Business context and reporting period
This Form 10-Q covers the three months ended March 31, 2018. The filing identifies the registrant as Colony NorthStar Credit Real Estate, Inc. (NYSE: CLNC), not BrightSpire Capital, Inc.; investors should verify the requested company identity and filing lineage.
The company is an externally managed commercial real estate credit REIT focused on senior mortgage loans, mezzanine loans, preferred equity, CMBS and net leased real estate. On January 31, 2018, it completed the Combination with NorthStar Real Estate Income Trust I and II and certain contributed portfolios. Class A common stock began trading on the NYSE on February 1, 2018. The company intends to qualify as a REIT beginning with the 2018 tax year.
Because NorthStar I and II results are included beginning February 1, 2018, while prior-period financial statements primarily represent the CLNS Investment Entities, period-to-period comparisons are not fully meaningful.
Key financial metrics
| Metric | March 31, 2018 / Q1 2018 | Comparable prior period |
|---|---|---|
| Total assets | $8.121 billion | $1.839 billion at December 31, 2017 |
| Stockholders' equity | $3.030 billion | $1.080 billion at December 31, 2017 |
| Cash and cash equivalents | $335.0 million | $25.2 million at December 31, 2017 |
| Restricted cash | $117.4 million | $41.9 million at December 31, 2017 |
| Net interest income | $30.3 million | $29.0 million |
| Property and other income | $29.1 million | $5.3 million |
| Total expenses | $79.1 million | $8.6 million |
| Net income attributable to common stockholders | $(4.7) million | $22.9 million |
| Basic and diluted EPS | $(0.05) | $0.47 |
| Core Earnings attributable to common stockholders | $44.4 million, or $0.44 per share | $25.1 million, or $0.53 per share |
| Net cash provided by operating activities | $17.3 million | $31.2 million |
| Net cash provided by investing activities | $340.0 million | $38.3 million |
| Net cash used in financing activities | $(47.5) million | $(43.7) million |
| Dividends declared per share | $0.29 for the quarter | None reported |
Reported net income was affected by $30.2 million of Combination-related transaction costs, $18.8 million of depreciation and amortization, and $8.0 million of management fees. The filing does not provide a single consolidated operating margin or net interest margin.
Portfolio and leverage
- The portfolio comprised 153 investments with approximately $7.6 billion of book value, or $7.3 billion at the company's share.
- The loan portfolio included 83 investments with $2.3 billion of book value at the company's share, a weighted average cash coupon of 8.0% and weighted average all-in levered yield of 8.2%.
- Owned real estate had approximately $1.6 billion of book value, 12.7 million square feet, 91% leased occupancy and $134.6 million of annualized base rent.
- Loans held for investment, net, totaled $1.816 billion, up from $1.301 billion at December 31, 2017.
- Debt carrying value totaled approximately $1.698 billion, consisting of $172.1 million of securitization bonds, $924.0 million of mortgage and other notes, and $602.3 million of credit facilities.
- The debt-to-equity ratio was 0.4x, compared with 0.3x at December 31, 2017. The company also had a $400 million corporate revolving facility with no borrowings outstanding at quarter-end.
- Total corporate liquidity was reported at $749.3 million, consisting of cash, the undrawn corporate facility and $14.3 million due from a servicer.
Material changes versus the prior comparable period
- The Combination materially expanded the balance sheet, portfolio, property income and financing base. Pro forma total revenues were $136.0 million for Q1 2018 versus $123.4 million for Q1 2017, while pro forma net income attributable to common stockholders was $35.2 million versus $39.9 million.
- Reported net income attributable to common stockholders declined to a $4.7 million loss from $22.9 million of income, primarily because of Combination costs and substantially higher depreciation, management fees, property expenses and financing-related expenses.
- Net interest income increased 4.4% to $30.3 million. Property and other income increased 448.3% to $29.1 million as a result of acquired real estate.
- Operating cash flow decreased to $17.3 million from $31.2 million, primarily due to cash transaction costs related to the Combination. Investing cash flow increased principally because of $225.2 million of cash received in the Combination and loan repayments.
- The company began paying monthly dividends of $0.145 per share for February and March 2018, equivalent to an annualized rate of $1.74 per share based on subsequent declarations.
- The company authorized a $300 million stock repurchase program through March 31, 2019, but had repurchased no shares as of March 31, 2018.
Guidance, outlook, commentary and risks
No quantitative earnings or portfolio guidance is provided. Management's stated objective is to generate consistent risk-adjusted returns primarily through cash distributions and preservation of invested capital, with secondary potential for capital appreciation. Management highlighted its diversified CRE capital-stack strategy, external manager's sourcing capabilities and a focus on matching financing duration to asset cash flows.
- A $260.2 million New York hospitality loan failed to make its March interest payment and was placed on nonaccrual status. Management recorded no additional provision because it believes collateral value is sufficient.
- Four loans associated with a previously modified mezzanine loan had aggregate carrying value of approximately $137.1 million of collateral; two were in default and subject to a forbearance arrangement through May 2018, with a possible 90-day extension.
- Subsequent to quarter-end, two hospitality loans totaling $117.0 million matured without satisfying extension tests and were in default as of the filing date, although interest payments were current.
- Unfunded lending commitments totaled $68.3 million, and contractual obligations included approximately $1.719 billion of secured debt, securitization bonds and ground lease obligations, excluding certain non-fixed management agreement obligations.
- Key risks include interest-rate and LIBOR exposure, refinancing and repurchase-facility liquidity risk, credit losses, commercial real estate valuation volatility, extension and prepayment risk, leverage, fair-value estimation, dependence on the external manager, related-party transactions, and the ability to maintain REIT and Investment Company Act status.
- A hypothetical 100-basis-point increase in applicable benchmarks was estimated to increase annual loan-portfolio interest income, net of interest expense, by $10.4 million.
- The company reported effective disclosure controls and no material changes in internal control over financial reporting.
Facts investors should verify
- Confirm whether this Colony NorthStar Credit Real Estate filing is the intended filing for BrightSpire Capital and review the subsequent name, ticker and corporate-history changes.
- Reconcile reported GAAP losses with Core Earnings and assess whether the $30.2 million of Combination costs and other adjustments are genuinely nonrecurring.
- Monitor the $260.2 million nonaccrual hospitality loan, the $117.0 million of subsequent hospitality loan defaults and the cross-defaulted loan group.
- Review debt maturities, repurchase-facility extension conditions, collateral requirements and recourse provisions, particularly the $419.2 million of scheduled principal payments during the remainder of 2018.
- Assess the sustainability of the $0.145 monthly dividend against Core Earnings, operating cash flow, leverage and required portfolio funding.
- Evaluate concentration in hospitality loans, which represented approximately 40% of the loan portfolio at the company's share, and exposure to floating-rate financing and fair-value Level 3 assets.
- Review related-party management fees, investment transactions with affiliates and the external manager's termination and incentive-fee provisions.