Franklin BSP Realty is a decent value trading below book value (NYSE: FBRT)

xavierarnau

Written by George Spritzer, co-produced by Alpha Gen Capital

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FBRT logo (FBRT website)

(The data below is from the Franklin BSP Realty Trust website, unless otherwise stated.)

Benefit Street Partners or BSP is a leading credit-focused alternative asset management firm for institutions and wealthy investors. It has $39 billion in assets under management. BSP is a wholly owned subsidiary of Franklin Templeton. BSP Real Estate is a middle market focused real estate team within the BSP platform.

In October 2021, BSP Realty Trust merged with Capstead Mortgage Corporation to create Franklin BSP Realty Trust (NYSE: FBRT). The fusion produced a significant increase in the scale of FBRT. It also provided a liquidity event to former FBRT shareholders who can now sell their shares through the public listing on the NYSE.

As part of the merger plan, FBRT used a strategy to transform more than $7 billion of Capstead’s low-yielding ARM residential assets into higher-yielding, low-volatility commercial mortgages.

According to nasdaq.com, institutions currently own about 31% of the fund’s outstanding shares. Much of the shareholder base is made up of former holders of Capstead Mortgage (which previously traded under the symbol CMO) or the former FBRT. Many of these earlier investors likely sold their FBRT shares.

Many former FBRT shareholders likely used publicly traded shares as a source of cash that was previously unavailable to them. Some of CMO’s former shareholders also probably sold shares as they might be unhappy with the new investment strategy. I believe this sale resulted in a reduced price for FBRT and Preferred FBRT.

FBRT uses a very flexible lending approach

FBRT customizes each loan to a specific property. Typically, every first mortgage meets the following criteria:

  • Loan amount from $10 million to $250 million
  • Up to 80% LTV
  • Term of 3 to 5 years for transitional loans
  • 10-year term for stabilized loans
  • Any type of commercial property

Investment strategy

FBRT uses four different sub-strategies to manage the portfolio.

  • Middle Market: Focused on value-added transition opportunities that are less competitive and more fragmented than the large loan market. There are opportunities for additional structural protections over larger, heavily syndicated loans. Typically offers higher returns with attractive LTVs.
  • Direct Origination: BSP has a strong mid-market origination team. She has established relationships with brokers and borrowers who source repeat clients. More than half of FBRT’s portfolio comes from regular borrowers.
  • Focus on multi-family dwellings: Attractive segment of the middle market due to strong loan demand, attractive risk-adjusted yields and excellent credit performance. 72% of the core portfolio is multi-family.
  • Conduit Business: Provides a competitive advantage in finding deals and the ability to offer multiple solutions to borrowers. The “gain on sale” model enhances FBRT’s return on equity with limited credit exposure.

Portfolio overview

  • Total portfolio with a main balance of $5.3 billion.
  • 174 commercial real estate loans averaging $30 million.
  • 170 senior loans with an average size of $31 million.
  • 4 mezzanine loans for an average amount of 4 million dollars.
  • Two loans in a situation of non-regularization.

Broadcast history

The table below shows recent quarterly distributions plus an interim distribution paid by FBRT. Ex-dividend dates are 1 business day prior to record dates.

Registration Date

Payment date

Rising

03/31/2021

04/01/2021

$0.275

06/30/2021

01/07/2021

$0.275

09/30/2021

01/10/2021

$0.355

10/13/2021

10/18/2021

$0.07 (provisional)

31/12/2021

01/10/2022

$0.285

03/31/2022

04/11/2022

$0.355

06/30/2022

11/07/2022

$0.355

Breakdown of the FBRT portfolio

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Collateral Distribution (FBRT website)

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Breakdown by region (FBRT website)

Share buyback programs

During the first quarter, FBRT Advisors purchased 572,940 shares for $7.5 million at an average gross price of $13.15 per share. This was done using the $35 million open market share purchase program that the advisor agreed to implement when FBRT acquired Capstead.

From April 1, 2022 through May 3, 2022, advisors purchased an additional 1,794,505 shares for $24.9 million at an average gross price of $13.89 per share. Subsequent to the end of the quarter, from July 1 through July 8, the advisor purchased 190,199 shares for $2.5 million at an average price of $13.33 per share, completing the advisors’ purchase program.

FBRT’s Board of Directors authorized another $65 million share buyback program which is now operational following the conclusion of the Advisor’s program.

Preferred shares FBRT 7.5% E

FBRT’s 7.5% preferred stock was hit by rapidly rising interest rates earlier this year and is now trading well below its $25 face value. Although not a premium issue, the dividends look pretty safe. Preferred payouts come “ahead” of generous ordinary dividend payouts.

Preferred FBRT pays a quarterly dividend of $1.875, which equates to an annual yield of 8.78% based on the August 5 closing price.

Franklin BSP Real Estate Trust

  • Total asset investment exposure = $6.2 billion
  • Total equity value = $1.6 billion
  • 99% first secured mortgages
  • Dividend yield on book value = 8.98%
  • Annual distribution rate = 9.90%
  • Dividend Frequency = Quarterly
  • Current quarterly distribution = $0.355 per share ($1.42 per year)
  • Operating expenses to equity value = ~5.0%
  • Net Debt/Equity Ratio = 2.4x
  • Net debt/equity recourse ratio = 0.5x
  • Price/book value = ~0.95
  • Average 3 Months. Daily trading volume = 1.28 million shares
  • Average 3 Months. Daily dollar volume = $19.3 million
  • FBRT-E yield = 8.78%

Sources: FBRT website, Yahoo Finance

I think FBRT common stock should do well over the long term. It may be beneficial to buy a smaller “starting” position here for tracking purposes and then add more common shares on a pullback closer to the $14.50 price level.

The FBRT common is quite liquid and often trades over a million shares a day. It’s easy to buy using smaller market orders or limit orders.

In today’s low interest rate environment, it can be difficult to find safe fixed income investments that generate a decent return. Based on current prices, I believe the preferred FBRT-E now offers excellent value on a risk-adjusted basis.

One should be more careful when buying FBRT-E preferred shares, which usually trade around 20,000 shares per day. Caution should be exercised when executing orders, as the bid-ask spread is often fifteen cents or more. I would definitely recommend using smaller sized limit orders. To accumulate a larger position, simply split the large order into several smaller orders. Since most brokers now offer no commission, this shouldn’t be a problem.

For those in a higher tax bracket, it’s probably best to own FBRT and FBRT-E in a tax-deferred retirement account. In 2021, 97.2% of FBRT and FBRT-E dividends were ordinary income and 2.8% capital gains. The portion of ordinary income may be eligible for the 20% deduction applicable to qualifying REIT dividends under IRC Section 199A.

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