BrightSpire: High Yield, Poor Return, Invest With Precaution (NYSE:BRSP)

BrightSpire Capital, Inc. (NYSE:BRSP) is a U.S. based credit real estate investment trust (REIT). The company has significant presence in the west and southwest parts of the country. Almost 70 percent of its operations are in those regions. The company was incorporated in New York in 2017 as Colony Credit Real Estate, Inc., and changed its name to BrightSpire Capital, Inc. in June 2021. This REIT generates, acquires, finances, and/or manages commercial real estate (CRE) senior mortgage loans, mezzanine loans, preferred equity, debt securities, and net leased properties.

About BrightSpire

While the company offers senior mortgage loans for a duration of 3 to 5 years, preferred equities and mezzanine loans are structured for a much longer period up to 10 years. Senior loans also carry a much lower interest in the range of 3 percent as compared to 10 percent plus interest rate of mezzanine loans. Loan portfolio consists of approximately 82 percent of its total business portfolio.

BrightSpire Capital, Inc. has a large diversified and stabilized portfolio with $4.1 billion in assets under management (AUM). 80 percent of its business comes from office and diversified REITs. Disciplined underwriting, efficient sourcing, and asset selection are central to the growth of this commercial credit REIT. In addition, BRSP handles a robust pipeline of investment opportunities and has easy access to debt and equity capital to fund its operations.

The company’s primary investment objective is protecting shareholders’ capital and producing attractive risk-adjusted returns. This REIT has a dynamic and flexible investment strategy, in order to gain from various opportunities available in different economic and capital market conditions. This flexibility is helpful in offering customized, solutions-oriented approaches for the borrowers and tenants.

BrightSpire’s Dividend

BrightSpire paid regular monthly dividends in 2018, 2019, and in the first quarter of 2020. It generated annualized yields of 10.1 percent and 12.5 percent in 2018 and 2019 respectively. Since 2021, the company has been paying quarterly dividends, generating an average yield of around 6 percent. It did not pay any dividends in the second, third and fourth quarters of 2020. However, due to the pandemic related market crash in March 2020, the stock dipped so low that only that first quarter dividend resulted in a 20+ percent yield.

In other words, although BrightSpire historically generated strong dividend yield, it lacked consistency, and there is no stated policy of dividend payment. Although it has recorded a close to double-digit four year average dividend yield, still it is quite difficult to opine about the dividend paying capacity of a company which has historically been so inconsistent.

BrightSpire’s Price Performance

The stock price has performed poorly since its inception. Though initially it was trading with a price of more than $20, the price started falling in mid-2018, and came down even before the March 2020 market crash to below $3. The stock has recovered from its bottom, and is trading around $10 over the past year. The stock closed at $8.89 on 8th April, 2022. As a result of this, the REIT has recorded a negative price growth of 56 percent and 45 percent over the past 17 and 12 quarters respectively.

The price performance has not been impressive in the short term either. BrightSpire recorded a decline of 11 percent and 9 percent over the last one and two quarters, respectively. The only positive thing is 5 percent price growth over the past four quarters. In a nutshell, it is quite difficult to examine the investability of this stock purely from its historical data.

BrightSpire Valuation

The current price multiple of this commercial credit REIT is extremely low. A price to book value of 0.79 and price to sales of 3.5 suggests that investors are not at all optimistic about BrightSpire utilizing its assets to generate sufficient cash flow and for its sales to generate sufficient cash earnings in the future. This may impact dividend distribution. I have not considered P/E as for REITs, the P/E ratio doesn’t hold much significance, because the value of real estate investments is more meaningful in terms of assets rather than earnings.

However, BrightSpire Capital, Inc. has an enterprise value of around $5 billion despite having a very low market capitalization (Implied) of $1.18 billion. Total Debt is around $4 billion, which is 73 percent of total capital. An EV/EBITDA of 21 gives some hope in terms of generating operating income and thus cash flow in the long run. Price / Rental Revenue of 11.2 also indicates the same.

BrightSpire Total Return History

Overall, historical total return can’t be considered discouraging. A close to double-digit dividend yield can be reason enough to hold this stock for a longer period of time and liquidate the stock only in case of significant capital appreciation. It sounds more like a good rental real estate property where investors enjoy the rentals and wait for an opportune moment to sell it.

However, the historical price loss has subsumed the dividend income. There has been an average price loss of around 3.5 percent every quarter, which is around 14 percent annually. Moreover, the stock is likely to observe some further downward movement as the 200-day simple moving average is above the 100-day simple moving average. Looking from a long term view point, I’d like to hold this commercial credit REIT and enjoy the close to double digit dividend yield. But, it would be wise to cover my exposure by buying a put option, possibly with low premium at a strike price near its current market price.

August 19 (4.5 months forward) put options are available for exercise prices of $2.5, $7.5, $10 and $12.5. In order to minimize my loss, I’ll buy the put option with the exercise price just below the current market price of $8.89, i.e. $7.5, for a premium of $0.30. As the premium is quite low, it won’t bother me much. In that way, I won’t have to suffer a loss if the price falls below $7.2. Thus, I’ll be able to minimize my loss up to 19 percent from the current market price.