20% Additional Upside with BRSP Stock?
Real estate investment trusts (REITs), mortgage REITs (mREITs) like BrightSpire Capital Inc (NYSE:BRSP) in particular, saw their shares take an oversized hit during the Federal Reserve’s recent unprecedented interest rate hike cycle.
Higher rates were needed to curb inflation, but they drive up the cost of borrowing and cut into margins, which has resulted in reduced profits and free cash flow (FCF). And REITs in general borrow a lot of money to build their portfolios.
You might think higher rates are good for mREITs, since they can charge more for the money that’s lent out. As you may know, mREITS provide financing for income-producing real estate by purchasing or originating mortgages and mortgage-back securities (MBS), earning income from the interest.
But that only goes so far. High interest rates can be a big deterrent. Lower rates, on the other hand, mean that more people will come in from the sidelines to get on the property ladder. Rates might be lower, but it can also mean more lending.
That’s where BrightSpire Capital Inc comes in.
BrightSpire Capital Inc is one of the largest publicly traded commercial real estate (CRE) credit REITs, with $3.9 billion in assets under management. (Source: “Portfolio,” BrightSpire Capital Inc, last accessed December 4, 2024.)
The New-York-City-based company originates, acquires, finances, and manages a diversified portfolio made up primarily of CRE mortgage loans, mezzanine loans, preferred equity, debt securities, and net leased properties in the U.S. Of its senior mortgage loan portfolio, 100% is made up of floating rates.
By property type, multifamily homes make up 41% of BrightSpire’s portfolio, followed by office (38%), industrial (eight percent), hotel (six percent), mixed use (six percent), and retail (one percent). Most of the mREIT’s properties (71%) are located in the west and southwest.
It looks like Brightspire is going to get a little bigger, too. In August, it announced a new $675.0-million CRE collateralized loan obligation (CLO). The company said it would be investing the liquidity in new loan obligation opportunities. (Source: “BrightSpire Capital Announces Pricing of $675 Million BRSP 2024-FL2 Commercial Real Estate CLO and the Redemption of CLNC 2019-FL1,” BrightSpire Capital Inc, August 9, 2024.)
Solid Third-Quarter Results
BrightSpire reported solid third-quarter results, including net income of $12.7 million, or $0.10 per share, up from third-quarter 2023 net income of $12.4 million, or $0.09 per share. (Source: “BrightSpire Capital, Inc. Announces Third Quarter 2024 Financial Results,” BrightSpire Capital Inc, October 30, 2023.)
Distributable earnings were $17.9 million, or $0.14 per share, with adjusted distributable earnings of $27.0 million, or $0.21 per share.
BrightSpire ended the quarter with a robust liquidity position of $416.0 million, with $251.0 million in unrestricted cash. Management expects its portfolio to grow by about $1.0 billion by the end of 2025.
Commenting on the third-quarter results, Michael J. Mazzei, BrightSpire’s chief executive officer, said, “The company had a productive quarter highlighted by the successful execution on a new CRE CLO, share repurchases, reinstated loan originations and watchlist reductions.”
“As we look towards the remainder of 2024 and into 2025, we expect to continue to resolve watchlist and REO assets and grow the portfolio and earnings through new loan originations.”
Quarterly Dividend of $0.16 Per Share
Strong dividend coverage allows BrightSpire to continue to reward investors with a reliable, high-yield dividend payout. On October 29, the mREIT’s board declared a quarterly dividend of $0.16 per share, or $0.64 on an annual basis, for a forward yield of 10.17%.
BrightSpire paid a monthly dividend before the 2020 health crisis and suspended the payout in the back half of 2020 and into 2021. In March 2021, it switched to a quarterly payout. This move coincided with the company rebranding itself and changing its name.
BRSP Stock Jumps on Solid Q3 Results
BrightSpire stock struggled a little in the third quarter, trading at a 40% discount to its book value. Management used that opportunity to repurchase 1.2 million shares at an average price of $5.52 per share. It still has over $40.0 million approved for stock repurchases.
BRSP stock has climbed considerably higher since it reported solid third-quarter results and provided an upbeat outlook. Before announcing its third-quarter results on October 29, BRSP was trading hands at around $5.40 per share. The next day, it hit an intraday high of $6.29 per share, before closing out the day at $6.21. The stock has continued to hold on to those gains, too.
Despite the big gains, BRSP stock is still undervalued, with Wall Street analysts providing a 12-month share price target of $7.50 per share. This points to potential upside of approximately 20%.
Chart courtesy of StockCharts.com
The Lowdown on BrightSpire Capital Inc
BrightSpire Capital Inc is a great mREIT with a diversified portfolio of CRE with floating rate loans. It continues to report solid financial results and provide investors with a reliable, high-yield dividend.
In the third quarter, the company enhanced its liquidity with a $675.0-million CLO transaction, repurchased 1.2 million shares, and saw the return of loan originations. BrightSpire has, management says, “hit on all cylinders.”
That’s music to the ears of the 260 institutions holding 65.86% of all outstanding BRSP shares. The biggest holder is Vanguard Group Inc, with 13.03 million shares for a 10.04% stake. BlackRock Inc is a close second, with a 9.29% stake, and Nut Tree Capital Management, LP is third, with an 8.48% stake. (Source: “BrightSpire Capital, Inc. (BRSP),” Yahoo! Finance, last accessed December 4, 2024.)