Reader RollsRoyceSilverCloud recently returned to my November article on Franklin BSP Realty Trust (FBRT) to comment, “I see absolutely no reason why FBRT’s preferred stock has fallen so much… They seem to have slipped off the radar.”
That could may be an exaggeration, but it’s definitely only a faint rash. The stock in question is Franklin BSP Realty Trust 7.50% Series E Cumulative Preferred Stock (NYSE:FBRT.PE).
The issue pays an annual dividend of $1,875, payable quarterly (Quantum Description). At the current price of $20.13, it is down 19.7% year-to-date. It has a current yield of 9.3%.
I owned its predecessor, CMO.PE, for years and collected 7.5% dividends on the liquidation bargain price of $25. Capstead, which has hobbled in the declining ARM residential securities business, was bought by smaller Franklin BSP Realty last year in a SPAC-like way to go public.
The Preferred barely budged when the takeover occurred, hovering around its $25 call price until the market’s decline in February. According to the Quantum description, it can be called at any time. Franklin BSP does not qualify for the reduced tax rate on preferred dividends, so this issue is better held in IRAs and other tax-advantaged accounts.
CMO.PE tended to flatten during market declines, falling to 14 in March 2020 before quickly recovering. One reason may be that the output is unrated and there is a flight to rated outputs during nerve-wracking times. Another reason is relatively low volume, averaging around 50,000 shares per day.
Comparison with other preferred
The trade-off for higher interest rates is of course security, but there seems to be no credit quality reason for FBRT.PE’s demise. The move from government-guaranteed ARMs to non-guaranteed commercial mortgage loans adds a layer of risk.
Still, that doesn’t seem to be the problem. A preferred mortgage REIT, Annaly Capital Management 6.75% Preferred (NLY.PI), has posted nearly the same 18.3% year-to-date decline.
One blue-chip preferred bank, JPMorgan Chase 5.75% Shares Preferred (JPM.PD), yields 6.03% and is down 11.1% this year. So basically, an investor gets 330 basis points of return for taking on that extra risk, which I see as fair consideration.
Most preferred stocks have fallen this year due to higher interest rates. The iShares Preferred and Income Securities Trust (PFF) has a YTD yield of -18.7% and a distribution yield of 4.71%. The Fed has already indicated that it will keep raising rates until inflation eases. FBRT.PE pays more than most, offering income investors some protection from rate hikes.
Franklin BSP on track
FBRT Common has held up well despite the expected slowdown in the real estate market. Franklin BSP is nearing completion of the transition from Capstead’s customizable mortgage portfolio to its own higher-margin commercial real estate loan book with a run-rate yield of 9.3%.
The ARM portfolio has declined rapidly and is now just $649 million at fair market value compared to $4.6 billion in commercial loans.
It has a book value of $16.50 per share and an 8.6% book yield. Since it’s selling for less, the current forward yield is even better, at 10.1%.
While credit can always go wrong in recessions, there’s still no evidence that it does. “We have a well-diversified book with only one loan on the watchlist and a very strong backlog,” CEO Richard Byrne said on the May earnings call.
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 real estate located in the United States. As of March 31, 2022, FBRT had over $7.1 billion in assets. FBRT is managed externally by Benefit Street Partners LLC, a wholly owned subsidiary of Franklin Templeton.”
The preferred stock naturally takes precedence over the common stock. The quarterly common dividend of $0.355 would have to be eliminated before the preferred dividend could be affected, and since it is cumulative, arrears would have to be paid before the common dividend would be resumed.
FBRT remains attractive despite certain risks. FBRT.PE is a relatively safe high yield for income investors. It’s best for tax-deferred accounts since its dividends don’t qualify. Investors in IRAs or Roths might want to buy before they go ex-dividend on June 30th.