Franklin BSP Realty Is Benefiting From Higher Short-Term Interest Rates

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

Franklin BSP Realty Trust (NYSE:FBRT) is a REIT that originates, acquires, and manages a diversified portfolio of commercial real estate debt investments. I wrote an article on FBRT last year which described the history of the fund and provided further background information: Franklin BSP Realty Is A Decent Value Trading Below Book Value.

There are several things that make FBRT an attractive investment:

• Well-diversified portfolio of senior floating rate loans.
• Conservative balance sheet.
• Strong sponsorship and management.
• FBRT has benefited from higher short-term interest rates.

Portfolio Updates (As of the end of 2nd quarter 2023)

• Total portfolio of $5.1 billion principal balance.
• 148 senior loans; average size ~$34 million.
• 8 mezzanine loans; average size ~$4 million.
• In April 2023, sold Brooklyn Hotel for $96 million. They received the full principal amount of the loan and approximately $20 million of additional proceeds after paying closing expenses.
• Only one non-performing loan. Five loans on the watch list.

Financing Sources and Net Leverage

Distribution History

The distribution table below shows recent quarterly distributions, which have held steady at $0.355 per quarter. The ex-dividend dates are 1 business day prior to the record dates.

The third quarter 2023 dividend of $0.355 has been announced. The dividend is payable on or about October 10, 2023 to stockholders of record as of Sept. 29, 2023.

Distribution Table

The chart below shows that distributable earnings for the fund have been growing nicely over the last year, increasing from $0.33 per quarter to the current $0.66. The current distribution is easily covered.

If the current trend continues, I wouldn't be surprised to see a dividend increase next year.

FBRT Collateral Breakdowns

Share Repurchase Program Update

FBRT repurchased 445,000 shares for $5.5 million in the second quarter of 2023 for an average cost of about $12.36 per share. This has been accretive to NAV.

About $39.3 million remains available under the share repurchase program.

Book Value and Shares Outstanding Update

Book value held steady during the first six months of 2023, after paying out the distributions. Shares outstanding of common stock dropped somewhat due to the share buybacks.

FBRT 7.5% E Preferred Stock (FBRT.PR.E)

The 7.5% preferred stock for FBRT was hurt by the rapid rise in interest rates last year, but the price has recovered significantly since the panic lows in March. It is not an investment grade issue, but the dividends currently seem quite secure. The preferred payments sit "in front of" the generous common dividend payouts, which were easily covered in the second quarter.

The FBRT preferred pays an annual dividend of $1.875, which equates to an annual yield of 9.41% based on the closing price of $19.92 on September 19.

Franklin BSP Realty Trust

• Total Assets Investment Exposure= $5.99 billion
• Total Equity Value= $1.69 billion
• ~98% Senior Secured Mortgage Loans
• Annual Distribution Rate= 10.11%
• Dividend Frequency= Quarterly
• Current Quarterly Distribution= $0.355 per share ($1.42 annually)
• Net Debt/Equity Leverage Ratio= 2.4x
• Recourse Net Debt/Equity Ratio= 0.6x
• Price/Book Value= ~0.88
• Average 3 Mos. Daily Trading Volume= 257,000 shares
• Average 3 Mos. Daily $ Volume= $3.6 million
• FBRT-E yield= 9.41%

Sources: FBRT website, Yahoo Finance

I think the FBRT common shares as well as its preferred shares are well suited to the current interest rate environment, where interest rates may remain elevated for quite some time. It may pay to gradually dollar cost average into a position.

The FBRT common is quite liquid and usually trades a few hundred thousand shares a day. It is easy to buy using smaller market orders or limit orders.

For someone looking for a safer investment than the common, I think the FBRT-E preferred provides an excellent value now on a risk-adjusted basis.

The FBRT-E preferred stock usually trades around 23,000 shares a day. Care must be used executing orders since the bid-asked spread can be fifteen cents or higher. I would definitely recommend using smaller size limit orders. To accumulate a larger position, simply break up the large order into multiple small orders. Since most brokers now offer zero commissions, this is not a problem.

For those in a high tax bracket, it is probably best to own FBRT and FBRT-E in a tax-deferred retirement account. In 2022, 100% of the FBRT and FBRT-E dividends were ordinary income. The ordinary income portion may be eligible for the 20% deduction applicable to qualified REIT dividends under IRC Section 199A.

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