Franklin BSP Realty Trust: A Buying Opportunity (NYSE:FBRT)

Franklin BSP Realty Trust: A Buying Opportunity (NYSE:FBRT)

Franklin BSP Realty Trust: A Buying Opportunity (NYSE:FBRT)

Concept image of Business Acronym REIT as Real Estate Investment Trust. 3d rendering

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Reader RollsRoyceSilverCloud recently went back to my November article about Franklin BSP Realty Trust (FBRT) to comment: “I see absolutely no reason why the preferred FBRT shares have fallen so sharply…They seem to have fallen off the radar.”

that may be an exaggeration, but at any rate it’s only a faint blip. The stock in question is Franklin BSP Realty Trust 7.50% Series E Cumulative Preferred Stock (NYSE:FBRT.PE

The issue pays a $1,875 annual dividend, payable quarterly (Quantum description). At a recent price of $20.13, it’s down 19.7% year-to-date. It has a current yield of 9.3%.

I owned its predecessor CMO.PE for years, collecting 7.5% dividends on the liquidation preference price of $25. Capstead, limping along in the declining residential ARM securities business, was bought by the smaller Franklin BSP Realty last year as a SPAC-like way to go public.

The preferred barely budgeted when the takeover occurred and hung around its $25 call price until the market decline began in February. It can be called at any time, according to the Quantum description. Franklin BSP does not qualify for the reduced tax rate on preferred dividends, so this issue may be better held in IRAs and other tax-advantaged accounts.

CMO.PE had a tendency to melt down during market declines, sinking to 14 in March 2020 before quickly recovering. One reason may be that the issue is unrated and there is a flight to rated issues during nerve-wracking times. Another is relatively low volume, averaging around 50,000 shares a day.

Comparison With Other Preferreds

The tradeoff for higher rates, of course, is safety, but there doesn’t seem to be any credit quality reason for the decline of FBRT.PE. The switch from agency-guaranteed ARMs to non-guaranteed commercial mortgage loans adds a layer of risk.

Still, that doesn’t seem to be the issue. A mortgage REIT preferred, Annaly Capital Management 6.75% Preferred (NLY.PI), has just about the same year-to-date decline, 18.3%.

A blue-chip bank preferred, JPMorgan Chase 5.75% Shares Preferred (JPM.PD), yields 6.03% and has declined 11.1% this year. So basically an investor is getting 330 basis points of yield for taking on additional risk, which I see as fair recompense.

Most preferred stocks are down this year as a result of higher interest rates. The iShares Preferred and Income Securities Trust (PFF) has a YTD return of -18.7% and a distribution yield of 4.71%. The Fed has already indicated it will continue raising rates until inflation abates. FBRT.PE pays more than most, giving income-oriented investors some protection from rate increases.

Franklin BSP On Track

FBRT common has held up well despite the anticipated slowdown of the real-estate market. Franklin BSP is nearing the completion of the transition from Capstead’s adjustable mortgage portfolio to its own commercial real estate lending book, which has a higher margin with a run-rate return of 9.3%.

The ARM portfolio has declined rapidly, totaling only $649 million at fair market value compared to $4.6 billion in commercial loans.

It has a book value of $16.50 a share and a book yield of 8.6%. Since it’s selling for less than that, the current forward yield is even better, 10.1%.

While loans can always go south during recessions, there’s no evidence of it yet. “We have a well-diversified book with only one loan on watch list and a very strong backlog,” CEO Richard Byrne said in the May earnings call.

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Data by YCharts

Franklin BSP Realty Trust, Inc. †NYSE: FBRT) is a real estate investment trust that originates, acquires, and manages a diversified portfolio of commercial real estate debt secured by properties located in the United States. As of March 31, 2022, FBRT had over $7.1 billion of assets. FBRT is externally managed by Benefit Street Partners LLC, a wholly owned subsidiary of Franklin Templeton.”

The preferred stock is of course senior to the common. The quarterly common dividend of $,355 would have to be eliminated before the preferred dividend could be touched, and since it is cumulative, arrears would need to be paid before the common dividend resumed.

conclusion

FBRT remains attractive despite some risk. FBRT.PE is a relatively safe high-yielder for income oriented investors. It’s best for tax-deferred accounts since its dividends aren’t qualified. Investors in IRAs or Roths may want to buy, perhaps before it goes ex-dividend on June 30.

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