Get to know the players
Benefit Street Partners Realty Trust (BSPRT) holds a diversified portfolio of commercial real estate debt secured by properties located in the U.S. At the end of the second quarter of 2021, BSPRT had over $3 billion of assets.
As of Q1 2021, the company had 140 senior loans with an average size of $22 million and some smaller mezzanine loans, most of which have a floating rate. Further, 50% of BSPRT's secured properties as of Q1 were multifamily, with office, hospitality, and industrial properties making up the bulk of the remaining collateral.
Capstead Mortgage Corporation was founded in 1985 and is the oldest publicly traded mortgage REIT. It holds a leveraged portfolio of residential adjustable-rate mortgage securities guaranteed by Fannie Mae, Freddie Mac, and Ginnie Mae. The mortgage REIT generally trades between $6 and $10 per share and has seen its share price rise by nearly 15% so far in 2021.
The company recently announced a Q2 2021 common dividend of $0.15 per common share. In Q1 2021, it reported net income of $18.9 million, or $0.15 per diluted common share. As of March 31, 2021, it had a portfolio of $7.4 billion.
The new company, Franklin BSP Realty Trust, will focus on commercial mortgage loans, trading on the NYSE under the ticker FBRT. BSPRT's manager, Benefit Street Partners -- a wholly-owned subsidiary of Franklin Templeton -- will manage the company.
The deal is expected to close in Q4 2021. The new company will become the fourth-largest commercial mortgage REIT. On July 23, 2021, Capstead's stockholders will receive a 15.75% premium to the reported share price of Capstead common stock on the New York Stock Exchange.
What this means for investors
Mortgage REITs are high-volatility investments. That's one of the reasons we tend not to look at them as long-term holds for a portfolio. The Capstead merger and pivot out of residential mortgage loans come at a time when some competitors, such as Annaly Capital, are heading in the opposite direction and selling off their commercial debt.
However, commercial real estate mortgages in general tend to be a lower-volatility product, which is one reason for the change in strategy. Over the next five years, there will be more than $2.1 trillion in real estate debt maturities, representing a sizable market opportunity.
Of course, when mentioning the company becoming the fourth-largest commercial mortgage REIT, it's worth taking a look at the other three. Those would be Starwood Property Trust, Blackstone Mortgage Trust, and Apollo Commercial Real Estate Finance. These all represent substantial competition to FBRT but also show the value that others see in the space.
After the merger, a $100 million common stock repurchase program will be available post-closing, and the company stock will be in a six-month lock-up for the majority of BSPRT shares.
If you're interested in the commercial loan space, this potential investment might be worth keeping on your watch list for later in the year. The fact that BSPRT's current portfolio has a strong emphasis on multifamily properties is likely good news, but it does have some exposure to riskier sectors, such as office and hospitality, which could be affected by the potential impact of the delta variant.