Brightspire Capital, Inc. annual report, FY2021

BrightSpire Capital, Inc. 2021 Form 10-K Summary

Business context and reporting period

BrightSpire Capital, Inc. is a commercial real estate credit REIT focused primarily on originating, acquiring, financing and managing senior mortgage loans, with selective mezzanine loans, preferred equity and net leased real estate investments. The filing covers the fiscal year ended December 31, 2021, with comparative results for 2020 and 2019. The company trades on the NYSE under the ticker BRSP and elected REIT status beginning in 2018.

At December 31, 2021, the company owned 97.7% of its operating partnership.
The company completed its transition from an externally managed to an internally managed REIT on April 30, 2021, and changed its name from Colony Credit Real Estate, Inc. on June 24, 2021.

Financial performance and key metrics

Metric	2021	2020	Change
Net interest income	$119.5 million	$102.3 million	+16.8%
Property and other income	$105.0 million	$176.9 million	-40.7%
Total expenses	$271.0 million	$361.3 million	-25.0%
Net loss	$104.6 million	$375.6 million	Loss decreased
Net loss attributable to common stockholders	$101.0 million	$353.3 million	Loss decreased
Basic and diluted loss per share	$0.79	$2.75	Loss decreased
Operating cash flow	$(21.3) million	$96.4 million	Declined $117.6 million
GAAP book value per share	$11.22	$12.96	-13.4%

Distributable Earnings were a loss of $58.7 million, or $(0.44) per share. Adjusted Distributable Earnings were $116.1 million, or $0.87 per share. These are non-GAAP measures and are not substitutes for GAAP net income or operating cash flow.
Net interest income increased primarily because of new loan originations and lower financing costs, partly offset by loan payoffs and CMBS sales.
Property operating income fell primarily because of real estate dispositions during 2020 and 2021.
The company recorded $109.3 million of restructuring charges, including a $102.3 million cash termination fee paid to the former manager.
Net leased and other real estate generated approximately $55.3 million of 2021 NOI and was approximately 97.0% occupied at year-end.

Portfolio, credit quality and liquidity

The portfolio contained 115 investments with approximately $4.4 billion of book value at year-end, including 98 senior and mezzanine loans and preferred equity investments.
Senior and mezzanine loans and preferred equity had a carrying value of $3.5 billion, a weighted average cash coupon of 3.7% and a weighted average unlevered all-in yield of 4.9%.
Multifamily assets represented 51.6% and office assets 33.2% of the loan and preferred equity portfolio by book value.
The average loan risk ranking improved to 3.1 from 3.7 at December 31, 2020. However, 23.7% of the portfolio was ranked 4 or 5, indicating high risk, delinquency or potential loss under the company’s definitions.
The allowance for loan losses was $36.6 million, including a $35.3 million PD/LGD-model reserve and a $1.3 million individually evaluated reserve. Unfunded lending commitments totaled $264.9 million.
Cash and cash equivalents were $259.7 million, compared with $474.8 million at year-end 2020. Including restricted cash, total cash, cash equivalents and restricted cash were $346.6 million.
The debt-to-equity ratio increased to 2.0x from 1.0x, based on the company’s stated calculation.
Debt carrying value totaled approximately $3.17 billion, including $1.50 billion of securitization bonds, $760.6 million of mortgage and other notes, and $905.1 million under master repurchase facilities. The bank credit facility was undrawn at year-end.
As of February 18, 2022, management reported approximately $434 million of liquidity, consisting of $269 million of cash and $165 million of available bank credit capacity.

Material changes versus the prior comparable period

Loan and preferred equity investments increased from $2.2 billion net at year-end 2020 to $3.45 billion net at year-end 2021. The company funded 64 senior mortgage loans with total commitments of $1.9 billion.
Management fee expense declined to $9.6 million from $29.7 million after the April 2021 internalization, but administrative expense increased to $50.0 million from $26.6 million as the company assumed operating costs directly.
The company completed the BRSP 2021-FL1 securitization, contributing $800 million of floating-rate mortgages and issuing $670 million of investment-grade notes at an advance rate of 83.75% and a stated weighted cost of funds of LIBOR plus 1.49%.
The company sold five legacy development or non-accrual assets for gross proceeds of $223.0 million and received net transaction proceeds of $198.3 million. It also used proceeds to substantially repay the $210 million 5-Investment Preferred Financing and regain full ownership of the warehouse distribution portfolio.
The company recorded a $97.9 million fair value loss on its mezzanine B-participation investment in a Los Angeles mixed-use development project. It also recorded a $131.1 million loss from unconsolidated ventures, primarily reflecting this investment and other legacy asset fair value losses.
The company sold its remaining available-for-sale CMBS securities during 2021. At year-end, it retained only B-pieces of a consolidated CMBS securitization trust subject to risk-retention requirements through June 2022.
Common dividends totaled $0.58 per share for 2021, compared with $0.30 per share for 2020. The company paid $53.1 million to Class A common stockholders. No minimum distribution level has been established.

Outlook, risks, contingencies and unusual items

Management continues to identify COVID-19 effects on borrower payments, tenant rent payments, property values, operating performance, liquidity and financing terms as material uncertainties. Potential actions include using reserves, granting forbearance, converting interest to payment-in-kind and modifying loans.
The company recorded $21.5 million of PIK interest in 2021. PIK income increases reported interest income without a corresponding current-period cash receipt and may affect distributable cash.
Several office and hotel exposures remain sensitive to occupancy, leasing and operating recovery. The Berkeley hotel and Long Island City office loans were specifically identified as requiring reserves, borrower support, waivers or modified funding arrangements.
On January 28, 2022, the bank credit facility was amended to reduce commitments from $300 million to $165 million, with an option to increase capacity to $300 million subject to conditions. Five repurchase facilities were also amended to reduce the minimum tangible net worth covenant to approximately $1.11 billion.
Future principal and interest obligations totaled approximately $3.55 billion at December 31, 2021, excluding $264.9 million of lending commitments. Payments due within one year totaled approximately $639.3 million.
Interest-rate, refinancing, margin-call, collateral-value, credit-spread and LIBOR-to-SOFR transition risks could materially affect earnings and liquidity. A hypothetical 100-basis-point increase in the applicable benchmark rate was estimated to reduce annual interest income, net of interest expense, by $4.1 million.
Subsequent to year-end, the company funded six senior loans with total commitments of $274.9 million and one mezzanine loan with a $28.2 million commitment. It also sold a net leased property for $19.6 million gross proceeds and expects to recognize an approximate $5.7 million net gain.
The independent auditor issued unqualified opinions on the financial statements and internal control over financial reporting. Critical audit matters included allowance for loan losses and impairment of equity-method investments.

Most important facts for investors to verify

Whether the internalization’s expected long-term cost savings offset the $109.3 million 2021 restructuring charge and higher direct administrative expenses.
The sustainability of $0.58 per share in annual dividends relative to GAAP earnings, operating cash flow, Distributable Earnings and REIT distribution requirements.
Borrower and property performance for risk-ranked 4 and 5 assets, especially hotel, office and development exposures, and the adequacy of the $36.6 million CECL allowance.
Near-term refinancing, covenant and liquidity requirements, including the $639.3 million of obligations due within one year and the reduced corporate credit facility.
The impact of higher interest rates, LIBOR-to-SOFR conversion, repurchase-facility haircuts and potential margin calls on net interest income and liquidity.
Management’s valuation assumptions for Level 3 assets, the Los Angeles mixed-use project and other unconsolidated ventures, where relatively small changes in assumptions could materially affect reported equity and earnings.