FSREI 10-Q Quarter ended March 31, 2020

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

☒	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2020

OR

☐	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

FOR	THE TRANSITION PERIOD FROM                      TO

COMMISSION FILE NUMBER: 000-56163

FS Credit Real Estate Income Trust, Inc.

(Exact name of registrant as specified in its charter)

Maryland		81-4446064
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)
201 Rouse Boulevard
Philadelphia, Pennsylvania		19112
(Address of principal executive offices)		(Zip Code)

(215) 495-1150

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Exchange Act:

None.

Title of each class		Trading Symbol(s)		Name of each exchange on which registered
N/A		N/A		N/A

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  ☒    No  ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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 such files).    Yes  ☒    No  ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, 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.

Large accelerated filer  ☐				Accelerated filer  ☐
Non-accelerated filer  ☒				Smaller reporting company  ☒
				Emerging growth company  ☒

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  ☒

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ☐    No  ☒

Indicate the number of shares outstanding of each of the issuer’s classes of common stock as of the latest practicable date.

As of May 10, 2020 there were 893,158 outstanding shares of Class F common stock, 141,116 outstanding shares of Class Y common stock, 1,222,424 outstanding shares of Class T common stock, 4,069,516 outstanding shares of Class S common stock, 528,122 outstanding shares of Class D common stock, 1,733,135 outstanding shares of Class M common stock and 1,752,414 outstanding shares of Class I common stock.

TABLE OF CONTENTS

				Page
PART I—FINANCIAL INFORMATION
ITEM 1.		FINANCIAL STATEMENTS
		Consolidated Balance Sheets as of March 31, 2020 (Unaudited) and December 31, 2019			1
		Unaudited Consolidated Statements of Operations for the three months ended March 31, 2020 and 2019			2
		Unaudited Consolidated Statements of Comprehensive Income for the three months ended March  31, 2020 and 2019			3
		Unaudited Consolidated Statements of Changes in Equity for the three months ended March  31, 2020 and 2019			4
		Unaudited Consolidated Statements of Cash Flows for the three months ended March 31, 2020 and 2019			5
		Notes to Unaudited Consolidated Financial Statements			6
ITEM 2.		MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS			27
ITEM 3.		QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK			38
ITEM 4.		CONTROLS AND PROCEDURES			39
PART II—OTHER INFORMATION
ITEM 1.		LEGAL PROCEEDINGS			40
ITEM 1A.		RISK FACTORS			40
ITEM 2.		UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS			42
ITEM 3.		DEFAULTS UPON SENIOR SECURITIES			43
ITEM 4.		MINE SAFETY DISCLOSURES			43
ITEM 5.		OTHER INFORMATION			43
ITEM 6.		EXHIBITS			44
		SIGNATURES			45

PART I—FINANCIAL INFORMATION

Item 1.

Financial Statements.

FS Credit Real Estate Income Trust, Inc.

Consolidated Balance Sheets

(in thousands, except share amounts)

		March 31, 2020 (Unaudited)				December 31, 2019
Assets
Cash and cash equivalents		$	35,106			$	40,214
Restricted cash			21,550				37,941
Loans receivable			614,223				406,645
Mortgage-backed securities, at fair value			14,780				6,651
Reimbursement due from sponsor			—				500
Interest receivable			2,054				1,070
Deferred financing costs			190				500
Other assets			5				5,259
Total assets (1)		$	687,908			$	498,780
Liabilities
Collateralized loan obligation (net of deferred financing costs of $5,280 and $5,483, respectively)		$	322,385			$	322,182
Repurchase agreements payable (net of deferred financing costs of $900 and $0, respectively)			103,990				—
Credit facility payable			6,000				—
Due to related party			11,891				6,290
Interest payable			462				773
Payable for shares repurchased			4,532				62
Other liabilities			4,343				3,686
Total liabilities (1)			453,603				332,993
Commitments and contingencies (See Note 9)
Stockholders’ equity
Preferred stock, $0.01 par value, 50,000,000 shares authorized, 125 and 0 issued and outstanding, respectively			—				—
Class F common stock, $0.01 par value, 125,000,000 shares authorized, 891,031 and 1,475,155 issued and outstanding, respectively			9				15
Class Y common stock, $0.01 par value, 125,000,000 shares authorized, 141,116 and 141,116 issued and outstanding, respectively			1				1
Class T common stock, $0.01 par value, 125,000,000 shares authorized, 1,188,342 and 981,836 issued and outstanding, respectively			12				10
Class S common stock, $0.01 par value, 125,000,000 shares authorized, 3,794,037 and 1,351,587 issued and outstanding, respectively			38				14
Class D common stock, $0.01 par value, 125,000,000 shares authorized, 482,083 and 322,602 issued and outstanding, respectively			5				3
Class M common stock, $0.01 par value, 125,000,000 shares authorized, 1,638,288 and 1,357,818 issued and outstanding, respectively			16				14
Class I common stock, $0.01 par value, 300,000,000 shares authorized, 1,727,710 and 1,230,360 issued and outstanding, respectively			17				12
Additional paid-in capital			235,319				165,082
Accumulated other comprehensive income (loss)			(1,855	)			17
Retained earnings			743				619
Total stockholders’ equity			234,305				165,787
Total liabilities and stockholders’ equity		$	687,908			$	498,780

(1)

The March 31, 2020 and December 31, 2019 consolidated balance sheets include assets of a consolidated variable interest entity, or VIE, that can only be used to settle obligations of the VIE, and liabilities of the consolidated VIE for which creditors do not have recourse to the Company. As of March 31, 2020 and December 31, 2019, assets of the VIE totaled $431,028 and $427,455, respectively, and liabilities of the VIE totaled $322,692 and $322,946, respectively. See Note 9 to the unaudited consolidated financial statements for further details.

See notes to unaudited consolidated financial statements.

1

FS Credit Real Estate Income Trust, Inc.

Unaudited Consolidated Statements of Operations

(in thousands, except share and per share amounts)

		Three Months Ended March 31,
		2020				2019
Net interest income
Interest income		$	8,128			$	4,558
Less: Interest expense			(3,207	)			(2,148	)
Net interest income			4,921				2,410
Other expenses
Management and performance fees			595				132
General and administrative expenses			718				892
Less: Expense limitation			—				(537	)
Net other expenses			1,313				487
Net income			3,608				1,923
Preferred stock dividends			(3	)			—
Net income attributable to FS Credit Real Estate Income Trust, Inc.		$	3,605			$	1,923
Per share information—basic and diluted
Net income per share of common stock (earnings per share)		$	0.40			$	0.51
Weighted average common stock outstanding			8,977,762				3,789,218

See notes to unaudited consolidated financial statements.

2

FS Credit Real Estate Income Trust, Inc.

Unaudited Consolidated Statements of Comprehensive Income

(in thousands)

		Three Months Ended March 31,
		2020				2019
Net income		$	3,608			$	1,923
Other comprehensive income
Net change in unrealized gain (loss) on mortgage-backed securities			(1,872	)			11
Total other comprehensive income (loss)			(1,872	)			11
Comprehensive income		$	1,736			$	1,934

See notes to unaudited consolidated financial statements.

3

FS Credit Real Estate Income Trust, Inc.

Unaudited Consolidated Statements of Changes in Equity

(in thousands)

		Par Value
		Common Stock Class F				Common Stock Class Y				Common Stock Class T				Common Stock Class S				Common Stock Class D				Common Stock Class M				Common Stock Class I				Additional Paid-In Capital				Accumulated Other Comprehensive Income (Loss)				Retained Earnings (Accumulated Deficit)				Total Stockholders’ Equity
Three Months Ended March 31, 2020
Balance as of December 31, 2019		$	15			$	1			$	10			$	14			$	3			$	14			$	12			$	165,082			$	17			$	619			$	165,787
Common stock issued			—				—				2				25				2				3				5				94,698				—				—				94,735
Preferred stock issued			—				—				—				—				—				—				—				125				—				—				125
Distributions declared			—				—				—				—				—				—				—				—				—				(3,481	)			(3,481	)
Proceeds from distribution reinvestment plan			—				—				—				—				—				—				—				1,105				—				—				1,105
Redemptions of common stock			(6	)			—				—				(1	)			—				(1	)			—				(19,878	)			—				—				(19,886	)
Stockholder servicing fees			—				—				—				—				—				—				—				(5,813	)			—				—				(5,813	)
Net income			—				—				—				—				—				—				—				—				—				3,608				3,608
Dividends on preferred stock			—				—				—				—				—				—				—				—				—				(3	)			(3	)
Other comprehensive income			—				—				—				—				—				—				—				—				(1,872	)			—				(1,872	)
Balance as of March 31, 2020		$	9			$	1			$	12			$	38			$	5			$	16			$	17			$	235,319			$	(1,855	)		$	743			$	234,305
Three Months Ended March 31, 2019
Balance as of December 31, 2018		$	25			$	2			$	1			$	—			$	1			$	4			$	1			$	83,555			$	(10	)		$	(143	)		$	83,436
Common stock issued			—				—				2				—				—				2				2				14,475				—				—				14,481
Distributions declared			—				—				—				—				—				—				—				—				—				(1,601	)			(1,601	)
Proceeds from distribution reinvestment plan			—				—				—				—				—				—				—				740				—				—				740
Redemptions of common stock			—				—				—				—				—				—				—				(125	)			—				—				(125	)
Stockholder servicing fees			—				—				—				—				—				—				—				(608	)			—				—				(608	)
Net income			—				—				—				—				—				—				—				—				—				1,923				1,923
Other comprehensive income			—				—				—				—				—				—				—				—				11				—				11
Balance as of March 31, 2019		$	25			$	2			$	3			$	—			$	1			$	6			$	3			$	98,037			$	1			$	179			$	98,257

See notes to unaudited consolidated financial statements

4

FS Credit Real Estate Income Trust, Inc.

Unaudited Consolidated Statements of Cash Flows

(in thousands)

		Three Months Ended March 31,
		2020				2019
Cash flows from operating activities
Net income		$	3,608			$	1,923
Adjustments to reconcile net income to net cash provided by (used in) operating activities
Amortization of deferred fees on loans			(199	)			(120	)
Amortization of deferred financing costs			550				232
Changes in assets and liabilities
Reimbursement due from sponsor			500				171
Interest receivable			(984	)			(91	)
Other assets			5,254				18
Due to related party			5,601				588
Interest payable			(311	)			28
Other liabilities			(5,142	)			(251	)
Net cash provided by (used in) operating activities			8,877				2,498
Cash flows used in investing activities
Origination and fundings of loans receivable			(207,466	)			(15,574	)
Principal collections from loans receivable			87				9,500
Purchases of mortgage-backed securities			(25,555	)			(274	)
Principal repayments of mortgage-backed securities			15,554				361
Net cash used in investing activities			(217,380	)			(5,987	)
Cash flows from financing activities
Issuance of common stock			94,735				14,481
Redemptions of common stock			(15,416	)			(225	)
Stockholder distributions paid			(2,181	)			(811	)
Stockholder servicing fees			(212	)			(20	)
Borrowings under repurchase agreements			104,890				9,295
Repayments under repurchase agreements			—				(17,725	)
Borrowings under credit facility			6,000				—
Payment of deferred financing costs			(937	)			(33	)
Proceeds from issuance of preferred stock			125				—
Net cash provided by (used in) financing activities			187,004				4,962
Total increase (decrease) in cash, cash equivalents and restricted cash			(21,499	)			1,473
Cash, cash equivalents and restricted cash at beginning of period			78,155				2,608
Cash, cash equivalents and restricted cash at end of period		$	56,656			$	4,081
Supplemental disclosure of cash flow information and non-cash financial activities
Payments of interest		$	2,968			$	1,888
Accrued stockholder servicing fee		$	5,601			$	588
Distributions payable		$	864			$	307
Reinvestment of stockholder distributions		$	1,105			$	740
Payable for shares repurchased		$	4,532				—

See notes to unaudited consolidated financial statements

5

FS Credit Real Estate Income Trust, Inc.

Notes to Unaudited Consolidated Financial Statements

(in thousands, except share and per share amounts)

Note 1. Principal Business and Organization

FS Credit Real Estate Income Trust, Inc., or the Company, was incorporated under the general corporation laws of the State of Maryland on November 7, 2016 and formally commenced investment operations on September 13, 2017. The Company is currently conducting an initial public offering of up to $2,750,000 of its Class T, Class S, Class D, Class M and Class I shares of common stock pursuant to a registration statement on Form S-11 filed with the Securities and Exchange Commission, or SEC, consisting of up to $2,500,000 in shares in its primary offering and up to $250,000 in shares pursuant to its distribution reinvestment plan. The Company is also conducting a private offering of shares of its Class F common stock and previously conducted a private offering of its Class Y common stock. The Company is managed by FS Real Estate Advisor, LLC, or FS Real Estate Advisor, a subsidiary of the Company’s sponsor, Franklin Square Holdings, L.P., which does business as FS Investments, or FS Investments, a national sponsor of alternative investment funds designed for the individual investor. FS Real Estate Advisor has engaged Rialto Capital Management, LLC, or Rialto, to act as its sub-adviser.

The Company has elected to be taxed as a real estate investment trust, or REIT, for U.S. federal income tax purposes commencing with its taxable year ended December 31, 2017. The Company intends to be an investment vehicle of indefinite duration focused on real estate debt investments and other real estate-related assets. The shares of common stock are generally intended to be sold and repurchased by the Company on a continuous basis. The Company intends to conduct its operations so that it is not required to register under the Investment Company Act of 1940, as amended, or the 1940 Act.

The Company’s primary investment objectives are to: provide current income in the form of regular, stable cash distributions to achieve an attractive dividend yield; preserve and protect invested capital; realize appreciation in net asset value, or NAV, from proactive investment management and asset management; and provide an investment alternative for stockholders seeking to allocate a portion of their long-term investment portfolios to commercial real estate debt with lower volatility than public real estate companies.

Note 2. Summary of Significant Accounting Policies

Basis of Presentation: The accompanying unaudited consolidated financial statements of the Company have been prepared in accordance with U.S. generally accepted accounting principles, or GAAP. The unaudited consolidated financial statements include both the Company’s accounts and the accounts of its wholly owned subsidiaries and a variable interest entity, or VIE, of which the Company is the primary beneficiary, as of March 31, 2020. All significant intercompany transactions have been eliminated in consolidation. In the opinion of management, the accompanying unaudited consolidated financial statements reflect all adjustments, which are normal and recurring in nature, necessary for fair financial statement presentation. The operating results presented for interim periods are not necessarily indicative of the results that may be expected for any other interim period or for the entire year. The Company has evaluated the impact of subsequent events through the date the unaudited consolidated financial statements were issued.

Use of Estimates: The preparation of the unaudited consolidated financial statements in accordance with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, and disclosure of contingent assets and liabilities, as of the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

6

FS Credit Real Estate Income Trust, Inc.

Notes to Unaudited Consolidated Financial Statements (continued)

(in thousands, except share and per share amounts)

Note 2. Summary of Significant Accounting Policies (continued)

Principles of Consolidation: Financial Accounting Standards Board, or FASB, Accounting Standards Codification Topic 810—Consolidation, or ASC 810, provides guidance on the identification of a VIE (a variable interest entity for which control is achieved through means other than voting rights) and the determination of which business enterprise, if any, should consolidate the VIE. An entity is considered a VIE if any of the following applies: (1) the equity investors (if any) lack one or more of the essential characteristics of a controlling financial interest; (2) the equity investment at risk is insufficient to finance that entity’s activities without additional subordinated financial support; or (3) the equity investors have voting rights that are not proportionate to their economic interests and the activities of the entity involve or are conducted on behalf of an investor with a disproportionately small voting interest.

The Company consolidates VIEs in which it is considered to be the primary beneficiary. The primary beneficiary is defined as the entity having both of the following characteristics: (1) the power to direct the activities that, when taken together, most significantly impact the VIE’s performance; and (2) the obligation to absorb losses and right to receive the returns from the VIE that would be significant to the VIE.

Cash, Cash Equivalents and Restricted Cash: The Company considers all highly liquid investments with original maturities of three months or less to be cash equivalents. The Company invests its cash in overnight institutional money market funds. As of March 31, 2020 and December 31, 2019, the Company’s investment in overnight institutional money market funds was $54,188 and $75,560, respectively. The Company’s uninvested cash is maintained with high credit quality financial institutions, which are members of the Federal Deposit Insurance Corporation. Restricted cash primarily represents cash held in an account to fund additional collateral interests within the Company’s collateralized loan obligation.

The following table provides a reconciliation of cash, cash equivalents and restricted cash in the Company’s consolidated balance sheets to the total amount shown in the Company’s unaudited consolidated statements of cash flows:

		March 31,
		2020				2019
Cash and cash equivalents		$	35,106			$	2,031
Restricted cash			21,550				2,050
Total cash, cash equivalents and restricted cash		$	56,656			$	4,081

Loans Receivable and Provision for Loan Losses: The Company originates and purchases commercial real estate debt and related instruments generally to be held as long-term investments at amortized cost. The Company is required to periodically evaluate each of these loans for possible impairment. Impairment is indicated when it is deemed probable that the Company will not be able to collect all amounts due to it pursuant to the contractual terms of the loan. If a loan is determined to be impaired, the Company writes down the loan through a charge to the provision for loan losses. Impairment of these loans, which are collateral dependent, is measured by comparing the estimated fair value of the underlying collateral, less costs to sell, to the book value of the respective loan. These valuations require significant judgments, which include assumptions regarding capitalization rates, leasing, creditworthiness of major tenants, occupancy rates, availability of financing, exit plan, loan sponsorship, actions of other lenders, and other factors deemed necessary by FS Real Estate Advisor and Rialto. Actual losses, if any, could ultimately differ from these estimates. FS Real Estate Advisor and Rialto perform a quarterly review of the Company’s portfolio of loans.

7

FS Credit Real Estate Income Trust, Inc.

Notes to Unaudited Consolidated Financial Statements (continued)

(in thousands, except share and per share amounts)

Note 2. Summary of Significant Accounting Policies (continued)

In connection with this review, FS Real Estate Advisor and Rialto assess the risk factors of each loan and assign a risk rating based on a variety of factors, including, without limitation, loan-to-value ratio, or LTV, debt yield, property type, geographic and local market dynamics, physical condition, cash flow volatility, leasing and tenant profile, loan structure and exit plan, and project sponsorship. Based on a 5-point scale, the Company’s loans are rated “1” through “5”, from less risk to greater risk, which ratings are defined as follows:

Loan Risk Rating		Summary Description
1		Very Low Risk
2		Low Risk
3		Medium Risk
4		High Risk/Potential for Loss: A loan that has a risk of realizing a principal loss
5		Impaired/Loss Likely: A loan that has a very high risk of realizing a principal loss or has otherwise incurred a principal loss

Mortgage-backed Securities: The Company classifies its mortgage-backed securities as available for sale. The investments are reported at fair value on the consolidated balance sheets with changes in fair value recorded in other comprehensive income.

Fair Value of Financial Instruments: Accounting Standards Codification Topic 820, Fair Value Measurements and Disclosures , or ASC Topic 820, defines fair value, establishes a framework for measuring fair value, and requires certain disclosures about fair value measurements under GAAP. Specifically, this guidance defines fair value based on exit price, or the price that would be received upon the sale of an asset or the transfer of a liability in an orderly transaction between market participants at the measurement date.

ASC Topic 820 also establishes a fair value hierarchy that prioritizes and ranks the level of market price observability used in measuring financial instruments. Market price observability is affected by a number of factors, including the type of financial instrument, the characteristics specific to the financial instrument, and the state of the marketplace, including the existence and transparency of transactions between market participants. Financial instruments with readily available quoted prices in active markets generally will have a higher degree of market price observability and a lesser degree of judgment used in measuring fair value.

Financial instruments measured and reported at fair value are classified and disclosed based on the observability of inputs used in the determination, as follows:

Level 1:		Generally includes only unadjusted quoted prices that are available in active markets for identical financial instruments as of the reporting date.
Level 2:		Pricing inputs include quoted prices in active markets for similar instruments, quoted prices in less active or inactive markets for identical or similar instruments where multiple price quotes can be obtained, and other observable inputs, such as interest rates, yield curves, credit risks, and default rates.
Level 3:		Pricing inputs are unobservable for the financial instruments and include situations where there is little, if any, market activity for the financial instrument. These inputs require significant judgment or estimation by management or third parties when determining fair value and generally represent anything that does not meet the criteria of Levels 1 and 2.

8

FS Credit Real Estate Income Trust, Inc.

Notes to Unaudited Consolidated Financial Statements (continued)

(in thousands, except share and per share amounts)

Note 2. Summary of Significant Accounting Policies (continued)

The estimated value of each asset reported at fair value using Level 3 inputs is determined by an internal committee composed of members of senior management of FS Real Estate Advisor.

Certain of the Company’s other assets are reported at fair value either (i) on a recurring basis, as of each quarter-end, or (ii) on a nonrecurring basis, as a result of impairment or other events. The Company generally values its assets recorded at fair value by either (i) discounting expected cash flows based on assumptions regarding the collection of principal and interest and estimated market rates, or (ii) obtaining assessments from third-party dealers. For collateral-dependent loans that are identified as impaired, the Company measures impairment by comparing FS Real Estate Advisor’s estimation of fair value of the underlying collateral, less costs to sell, to the book value of the respective loan. These valuations may require significant judgments, which include assumptions regarding capitalization rates, leasing, creditworthiness of major tenants, occupancy rates, availability of financing, exit plan, loan sponsorship, actions of other lenders, and other factors deemed necessary by FS Real Estate Advisor and Rialto.

The Company is also required by GAAP to disclose fair value information about financial instruments that are not otherwise reported at fair value in the Company’s consolidated balance sheets, to the extent it is practicable to estimate a fair value for those instruments. These disclosure requirements exclude certain financial instruments and all non-financial instruments.

The following methods and assumptions are used to estimate the fair value of each class of financial instruments, for which it is practicable to estimate that value:

•

Cash and cash equivalents: The carrying amount of cash on deposit and in money market funds approximates fair value.

•

Restricted cash: The carrying amount of restricted cash approximates fair value.

•

Loans receivable, net: The fair values for these loans were estimated by FS Real Estate Advisor based on discounted cash flow methodology taking into consideration factors, including capitalization rates, discount rates, leasing, occupancy rates, availability and cost of financing, exit plan, sponsorship, actions of other lenders, and indications of market value from other market participants.

•

Mortgage-backed securities: The fair values for these investments were based on indicative deal quotes.

•

Collateralized loan obligation, repurchase obligations and credit facility: The fair values for these instruments were estimated based on the rate at which similar credit facilities would have currently been priced.

Deferred Financing Costs: Deferred financing costs include issuance and other costs related to the Company’s debt obligations. The deferred financing costs related to the Company’s collateralized loan obligation and repurchase agreements are recorded as a reduction in the net book value of the related liability on the Company’s consolidated balance sheets. Deferred financing costs related to the Company’s revolving credit facility and facilities that are undrawn as of the reporting date are recorded as an asset on the Company’s consolidated balance sheets. These costs are amortized as interest expense using the straight-line method over the term of the related obligation, which approximates the effective interest method.

9

FS Credit Real Estate Income Trust, Inc.

Notes to Unaudited Consolidated Financial Statements (continued)

(in thousands, except share and per share amounts)

Note 2. Summary of Significant Accounting Policies (continued)

Revenue Recognition: Security transactions are accounted for on the trade date. The Company records interest income on an accrual basis to the extent that the Company expects to collect such amounts. The Company records dividend income on the ex-dividend date. The Company does not accrue as a receivable interest or dividends on loans and securities if there is reason to doubt the collectability of such income. Any loan origination fees to which the Company is entitled, loan exit fees, original issue discount and market discount are capitalized and such amounts are amortized as interest income over the respective term of the investment. Upon the prepayment of a loan or security, any unamortized loan origination fees to which the Company is entitled are recorded as fee income. The Company records prepayment premiums on loans and securities as fee income when it receives such amounts.

Organization Costs: Organization costs include, among other things, the cost of incorporating, including the cost of legal services and other fees pertaining to the Company’s organization. These costs will be expensed as incurred. During the period from November 7, 2016 (Inception) to September 13, 2017 (Commencement of Operations), the Company incurred organization costs of $243, which were paid on its behalf by FS Investments (see Note 6).

Offering Costs: Offering costs primarily include, among other things, marketing expenses and printing, legal and due diligence fees and other costs pertaining to the Company’s continuous public offering of shares of its common stock, including the preparation of the registration statement and salaries and direct expenses of FS Real Estate Advisor’s personnel, employees of its respective affiliates and others while engaged in such activities. The Company will charge offering costs against additional paid-in capital on the consolidated balance sheets as it raises proceeds in its continuous public offering in excess of $250,000. FS Real Estate Advisor has agreed not to seek reimbursement of offering costs previously incurred until such time as it determines that the Company has achieved economies of scale sufficient to ensure that it can bear a reasonable level of expenses in relation to its income. After such time, the Company may reimburse FS Real Estate Advisor 0.75% of the gross proceeds raised in its continuous public offering. During the period from November 7, 2016 (Inception) to March 31, 2020, the Company incurred offering costs of $10,494, which were paid on its behalf by FS Investments (see Note 6).

Income Taxes: The Company elected to be taxed as a REIT under the Internal Revenue Code of 1986, as amended, or the Code, commencing with its taxable year ended December 31, 2017. In order to maintain its status as a REIT, the Company must meet certain organizational and operational requirements, including a requirement to distribute at least 90% of its annual REIT taxable income to its stockholders. As a REIT, the Company generally will not be subject to federal income tax on income that it distributes to stockholders. If the Company fails to qualify as a REIT in any taxable year, it will be subject to federal income tax on its taxable income at regular corporate income tax rates and generally will not be permitted to qualify for treatment as a REIT for federal income tax purposes for the four taxable years following the year during which qualification is lost unless the Internal Revenue Service grants the Company relief under certain statutory provisions.

Uncertainty in Income Taxes : The Company evaluates each of its tax positions to determine if they meet the minimum recognition threshold in connection with accounting for uncertainties in income tax positions taken or expected to be taken for the purposes of measuring and recognizing tax benefits or liabilities in the unaudited consolidated financial statements. Recognition of a tax benefit or liability with respect to an uncertain tax position is required only when the position is “more likely than not” to be sustained assuming examination by taxing authorities. The Company recognizes interest and penalties, if any, related to unrecognized tax liabilities as income tax expense in the unaudited consolidated statements of operations. During the period from November 7, 2016 (Inception) to March 31, 2020, the Company did not incur any interest or penalties.

10

FS Credit Real Estate Income Trust, Inc.

Notes to Unaudited Consolidated Financial Statements (continued)

(in thousands, except share and per share amounts)

Note 2. Summary of Significant Accounting Policies (continued)

Stockholder Servicing Fees: The Company follows the guidance in Accounting Standards Codification Topic 405, Liabilities , when accounting for stockholder servicing fees. The Company will pay stockholder servicing fees over time on its shares of Class T, Class S, Class D and Class M common stock as described in Note 6. The Company records stockholder servicing fees as a reduction to additional paid-in capital and records the related liability in an amount equal to its best estimate of the fees payable in relation to the shares of Class T, Class S, Class D and Class M common stock on the date such shares are issued. The liability will be reduced over time, as the fees are paid to the dealer manager, or adjusted if the fees are no longer payable.

Recent Accounting Pronouncements: In June 2016, the FASB issued ASU 2016-13, Financial Instruments—Credit Losses: Measurement of Credit Losses on Financial Instruments (Topic 326) , or ASU 2016-13. ASU 2016-13 significantly changes how entities will measure credit losses for most financial assets and certain other instruments that are not measured at fair value through net income. ASU 2016-13 will replace the “incurred loss” model under existing guidance with an “expected loss” model for instruments measured at amortized cost and require entities to record allowances for available-for-sale debt securities rather than reduce the carrying amount, as they do today under the other than-temporary impairment model. It also simplifies the accounting model for purchased credit-impaired debt securities and loans. For public entities, the new standard is effective during the interim and annual periods beginning after December 15, 2019, with early adoption permitted. In November 2019, the FASB issued ASU 2019-10, Financial Instruments—Credit Losses: Measurement of Credit Losses on Financial Instrument (Topic 326), Derivatives and Hedging (Topic 815), and Leases (Topic 842) Effective Dates, which deferred the effective date of ASU 2016-13 for smaller reporting companies until fiscal years beginning after December 15, 2022. The Company, as a smaller reporting company, continues to evaluate the impact of this update on its unaudited consolidated financial statements.

Note 3. Loans Receivable

The following table details overall statistics for the Company’s loans receivable portfolio as of March 31, 2020 and December 31, 2019:

		March 31, 2020 (Unaudited)				December 31, 2019
Number of loans			33				24
Principal balance		$	613,440			$	405,985
Net book value		$	614,223			$	406,645
Unfunded loan commitments (1)		$	55,914			$	44,226
Weighted-average cash coupon (2)			L+4.17	%			L+4.22	%
Weighted-average all-in yield (2)			L+4.29	%			L+4.39	%
Weighted-average maximum maturity (years) (3)			4.0				3.6

(1)	The Company may be required to provide funding when requested by the borrower in accordance with the terms of the underlying agreements.

(2)	The Company’s floating rate loans are indexed to the London Interbank Offered Rate, or LIBOR. In addition to cash coupon, all-in yield includes accretion of discount (amortization of premium) and accrual of exit fees.

(3)	Maximum maturity assumes all extension options are exercised by the borrower, however loans may be repaid prior to such date.

11

FS Credit Real Estate Income Trust, Inc.

Notes to Unaudited Consolidated Financial Statements (continued)

(in thousands, except share and per share amounts)

Note 3. Loans Receivable (continued)

For the three months ended March 31, 2020 and 2019, the activity in the Company’s loan portfolio was as follows:

		For the Three Months Ended March 31,
		2020				2019
Balance at beginning of period		$	406,645			$	239,207
Loan fundings			207,466				15,574
Loan repayments			(87	)			(9,500	)
Amortization of deferred fees on loans			199				120
Balance at end of period		$	614,223			$	245,401

The following tables detail the property type and geographic location of the properties securing the loans in the Company’s portfolio as of March 31, 2020 and 2019:

		March 31, 2020 (Unaudited)								December 31, 2019
Property Type		Net Book Value				Percentage				Net Book Value				Percentage
Office		$	146,658				24	%		$	121,151				30	%
Multifamily			127,418				21	%			81,111				20	%
Mixed Use			91,251				15	%			76,833				19	%
Hospitality			58,328				10	%			56,221				14	%
Retail			51,996				8	%			41,310				10	%
Industrial			118,887				19	%			30,019				7	%
Self Storage			19,685				3	%			—				—
Total		$	614,223				100	%		$	406,645				100	%

		March 31, 2020 (Unaudited)								December 31, 2019
Geographic Location (1)		Net Book Value				Percentage				Net Book Value				Percentage
South		$	295,259				48	%		$	163,486				40	%
Northeast			168,223				27	%			152,874				38	%
West			120,723				20	%			80,319				20	%
Midwest			10,333				2	%			9,966				2	%
Various			19,685				3	%			—				—
Total		$	614,223				100	%		$	406,645				100	%

(1)	As defined by the United States Department of Commerce, Bureau of the Census.

As of March 31, 2020 and 2019, all of the Company’s loans had a risk rating of 3. The Company did not have any impaired loans, non-accrual loans, or loans in maturity default as of March 31, 2020 or December 31, 2019.

12

FS Credit Real Estate Income Trust, Inc.

Notes to Unaudited Consolidated Financial Statements (continued)

(in thousands, except share and per share amounts)

Note 4. Mortgage-Backed Securities

The Company classified its commercial mortgage-backed securities, or CMBS, as available-for-sale as of March 31, 2020 and December 31, 2019. The investment is reported at fair value on the consolidated balance sheets with changes in fair value recorded in other comprehensive income.

The table below summarizes various attributes of the Company’s investments in available-for-sale CMBS as of March 31, 2020 and December 31, 2019, respectively.

										Gross Unrealized												Weighted Average
		Outstanding Face Amount				Amortized Cost Basis				Gains				Losses				Fair Value				Coupon (1)				Remaining Duration (years)
March 31, 2020 (Unaudited)
CMBS		$	16,634			$	16,634			$	—			$	(1,854	)		$	14,780				2.60	%			1.6
December 31, 2019
CMBS		$	6,634			$	6,634			$	17			$	—			$	6,651				3.20	%			1.7

(1)	Calculated using the one-month LIBOR rate of 0.99% and 1.80% as of March 31, 2020 and December 31, 2019, respectively.

Note 5. Financing Arrangements

The following tables present summary information with respect to the Company’s outstanding financing arrangements as of March 31, 2020 and December 31, 2019. For additional information regarding these financing arrangements, see the notes to the Company’s audited consolidated financial statements contained in its annual report on Form 10-K for the year ended December 31, 2019. Any significant changes to the Company’s financing arrangements during the three months ended March 31, 2020 are discussed below.

As of March 31, 2020 (Unaudited)

Arrangement (1)

Type of Arrangement

Rate

Amount Outstanding

Amount Available

Maturity Date

2019-FL1 Notes

Collateralized Loan Obligation

L+1.20% - 2.50%

$

327,665

$

—

December 18,  2036 (2)

WF-1 Facility (3)

Repurchase

L+2.15% - 2.50% (4)

26,250

123,750

August 30, 2020

GS-1 Facility (5)

Repurchase

L+1.75% - 2.75% (6)

78,640

96,360

January 26, 2021

CNB Facility

Revolving Credit Facility

L+2.25%

6,000

9,000

August 23, 2021

Total

$

438,555

$

229,110

(1)	The carrying amount outstanding under the facilities approximates their fair value.

(2)	The 2019-FL1 Notes mature on the December 2036 payment date, as defined in the Indenture governing the 2019-FL1 Notes and calculated based on the current U.S. federal holidays.

(3)	The carrying amount and fair value of assets transferred as collateral underlying the facility is $65,944 and $66,000, respectively.

(4)	FS CREIT Finance WF-1 LLC, or WF-1, and Wells Fargo Bank, National Association, or Wells Fargo, may mutually agree on rates outside this range on an asset by asset basis.

(5)	The carrying amount and fair value of assets transferred as collateral underlying the facility is $104,820 and $104,853, respectively.

(6)	FS CREIT Finance GS-1 LLC, or GS-1, and Goldman Sachs Bank USA, or Goldman Sachs, may mutually agree on rates outside this range on an asset by asset basis.

13