Franklin BSP Realty Trust, Inc. (FBRT) is a Maryland-based real estate investment trust (REIT) that primarily originates, acquires, and manages a diversified portfolio of commercial real estate debt investments. With a focus on commercial mortgage loans, subordinated mortgage loans, mezzanine loans, and real estate securities, FBRT has established itself as a prominent player in the commercial real estate finance industry.
Business Overview and History: FBRT was formed in 2013 and elected to be treated as a REIT for U.S. federal income tax purposes starting that same year. The company's business is conducted through Benefit Street Partners Realty Operating Partnership, L.P. (the "OP"), a Delaware limited partnership, of which FBRT is the sole general partner. FBRT is externally managed by Benefit Street Partners L.L.C. (the "Advisor"), an SEC-registered investment advisor and a wholly-owned subsidiary of Franklin Resources, Inc. The Advisor manages FBRT's affairs on a day-to-day basis and receives compensation and fees for its services.
In 2020, FBRT faced significant challenges due to the COVID-19 pandemic, which impacted certain sectors of its commercial real estate portfolio. The company proactively addressed these issues by writing down assets, taking title to properties through foreclosure or deed-in-lieu, and actively managing its real estate owned (REO) portfolio. In 2022, FBRT grappled with the fallout from the fraud and default of a loan secured by a portfolio of Walgreens properties. The company foreclosed on the properties, sold some, and continues to market the remaining assets for sale. Throughout these challenges, FBRT has remained focused on improving the credit quality of its portfolio through new loan originations, credit-enhancing loan modifications, and actively managing its REO assets.
Over the years, FBRT has built a diverse portfolio of commercial real estate debt investments, with a focus on first mortgage loans, subordinated mortgage loans, mezzanine loans, and CMBS. As of September 30, 2024, the company's portfolio consisted of 157 commercial mortgage loans with a total carrying value of $5.08 billion, as well as $210.66 million in real estate securities. The company's real estate owned (REO) portfolio, primarily consisting of foreclosed multifamily properties, stood at $286.52 million in assets and $4.36 million in liabilities as of the same date.
Financials and Operational Metrics: For the nine months ended September 30, 2024, FBRT reported total revenue of $398.25 million and net income of $62.23 million. The company's operating cash flow for the same period was $112.32 million, while its free cash flow amounted to $420.44 million. FBRT's debt-to-equity ratio stood at 2.8x as of September 30, 2024, with a total leverage ratio of 2.9x.
For the most recent fiscal year (2023), FBRT reported revenue of $569.53 million, net income of $145.22 million, and operating cash flow of $197.39 million. In the most recent quarter (Q3 2024), the company reported revenue of $142.07 million, net income of $31.61 million, and operating cash flow of $97.44 million.
During the third quarter of 2024, FBRT originated $380 million in new loan commitments, primarily in the multifamily sector across the Southeast and Southwest regions. The company also received $510 million in loan repayments, including $40 million from office loans. As of September 30, 2024, 99% of FBRT's commercial mortgage loan portfolio was in the senior debt position, with 95% of the loans being floating-rate.
FBRT's portfolio quality has been a focus, with the company actively addressing non-performing loans and managing its REO assets. As of September 30, 2024, the company had only three loans designated as non-performing, representing just 1.3% of its overall portfolio. The company has made significant progress in resolving its watch list loans and REO assets, having reduced the watch list from seven to three positions during the quarter.
Liquidity and Capital Structure: FBRT maintains a robust liquidity position, with $1.1 billion in available liquidity as of September 30, 2024. This includes $346.15 million in unrestricted cash, as well as additional capacity in the company's collateralized loan obligations (CLOs) and warehouse lines. The company's capital structure is primarily non-recourse, with 93% of its financings being non-recourse, non-mark-to-market on its core book.
FBRT has several available credit lines, including: - JPM Repo Facility: $500 million capacity, with $29.61 million outstanding - Atlas Repo Facility: $350 million capacity, with $87.62 million outstanding - WF Repo Facility: $400 million capacity, with $6.09 million outstanding - Barclays Revolver Facility: $100 million capacity, with $753,000 outstanding - Barclays Repo Facility: $500 million capacity, with $66.54 million outstanding
Business Segments: FBRT operates through four main business segments:
1. Real Estate Debt Segment: This segment focuses on originating, acquiring, and asset managing commercial real estate debt investments, including first mortgages, subordinate mortgages, mezzanine loans, and participations in such loans. As of September 30, 2024, the company's portfolio consisted of 157 commercial mortgage loans with a total carrying value of $5.08 billion, net of allowance for credit losses. These loans have a weighted average coupon of 8.5% and a weighted average remaining contractual maturity life of 1 year.
2. Real Estate Securities Segment: This segment invests in and manages real estate securities, primarily focusing on commercial mortgage-backed securities (CMBS), CMBS bonds, collateralized debt obligations (CDOs), and other securities. As of September 30, 2024, the company had $210.66 million of real estate securities available for sale, measured at fair value.
3. Commercial Real Estate Conduit Segment: Operated through the company's taxable REIT subsidiary (TRS), this segment focuses on generating risk-adjusted returns by originating and subsequently selling fixed-rate commercial real estate loans into the CMBS securitization market at a profit. The TRS may also hold certain mezzanine loans that do not qualify as good REIT assets due to any potential loss from foreclosure.
4. Real Estate Owned Segment: This segment represents real estate acquired by the company through foreclosure, deed in lieu of foreclosure, or purchase. As of September 30, 2024, the company had $113.85 million of real estate owned held for investment and $284.42 million of real estate owned held for sale.
Risks and Challenges: While FBRT has navigated the commercial real estate landscape effectively, the company faces various risks and challenges. The continued weakness in the office sector, which now accounts for only 4% of FBRT's portfolio, has been a significant concern. The company has proactively addressed these issues by writing down assets and taking possession of properties through foreclosure or deed-in-lieu transactions.
Additionally, the volatile interest rate environment presents both opportunities and risks for FBRT. The company's ability to originate new loans at current market rates and effectively manage its legacy portfolio will be crucial in navigating this landscape.
Industry Trends: The commercial real estate industry has faced significant headwinds, particularly in the office sector, due to the impacts of the COVID-19 pandemic. However, the multifamily sector, which makes up the majority of FBRT's portfolio, has remained relatively resilient. The Compound Annual Growth Rate (CAGR) of the US multifamily market is expected to be 3-5% over the next 5 years, providing a positive outlook for FBRT's focus on this sector.
Recent Performance and Guidance: In the third quarter of 2024, FBRT reported GAAP earnings of $0.30 per diluted common share and distributable earnings of -$0.10 per diluted common share. Distributable earnings excluding realized losses were $0.31 per diluted common share, which excludes $36.4 million of losses realized related to their REO Walgreens portfolio.
While FBRT has not provided specific forward-looking guidance, the company remains confident that its current dividend level accurately reflects the portfolio's long-term stabilized earnings potential. The company also expects to deploy its ample unrestricted cash of $1.1 billion in available liquidity in the relatively near future.
Outlook and Conclusion: Despite the challenges, FBRT remains well-positioned to capitalize on the current market conditions. The company's focus on multifamily and other resilient asset classes, as well as its proactive approach to managing its legacy portfolio, have positioned it as a market leader. With a robust liquidity position, a strong capital structure, and a seasoned management team, FBRT is poised to navigate the commercial real estate landscape with resilience and continue to deliver value to its shareholders.
The company's diverse business segments, including real estate debt, real estate securities, commercial real estate conduit, and real estate owned, provide a well-rounded approach to the commercial real estate market. This diversification, combined with FBRT's strong financial position and strategic focus on resilient sectors like multifamily, positions the company to weather market fluctuations and capitalize on emerging opportunities in the commercial real estate landscape.