Brightspire Capital, Inc. quarterly report, Q3 FY2021

Business Context and Reporting Period

BrightSpire Capital, Inc. is a commercial real estate credit REIT focused primarily on originating, acquiring, financing and managing commercial real estate debt investments, with selective net-leased and other real estate investments. The company changed its name from Colony Credit Real Estate, Inc. and its ticker to BRSP on June 24, 2021. This unaudited Form 10-Q covers the three and nine months ended September 30, 2021, with comparisons to the same periods in 2020.

During the quarter, the company operated through four segments: senior and mezzanine loans and preferred equity; net leased and other real estate; CRE debt securities; and corporate. It completed the internalization of management on April 30, 2021 and now directly employs its management and operating personnel.

Financial Performance and Key Metrics

Metric	Q3 2021	Q3 2020	9M 2021	9M 2020
Net interest income	$33.4 million	$25.2 million	$83.9 million	$78.0 million
Property and other income	$27.3 million	$41.7 million	$79.0 million	$139.0 million
Net income (loss)	$(71.7) million	$6.4 million	$(189.9) million	$(314.3) million
Net loss attributable to common stockholders	$(70.1) million	$5.0 million	$(182.1) million	$(300.8) million
GAAP loss per share	$(0.54)	$0.04	$(1.42)	$(2.34)
Cash flow from operating activities	Not separately reported for the quarter	Not separately reported for the quarter	$(71.0) million	$44.9 million

Q3 net interest income increased 27.5% from the prior-year quarter, principally reflecting growth in the loan portfolio and the reinstatement of interest income on the San Jose hotel loan.
Q3 property and other income declined 34.5%, primarily because of real estate dispositions and a smaller property portfolio.
Q3 total expenses were $37.8 million, down from $70.6 million. The decrease reflected the elimination of post-internalization management fees, lower property costs and lower depreciation, partly offset by higher administrative expense.
Q3 equity in earnings of unconsolidated ventures was a loss of $96.0 million, including a $97.9 million fair value loss on the Los Angeles mixed-use project.
Adjusted Distributable Earnings, a non-GAAP measure, was $35.0 million, or $0.26 per share, in Q3. Distributable Loss was $68.4 million, or $(0.51) per share. These measures are not GAAP net income or operating cash flow.
At September 30, 2021, total assets were $5.5 billion, total equity was $1.7 billion, and stockholders’ equity was $1.4 billion. GAAP book value was $11.04 per share, compared with $11.75 at June 30, 2021.

Portfolio, Debt and Liquidity

The portfolio comprised 108 investments with approximately $3.9 billion of book value at the company’s share. Loan investments represented 90 positions, with a weighted-average cash coupon of 3.8% and unlevered all-in yield of 5.4%.
Loans and preferred equity held for investment increased to $3.2 billion gross and $3.1 billion net, from $2.2 billion gross and $2.2 billion net at December 31, 2020. The allowance for loan losses was $42.7 million.
Management reported five loans on nonaccrual status at September 30, 2021. The portfolio’s average internal risk rating improved to 3.2 from 3.5 at June 30, 2021, although 27.2% of loan and preferred equity carrying value was rated risk category 4 or 5.
Net leased and other real estate had approximately $695.6 million of value at the company’s share, 96.8% occupancy, and Q3 net operating income of $15.1 million.
Debt consisted principally of $1.5 billion of securitization bonds, $764.7 million of mortgage and other notes, and $558.5 million of master repurchase borrowings. The reported debt-to-equity ratio increased to 1.8x from 1.0x at year-end 2020.
Liquidity at November 2, 2021 was approximately $367 million, consisting of $209 million of cash and $158 million of available borrowing capacity under the bank credit facility. The company reported compliance with applicable financial covenants at September 30, 2021.
Cash, cash equivalents and restricted cash declined to $279.0 million at September 30, 2021 from $535.0 million a year earlier. Nine-month investing cash outflows were $474.7 million, primarily reflecting $1.3 billion of loan originations and additional funding.

Material Changes Versus Comparable Periods

Net loss attributable to common stockholders improved to $(182.1) million for the first nine months from $(300.8) million, but remained significant.
The improvement reflected lower loan-loss provisions, lower real estate impairment charges, favorable changes in securitization-related fair values, and lower financing and property expenses.
These benefits were partly offset by the $109.3 million internalization-related restructuring charge, a $132.2 million loss from unconsolidated ventures, and substantially lower property operating income.
Administrative expense rose 96.5% for the nine months, primarily because the company assumed direct compensation and operating costs after internalization and recorded higher equity-based compensation.
The company originated 18 senior mortgage loans in Q3 with total commitments of $518.5 million and completed the BRSP 2021-FL1 securitization, issuing $670 million of investment-grade notes backed by approximately $800 million of mortgages.

Guidance, Outlook, Risks and Unusual Items

Management expects to amend and restate the San Jose hotel senior loan at approximately $184.9 million in Q4 2021, subject to customary conditions. The hotel was scheduled to reopen in Q1 2022.
The company expects the sale of five co-investment assets to Fortress to close by March 31, 2022, subject to conditions, consents and an Irish legal proceeding. Management estimated an aggregate net realized loss of approximately $4.6 million, but stated that closing and final results were uncertain.
The Los Angeles mixed-use project remains a major exposure. The borrower defaulted on July 9, 2021, senior lenders made approximately $47 million of protective advances, and foreclosure of the company’s subordinate participation remains possible.
COVID-19 continues to affect hospitality, office, retail and other commercial real estate exposures. Potential consequences include borrower defaults, rent deferrals, payment-in-kind interest, lower property values, additional impairments and margin calls or accelerated repayments under financing facilities.
The company recorded $11.1 million of PIK interest in Q3 and $18.3 million for the nine months. PIK interest increases reported income and loan balances but is not current-period cash collection.
The company declared and paid a $0.16 per-share Q3 dividend and subsequently approved a $0.18 per-share Q4 dividend. The filing states that no minimum distribution level has been established and future distributions are not assured.
Other risks include reliance on floating-rate financing, LIBOR transition and basis risk, foreign currency exposure, fair-value uncertainty, real estate illiquidity, covenant requirements and the ability to realize expected savings from internalization.

Important Facts for Investors to Verify

Whether the Los Angeles mixed-use investment requires additional write-downs, protective advances or results in foreclosure losses.
Whether the Fortress co-investment portfolio sale closes, the effect of the Irish injunction proceeding, and the final realized gain or loss.
Whether the San Jose hotel reopens as scheduled and whether the restructured loan performs and becomes financeable.
Actual post-internalization operating costs and whether expected management-fee savings exceed newly assumed compensation, administrative and infrastructure expenses.
Liquidity after the Bank Credit Facility’s February 2022 maturity, including any extension, refinancing or repayment requirements.
Borrower performance, nonaccrual trends, CECL reserves and exposure to hotel, office, mezzanine and preferred-equity investments.
The sustainability of dividends relative to Adjusted Distributable Earnings, operating cash flow and financing needs.
Subsequent-period fair-value movements, securitization note protection tests, repurchase-facility margin requirements and covenant compliance.