Franklin BSP Stock: 10.6%-Yielding Alternative Bank Has 20% Upside
September 13, 2024
Franklin BSP Realty Trust Reports Solid Q2 Results
High inflation and interest rates are a double whammy for Americans. The higher cost of living makes it more difficult to pay bills, and higher interest rates make it challenging for people to pay off their mortgages or even step onto the property ladder.
But there’s one way that investors could actually make money off mortgages: through mortgage real estate investment trusts (mREITs) like Franklin BSP Realty Trust Inc (NYSE:FBRT).
How do mREITs make money?
They borrow money at short-term interest rates, buy securitized mortgages, and collect income from these mortgages.
mREITs have taken a hit in this high-interest rate environment. That’s because higher interest rates make it more expensive to borrow and service debt, which can cut into profitability.
But, with the Federal Reserve poised to cut interest rates, the outlook for mREITs is heating up. Lower interest rates make borrowing cheaper and allow mREITs to refinance debt at better rates.
How do mREIT shareholders make money?
mREITs legally have to distribute 90% of their taxable income to investors in the form of a dividend. And those dividends can be quite high. Franklin BSP stock’s current dividend yield is 10.6%; that’s more than three times the current inflation rate of 2.9%.
Investors are becoming increasingly optimistic about lower interest rates and the impact they will have on mREITs. iShares Mortgage Real Estate Capped ETF (NYSE:REM) is up just 3.5% since the start of 2024, but it’s up 10% over the last six months.
Franklin BSP stock is following a similar trajectory, up 3.8% in 2024 but up 11.5% over the last six months. The outlook for FBRT stock remains solid, too, with Wall Street providing a 12-month share price target range of $14.00 to $16.00. This points to potential gains of 5.5% to 20.5%.
Chart courtesy of StockCharts.com
About Franklin BSP Realty Trust Inc
Franklin BSP Realty Trust Inc is an mREIT that originates, acquires, and manages a portfolio of commercial real estate debt, primarily first mortgage loans. It also invests in subordinate loans, mezzanine loans, and securities. (Source: “FBRT Second Quarter 2024 Supplemental Information,” Franklin BSP Realty Trust Inc, August 1, 2024.)
The company’s diversified portfolio is secured by real estate located in the U.S. and diversified by property type and geographic location. Most of its collateral is located in the southeast and southwest, accounting for 74% of its portfolio. By state, Franklin BSP Realty’s biggest concentrations are in Texas (34), Florida (12%), and North Carolina (10%).
The company’s current $5.4-billion portfolio is made up of 153 commercial real estate (CRE) loans. The majority (74%) of its portfolio is made up of multifamily, followed by hospitality (14%), office (5%), industrial (5%), retail (1%), and other (2%).
Originates Over $1.2 Billion Year to Date
For the second quarter ended June 30, Franklin BSP Realty Trust reported a net loss of $3.8 million, or a loss of $0.11 per share, down from first-quarter 2024 net income of $35.8 million, or $0.35 per share. (Source: “Franklin BSP Realty Trust, Inc. Announces Second Quarter 2024 Results,” Franklin BSP Realty Trust Inc, July 31, 2024.)
Distributable earnings came in at $32.4 million, or $0.31 per share, down from $41.0 million, or $0.41 per share, in the previous quarter.
At the end of the second quarter, Franklin BSP’s core portfolio principal balance was $5.4 billion, up $195.0 million from the first quarter. During the quarter, the mREIT closed $622.0 million in new loan commitments, bringing total loan commitments for the first half of 2024 to $1.2 billion.
During the quarter, the company sold two “Walgreens” stores. Subsequent to the end of the second quarter it sold an additional 16 Walgreens stores.
Franklin BSP ended the quarter with total liquidity of $699.0 million, which includes $95.0 million in cash and cash equivalents.
Commenting on the second-quarter results, Michael Comparato, Franklin BSP’s president, said, “Our 74% multifamily portfolio is performing well, and our team continues to make exceptional progress working through our watch list and REO positions. We continue to deploy capital and grow our balance sheet because of the conviction we have in our portfolio.”
Declares Cash Dividend of $0.355 Per Share
Franklin BSP stock has only been trading since 2021. It was the result of a merger between Franklin, formerly known as Benefit Street Partners Realty Trust, and Capstead Mortgage Corporation. (Source: “Franklin BSP Realty Trust, Inc. and Capstead Mortgage Corporation Announce Completion of Merger,” Franklin BSP Realty Trust Inc, October 19, 2021.)
As a result, the newly merged company doesn’t have a long history of paying a dividend. That said, Franklin BSP stock has paid a reliable dividend since the merger. Most recently, this past June, the mREIT declared a quarterly dividend of $0.355 per share, or $1.42 on an annual basis, for a current yield of 10.66%.
In addition to a reliable ultra-high yield dividend, Franklin BSP stock also returns value to shareholders through share buybacks. In the second quarter, the mREIT repurchased 240,740 shares of its common stock at an average price of $12.42 per share for an aggregate of $3.0 million. Approximately $31.1 million remains available under the current $65.0 million share repurchase plan.
The Lowdown on Franklin BSP Stock
Franklin BSP Realty Trust is an mREIT with a diversified portfolio of CRE debt, primarily first mortgage loans in the multifamily sector.
In fact, over 99% of the aggregate principal balance of the company’s portfolio is in senior mortgage loans, with approximately 97% in floating rate loans and roughly 74% of the portfolio collateralized by multifamily properties.
Franklin BSP has a strong balance sheet with total liquidity of $699.0 million and, during the first half of the year, it originated over $1.3 billion in total commitments.
Thanks to the company’s strong cash generation, Franklin BSP stock is able to provide investors with both a reliable, high-yield dividend and share buybacks.
