulatory Matters
In the ordinary course of business, the Company may become subject to litigation, claims and regulatory matters. Except as noted below, the Company has no knowledge of material legal or regulatory proceedings pending or known to be contemplated against the Company at this time. On June 6, 2016, an action was filed against the Company and two of its directors in the United States District Court for the Southern District of New York and styled Rurode v. Realty Finance Trust, Inc., et. al., No. 1:16-cv-04553. The plaintiff’s individual and derivative complaint alleged that the Company made material misstatements in the proxy statement for its 2016 annual stockholder’s meeting related to an alleged planned merger transaction between the Company and an affiliate of its Former advisor. The plaintiff alleged violations of Section 14(a) of the Securities Exchange Act of 1934 and sought to enjoin the Company’s 2016 annual meeting. On June 28, 2016, the parties filed, and the court subsequently entered, a stipulation and order of dismissal of the action, but provided that the court would retain jurisdiction to consider any application by plaintiff for an award of attorneys’ fees. On October 20, 2016, the plaintiff submitted a request for $0.75 million in fees and expenses. On November 14, 2016, the defendants filed a memorandum of law in opposition to that fee request. On July 19, 2017, the Company and the plaintiff entered into an agreement pursuant to which the Company paid $245,000 in attorneys’ fees and expenses and the plaintiff agreed to withdraw its October 20, 2016 fee request to the court and to release the Company from any further claims related to such fee request.
Note 9 - Related Party Transactions and Arrangements
The Company entered into the Advisory Agreement with the Advisor on September 29, 2016.
The Advisor receives an acquisition fee of 1.0% of the principal amount funded by the Company to originate or acquire commercial mortgage loans (or anticipated net equity funded by the Company in the case of acquisitions of real estate securities) and receives reimbursement for insourced acquisition expenses of 0.5%; provided, however, that if and when the aggregate purchase price for all investments acquired after the date of the Advisory Agreement reaches $600,000,000, the Company’s obligation to pay acquisition fees to the Advisor shall terminate. In no event will the total of all acquisition fees and acquisition expenses exceed 4.5% of the principal amount funded with respect to the Company's total portfolio including subsequent funding to investments in the Company's portfolio. In September 2017, the Company's aggregate purchase price for all investments acquired reached $600,000,000, and concurrently terminated the 1.0% acquisition fee payments to the Advisor for all investments subsequent to the limit being reached.
The Company pays the Advisor, or its affiliates, a monthly asset management fee equal to one-twelfth of 1.5% of stockholder’s equity as calculated pursuant to the Advisory Agreement. The Company will pay the Advisor, an annual subordinated performance fee calculated on the basis of total return to stockholders, payable monthly in arrears, such that for any year in which total return on stockholders’ capital exceeds 6.0% per annum, the Advisor will be entitled to 15.0% of the excess total return; provided that in no event will the annual subordinated performance fee payable to the Advisor exceed 10.0% of the aggregate total return for such year. The Company will reimburse the Advisor for expenses incurred related to administrative services such as accounting, legal and other services in accordance with the advisory agreement.
Until September 29, 2016, the Former Advisor served as the Company’s advisor and the Company paid the Former Advisor certain fees and expense reimbursements pursuant to its advisory agreement with the Former Advisor.
During the three and nine months ended September 30, 2017, the Company paid acquisition fees and expenses of $3.0 million and $9.0 million respectively, of which $1.7 million and $4.2 million respectively, have been recognized in Acquisition fees and expenses on the Company's consolidated statements of operations. In addition, during the three and nine months ended September 30, 2017, the Company capitalized $1.3 million and $4.8 million, respectively of acquisition fees and
-21
BENEFIT STREET PARTNERS REALTY TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2017
(Unaudited)
expenses included in Commercial mortgage loans within the Company's consolidated balance sheets, which is amortized over the life of each investment using the effective interest method.
During the three and nine months ended September 30, 2016, the Company paid acquisition fees and expenses of $0.3 million and $0.6 million respectively, and recognized the same amounts respectively, in Acquisition fees and expenses on the Company's consolidated statements of operations. The Company did not capitalize any acquisitions expenses for the three and nine months ended September 30, 2016.
The Company paid the Former Advisor, or its affiliates, a monthly asset management fee equal to one-twelfth of 0.75% of the cost of the Company's assets. The asset management fee was based on the lower of the cost of the Company's assets and the fair value of the Company's assets (fair value consist of the market value of each portfolio investment as determined by the Former Advisor in accordance with the Company's valuation guidelines).
During the three and nine months ended September 30, 2017, the Company incurred $2.3 million and $7.0 million in asset management fees, respectively. During the three and nine months ended September 30, 2016, the Company incurred $1.1 million and $7.1 million in asset management fees, respectively. These asset management fees are recorded in "Asset management and subordinated performance fee" within the consolidated statements of operations.
The Company is required to pay the Advisor an annual subordinated performance fee calculated on the basis of total return to stockholders, payable monthly in arrears, such that for any year in which total return on stockholders’ capital exceeds 6.0% per annum, the Former Advisor will be entitled to 15.0% of the excess total return; provided that in no event will the annual subordinated performance fee payable to the Former Advisor exceed 10.0% of the aggregate total return for such year. This fee will be payable only upon the sale of assets, distributions or other event which results in the Company's return on stockholders’ capital exceeding 6.0% per annum.
The Company did not incur an annual subordinated performance fee during the three and nine months ended September 30, 2017 and September 30, 2016. These subordinated performance fees are recorded in "Asset management and subordinated performance fees" within the Company's consolidated statements of operations.
The table below depicts related party fees and reimbursements in connection with the operations of the Company for the three and nine months ended September 30, 2017 and 2016 and the associated payable as of September 30, 2017 and December 31, 2016 (in thousands):
Three Months Ended September 30, | Nine Months Ended September 30, | Payable as of | |||||||||||||||||||||||
2017 | 2016 | 2017 | 2016 | September 30, 2017 | December 31, 2016 | ||||||||||||||||||||
Total compensation and reimbursement for services provided by the Former Advisor, its affiliates, entities under common control with the Former Advisor and the Former Dealer Manager | $ | — | $ | — | $ | — | $ | — | $ | 480 | $ | 480 | |||||||||||||
Acquisition fees and expenses | 3,014 | 255 | 8,968 | 635 | 212 | — | |||||||||||||||||||
Administrative services expenses | 1,480 | — | 2,480 | 3,285 | 3,835 | 1,480 | 1,000 | ||||||||||||||||||
Advisory and investment banking fee | — | — | — | 6 | — | — | |||||||||||||||||||
Asset management and subordinated performance fee | 2,299 | 1,066 | 6,952 | 7,091 | 2,299 | 2,439 | |||||||||||||||||||
Other related party expenses | 87 | 6 | 183 | 56 | 112 | 145 | |||||||||||||||||||
Total related party fees and reimbursements | $ | 6,880 | $ | 3,807 | $ | 19,388 | $ | 11,623 | $ | 4,583 | $ | 4,064 | |||||||||||||
The payables as of September 30, 2017 and December 31, 2016 in the table above are included in "Due to affiliates" in the Company's consolidated balance sheets.
Subject to the limitations outlined below, the Company reimbursed the Former Advisor's cost of providing administrative services and personnel costs in connection with other services provided, in addition to paying an asset management fee;
-22
BENEFIT STREET PARTNERS REALTY TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2017
(Unaudited)
however, the Company did not reimburse the Former Advisor for personnel costs in connection with services for which the Former Advisor received acquisition fees or disposition fees. For the three and nine months ended September 30, 2017, the Company incurred $1.5 million and $3.3 million of administrative costs in connection with the operations of the Company, which is included in "Administrative services expenses" in the consolidated statements of operations. For the three and nine months ended September 30, 2016, the Company incurred $2.5 million and $3.8 million of administrative costs in connection with the operations of the Company, which is included in "Administrative services expenses" in the consolidated statements of operations.
The Advisor is required to pay any expenses in which the Company's operating expenses as defined by North American Securities Administrators Association at the end of the four preceding fiscal quarters exceeds the greater of (i) 2.0% of average invested assets or (ii) 25.0% of net income for such expense year. For the preceding four fiscal quarters, the Company did not exceed the greater of the two aforementioned criteria as of September 30, 2017.
The Company has also established a restricted share plan for the benefit of employees, directors, employees of the Advisor and its affiliates.
Note 10 - Fair Value of Financial Instruments
GAAP establishes a hierarchy of valuation techniques based on the observability of inputs used in measuring financial instruments at fair values. GAAP establishes market-based or observable inputs as the preferred source of values, followed by valuation models using management assumptions in the absence of market inputs. The three levels of the hierarchy are described below:
• | Level I - Inputs are unadjusted, quoted prices in active markets for identical assets or liabilities at the measurement date. |
• | Level II - Inputs (other than quoted prices included in Level I) are either directly or indirectly observable for the asset or liability through correlation with market data at the measurement date and for the duration of the instrument’s anticipated life. |
• | Level III - Unobservable inputs that reflect the entity’s own assumptions about the assumptions that market participants would use in the pricing of the asset or liability and are consequently not based on market activity, but rather through particular valuation techniques. |
The determination of where an asset or liability falls in the above hierarchy requires significant judgment and factors specific to the asset or liability. In instances where the determination of the fair value measurement is based on inputs from different levels of the fair value hierarchy, the level in the fair value hierarchy within which the entire fair value measurement falls is based on the lowest level input that is significant to the fair value measurement in its entirety. The Company evaluates its hierarchy disclosures each quarter and depending on various factors, it is possible that an asset or liability may be classified differently from quarter to quarter.
The Company has implemented valuation control processes to validate the fair value of the Company's financial instruments measured at fair value including those derived from pricing models. These control processes are designed to assure that the values used for financial reporting are based on observable inputs wherever possible. In the event that observable inputs are not available, the control processes are designed to assure that the valuation approach utilized is appropriate and consistently applied and the assumptions are reasonable.
Financial Instruments Measured at Fair Value on a Recurring Basis
CMBS are valued utilizing both observable and unobservable market inputs. These factors include projected future cash flows, ratings, subordination levels, vintage, remaining lives, credit issues, recent trades of similar real estate securities and the spreads used in the prior valuation. Depending upon the significance of the fair value inputs used in determining these fair
values, these real estate securities are classified in either Level II or Level III of the fair value hierarchy. The Company obtains current market spread information where available and uses this information in evaluating and validating the market price of all CMBS. Depending upon the significance of the fair value inputs used in determining these fair values, these real estate securities are classified in either Level II or Level III of the fair value hierarchy. As of September 30, 2017 the Company had no CMBS. As of December 31, 2016, the Company obtained broker quotes for determining the fair value of each CMBS investment used. As the broker quotes were both limited and non-binding, the Company has classified the CMBS as Level III.
-23
BENEFIT STREET PARTNERS REALTY TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2017
(Unaudited)
Commercial mortgage loans held-for-sale, measured at fair value in the Company's TRS are initially recorded at transaction proceeds, which are considered to be the best initial estimate of fair value. Fair value is determined using a discounted cash flow model that primarily considers changes in interest rates and credit spreads, weighted average life and current performance of the underlying collateral. This model uses market data from recent securitizations that have similar collateral to the Company’s loan portfolio and other information available from market participants. All results of the model are evaluated by the Company’s senior investment professionals. The Company also engaged the services of a third party independent valuation firm to determine fair value of certain investments held by the Company. Future profit and loss from the securitization is not recognized, but overall spread moves are captured in the loan valuation, the Company classified the commercial mortgage loans held-for-sale, measured at fair value as Level III.
The fair value for Treasury note futures is derived using market prices. Treasury note futures trade on the Chicago Mercantile Exchange (“CME”). The deliverable instruments are a variety of recently issued 10-year U.S. Treasury notes. The future contracts are liquid and are centrally cleared through the CME. Treasury note futures are generally categorized in Level I of the fair value hierarchy.
The fair value for a credit default swap contract is derived using a pricing model that is widely accepted by marketplace participants. Credit default swaps are traded in the OTC market. The pricing model takes into account multiple inputs including specific contract terms, interest rate yield curves, interest rates, credit curves, recovery rates, and current credit spreads obtained from swap counterparties and other market participants. Most inputs into the model are not subjective as they are observable in the marketplace or set per the contract. Valuation is primarily determined by the difference between the contract spread and the current market spread. The contract spread (or rate) is generally fixed and the market spread is determined by the credit risk of the underlying debt or reference entity. If the underlying indices are liquid and the OTC market for the current spread is active, credit default swaps are categorized in Level II of the fair value hierarchy. If the underlying indices are illiquid and the OTC market for the current spread is not active, credit default swaps are categorized in Level III of the fair value hierarchy.
The following table presents information about the Company’s financial instruments carried at fair value on a recurring basis in the consolidated balance sheets by its level in the fair value hierarchy as of September 30, 2017 and December 31, 2016:
($ in thousands) | Total | Level I | Level II | Level III | ||||||||||||
September 30, 2017 | ||||||||||||||||
Assets, at fair value | ||||||||||||||||
Real estate securities | $ | — | $ | — | $ | — | $ | — | ||||||||
Commercial mortgage loans, held-for-sale (1) | 60,950 | — | — | 60,950 | ||||||||||||
Treasury note futures | 754 | 754 | — | — | ||||||||||||
Credit derivatives | 206 | — | 206 | — | ||||||||||||
Total assets, at fair value | $ | 61,910 | $ | 754 | $ | 206 | — | $ | 60,950 | |||||||
Liabilities, at fair value | ||||||||||||||||
Credit derivatives | $ | 1,003 | $ | — | $ | 1,003 | $ | — | ||||||||
Total liabilities, at fair value | $ | 1,003 | $ | — | $ | 1,003 | $ | — | ||||||||
December 31, 2016 | ||||||||||||||||
Assets, at fair value | ||||||||||||||||
Real estate securities | $ | 49,049 | $ | — | $ | — | $ | 49,049 | ||||||||
Commercial mortgage loans, held-for-sale (1) | — | — | — | — | ||||||||||||
Treasury note futures | — | — | — | — | ||||||||||||
Credit derivatives | — | — | — | — | ||||||||||||
Total assets, at fair value | $ | 49,049 | $ | — | $ | — | $ | 49,049 | ||||||||
(1) Loans held in the Company's TRS, reported within "Commercial mortgage loans, held-for-sale, measured at fair value" on the consolidated balance sheets. | ||||||||||||||||
-24
BENEFIT STREET PARTNERS REALTY TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2017
(Unaudited)
The following table summarizes the valuation method and significant unobservable inputs used for the Company’s financial instruments that are categorized within Level III of the fair value hierarchy as of September 30, 2017. Both observable and unobservable inputs may be used to determine the fair value of positions that the Company has classified within the Level III category. As a result, the unrealized gains and losses for assets and liabilities within the Level III category may include changes in fair value that were attributable to both observable and unobservable inputs.
September 30, 2017 | Asset Category | Fair Value September 30, 2017 (in thousands) | Valuation Methodologies | Unobservable Inputs (1) | Weighted Average (2) | Range | |
Commercial mortgage loans, held-for-sale, measured at fair value | $60,950 | Discounted Cash Flow | Yield | 4.39 | % | 4.21%-4.87% | |
(1) In determining certain of these inputs, the Company evaluates a variety of factors including economic conditions, industry and market developments, market valuations of comparable companies and company specific developments including exit strategies and realization opportunities. The Company has determined that market participants would take these inputs into account when valuing the investments.
(2) Inputs were weighted based on the fair value of the investments included in the range.
-25
BENEFIT STREET PARTNERS REALTY TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2017
(Unaudited)
The following table presents additional information about the Company’s financial instruments which are measured at fair value on a recurring basis as of September 30, 2017 and December 31, 2016 for which the Company has used Level III inputs to determine fair value (in thousands):
September 30, 2017 | ||||||||
Commercial Mortgage Loans, held-for-sale, measured at fair value | Real Estate Securities | |||||||
Beginning balance, January 1, 2017 | $ | — | $ | 49,049 | ||||
Transfers into Level III | — | |||||||
Total realized and unrealized gains (losses) included in earnings: | ||||||||
Realized gain (loss) on sale of real estate securities | — | 172 | ||||||
Impairment losses on real estate securities | — | |||||||
Net accretion | — | 167 | ||||||
Unrealized gains (losses) included in OCI (1) | — | 500 | ||||||
Purchases | 60,950 | — | ||||||
Sales / paydown | — | (49,888 | ) | |||||
Cash repayments/receipts | — | — | ||||||
Transfers out of Level III | — | — | ||||||
Ending balance, September 30, 2017 | $ | 60,950 | $ | — | ||||
December 31, 2016 | ||||||||
Commercial Mortgage Loans, held-for-sale, measured at fair value | Real Estate Securities | |||||||
Beginning balance, January 1, 2016 | $ | — | $ | — | ||||
Transfers into Level III | — | 57,639 | ||||||
Total realized and unrealized gains (losses) included in earnings: | ||||||||
Realized gain (loss) on sale of real estate securities | — | (874 | ) | |||||
Impairment losses on real estate securities | — | (310 | ) | |||||
Net accretion | — | — | ||||||
Unrealized gains (losses) included in OCI | — | 1,719 | ||||||
Purchases | — | — | ||||||
Sales/paydown | — | (9,125 | ) | |||||
Cash repayments/receipts | — | — | ||||||
Transfers out of Level III | — | — | ||||||
Ending balance, December 31, 2016 | $ | — | $ | 49,049 | ||||
________________________
(1) - Unrealized gains included in Other comprehensive income ("OCI") are attributable to assets held at December 31, 2016.
-26
BENEFIT STREET PARTNERS REALTY TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2017
(Unaudited)
Financial Instruments Measured at Fair Value on a Non-Recurring Basis
The following table presents the Company's financial instruments carried at fair value on a non-recurring basis in the consolidated balance sheets by its level in the fair value hierarchy as of September 30, 2017 and December 31, 2016 (in thousands):
Total | Level I | Level II | Level III | ||||||||||||
September 30, 2017 | |||||||||||||||
Commercial mortgage loans, held-for-sale (1) | $ | 33,451 | $ | — | $ | — | $ | 33,451 | |||||||
December 31, 2016 | |||||||||||||||
Commercial mortgage loans, held-for-sale (1) | 21,179 | — | — | 21,179 | |||||||||||
(1) Fair value of the Commercial mortgage loans, held-for-sale as presented in the consolidated balance sheets is recorded at lower of cost or fair value. This treatment resulted in assets of $31,180 and $21,179 at September 30, 2017 and December 31, 2016, respectively.
The following table summarizes the valuation method and significant unobservable inputs used for the Company’s financial instruments that are categorized within Level III of the fair value hierarchy as of September 30, 2017and December 31, 2016. Both observable and unobservable inputs may be used to determine the fair value of positions that the Company has classified within the Level III category. As a result, the unrealized gains and losses for assets and liabilities within the Level III category may include changes in fair value that were attributable to both observable and unobservable inputs.
($ in thousands) | Asset Category | Fair Value September 30, 2017 | Valuation Methodologies | Unobservable Inputs (1) | Weighted Average (2) | Range | |||
September 30, 2017 | Commercial mortgage loans, held-for-sale | $ | 33,451 | Discounted Cash Flow | Yield | 10.18 | % | 10% - 13% | |
December 31, 2016 | Commercial mortgage loans, held-for-sale | $ | 21,179 | Discounted Cash Flow | Yield | 10.80 | % | 10.5% - 11% | |
(2) Inputs were weighted based on the fair value of the investments included in the range.
A review of the fair value hierarchy classification is conducted on a quarterly basis. Changes in the type of inputs may result in a reclassification for certain assets. The Company's policy with respect to transfers between levels of the fair value hierarchy is to recognize transfers into and out of each level as of the beginning of the reporting period. There were no transfers between levels within fair value hierarchy during the three and nine months ended September 30, 2017.
The fair value of cash and cash equivalents and restricted cash are measured using observable quoted market prices, or Level I inputs and their carrying value approximates their fair value. The fair value of borrowings under repurchase agreements approximate their carrying value on the consolidated balance sheets due to their short-term nature, and are measured using Level II inputs.
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BENEFIT STREET PARTNERS REALTY TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2017
(Unaudited)
Financial Instruments Not Measured at Fair Value
The fair values of the Company's commercial mortgage loans, held-for-investment and collateralized loan obligations, which are not reported at fair value on the consolidated balance sheets are reported below as of September 30, 2017 and December 31, 2016 (in thousands):
Level | Carrying Amount | Fair Value | |||||||||
September 30, 2017 | |||||||||||
Commercial mortgage loans, held-for-investment (1) | Asset | III | $ | 1,287,065 | $ | 1,281,114 | |||||
Collateralized loan obligation | Liability | II | 515,500 | 583,046 | |||||||
December 31, 2016 | |||||||||||
Commercial mortgage loans, held-for-investment (1) | Asset | III | 1,048,737 | 1,029,756 | |||||||
Collateralized loan obligation | Liability | II | 278,450 | 282,001 | |||||||
________________________
1 The carrying value is gross of $2.0 million and $2.2 million of allowance for loan losses as of September 30, 2017 and December 31, 2016, respectively.
The fair value of the commercial mortgage loans, held for investment is estimated using a discounted cash flow analysis, based on the Advisor's experience with similar types of investments. The Company received broker quotes for each tranche of the CLOs issued in 2015 and 2017.
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BENEFIT STREET PARTNERS REALTY TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2017
(Unaudited)
Note 11 - Derivative Instruments
The Company uses derivative instruments primarily to economically manage the fair value variability of fixed rate assets caused by interest rate fluctuations and overall portfolio market risk.
As of September 30, 2017, the net premiums received on derivative instrument assets were $0.6 million.
The following derivative instruments were outstanding as of September 30, 2017 ($ in thousands):
Fair Value | |||||||||||||||
Contract type | Notional | Assets (1) | Liabilities (1) | Net | |||||||||||
Credit derivatives | $ | 66,000 | $ | 206 | $ | 1,003 | $ | (797 | ) | ||||||
Treasury note futures | 69,676 | 754 | — | 754 | |||||||||||
Total | $ | 135,676 | $ | 960 | $ | 1,003 | $ | (43 | ) | ||||||
(1) Shown as derivative instruments, at fair value, in the accompanying consolidated balance sheets. | |||||||||||||||
The Company did not have any derivative instruments outstanding as of December 31, 2016.
The following tables indicates the net realized and unrealized losses on derivatives, by primary underlying risk exposure, as included in loss on derivative instruments in the consolidated statements of operations for the three and nine months ended September 30, 2017. The Company did not have any net realized and unrealized gain or loss on derivatives during the three and nine months ended September 30, 2016.
Three Months Ended September 30, 2017 | Nine Months Ended September 30, 2017 | ||||||||||||||||||||||
Unrealized Gain (Loss) | Realized Gain (Loss) | Total | Unrealized Gain (Loss) | Realized Gain (Loss) | Total | ||||||||||||||||||
Contract type | |||||||||||||||||||||||
Credit derivatives | $ | (171 | ) | $ | (18 | ) | $ | (189 | ) | $ | (171 | ) | $ | (18 | ) | $ | (189 | ) | |||||
Treasury note futures | 754 | — | 754 | 754 | — | 754 | |||||||||||||||||
Total | $ | 583 | $ | (18 | ) | $ | 565 | $ | 583 | $ | (18 | ) | $ | 565 | |||||||||
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BENEFIT STREET PARTNERS REALTY TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2017
(Unaudited)
Note 12 - Offsetting Assets and Liabilities
The Company's consolidated balance sheets uses a gross presentation of derivatives and repurchase agreements and collateral pledged. Master netting agreements that the Company has entered into with its derivative and repurchase agreement counterparties allow for netting of the same transaction, in the same currency, on the same date. Assets, liabilities, and collateral subject to master netting agreements as of September 30, 2017 and December 31, 2016 are disclosed in the tables above. The Company does not present its derivative and repurchase agreements net on the consolidated balance sheets as it has elected gross presentation.
The table below provides a gross presentation, the effects of offsetting and a net presentation of the Company's repurchase agreements and derivatives within the scope of ASC 210-20, Balance Sheet—Offsetting, as of September 30, 2017 and December 31, 2016, (in thousands):
Gross Amounts Not Offset on the Balance Sheet | |||||||||||||||||||||||||||||
Gross Amounts of Recognized Assets | Gross Amounts Offset in the Balance Sheet | Net Amount of Assets Presented in the Balance Sheet | Financial Instruments | Cash Collateral Received | Net Amount | ||||||||||||||||||||||||
September 30, 2017 | |||||||||||||||||||||||||||||
Derivatives | $ | 960 | $ | — | $ | 960 | $ | — | $ | — | $ | 960 | |||||||||||||||||
Total | $ | 960 | $ | — | $ | 960 | $ | — | $ | — | $ | 960 | |||||||||||||||||
Gross Amounts Not Offset on the Balance Sheet | |||||||||||||||||||||||||||||
Gross Amounts of Recognized Liabilities | Gross Amounts Offset on the Balance Sheet | Net Amount of Liabilities Presented on the Balance Sheet | Financial Instruments as Collateral Pledged (*) | Cash Collateral Pledged | Net Amount | ||||||||||||||||||||||||
September 30, 2017 | |||||||||||||||||||||||||||||
Repurchase agreements, commercial mortgage loans | $ | 319,385 | $ | — | $ | 319,385 | $ | 553,364 | $ | 5,005 | $ | — | |||||||||||||||||
Repurchase agreements - real estate securities | 39,035 | — | 39,035 | 55,764 | 389 | — | |||||||||||||||||||||||
Derivatives | 1,003 | — | 1,003 | — | 1,436 | — | |||||||||||||||||||||||
Total | $ | 359,423 | — | $ | — | $ | 359,423 | $ | 609,128 | — | $ | 6,830 | — | $ | — | ||||||||||||||
Gross Amounts Not Offset on the Balance Sheet | |||||||||||||||||||||||||||||
December 31, 2016 | Gross Amounts of Recognized Liabilities | Gross Amounts Offset on the Balance Sheet | Net Amount of Liabilities Presented on the Balance Sheet | Financial Instruments as Collateral Pledged (*) | Cash Collateral Pledged | Net Amount | |||||||||||||||||||||||
Repurchase agreements, commercial mortgage loans | $ | 257,664 | $ | — | $ | 257,664 | $ | 399,914 | $ | 5,000 | $ | — | |||||||||||||||||
Real estate securities | 66,639 | — | 66,639 | 102,358 | 21 | — | |||||||||||||||||||||||
Total | $ | 324,303 | — | $ | — | — | $ | 324,303 | — | $ | 502,272 | — | $ | 5,021 | — | $ | — | ||||||||||||
* Includes $55.8 million and $53.3 million Tranche C of Company issued CLO held by the Company, which eliminates within the real estate securities, at fair value line of the consolidated balance sheets as of September 30, 2017 and December 31, 2016, respectively.
Note 13 - Segment Reporting
The Company has determined that it has three reportable segments based on how the chief operating decision maker reviews and manages the business. The three reporting segments are as follows:
• | The real estate debt business which is focused on originating, acquiring and asset managing commercial real estate debt investments, including first mortgage loans, subordinate mortgages, mezzanine loans and participations in such loans. |
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BENEFIT STREET PARTNERS REALTY TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2017
(Unaudited)
• | The real estate securities business focuses on investing in and asset managing commercial real estate securities primarily consisting of CMBS and may include unsecured REIT debt, CDO notes and other securities. |
• | The conduit business operated through the Company's TRS, which is focused on generating superior risk-adjusted returns by originating and subsequently selling fixed-rate commercial real estate loans into the CMBS securitization market at a profit. The Company performed a recast of its results of operations for the TRS, a new line of business, and determined there to be no material changes. |
The following table represents the Company's operations by segment for the three months ended September 30, 2017 and 2016 (in thousands):
Three Months Ended September 30, 2017 | Total | Real Estate Debt | Real Estate Securities | TRS | ||||||||||||
Interest income | $ | 22,195 | $ | 21,795 | $ | 269 | $ | 131 | ||||||||
Interest expense | 8,845 | 8,386 | 409 | 50 | ||||||||||||
Net income (loss) | 6,975 | 7,588 | (22 | ) | (591 | ) | ||||||||||
Three Months Ended September 30, 2016 | ||||||||||||||||
Interest income | 20,250 | 18,682 | 1,568 | — | ||||||||||||
Interest expense | 7,317 | 6,642 | 675 | — | ||||||||||||
Net income | 5,373 | 5,265 | 108 | — | ||||||||||||
The following table represents the Company's operations by segment for the nine months ended September 30, 2017 and 2016 (in thousands):
Nine Months Ended September 30, 2017 | Total | Real Estate Debt | Real Estate Securities | TRS | ||||||||||||
Interest income | $ | 61,917 | $ | 60,435 | $ | 1,351 | $ | 131 | ||||||||
Interest expense | 21,990 | 20,686 | 1,254 | 50 | ||||||||||||
Net income | 19,305 | 19,627 | 269 | (591 | ) | |||||||||||
Nine Months Ended September 30, 2016 | ||||||||||||||||
Interest income | 60,763 | 55,973 | 4,790 | — | ||||||||||||
Interest expense | 17,478 | 15,443 | 2,035 | — | ||||||||||||
Net income | 23,653 | 22,775 | 878 | — | ||||||||||||
The following table represents the Company's total assets by segment as of September 30, 2017 and December 31, 2016 (in
thousands):
As of September 30, 2017 | Total | Real Estate Debt | Real Estate Securities | Conduit | ||||||||||||
Total Assets | $ | 1,521,102 | $ | 1,437,630 | $ | 389 | $ | 83,083 | ||||||||
As of December 31, 2016 | ||||||||||||||||
Total Assets | 1,248,125 | 1,198,806 | 49,319 | — | ||||||||||||
For the purposes of the table above, any expenses not associated with a specific segment have been allocated to the business segments using a percentage derived by using the sum of commercial mortgage loans, net and real estate securities, at fair value as the denominator and commercial mortgage loans, net and real estate securities, at fair value as the numerators.
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BENEFIT STREET PARTNERS REALTY TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2017
(Unaudited)
Note 14 - Subsequent Events
Distributions Paid
On October 2, 2017 and November 1, 2017, the Company paid monthly distributions of $3.7 million and $3.9 million, respectively, to stockholders of record during the month of September 2017 and October 2017, respectively. Pursuant to the DRIP, $1.2 million of the October 2017 distribution $1.3 million of the November 2017 distribution was used to purchase 63,693 and 65,287 shares, respectively.
Determination of Net Asset Value per Share
On November 9, 2017, the Company’s board of directors unanimously determined an estimated NAV per share of the Company’s common stock of $19.02 as of September 30, 2017. The estimated NAV per share is based upon the estimated value of the Company’s assets less the Company’s liabilities as of September 30, 2017. An independent third-party valuation firm was engaged to value the Company’s investment portfolio. The Advisor calculated the estimated NAV per share based in part on this valuation and recommended to the board of directors the estimated NAV per share calculated by the Advisor. The valuation was performed in accordance with the provisions of Practice Guideline 2013-01, Valuations of Publicly Registered Non-Listed REITs, issued by the Investment Program Association in April 2013.
As a result of the approval by the board of directors of the estimated NAV per share as of September 30, 2017, and pursuant to the terms of the DRIP and SRP, the Company (i) will offer shares pursuant to the DRIP at a purchase price of $19.02, beginning with November 2017 distributions which are reinvested in December 2017; and (ii) will repurchase shares pursuant to the SRP at a repurchase price of $19.02, subject to discounts in certain circumstances and subject to the terms and conditions of the SRP.
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Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
The following discussion should be read in conjunction with the accompanying consolidated financial statements of Benefit Street Partners Realty Trust, Inc. The notes thereto and other financial information included elsewhere in this Quarterly Report on Form 10-Q as well as our Annual Report on Form 10-K for the fiscal year ended December 31, 2016 filed with the U.S. Securities and Exchange Commission (the "SEC") on March 29, 2017.
As used herein, the terms "we," "our" and "us" refer to Benefit Street Partners Realty Trust, Inc., a Maryland corporation, and, as required by context, to Benefit Street Partners Realty Operating Partnership, L.P., a Delaware limited partnership, which we refer to as the "OP," and to its subsidiaries. We are externally managed by Benefit Street Partners L.L.C. (our "Advisor").
The forward-looking statements contained in this Quarterly Report on Form 10-Q may include, but are not limited to, statements as to:
• | our business and investment strategy; |
• | our ability to make investments in a timely manner or on acceptable terms; |
• | current credit market conditions and our ability to obtain long-term financing for our investments in a timely manner and on terms that are consistent with what we project when we invest; |
• | the effect of general market, real estate market, economic and political conditions, including the recent economic slowdown and dislocation in the global credit markets; |
• | our ability to make scheduled payments on our debt obligations; |
• | our ability to generate sufficient cash flows to make distributions to our stockholders; |
• | our ability to generate sufficient debt and equity capital to fund additional investments, including through our ability to execute securitization transactions; |
• | our ability to refinance our existing financing arrangements; |
• | the degree and nature of our competition; |
• | the availability of qualified personnel; |
• | our ability to maintain our qualification as a real estate investment trust ("REIT"); and |
• | other factors set forth under the caption "Risk Factors" in our Annual Report on Form 10-K for the year ended December 31, 2016 and in Item 1A of Part II of this Form 10-Q for the quarter ended September 30, 2017. |
In addition, words such as "anticipate," "believe," "expect" and "intend" indicate a forward-looking statement, although not all forward-looking statements include these words. The forward-looking statements contained in this Quarterly Report on Form 10-Q involve risks and uncertainties. Our actual results could differ materially from those implied or expressed in the forward-looking statements for any reason.
Our investors should not place undue reliance on these forward-looking statements. The forward-looking statements made in this Quarterly Report on Form 10-Q relate only to events as of the date on which the statements are made. We undertake no obligation to update any forward-looking statement to reflect events or circumstances occurring after the date of this Quarterly Report on Form 10-Q.
Overview
We were incorporated in Maryland on November 15, 2012 and conduct our operations to qualify as a REIT for U.S. federal income tax purposes beginning with the taxable year ended December 31, 2013. In addition, the Company, through certain subsidiaries which are treated as taxable REIT subsidiaries (each a “TRS”), is indirectly subject to U.S. federal, state and local income taxes. On May 14, 2013, we commenced business operations after raising in excess of $2.0 million of equity, the amount required for us to release equity proceeds from escrow. We are in business to originate, acquire and manage a diversified portfolio of commercial real estate debt secured by properties located both within and outside of the United States. We may also invest in commercial real estate securities. Commercial real estate debt investments may include first mortgage loans, subordinated mortgage loans, mezzanine loans and participations in such loans. Commercial real estate securities may include commercial mortgage-backed securities ("CMBS") , senior unsecured debt of publicly traded REITs, debt or equity securities of other publicly traded real estate companies and CDOs. The Company also originates conduit loans which the Company intends to sell through its TRS into CMBS securitization transactions at a profit.
We have no direct employees. On September 29, 2016 we terminated our advisory agreement with our former advisor and entered into the Advisory Agreement with our Advisor. Our Advisor manages our affairs on a day-to-day basis. The Advisor receives compensation and fees for services related to the investment and management of our assets and our operations.
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The Advisor, an SEC-registered investment adviser, is a credit-focused alternative asset management firm. The Advisor manages assets across a broad range of complementary credit strategies, including high yield, levered loans, private/opportunistic debt, liquid credit, structured credit and commercial real estate debt. The Advisor is affiliated with Providence Equity Partners L.L.C.
Estimated Per Share NAV
On November 9, 2017, our board of directors unanimously approved and established an estimated per share net asset value (“NAV”) of $19.02. The estimated per share NAV is based upon the estimated value of our assets less our liabilities as of September 30, 2017 (the “Valuation Date”). This valuation was performed in accordance with the provisions of Practice Guideline 2013-01, Valuations of Publicly Registered Non-Listed REITs, issued by the Investment Program Association in April 2013. We believe that there have been no material changes between the Valuation Date and the date of this filing that would impact the estimated per share NAV.
With the unanimous approval of our board of directors, we engaged an independent third-party valuation firm to estimate the fair value of our loans. The valuation firm estimated the value of our loan portfolio by applying a discounted cash flow analysis to each loan to determine a range of estimated valuations. To estimate the Company’s NAV, the Advisor adjusted the loan portfolio valuation prepared by the valuation advisor by adding the amounts of cash and other tangible assets reflected on our balance sheet (as computed in accordance with GAAP) and subtracting our liabilities as reflected on our balance sheet (computed in accordance with GAAP). Based in part on these valuation ranges, the Advisor estimated that the Company’s NAV as of September 30, 2017 ranged from $18.56 to $19.49, with a midpoint estimated NAV of $19.02 (the “Midpoint Valuation”). The Advisor recommended our board of directors approve the Midpoint Valuation as our estimated per share NAV. As with any methodology used to estimate value, the methodologies employed to estimate the NAV were based upon a number of estimates and assumptions that may not be accurate or complete. If different judgments, assumptions or opinions were used, a different estimate would likely result.
We believe that the method used to determine the estimated per share NAV of the Company’s common stock is the methodology most commonly used by public, non-listed REITs to estimate per share NAV. The estimated per share NAV does not represent the per share amount a third party would pay to acquire us, or the price at which our common stock would trade in the event we were listed on a national securities exchange. For example, the estimated per share NAV of the Company’s common stock does not reflect a liquidity discount for the fact that the shares are not currently traded on a national securities exchange and other costs that may be incurred in connection with a liquidity event.
The estimated per share NAV was determined at a moment in time and as of the Valuation Date and the values of our assets and liabilities will change over time as a result of changes relating to the individual loans in our portfolio as well as changes and developments in the real estate and capital markets generally, including changes in interest rates. Stockholders should not rely on the estimated per share NAV in making a decision to buy or sell shares of our common stock.
Significant Accounting Policies and Use of Estimates
A summary of our significant accounting policies is set forth in Note 2 - Summary of Significant Accounting Policies to our consolidated financial statements included in this Quarterly Report on Form 10-Q. A full disclosure of our significant accounting polices is disclosed in our Annual Report on Form 10-K for the year ended December 31, 2016.
Portfolio
As of September 30, 2017 and December 31, 2016, our portfolio consisted of 73 and 71 commercial mortgage loans, excluding commercial mortgage loans accounted for under the fair value option, and 0 and 6 investments in CMBS, respectively. The commercial mortgage loans held for investment had a total carrying value, net of allowance for loan losses, of $1,285.1 million and $1,046.6 million. As of September 30, 2017 and December 31, 2016, the Company's total commercial mortgage loans, held for sale, measured at fair value comprised of 4 and 0 loans, respectively. As of September 30, 2017 and December 31, 2016, the Company's total CMBS investments had a fair value of $0.0 million and $49.0 million, respectively. For our commercial mortgage loans, excluding commercial mortgage loans accounted for under the fair value option, we currently estimate loss rates based on historical realized losses experienced in the industry and take into account current collateral and economic conditions affecting the probability or severity of losses when establishing the allowance for loan losses. We recorded a general allowance for loan losses as of September 30, 2017 and December 31, 2016 in the amount of $2.0 million and $2.2 million, respectively. There were no impaired or specifically reserved loans in the portfolio as of September 30, 2017 and December 31, 2016.
As of September 30, 2017 and December 31, 2016, our commercial mortgage loans, excluding commercial mortgage loans accounted for under the fair value option had a weighted average coupon of 6.4% and 6.1%, and a weighted average life of 1.5 and 1.9 years, respectively. We had no CMBS as of September 30, 2017. As of December 31, 2016, our CMBS investments had a weighted average coupon of 5.8% and a remaining life of 3.1 years
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The following charts summarize our commercial mortgage loans, excluding commercial mortgage loans, held-for-sale, measured at fair value and CMBS as a percentage of par value, by the collateral type, geographical region and coupon rate type as of September 30, 2017 and December 31, 2016:
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-36
An investments region classification is defined according to the map below based on the location of investments' secured property.
The following charts show the par value by maturity year for the commercial mortgage loans held-for-investment in our portfolio, excluding loans held in our TRS segment as of September 30, 2017 and December 31, 2016.
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The following table shows selected data from our commercial mortgage loans portfolio, excluding commercial mortgage loans accounted for under the fair value option as of September 30, 2017 (in thousands):
Loan Type | Property Type | Par Value | Interest Rate (1) | Effective Yield | Loan to Value (2) |
Senior 1 | Office | $31,250 | 1M LIBOR + 4.50% | 5.7% | 75.0% |
Senior 2 | Retail | 9,450 | 1M LIBOR + 4.90% | 6.1% | 69.2% |
Senior 3 | Hospitality | 4,423 | 1M LIBOR + 5.50% | 6.7% | 55.3% |
Senior 4 | Retail | 11,800 | 1M LIBOR + 4.75% | 6.0% | 79.4% |
Senior 5 | Office | 33,734 | 1M LIBOR + 4.65% | 5.9% | 80.0% |
Senior 6 | Office | 42,481 | 1M LIBOR + 5.25% | 6.5% | 75.0% |
Senior 7 | Office | 13,440 | 1M LIBOR + 5.00% | 6.2% | 75.0% |
Senior 8 | Office | 30,450 | 1M LIBOR + 4.60% | 5.8% | 65.0% |
Senior 9 | Retail | 11,684 | 1M LIBOR + 4.50% | 5.7% | 74.8% |
Senior 10 | Multifamily | 14,775 | 1M LIBOR + 5.00% | 6.2% | 76.7% |
Senior 11 | Retail | 10,745 | 1M LIBOR + 5.25% | 6.5% | 80.0% |
Senior 12 | Hospitality | 16,800 | 1M LIBOR + 4.90% | 6.1% | 74.0% |
Senior 13 | Multifamily | 26,410 | 1M LIBOR + 4.25% | 5.5% | 79.7% |
Senior 14 | Multifamily | 14,917 | 1M LIBOR + 4.50% | 5.7% | 76.0% |
Senior 15 | Retail | 14,600 | 1M LIBOR + 4.25% | 5.5% | 65.0% |
Senior 16 | Retail | 27,249 | 1M LIBOR + 4.75% | 6.0% | 67.4% |
Senior 17 | Office | 9,844 | 1M LIBOR + 4.65% | 5.9% | 70.8% |
Senior 18 | Industrial | 19,553 | 1M LIBOR + 4.25% | 5.5% | 68.0% |
Senior 19 | Multifamily | 18,941 | 1M LIBOR + 4.20% | 5.4% | 76.4% |
Senior 20 | Hospitality | 10,350 | 1M LIBOR + 5.50% | 6.7% | 69.9% |
Senior 21 | Hospitality | 15,375 | 1M LIBOR + 5.30% | 6.5% | 73.5% |
Senior 22 | Mixed Use | 45,235 | 1M LIBOR + 5.50% | 6.7% | 72.6% |
Senior 23 | Retail | 7,500 | 1M LIBOR + 5.00% | 6.2% | 59.0% |
Senior 24 | Retail | 4,725 | 1M LIBOR + 5.50% | 6.7% | 72.0% |
Senior 25 | Multifamily | 44,595 | 1M LIBOR + 4.25% | 5.5% | 77.0% |
Senior 26 | Multifamily | 18,075 | 1M LIBOR + 4.50% | 5.7% | 75.0% |
Senior 27 | Office | 14,040 | 1M LIBOR + 4.75% | 6.0% | 74.4% |
Senior 28 | Multifamily | 24,387 | 1M LIBOR + 4.25% | 5.5% | 69.6% |
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Loan Type | Property Type | Par Value | Interest Rate (1) | Effective Yield | Loan to Value (2) |
Senior 29 | Multifamily | 18,146 | 1M LIBOR + 3.85% | 5.1% | 76.8% |
Senior 30 | Multifamily | 5,519 | 1M LIBOR + 3.95% | 5.2% | 77.5% |
Senior 31 | Multifamily | 13,120 | 1M LIBOR + 3.95% | 5.2% | 78.2% |
Senior 32 | Multifamily | 5,894 | 1M LIBOR + 4.05% | 5.3% | 80.0% |
Senior 33 | Industrial | 33,655 | 1M LIBOR + 4.00% | 5.2% | 65.0% |
Senior 34 | Office | 12,000 | 1M LIBOR + 4.75% | 6.0% | 54.1% |
Senior 35 | Office | 35,000 | 1M LIBOR + 5.00% | 6.2% | 79.0% |
Senior 36 | Office | 19,979 | 1M LIBOR + 4.55% | 5.8% | 70.0% |
Senior 37 | Office | 29,006 | 1M LIBOR + 4.25% | 5.5% | 73.3% |
Senior 38 | Office | 15,030 | 1M LIBOR + 5.35% | 6.6% | 47.1% |
Senior 39 | Multifamily | 14,000 | 1M LIBOR + 5.00% | 6.2% | 56.3% |
Senior 40 | Office | 16,300 | 1M LIBOR + 6.00% | 7.2% | 74.8% |
Senior 41 | Retail | 13,700 | 1M LIBOR + 4.75% | 6.0% | 62.6% |
Senior 42 | Retail | 28,500 | 1M LIBOR + 4.73% | 6.0% | 73.1% |
Senior 43 | Retail | 12,700 | 1M LIBOR + 5.00% | 6.2% | 73.3% |
Senior 44 | Multifamily | 23,150 | 1M LIBOR + 5.00% | 6.2% | 71.7% |
Senior 45 | Multifamily | 45,103 | 1M LIBOR + 6.75% | 8.0% | 83.4% |
Senior 46 | Retail | 15,750 | 1M LIBOR + 5.25% | 6.5% | 70.5% |
Senior 47 | Retail | 25,000 | 1M LIBOR + 4.40% | 5.6% | 71.4% |
Senior 48 | Multifamily | 13,944 | 1M LIBOR + 7.10% | 8.3% | 76.4% |
Senior 49 | Hospitality | 12,600 | 1M LIBOR + 5.50% | 6.7% | 61.6% |
Senior 50 | Hospitality | 11,750 | 1M LIBOR + 5.50% | 6.7% | 71.2% |
Senior 51 | Retail | 20,450 | 1M LIBOR + 5.00% | 6.2% | 60.9% |
Senior 52 | Multifamily | 26,000 | 1M LIBOR + 7.25% | 8.5% | 69.7% |
Senior 53 | Hospitality | 14,900 | 1M LIBOR + 6.25% | 7.5% | 69.0% |
Senior 54 | Office | 11,580 | 1M LIBOR + 4.45% | 5.7% | 65.0% |
Senior 55 | Office | 9,750 | 1M LIBOR + 5.50% | 6.7% | 74.0% |
Senior 56 | Multifamily | 39,700 | 1M LIBOR + 5.50% | 6.7% | 76.0% |
Senior 57 | Multifamily | 25,500 | 1M LIBOR + 4.85% | 6.1% | 83.1% |
Senior 58 | Retail | 7,500 | 1M LIBOR + 5.25% | 6.5% | 70.5% |
Senior 59 | Office | 62,040 | 1M LIBOR + 4.50% | 5.7% | 69.2% |
Senior 60 | Multifamily | 38,775 | 1M LIBOR + 4.50% | 5.7% | 73.8% |
Senior 61 | Hospitality | 8,875 | 1M LIBOR + 6.20% | 7.4% | 67.7% |
Senior 62 | Office | 25,120 | 1M LIBOR + 4.15% | 5.4% | 69.5% |
Mezzanine 1 | Multifamily | 4,000 | 12.00% | 12.0% | 74.5% |
Mezzanine 2 | Office | 7,000 | 12.00% | 12.0% | 78.3% |
Mezzanine 3 | Retail | 1,963 | 13.00% | 13.0% | 85.0% |
Mezzanine 4 | Multifamily | 3,480 | 9.50% | 9.5% | 84.5% |
Mezzanine 5 | Office | 5,066 | 3M LIBOR + 10.00% | 11.2% | 79.5% |
Mezzanine 6 | Office | 10,000 | 10.00% | 10.0% | 79.0% |
Mezzanine 7 | Hospitality | 7,140 | 10.00% | 10.0% | 73.9% |
Mezzanine 8 | Hospitality | 3,900 | 10.00% | 10.0% | 73.9% |
Mezzanine 9 | Hospitality | 12,510 | 10.00% | 10.0% | 73.9% |
Mezzanine 10 | Hospitality | 8,050 | 10.00% | 10.0% | 73.9% |
Mezzanine 11 | Multifamily | 3,000 | 1M LIBOR + 13.00% | 14.2% | 69.7% |
$1,322,973 | 5.9% | 72.5% | |||
________________________
(1) Our floating rate loan agreements contain the contractual obligation for the borrower to maintain an interest rate cap to protect against rising interest rates. In a simple interest rate cap, the borrower pays a premium for a notional principal amount based on a capped interest rate (the "cap rate"). When the floating rate exceeds the cap rate, the borrower receives a payment from the cap counterparty equal to the difference between the floating rate and the cap rate on the same notional principal amount for a specified period of time. When interest rates rise, the value of an interest rate cap will increase, thereby reducing the borrower's exposure to rising interest rates.
(2) Loan to value percentage is from metrics at origination.
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The following table shows selected data from our commercial mortgage loans, held-for-sale, measured at fair value.
Loan Type | Property Type | Par Value | Interest Rate | Effective Yield | Loan to Value (1) |
TRS Senior 1 | Mixed Use | $14,150 | 4.41% | 4.4% | 53.4% |
TRS Senior 2 | Retail | 28,000 | 4.34% | 4.3% | 69.5% |
TRS Senior 3 | Multifamily | 7,200 | 4.87% | 4.9% | 49.7% |
TRS Senior 4 | Industrial | 11,600 | 4.21% | 4.2% | 55.8% |
60,950 | n/m | 60.8% | |||
(1) Loan to value percentage is from metrics at origination. | |||||
n/m - not meaningful. | |||||
Results of Operations
The Company has determined that it has three reportable segments based on how the chief operating decision maker reviews and manages the business. The three reporting segments are as follows:
• | The real estate debt business which is focused on originating, acquiring and asset managing commercial real estate debt investments, including first mortgage loans, subordinate mortgages, mezzanine loans and participations in such loans. |
• | The real estate securities business focuses on investing in and asset managing commercial real estate securities primarily consisting of CMBS and may include unsecured REIT debt, CDO notes and other securities. |
• | The conduit business operated through the Company's TRS, which is focused on generating superior risk-adjusted returns by originating and subsequently selling fixed-rate commercial real estate loans into the CMBS securitization market at a profit. The Company performed a recast of its results of operations for the TRS, a new line of business, and determined there to be no material changes. |
Comparison of the Three Months Ended September 30, 2017 to the Three Months Ended September 30, 2016
Net Interest Income
Net interest income is generated on our interest-earning assets less related interest-bearing liabilities and is recorded as part of our real estate debt and real estate securities segments.
The following table presents the average balance of interest-earning assets less related interest-bearing liabilities, associated interest income and expense and corresponding yield earned and incurred for the three months ended September 30, 2017 and 2016 (dollars in thousands):
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Three Months Ended September 30, | ||||||||||||||||||||||
2017 | 2016 | |||||||||||||||||||||
Average Carrying Value(1) | Interest Income / Expense(2) | WA Yield / Financing Cost(3)(4) | Average Carrying Value(1) | Interest Income / Expense(2) | WA Yield / Financing Cost(3)(4) | |||||||||||||||||
Interest-earning assets: | ||||||||||||||||||||||
Real estate debt | $ | 1,272,914 | $ | 21,919 | 6.9 | % | $ | 1,127,464 | $ | 18,682 | 6.6 | % | ||||||||||
Real estate securities | 12,749 | 276 | 8.7 | % | 122,264 | 1,568 | 5.1 | % | ||||||||||||||
Total | $ | 1,285,663 | $ | 22,195 | 6.9 | % | $ | 1,249,728 | $ | 20,250 | 6.5 | % | ||||||||||
Interest-bearing liabilities: | ||||||||||||||||||||||
Repurchase agreements - commercial mortgage loans | $ | 237,017 | $ | 2,784 | 4.7 | % | $ | 253,860 | $ | 4,451 | 7.0 | % | ||||||||||
Other financing - commercial mortgage loans | 34,681 | 472 | 5.4 | % | — | — | — | % | ||||||||||||||
Repurchase agreements - real estate securities | 47,477 | 409 | 3.4 | % | 114,086 | 675 | 2.4 | % | ||||||||||||||
Collateralized loan obligations | 523,227 | 5,180 | 4.0 | % | 287,443 | 2,191 | 3.0 | % | ||||||||||||||
Total | $ | 842,402 | $ | 8,845 | 4.2 | % | $ | 655,389 | $ | 7,317 | 4.5 | % | ||||||||||
Net interest income/spread | $ | 13,350 | 2.7 | % | $ | 12,933 | 2.0 | % | ||||||||||||||
Average leverage %(5) | 65.5 | % | 52.4 | % | ||||||||||||||||||
Weighted average levered yield(6) | 8.7 | % | 7.5 | % | ||||||||||||||||||
(1) Based on amortized cost for real estate debt and real estate securities and principal amount for repurchase agreements. Amounts are calculated based on daily averages for three months ended September 30, 2017 and 2016, respectively.
(2) Includes the effect of amortization of premium or accretion of discount and deferred fees.
(3) Calculated as interest income or expense divided by average carrying value.
(4) Annualized.
(5) Calculated by dividing total average interest-bearing liabilities by total average interest-earning assets.
(6) Calculated by taking the sum of (i) the net interest spread multiplied by the average leverage and (ii) the interest-earning assets.
Interest Income
Interest income earned during the three months ended September 30, 2017 was $1.9 million higher compared to the three months ended September 30, 2016. The increase in interest income was due to an increase in the 1 Month LIBOR, the benchmark index for our loans and an increase of $35 million in the average carrying value of our interest-earning assets. As of September 30, 2017, our loans had a total carrying value of $1,379.2 million and our CMBS investments had a fair value of $0.0 million, while as of September 30, 2016, our loans had a total carrying value of $1,120.9 million and our CMBS investments had a fair value of $57.6 million.
Interest Expense
Interest expense for the three months ended September 30, 2017 was $1.5 million higher compared to the three months ended September 30, 2016. The increase in interest expense was due to an increase in the 1 Month LIBOR, the benchmark index for our financing lines and an increase of $187 million in the average carrying value of our interest-bearing liabilities.
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Expenses
Expenses for the three months ended September 30, 2017 and 2016 were made up of the following (in thousands):
Three Months Ended September 30, | ||||||||
2017 | 2016 | |||||||
Asset management and subordinated performance fee | $ | 2,299 | $ | 1,066 | ||||
Acquisition fees and acquisition expenses | 1,685 | 255 | ||||||
Professional fees | 1,348 | 2,154 | ||||||
Administrative services expenses | 1,480 | 2,480 | ||||||
Other expenses | 1,411 | 686 | ||||||
Total expenses | $ | 8,223 | $ | 6,641 | ||||
For the three months ended September 30, 2017, expenses were primarily related to asset management and subordinated performance fees. During the three months ended September 30, 2017 and September 30, 2016, we incurred $2.3 million and $1.1 million of asset management and subordinated performance fees, respectively, an increase of $1.2 million. The entire $2.3 million in the asset management and subordinated performance fee line for the three months ended September 30, 2017 is composed of asset management fees, as there was no subordinated performance fee due to applicable conditions not having been satisfied. The $1.1 million in the asset management and subordinated performance fee line for the three months ended September 30, 2016, is composed approximately $2.3 million of asset management fees and the reversal of approximately $1.3 million of subordinated performance fees.
During the three months ended September 30, 2017 and September 30, 2016, we incurred $1.7 million and $0.3 million of acquisition fees and acquisition expenses, respectively, an increase of approximately $1.4 million, primarily due to the fact we had nominal origination activity in 2016. This increase was offset by decreases in professional fees and administrative services expenses in the three months ended September 30, 2017 compared to September 30, 2016, which were primarily due to the change made to our advisor in the third quarter of 2016.
Comparison of the Nine Months Ended September 30, 2017 to the Nine Months Ended September 30, 2016
Net Interest Income
Net interest income is generated on our interest-earning assets less related interest-bearing liabilities and is recorded as part of our real estate debt and real estate securities segments.
The following table presents the average balance of interest-earning assets less related interest-bearing liabilities, associated interest income and expense and corresponding yield earned and incurred for the nine months ended September 30, 2017 and 2016 (dollars in thousands):
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Nine Months Ended September 30, | ||||||||||||||||||||||
2017 | 2016 | |||||||||||||||||||||
Average Carrying Value(1) | Interest Income / Expense(2) | WA Yield / Financing Cost(3)(4) | Average Carrying Value(1) | Interest Income / Expense(2) | WA Yield / Financing Cost(3)(4) | |||||||||||||||||
Interest-earning assets: | ||||||||||||||||||||||
Real estate debt | $ | 1,157,015 | $ | 60,566 | 7.0 | % | $ | 1,133,211 | $ | 55,973 | 6.6 | % | ||||||||||
Real estate securities | 25,424 | 1,351 | 7.1 | % | 128,474 | 4,790 | 5.0 | % | ||||||||||||||
Total | $ | 1,182,439 | $ | 61,917 | 7.0 | % | $ | 1,261,685 | $ | 60,763 | 6.4 | % | ||||||||||
Interest-bearing liabilities: | ||||||||||||||||||||||
Repurchase agreements - commercial mortgage loans | $ | 301,665 | $ | 10,511 | 4.6 | % | $ | 248,436 | $ | 9,019 | 4.8 | % | ||||||||||
Other financing - commercial mortgage loans | 17,555 | 712 | 5.4 | % | — | — | n/a | |||||||||||||||
Repurchase agreements - real estate securities | 54,928 | 1,254 | 3.0 | % | 119,054 | 2,035 | 2.3 | % | ||||||||||||||
Collateralized loan obligations | 335,683 | 9,513 | 3.8 | % | 287,351 | 6,424 | 3.0 | % | ||||||||||||||
Total | $ | 709,831 | $ | 21,990 | 4.1 | % | $ | 654,841 | $ | 17,478 | 3.6 | % | ||||||||||
Net interest income/spread | $ | 39,927 | 2.9 | % | $ | 43,285 | 2.8 | % | ||||||||||||||
Average leverage %(5) | 60.0 | % | 51.9 | % | ||||||||||||||||||
Weighted average levered yield(6) | 8.7 | % | 7.9 | % | ||||||||||||||||||
(1) Based on amortized cost for real estate debt and real estate securities and principal amount for repurchase agreements. Amounts are calculated based on daily averages for nine months ended September 30, 2017 and 2016, respectively.
(2) Includes the effect of amortization of premium or accretion of discount and deferred fees.
(3) Calculated as interest income or expense divided by average carrying value.
(4) Annualized.
(5) Calculated by dividing total average interest-bearing liabilities by total average interest-earning assets.
(6) Calculated by taking the sum of (i) the net interest spread multiplied by the average leverage and (ii) the interest-earning assets.
Interest Income
Our interest income during the nine months ended September 30, 2017 was $1.2 million higher compared to the same period in 2016. The increase was primarily due to the increase in the weighted average yield of our portfolio. As of September 30, 2017, our loans had a carrying value of $1,379.2 million and our CMBS investments had a fair value of $0.0 million, while as of September 30, 2016, our loans had a total carrying value of $1,120.9 million and our CMBS investments had a fair value of $57.6 million.
Interest Expense
Interest expense for the nine months ended September 30, 2017 was $4.5 million higher compared to the nine months ended September 30, 2016. The increase was primarily due to the increase in the average carrying value of our interest-bearing liabilities.
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Expenses
Expenses for the nine months ended September 30, 2017 and 2016 were made up of the following (in thousands):
Nine Months Ended September 30, | ||||||||
2017 | 2016 | |||||||
Asset management and subordinated performance fee | $ | 6,952 | $ | 7,091 | ||||
Acquisition fees and acquisition expenses | 4,175 | 635 | ||||||
Professional fees | 3,320 | 4,226 | ||||||
Administrative services expenses | 3,285 | 3,835 | ||||||
Other expenses | 2,773 | 2,092 | ||||||
Total expenses from operations | $ | 20,505 | $ | 17,879 | ||||
For the nine months ended September 30, 2017, expenses were primarily related to asset management fees and acquisition fees and acquisition expenses. During the nine months ended September 30, 2017 and September 30, 2016, we incurred $7.0 million and $7.1 million of asset management and subordinated performance fees, respectively, a decrease of $0.1 million. The entire $7.0 million in the asset management and subordinated performance fee line for the nine months ended September 30, 2017 is comprised of asset management fees.
During the nine months ended September 30, 2017 and September 30, 2016, we incurred $4.2 million and $0.6 million of acquisition fees and acquisition expenses, respectively, an increase of approximately $3.6 million, primarily due to the fact we had nominal origination activity in 2016. This increase was partially offset by decreases in professional fees and administrative services expenses in the nine months ended September 30, 2017 compared to September 30, 2016, which were primarily due to expenses incurred in connection with the change in our advisor in 2016.
Liquidity and Capital Resources
Our principal demands for cash will be acquisition costs, including the purchase price of any investments we originate or acquire, the payment of our operating and administrative expenses, continuing debt service obligations, and distributions to our stockholders. We currently believe that we have sufficient liquidity and capital resources available for all anticipated uses, including the acquisition of additional investments, required debt service and the payment of cash dividends.
We expect to use additional debt financing as a source of capital. Our board of directors currently intends to operate at a leverage level of between one to three times book value of equity. However, our board of directors may change this target without shareholder approval. We anticipate that adequate cash will be generated from operations to fund our operating and administrative expenses, continuing debt service obligations and the payment of distributions.
In addition to our current mix of financing sources, we may also access additional forms of financings, including credit facilities, securitizations, public and private, secured and unsecured debt issuances by us or our subsidiaries, or through capital recycling initiatives whereby we sell certain assets in our portfolio and reinvest the proceeds in assets with more attractive risk-adjusted returns.
Repurchase Agreement, Commercial Mortgage Loans
As of September 30, 2017, we have repurchase facilities with JPMorgan Chase Bank, National Association (the "JPM Repo Facility"), Goldman Sachs Bank USA (the "GS Repo Facility"), U.S. Bank National Association (the "USB Repo Facility"), Barclays Bank PLC (the "Barclays Facility") and Credit Suisse AG (the "CS Repo Facility" and together with JPM Repo Facility, GS Repo Facility, USB Repo Facility, Barclays Facility, the "Repo Facilities").
The JPM Repo Facility has a maturity date of June 12, 2019 plus a one-year extension at the Company's option and provides up to $300.0 million in advances. The GS Repo Facility has a maturity date of December 27, 2018, with a one-year extension at the Company’s option, which may be exercised upon the satisfaction of certain conditions, and provides up to $250.0 million in advances. The USB Repo Facility matures on July 15, 2020, with two one-year extensions at the option of the Company, which may be exercised upon the satisfaction of certain conditions, and provides up to $100.0 million in advances. The CS Repo Facility matures on August 30, 2018 and provides up to $250.0 million in advances. Prior to the end of each calendar quarter, the Company may request an extension of the termination date for an additional 364 days from the end of such calendar quarter subject to the satisfaction of certain conditions and approvals.
We expect to use advances from these Repo Facilities to finance the acquisition or origination of eligible loans, including first mortgage loans, subordinated mortgage loans, mezzanine loans and participation interests therein.
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As of September 30, 2017 and December 31, 2016, there was $137.5 million and $257.7 million outstanding under the JPM Repo Facility, respectively. As of September 30, 2017, we had $138.0 million outstanding under the GS Repo Facility. The Company had no advances under the GS Repo Facility as of December 31, 2016. As of September 30, 2017, we had $12.3 million outstanding under the USB Repo Facility. The Company had no advances under the USB Repo Facility as of December 31, 2016. As of September 30, 2017, we had $31.6 million outstanding under the CS Repo Facility. The Company had no advances under the CS Repo Facility as of December 31, 2016.
The Company entered into the Barclays Facility on September 19, 2017. The Barclays Facility provides for a senior secured $75 million revolving line of credit and bears interest at per annum rates equal to one of two base rates plus an applicable margin. The Barclays Facility has a maturity of September 19, 2019, subject to an extension term of one year, and provides for quarterly interest-only payments, with all principal and interest outstanding being due on the maturity date. The Barclays Facility may be prepaid from time to time and at any time, in whole or in part, without premium or penalty. The Company expects to use advances on the Barclays Facility to finance the origination of eligible loans, including first lien mortgage loans, junior mortgage loans, mezzanine loans, and participation interests therein. As of September 30, 2017, the Company had no advances under the Barclays Facility.
The Repo Facilities generally provide that in the event of a decrease in the value of the Company's collateral, the lenders can demand additional collateral. Should the value of the Company’s collateral decrease as a result of deteriorating credit quality, resulting margin calls may cause an adverse change in the Company’s liquidity position.
Other financing - Commercial Mortgage Loans
We entered into a financing arrangement with Pacific Western Bank for term financing (“PWB Financing”) on May 17, 2017. The PWB Financing provided the Company with $36.2 million and is collateralized by a portfolio asset of $54.2 million. The PWB Financing initially matures on June 9, 2019, with two one-year extension option at the Company’s option. As of September 30, 2017, we had $30.5 million outstanding under the PWB Financing
Repurchase Agreements - Real Estate Securities
We entered into various Master Repurchase Agreements ("MRAs") that allow us to sell real estate securities while providing a fixed repurchase price for the same real estate securities in the future. The repurchase contracts on each security under an MRA generally mature in 30 to 90 days and terms are adjusted for current market rates as necessary. As of September 30, 2017 and December 31, 2016, we entered into six MRAs, of which one and three were in use for each respective periods presented, described below (in thousands):
Amount | Weighted Average | ||||||||||||||||
Counterparty | Outstanding | Accrued Interest | Collateral Pledged (*) | Interest Rate | Days to Maturity | ||||||||||||
As of September 30, 2017 | |||||||||||||||||
J.P. Morgan Securities LLC | $ | 39,035 | $ | 74 | $ | 55,764 | 2.97 | % | 6 | ||||||||
Total/Weighted Average | $ | 39,035 | $ | 74 | $ | 55,764 | 2.97 | % | 6 | ||||||||
As of December 31, 2016 | |||||||||||||||||
J.P. Morgan Securities LLC | $ | 59,122 | $ | 96 | $ | 92,658 | 2.55 | % | 6 | ||||||||
Citigroup Global Markets, Inc. | 3,879 | 1 | 4,850 | 2.11 | % | 26 | |||||||||||
Wells Fargo Securities, LLC | 3,638 | 4 | 4,850 | 2.05 | % | 13 | |||||||||||
Total/Weighted Average | $ | 66,639 | $ | 101 | $ | 102,358 | 2.50 | % | 8 | ||||||||
(*) Collateral includes $55.8 million and $53.3 million Tranche C of Company issued CLO held by the Company, which eliminates within the real estate securities, at fair value line of the consolidated balance sheets as of September 30, 2017 and December 31, 2016, respectively.
Distributions
On May 13, 2013, our board of directors authorized, and declared a distribution calculated daily at a rate of $0.00565068493, which is equivalent to $2.0625 per annum, per share of common stock. In March 2016, our board of directors ratified the same distribution amount. In August 2017, our board of directors authorized and declared a distribution calculated daily at a rate of $0.00394521 per day, which is equivalent to $1.44 per annum, per share of common stock. Distribution payments are dependent on the availability of funds. The board of directors may change the amount of distributions paid or suspend distribution payments at any time, and therefore, distribution payments are not assured.
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The distribution will be payable by the fifth day following the end of each month to stockholders of record at the close of business each day during the prior month.
The below table shows the distributions paid on shares outstanding during the nine months ended September 30, 2017 and nine months ended September 30, 2016 (in thousands):
Nine Months Ended September 30, 2017 Payment Date | Amount Paid in Cash | Amount Issued under DRIP | ||||||||
January 3, 2017 | $ | 3,575 | $ | 2,007 | ||||||
February 1, 2017 | 3,560 | 1,957 | ||||||||
March 1, 2017 | 3,231 | 1,770 | ||||||||
April 1, 2017 | 3,621 | 1,926 | ||||||||
May 1, 2017 | 3,536 | 1,846 | ||||||||
June 1, 2017 | 3,692 | 1,887 | ||||||||
July 3, 2017 | 3,607 | 1,809 | ||||||||
August 1, 2017 | 3,755 | 1,854 | ||||||||
September 1, 2017 | 2,751 | 1,293 | ||||||||
Total | $ | 31,328 | $ | 16,349 | ||||||
Nine Months Ended September 30, 2016 Payment Date | Amount Paid in Cash | Amount Issued under DRIP | ||||||||
January 4, 2016 | $ | 3,225 | $ | 2,324 | ||||||
February 2, 2016 | 3,337 | 2,159 | ||||||||
March 2, 2016 | 3,057 | 2,099 | ||||||||
April 1, 2016 | 3,342 | 2,188 | ||||||||
May 2, 2016 | 3,296 | 2,068 | ||||||||
June 1, 2016 | 3,446 | 2,112 | ||||||||
July 1, 2016 | 3,361 | 2,034 | ||||||||
August 3, 2016 | 3,423 | 2,070 | ||||||||
September 1, 2016 | 3,465 | 2,045 | ||||||||
Total | $ | 29,952 | $ | 19,099 | ||||||
The following table shows the sources for the payment of distributions to common stockholders for the periods presented (in thousands):
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Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||||||||||||||
2017 | 2016 | 2017 | 2016 | |||||||||||||||||||||||||
Distributions: | ||||||||||||||||||||||||||||
Cash distributions paid | $ | 10,113 | $ | 10,249 | $ | 31,328 | $ | 29,952 | ||||||||||||||||||||
Distributions reinvested | 4,956 | 6,149 | 16,349 | 19,099 | ||||||||||||||||||||||||
Total distributions | $ | 15,069 | $ | 16,398 | $ | 47,677 | $ | 49,051 | ||||||||||||||||||||
Source of distribution coverage: | ||||||||||||||||||||||||||||
Cash flows provided by operations | $ | 4,324 | 28.7 | % | $ | 8,349 | 50.9 | % | $ | 20,394 | 42.8 | % | $ | 27,553 | 56.2 | % | ||||||||||||
Available cash on hand | 5,789 | 38.4 | % | 1,900 | 11.6 | % | 10,934 | 22.9 | % | 2,399 | 4.9 | % | ||||||||||||||||
Common stock issued under DRIP | 4,956 | 32.9 | % | 6,149 | 37.5 | % | 16,349 | 34.3 | % | 19,099 | 38.9 | % | ||||||||||||||||
Total sources of distributions | $ | 15,069 | 100.0 | % | $ | 16,398 | 100.0 | % | $ | 47,677 | 100.0 | % | $ | 49,051 | 100.0 | % | ||||||||||||
Cash flows provided by operations (GAAP) | $ | 4,324 | $ | 8,349 | $ | 20,394 | $ | 27,553 | ||||||||||||||||||||
Net income (GAAP) | $ | 6,975 | $ | 5,373 | $ | 19,305 | $ | 23,653 | ||||||||||||||||||||
The following table compares cumulative distributions paid to cumulative net income (in accordance with GAAP) for the period from November 15, 2012 (date of inception) through September 30, 2017 (in thousands):
For the Period from November 15, 2012 (date of inception) to September 30, 2017 | ||||
Distributions paid: | ||||
Common stockholders in cash | $ | 106,406 | ||
Common stockholders pursuant to DRIP / offering proceeds | 66,773 | |||
Total distributions paid | $ | 173,179 | ||
Reconciliation of net income: | ||||
Net interest income | $ | 157,300 | ||
Realized loss on sale of real estate securities | (1,734 | ) | ||
Realized loss on loans held for sale | (1,475 | ) | ||
Acquisition fees | (17,283 | ) | ||
Other operating expenses | (56,522 | ) | ||
Net income | 80,286 | |||
Cash flows provided by operations | $ | 84,312 | ||
Cash Flows
Cash Flows for the Nine Months Ended September 30, 2017
Net cash provided by operating activities for the nine months ended September 30, 2017 was $20.4 million. Cash inflows were primarily driven by net income of $19.3 million.
Net cash used in investing activities for the nine months ended September 30, 2017 was $312.0 million. Cash outflows of $565.1 million was due to new originations and additional funding activities. This was partially offset by cash inflows of proceeds from the sale of real estate securities of $34.9 million, proceeds from the sale of commercial mortgage loans of $88.4 million and principal repayments of $228.8 million.
Net cash provided by financing activities for the nine months ended September 30, 2017 was $245.9 million. Cash inflows were primarily driven by proceeds of $339.5 million from issuance of our CLO, BSPRT 2017-FL1. This was partially offset by cash outflows of $61.7 million net repayments on the Repo Facilities, $27.6 million from net repayment on our CMBS MRAs, the payment of $31.3 million in cash distributions paid to stockholders, $20.5 million of stock redemptions and repayments on collateralized debt obligations of $97.5 million.
Cash Flows for the Nine Months Ended September 30, 2016
Net cash provided by operating activities for the nine months ended September 30, 2016 was $27.6 million. Cash inflows were primarily driven by net income of $23.7 million.
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Net cash provided by investing activities for the nine months ended September 30, 2016 was $78.8 million. Cash inflows were primarily driven by proceeds from the sale of real estate securities of $70 million and principal repayments of $51.1 million, partially offset by additional funding of $42.2 million.
Net cash used in financing activities for the nine months ended September 30, 2016 was $60.3 million. Cash inflows were primarily driven by $35.6 million from net borrowings on the JPM Repo Facility offset by $44.5 million from net payment on our CMBS MRAS, the payment of $30.0 million in cash distributions paid to stockholders and $19.0 million of stock redemptions.
Related Party Arrangements
We entered into the Advisory Agreement with the Advisor on September 29, 2016.
The Advisor Agreement provides the Advisor shall receive an acquisition fee of 1.0% of the principal amount funded by us to originate or acquire commercial mortgage loans and 1.0% of the anticipated net equity funded by us to acquire real estate securities; provided, however, that if and when the aggregate purchase price for all investments acquired after the date of the Advisory Agreement reaches $600,000,000, our obligation to pay acquisition fees to the Advisor shall terminate. We reimburse the Advisor for insourced expenses incurred by the Advisor on our behalf related to selecting, evaluating, originating and acquiring investments in an amount up to 0.5% of the principal amount funded by us to originate or acquire commercial mortgage loans and up to 0.5% of the anticipated net equity funded by us to acquire real estate securities investments. In no event will the total of all acquisition fees and acquisition expenses exceed 4.5% of the principal amount funded with respect to our total portfolio including subsequent funding to investments in our portfolio. In September 2017, the Company's aggregate purchase price for all investments acquired after the date of the Advisory Agreement reached $600,000,000, and therefore we will no longer be obligated to pay the Advisor acquisition fees in connection with acquisitions subsequent to that date.
We pay the Advisor, or its affiliates, a monthly asset management fee equal to one-twelfth of 1.5% of stockholder’s equity as calculated pursuant to the Advisory Agreement. We will pay the Advisor, an annual subordinated performance fee calculated on the basis of total return to stockholders, payable monthly in arrears, such that for any year in which total return on stockholders’ capital exceeds 6.0% per annum, the Advisor will be entitled to 15.0% of the excess total return; provided that in no event will the annual subordinated performance fee payable to the Advisor exceed 10.0% of the aggregate total return for such year. We will reimburse the Advisor for expenses incurred related to administrative services such as accounting, legal and other services in accordance with the advisory agreement.
Total Costs Incurred Due to Related Party Arrangements
The table below shows the costs incurred due to arrangements with our Advisor (with respect to the nine months ended September 30, 2017) and the Former Advisor and its affiliates and the Advisor (with respect to the nine months ended September 30, 2016) during the three and nine months ended September 30, 2017 and 2016 and the associated payable as of September 30, 2017 and December 31, 2016 (in thousands). Of the amounts included in the table below, $26.4 thousand and $28.4 thousand for three and nine months ended September 30, 2016, respectively, for asset management fees and acquisition fees and expenses, were the only amounts payable to the Advisor.
See Note 9 - Related Party Transactions and Arrangements for further detail.
Three Months Ended September 30, | Nine Months Ended September 30, | Payable as of | |||||||||||||||||||||
2017 | 2016 | 2017 | 2016 | September 30, 2017 | December 31, 2016 | ||||||||||||||||||
Total compensation and reimbursement for services provided by the Former Advisor, its affiliates, entities under common control with the Former Advisor and the Former Dealer Manager | — | — | — | — | 480 | 480 | |||||||||||||||||
Acquisition fees and expenses(1) | 3,014 | 255 | 8,968 | 635 | 212 | — | |||||||||||||||||
Administrative services expenses | 1,480 | 2,480 | 3,285 | 3,835 | 1,480 | 1,000 | |||||||||||||||||
Advisory and investment banking fee | — | — | — | 6 | — | — | |||||||||||||||||
Asset management and subordinated performance fee | 2,299 | 1,066 | 6,952 | 7,091 | 2,299 | 2,439 | |||||||||||||||||
Other related party expenses | 87 | 6 | 183 | 56 | 112 | 145 | |||||||||||||||||
Total | $ | 6,880 | $ | 3,807 | $ | 19,388 | $ | 11,623 | $ | 4,583 | $ | 4,064 | |||||||||||
________________________
1 Includes amortization of capitalized acquisition fees and expenses.
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The payables as of September 30, 2017 and December 31, 2016 in the table above are included in Due to affiliates on our consolidated balance sheets.
Off Balance Sheet Arrangements
We have no off balance sheet arrangements as of September 30, 2017 and through the date of the filing of this Form 10-Q.
Non-GAAP Financial Measures
Funds from Operations and Modified Funds from Operations
Due to certain unique operating characteristics of real estate companies, as discussed below, the National Association of Real Estate Investment Trusts ("NAREIT") and the Investment Program Association ("IPA") industry trade groups, have each promulgated measures respectively known as funds from operations ("FFO") and modified funds from operations ("MFFO"), which we believe to be appropriate supplemental measures to reflect the operating performance of a REIT. The use of FFO and MFFO is recommended by the REIT industry as supplemental performance measures. FFO and MFFO are not equivalents to our net income or loss as determined under generally accepted accounting principles ("GAAP").
We define FFO, a non-GAAP measure, consistent with the standards established by the White Paper on FFO approved by the Board of Governors of NAREIT, as revised in February 2004 (the "White Paper"). The White Paper defines FFO as net income or loss computed in accordance with GAAP, excluding gains or losses from sales of depreciable property, property and asset impairment write-downs, depreciation and amortization, and after adjustments for unconsolidated partnerships and joint ventures. Adjustments for unconsolidated partnerships and joint ventures are calculated to reflect FFO. Our business plan is to operate as a mortgage REIT with our portfolio consisting of commercial mortgage loan investments and investments in real estate securities. We will typically have no FFO adjustments to our net income or loss computed in accordance with GAAP as a result of operating as a mortgage REIT. Although we have the ability to acquire real property, we have not acquired any at this time and as such have not had any FFO adjustments to our net income or loss computed in accordance with GAAP.
Publicly registered, non-listed REITs typically operate differently from exchange traded REITs because they generally have a limited life followed by a liquidity event or other targeted exit strategy. Non-listed REITs typically have a significant amount of acquisition activity and are substantially more dynamic during their initial years of investment and operation as compared to later years when the proceeds from their continuous public offering have been fully invested and when we are seeking to implement a liquidity event or other exit strategy. However, it is likely that we will make investments past the acquisition stage, albeit at a substantially lower level.
The origination and acquisition of debt investments is a key operating feature of our business plan that results in the generation of income and cash flows in order to make distributions to stockholders. Acquisition fees paid to our Advisor and acquisition expenses reimbursed to our Advisor in connection with the origination and acquisition of debt investments are evaluated in accordance with GAAP to determine if they should be expensed in the period incurred or capitalized and amortized over the life of the investment. Acquisition fees and acquisition expenses that are deemed to be expensed in the period incurred are included in the computation of net income or loss from operations. The amortization of acquisition fees and acquisition expenses that are able to be capitalized are included in the computation of net income or loss from operations. All such acquisition fees and acquisition expenses are paid in cash when incurred that would otherwise be available to distribute to our stockholders. When proceeds from our equity offerings have not been sufficient to fund the payment of acquisition fees and the reimbursement of acquisition expenses to our Former Advisor or Advisor, such fees and expenses have been paid from other sources, including financings, operating cash flow, net proceeds from the sale of investments or from other cash flows. We believe that acquisition fees and acquisition expenses incurred by us negatively impact our operating performance during the period in which such investments are originated or acquired by reducing cash flows and therefore the potential distributions to stockholders.
We define MFFO, a non-GAAP measure, consistent with the IPA's Guideline 2010 - 01, Supplemental Performance Measure for Publicly Registered, Non-Listed REITs: Modified Funds from Operations (the "Practice Guideline") issued by the IPA in November 2010. We define MFFO as FFO further adjusted for the following items, as applicable: acquisition fees (to the extent reflected in net income or loss from operations in the current period); accretion of discounts and amortization of premiums and other loan expenses on debt investments; fair value adjustments on real estate related investments such as commercial real estate securities or derivative investments included in net income; impairments of real estate related investments, gains or losses included in net income from the extinguishment or sale of debt, hedges, foreign exchange, derivatives or securities holdings where trading of such holdings is not a fundamental attribute of the business plan, unrealized gains or losses from fair value adjustments on real estate securities, including commercial mortgage backed securities and other securities, interest rate swaps and other derivatives not deemed to be hedges and foreign exchanges holdings; unrealized gains or losses resulting from consolidation from, or deconsolidation to, equity accounting, and after adjustments for consolidated and unconsolidated partnerships and joint ventures, with such adjustments calculated to reflect MFFO on the same basis. The accretion of discounts and amortization of premiums and other loan expenses on debt investments, gains and losses on hedges,
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foreign exchange, derivatives or securities holdings, unrealized gains and losses resulting from consolidations, as well as other listed cash flow adjustments are adjustments made to net income in calculating the cash flows provided by operating activities and, in some cases, reflect gains or losses which are unrealized and may not ultimately be realized. While we will be responsible for managing interest rate, hedge and foreign exchange risk, we expect to retain an outside consultant to review all our hedging agreements. Inasmuch as interest rate hedges are not a fundamental part of our operations, we believe it is appropriate to exclude such gains and losses in calculating MFFO, as such gains and losses are not reflective of our core operations.
Our MFFO calculation excludes impairments of real estate related investments, including loans. We assess the credit quality of our investments and adequacy of loan loss reserves on a quarterly basis, or more frequently as necessary. For loans classified as held-for-investment, we establish and maintain a general allowance for loan losses inherent in our portfolio at the reporting date and, where appropriate, a specific allowance for loan losses for loans we have determined to be impaired at the reporting date. An individual loan is considered impaired when it is deemed probable that we will not be able to collect all amounts due according to the contractual terms of the loan. Real estate related securities are evaluated for other-than-temporary impairment when the fair value of a security falls below its net amortized cost. Significant judgment is required in this analysis. We consider the estimated net recoverable value of the loan or security as well as other factors, including but not limited to the fair value of any collateral, the amount and the status of any senior debt, the prospects for the borrower and the competitive situation of the region where the borrower does business. Fair value is typically estimated based upon discounting the expected future cash flows of the underlying collateral taking into consideration the discount rate, capitalization rate, occupancy, creditworthiness of major tenants and many other factors. This requires significant judgment and because it is based upon projections of future economic events, which are inherently subjective, the amounts ultimately realized may differ materially from the carrying value as of the balance sheet date. If upon completion of the assessment, the estimated fair value of the underlying collateral is less than the net carrying value of the loan, a specific allowance for loan losses is recorded. In the case of real estate securities, all or a portion of a deemed impairment may be recorded. Due to our limited life, any allowance for loan losses or impairment of real estate securities recorded may be difficult to recover.
MFFO is a metric used by management to evaluate our performance against other non-listed REITs which have limited lives with short and defined acquisition periods and targeted exit strategies shortly thereafter and is not intended to be used as a liquidity measure. Although management uses the MFFO metric to evaluate future operating performance, this metric excludes certain key operating items and other adjustments that may affect our overall operating performance. MFFO is not equivalent to net income or loss as determined under GAAP. We believe that our use of MFFO and the adjustments used to calculate it allow us to present our performance in a manner that reflects certain characteristics that are unique to non-listed REITs, such as their limited life, limited and defined acquisition period and targeted exit strategy, and hence that the use of such measures is useful to investors.
We believe that FFO provides useful context for understanding MFFO, and we believe that MFFO is a useful non-GAAP measure for non-listed REITs. It is helpful to management and stockholders in assessing our future operating performance once our organization and offering and acquisition and development stages are complete, because it eliminates from net income non-cash fair value adjustments on our real estate securities and acquisition fees and acquisition expenses that are incurred as part of our investment activities. However, MFFO may not be a useful measure of our operating performance or as a comparable measure to other typical non-listed REITs if we do not continue to operate in a similar manner to other non-listed REITs, including if we were to extend our acquisition and development stage or if we determined not to pursue an exit strategy.
However, MFFO does have certain limitations. For instance, the effect of any amortization or accretion on investments originated or acquired at a premium or discount, respectively, is not reported in MFFO. In addition, realized gains or losses from acquisitions and dispositions and other adjustments listed above are not reported in MFFO, even though such realized gains or losses and other adjustments could affect our operating performance and cash available for distribution. Stockholders should note that any cash gains generated from the sale of investments would generally be used to fund new investments. Any mark-to-market or fair value adjustments may be based on many factors, including current operational or individual property issues or general market or overall industry conditions.
Neither FFO nor MFFO is equivalent to net income or loss or cash flow provided by operating activities determined in accordance with GAAP and should not be construed to be more relevant or accurate than the GAAP methodology in evaluating our operating performance or our ability to pay distributions to our stockholders. Neither FFO nor MFFO is necessarily indicative of cash flow available to fund our cash needs including our ability to make distributions to our stockholders. FFO and MFFO do not represent amounts available for management’s discretionary use because of needed capital replacement or expansion, debt service obligations or other commitments or uncertainties. Furthermore, neither FFO nor MFFO should be considered as an alternative to net income or loss as an indicator of our operating performance.
Neither the SEC, NAREIT nor any other regulatory body has passed judgment on the acceptability of the adjustments that we use to calculate FFO or MFFO. In the future, the SEC, NAREIT or another regulatory body may decide to standardize the
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allowable adjustments across the non-listed REIT industry and we would have to adjust our calculation and characterization of FFO or MFFO.
The table below reflects the items deducted or added to net income or loss in our calculation of FFO and MFFO for the nine months ended September 30, 2017 and 2016 (in thousands):
Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||
2017 | 2016 | 2017 | 2016 | ||||||||||||||
Funds From Operations: | |||||||||||||||||
Net income (GAAP) | $ | 6,975 | $ | 5,373 | $ | 19,305 | $ | 23,653 | |||||||||
Funds from operations | $ | 6,975 | $ | 5,373 | $ | 19,305 | $ | 23,653 | |||||||||
Modified Funds From Operations: | |||||||||||||||||
Funds from operations | $ | 6,975 | $ | 5,373 | $ | 19,305 | $ | 23,653 | |||||||||
Accretion of premiums, discounts and fees on investments, net | (458 | ) | (619 | ) | (1,617 | ) | (1,761 | ) | |||||||||
Acquisition fees | 1,685 | 255 | 4,175 | 635 | |||||||||||||
Unrealized (gain) loss on commercial mortgage loans held-for-sale | 27 | — | (220 | ) | — | ||||||||||||
Loan loss (recovery)/provision | (641 | ) | (113 | ) | (222 | ) | 721 | ||||||||||
Unrealized (gains)/losses on derivatives | (583 | ) | — | (583 | ) | — | |||||||||||
Income tax (benefit)/expense | (291 | ) | — | (291 | ) | — | — | ||||||||||
Modified funds from operations | $ | 6,714 | $ | 4,896 | $ | 20,547 | $ | 23,248 | |||||||||
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Item 3. Quantitative and Qualitative Disclosures about Market Risk.
Our market risk arises primarily from interest rate risk relating to interest rate fluctuations. Many factors, including governmental monetary and tax policies, domestic and international economic and political considerations and other factors that are beyond our control contribute to interest rate risk. To meet our short and long-term liquidity requirements, we may borrow funds at fixed and variable rates. Our interest rate risk management objectives are to limit the impact of interest rate changes in earnings and cash flows and to lower our overall borrowing costs. To achieve these objectives, from time to time, we may enter into interest rate hedge contracts such as swaps, collars and treasury lock agreements in order to mitigate our interest rate risk with respect to various debt instruments. While hedging activities may insulate us against adverse changes in interest rates, they may also limit our ability to participate in benefits of lower interest rates with respect to our portfolio of investments with fixed interest rates. During the periods covered by this report, we did not engage in interest rate hedging activities. We do not hold or issue these derivative contracts for trading or speculative purposes. We do not have any foreign denominated investments, and thus, we are not exposed to foreign currency fluctuations.
As of September 30, 2017 and December 31, 2016, our portfolio included 64 and 62 variable rate investments, respectively, based on LIBOR for various terms. Borrowings under our repurchase agreements are also based on LIBOR. The following table quantifies the potential changes in interest income net of interest expense should interest rates increase by 50 or 100 basis points or decrease by 25 basis points, assuming that our current balance sheet was to remain constant and no actions were taken to alter our existing interest rate sensitivity:
Estimated Percentage Change in Interest Income Net of Interest Expense | ||||||
Change in Interest Rates | September 30, 2017 | December 31, 2016 | ||||
(-) 25 Basis Points | (1.86 | )% | (1.94 | )% | ||
Base Interest Rate | — | % | — | % | ||
(+) 50 Basis Points | 3.31 | % | 3.89 | % | ||
(+) 100 Basis Points | 6.75 | % | 7.78 | % | ||
Item 4. Controls and Procedures.
Disclosure Controls and Procedures
In accordance with Rules 13a-15(b) and 15d-15(b) of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), management, with the participation of our Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e) and Rule 15d-15(e) of the Exchange Act) as of the end of the period covered by this Quarterly Report on Form 10-Q. Based on such evaluation, our Chief Executive Officer and Chief Financial Officer have concluded, as of the end of such period, that our disclosure controls and procedures are effective in recording, processing, summarizing and reporting, on a timely basis, information required to be disclosed by us in our reports that we file or submit under the Exchange Act.
Changes in Internal Controls Over Financial Reporting
During the three months ended September 30, 2017, there were no changes in our internal controls over financial reporting (as defined in Rule 13a-15(f) and 15(d)-15(f) of the Exchange Act) that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
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PART II
Item 1. Legal Proceedings.
In the ordinary course of business, the Company may become subject to litigation, claims and regulatory matters. Except as noted below, the Company has no knowledge of material legal or regulatory proceedings pending or known to be contemplated against the Company at this time. On June 6, 2016, an action was filed against the Company and two of its directors in the United States District Court for the Southern District of New York and styled Rurode v. Realty Finance Trust, Inc., et. al., No. 1:16-cv-04553. The plaintiff’s individual and derivative complaint alleged that the Company made material misstatements in the proxy statement for its 2016 annual stockholder’s meeting related to an alleged planned merger transaction between the Company and an affiliate of its former advisor. The plaintiff alleged violations of Section 14(a) of the Securities Exchange Act of 1934 and sought to enjoin the Company’s 2016 annual meeting. On June 28, 2016, the parties filed, and the court subsequently entered, a stipulation and order of dismissal of the action, but provided that the court would retain jurisdiction to consider any application by plaintiff for an award of attorneys’ fees. On October 20, 2016, the plaintiff submitted a request for $0.75 million in fees and expenses. On July 19, 2017, the Company and the plaintiff entered into an agreement pursuant to which the Company paid $245,000 in attorneys’ fees and expenses and the plaintiff agreed to withdraw its October 20, 2016 fee request to the court and to release the Company from any further claims related to such fee request.
Item 1A. Risk Factors.
Our potential risks and uncertainties are presented in the section entitled "Risk Factors" contained in the Annual Report on Form 10-K for the year ended December 31, 2016. In addition, we have identified the following risk factors which may potentially impact our business due to the conduit segment of the business.
We may use warehouse facilities that may limit our ability to acquire assets, and we may incur losses if the collateral is liquidated.
We may utilize warehouse facilities pursuant to which we accumulate mortgage loans in anticipation of a securitization financing, which assets are pledged as collateral for such facilities until the securitization transaction is consummated. In order to borrow funds to acquire assets under any additional warehouse facilities, we expect that our lenders thereunder would have the right to review the potential assets for which we are seeking financing. We may be unable to obtain the consent of a lender to acquire assets that we believe would be beneficial to us and we may be unable to obtain alternate financing for such assets. In addition, no assurance can be given that a securitization transaction would be consummated with respect to the assets being warehoused. If the securitization is not consummated, the lender could liquidate the warehoused collateral and we would then have to pay any amount by which the original purchase price of the collateral assets exceeds its sale price, subject to negotiated caps, if any, on our exposure. In addition, regardless of whether the securitization is consummated, if any of the warehoused collateral is sold before the consummation, we would have to bear any resulting loss on the sale. No assurance can be given that we will be able to obtain additional warehouse facilities on favorable terms, or at all.
We directly or indirectly utilize non‑recourse securitizations, and such structures expose us to risks that could result in losses to us.
We utilize non‑recourse securitizations of our investments in mortgage loans to the extent consistent with the maintenance of our REIT qualification and exemption from the Investment Company Act in order to generate cash for funding new investments and/or to leverage existing assets. In most instances, this involves us transferring our loans to a special purpose securitization entity in exchange for cash. In some sale transactions, we also retain a subordinated interest in the loans sold. The securitization of our portfolio investments might magnify our exposure to losses on those portfolio investments because the subordinated interest we retain in the loans sold would be subordinate to the senior interest in the loans sold, and we would, therefore, absorb all of the losses sustained with respect to a loan sold before the owners of the senior interest experience any losses. Moreover, we cannot be assured that we will be able to access the securitization market in the future, or be able to do so at favorable rates. The inability to consummate securitizations of our portfolio investments to finance our investments on a long‑term basis could require us to seek other forms of potentially less attractive financing or to liquidate assets at an inopportune time or price, which could adversely affect our performance and our ability to continue to grow our business.
The securitization market is subject to an evolving regulatory environment that may affect certain aspects of these activities.
As a result of the dislocation of the credit markets, the securitization market has become subject to additional regulation. In particular, pursuant to the Dodd‑Frank Wall Street Reform and Consumer Protection Act, various federal agencies have promulgated a rule that generally requires issuers in securitizations to retain 5% of the risk associated with the securities. To the extent we are required to buy significant B‑Pieces in our securitizations, this could reduce our returns in these transactions.
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We enter into hedging transactions that could expose us to contingent liabilities in the future.
Subject to maintaining our qualification as a REIT, part of our investment strategy involves entering into hedging transactions that require us to fund cash payments in certain circumstances (such as the early termination of the hedging instrument caused by an event of default or other early termination event, or the decision by a counterparty to request margin securities it is contractually owed under the terms of the hedging instrument). The amount due would be equal to the unrealized loss of the open swap positions with the respective counterparty and could also include other fees and charges. These economic losses will be reflected in our results of operations, and our ability to fund these obligations will depend on the liquidity of our assets and access to capital at the time, and the need to fund these obligations could adversely impact our financial condition.
Hedging may adversely affect our earnings, which could reduce our cash available for distribution to our stockholders.
Subject to maintaining our qualification as a REIT, we pursue various hedging strategies to seek to reduce our exposure to adverse changes in interest rates. Our hedging activity varies in scope based on the level and volatility of interest rates, exchange rates, the types of assets held and other changing market conditions. Hedging may fail to protect or could adversely affect us because, among other things:
• | interest rate, currency and/or credit hedging can be expensive and may result in us receiving less interest income; |
• | available interest rate hedges may not correspond directly with the interest rate risk for which protection is sought; |
• | due to a credit loss, prepayment or asset sale, the duration of the hedge may not match the duration of the related asset or liability; |
• | the amount of income that a REIT may earn from hedging transactions (other than hedging transactions that satisfy certain requirements of the Internal Revenue Code or that are done through a taxable REIT subsidiary) to offset losses is limited by U.S. federal tax provisions governing REITs; |
• | the credit quality of the hedging counterparty owing money on the hedge may be downgraded to such an extent that it impairs our ability to sell or assign our side of the hedging transaction; and |
• | the hedging counterparty owing money in the hedging transaction may default on its obligation to pay. |
We may fail to recalculate, readjust or execute hedges in an efficient manner.
Any hedging activity in which we engage may materially and adversely affect our results of operations and cash flows. Therefore, while we may enter into such transactions seeking to reduce risks, unanticipated changes in interest rates, credit spreads or currencies may result in poorer overall investment performance than if we had not engaged in any such hedging transactions. In addition, the degree of correlation between price movements of the instruments used in a hedging strategy and price movements in the portfolio positions or liabilities being hedged may vary materially. Moreover, for a variety of reasons, we may not seek to establish a perfect correlation between such hedging instruments and the portfolio positions or liabilities being hedged. Any such imperfect correlation may prevent us from achieving the intended hedge and expose us to risk of loss.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
We did not sell any equity securities that were not registered under the Securities Act during the three months ended September 30, 2017.
Refer to See Note 7 - Common Stock to our consolidated financial statements included in this Quarterly Report on Form 10-Q for a discussion of our amended and restated share repurchase program (the “SRP”), which became effective on February 28, 2016.
Item 3. Defaults upon Senior Securities.
Not applicable.
Item 4. Mine Safety Disclosures.
Not applicable.
Item 5. Other Information.
Not applicable.
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Item 6. Exhibits.
EXHIBITS INDEX
The following exhibits are included in this Quarterly Report on Form 10-Q for the quarter ended September 30, 2017 (and are numbered in accordance with Item 601 of Regulation S-K).
Exhibit No. | Description | |
3.1(1) | ||
3.2(1) | ||
10.1(2) | ||
10.2(2) | ||
10.3(3) | ||
10.4(3) | ||
31.1* | ||
31.2* | ||
32* | ||
101* | ||
* Filed herewith.
(1) Filed as an exhibit to our current report on Form 8-K filed with the SEC on August 17, 2017.
(2) Filed as an exhibit to our current report on Form 8-K filed with the SEC on September 7, 2017.
(3) Filed as an exhibit to our current report on Form 8-K filed with the SEC on September 25, 2017.
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BENEFIT STREET PARTNERS REALTY TRUST, INC.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
BENEFIT STREET PARTNERS REALTY TRUST, INC. | |
Dated: November 14, 2017 | By: /s/ Richard J. Byrne Name: Richard J. Byrne Title: Chief Executive Officer and President (Principal Executive Officer) |
Dated: November 14, 2017 | By: /s/ Jerome S. Baglien Name: Jerome S. Baglien Title: Chief Financial Officer and Treasurer (Principal Financial Officer and Principal Accounting Officer) |
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