Focusing On Multifamily Loans Will Strengthen Portfolio Quality

Key Takeaways

• Strategic shift to high-quality multifamily loans is expected to improve revenue through advantageous valuations and increased net interest income.
  
• Active management of loan portfolio, including reducing non-performing assets and office exposure, is set to enhance earnings and credit quality.
  
• Legacy loans and office sector challenges create risks for earnings stability and dividend levels, with foreclosures impacting asset values and future revenue potential.

Catalysts

A real estate finance company, originates, acquires, and manages a portfolio of commercial real estate debt investments secured by properties located in the United States.

• FBRT's shift to originating new, high-quality loans post-rate hikes, particularly in multifamily properties, is expected to improve its revenue and net interest income as these loans come with higher spreads at more advantageous valuations.
  
• The company's significant progress in resolving watchlist loans and selling off REO assets is likely to enhance net margins and earnings by reducing non-performing assets and recycling capital into new, higher-yielding loans.
  
• The high liquidity position of $1.1 billion, including $346 million in cash, allows FBRT to capitalize on attractive lending opportunities and enhance future earnings and revenue growth through strategic loan originations.
  
• The focus on multifamily properties, which are expected to see favorable supply-demand dynamics in the coming years, positions FBRT to increase rent-based revenue, thus potentially enhancing net margins.
  
• The company's active management and planned reduction of office exposure, combined with a focus on multifamily loans in strong markets, are anticipated to stabilize and potentially grow earnings by improving the overall credit quality and risk profile of the loan portfolio.

Franklin BSP Realty Trust Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Franklin BSP Realty Trust's revenue will grow by 11.8% annually over the next 3 years.
• Analysts assume that profit margins will increase from 39.6% today to 57.0% in 3 years time.
• Analysts expect earnings to reach $135.0 million (and earnings per share of $1.64) by about December 2027, up from $67.2 million today.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 11.7x on those 2027 earnings, down from 15.8x today. This future PE is greater than the current PE for the US Mortgage REITs industry at 10.6x.
• Analysts expect the number of shares outstanding to grow by 0.11% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 8.02%, as per the Simply Wall St company report.

Franklin BSP Realty Trust Future Earnings Per Share Growth

Risks

• The company is dealing with legacy loans that have deteriorated due to increased interest rates, particularly in the office sector, which could continue to negatively impact net margins.
  
• Challenges within the office sector, which has seen significant value declines post-COVID, create a risk of higher loan delinquencies, impacting overall earnings stability.
  
• Despite originating high-quality loans post-rate hikes, the overall loan portfolio size decreased, which can affect net interest income and revenue potential.
  
• The company's distributable earnings were unable to cover quarterly dividends, indicating potential risks in maintaining dividend levels if earnings do not stabilize.
  
• The presence of 13 foreclosure REO positions, despite recent progress in resolving some, highlights potential risks to asset values and portfolio quality, potentially impacting future revenue streams.

Valuation

• The analysts have a consensus price target of $15.33 for Franklin BSP Realty Trust based on their expectations of its future earnings growth, profit margins and other risk factors.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be $236.9 million, earnings will come to $135.0 million, and it would be trading on a PE ratio of 11.7x, assuming you use a discount rate of 8.0%.
• Given the current share price of $13.0, the analyst's price target of $15.33 is 15.2% higher.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.