Orion Office REIT: Form 10 Notes

Similar to my last post on Loyalty Ventures (LYLT), this is a half baked idea, it hasn't started trading yet but it might help others if I put my thoughts on paper and help me if anyone else has spent some time on it and would be willing enough to share thoughts, especially if you have a different view.

I love a good merger-spinoff combo, the latest one is a result of the merger of two large net lease REITs, Realty Income (O) (which is the bluest of blue chip in net lease land) and VEREIT (VER), the merger closes 11/1, the two are combining their office properties and spinning them off as Orion Office REIT (ONL, presumably for "Office Net Lease") mid-November.  About 2/3rds of the portfolio is coming from VEREIT and 1/3rd from Realty Income, VEREIT has spent the last few years selling down their office exposure to look closer to Realty Income and other high quality peers, so there is some risk these are their lower quality office assets.  Office properties usually aren't a great fit for a net lease REIT, they're less mission critical to the operations of the tenant as a restaurant location would be or a casino or an auto body shop.  Caesars Entertainment is not going to leave Caesars Palace (net-lease owned by VICI), but they can change a corporate office building without impacting the business.  Add covid into the mix where people are generally living their lives as normal other than returning to the office and it makes sense that Realty Income would use this opportunity to spinoff their office exposure.  This could be viewed as a BadCo or garbage barge spin, here's the Form 10.

The Realty Income management team is going to stay in place, while much of the VEREIT team is moving to the spinoff.  Orion is positioning itself as a single-tenant, long-term leased (resemble a triple-net if not explicitly one), suburban office REIT with the thesis that in a post-covid world, suburban office is going to make a comeback as millennials move to the suburbs and white collar employees generally want shorter commutes.  Orion wants to be a growth vehicle, taking advantage of any covid induced dislocations and a lack of competition, targeting properties in fast growing sun-belt metro arears.

Anecdotally, my friends that pre-covid worked in the suburbs are back in the office at least part time, others that worked downtown are still fully virtual.  I think it will be difficult to get people, especially those with families, to return to the old normal routine of an hour plus on a commuter train when the labor market is this tight.  Try taking a dog treat away, the dog won't be happy, everyone has adjusted and proved many formerly cube farm jobs can be done in pajamas from the comforts of home.  But maybe suburban office makes a comeback, suburban office would generally feature shorter/more flexible commutes as employees drive-to the office versus take public transportation on set schedules.  Again anecdotally, in my typical office job, we're trying to get people back to the office, it's difficult to train new people in fully virtually environment and we're generally having trouble keeping the previous corporate culture together almost two years removed from the beginning of covid.  Many people have never met face to face (even with their manager), there's resulting infighting, clients hate us, etc.  I have an uninformed view that how big corporates handle their return to office/remote strategy might be more important for long term success than their go-to-market strategy with clients in the next 1-3 years.  Office space will likely have a place in the future, but clearly a smaller footprint, more communal layouts and possibly different locations than pre-covid.  Maybe Orion gets sold off on the perception that it is a garbage barge spin but is instead well timed at the inflection points of both a return to office theme and suburbs over central business districts themes?  I'm not fully there on that thesis, but I'm intrigued by the idea.

The biggest problem is while it might be Orion's go-forward strategy, the starting portfolio doesn't resemble a long-term leased sun-belt suburban office portfolio.  The weighted average lease life is less than 3.5 years and many of their 92 properties are large headquarter like campuses in the northeast and midwest.  For example, they will own the old Merrill Lynch Princeton, NJ campus now occupied by Bank of America and the Walgreen's corporate campus down the street from me in the northern suburbs of Chicago.  The headline portfolio metrics seem good, it's 94.4% occupied (I assume this means leased, would be interesting to see the percentage where the tenants have returned), 72% investment grade tenants and 99% rent collection through covid.

Below is the lease expiration schedule, many of their leases are expiring in the next 3.5 years, depending on your view of the pace of return-to-office, this could be a challenging time to re-lease these properties at or near the same levels of base rent or square footage.

I'm going to compare Orion to Office Properties Income Trust (OPI) which also focuses on long-term single tenant office buildings, it differs from Orion positively as its weighted average lease term is 6 years (plus has more central business districts properties) and on the negative side, it is externally managed by RMR Group (RMR) which comes with conflicts that deserves a discount and has less net leases leading to more capex and lower FFO to AFFO conversion.  OPI is one of the cheapest office REITs and might be a good bogey for where Orion will trade initially.

Part of OPI's strategy is to sell assets with upcoming lease expirations that are not net leased and thus require the owner to upkeep the property and pay for capital expenditures.  I found their recent commentary on the Q3 earnings call surprising:

Ronald Kamden

And then just on the disposition side, can you just maybe comment on who are the buyers, what the market - like who sort of looking at these properties and any comments on pricing would also be helpful, whether it's cap rates or you're seeing increased interest would be helpful. Thanks.

Chris Bilotto

Yes. So I think from who the buyers are, I mean these - given kind of the size of these assets, a lot of these properties are kind of more local, local, regional groups, not necessarily institutional investors. And so it really is a mix, just kind of given the fact that these properties, it's not necessarily a portfolio, but they're individual dispositions. And so I think from kind of looking at the financial aspect, I would say that from kind of a cap rate for these assets and at least what we've sold, we're seeing kind of collective cap rates in between 7% and 8% and that can kind of vary on one side or the other depending on the circumstances.

And I think it's just kind of important to note that these are buildings we're selling as part of our capital recycling strategy because they're buildings that we feel like where we would rather maximized value. These are buildings that are older in age, capital intensive and in some cases kind of have short-term fault and so by way of example from what we've sold to-date, as I noted, the weighted average lease term was 1.2 years.

Again, those are surprising cap rates for a property type that many, include me, believe to be potentially obsolete. If these properties are trading for a 7%-8% cap rate, ONL should probably trade somewhere in there, maybe closer to the 7% range since the governance structure will be better and these are true net lease properties.

FFO is a fairly standardized number, while it's not GAAP, most REITs follow the same industry methodolgy, adjusted AFFO can vary, it is supposed to further adjust FFO (which is primarily just net income + depreciation, then adjusted for acquisitions/dispositions) by removing recurring capital expenditures to maintain the properties, a closer true cashflow/earnings number.  In a net lease REIT, FFO and AFFO should be very similar since the tenant is responsible for maintaining the property.  

That is what we see with ONL:

For the Realty Income office assets (FFO is proforma for the new capital structure, it does include the anticipate debt, overhead, etc.):

For the VEREIT office assets:

FFO and AFFO match up pretty well, call it ~$150MM in combined AFFO for the pro forma ONL.  There will be 54.2 million shares outstanding at the time of the spin (1 share of ONL for every 10 of O), or ~$2.75/share of LTM AFFO for Orion.  OPI trades for 8x AFFO, if ONL traded similarly it would go for ~$22/share.

That might be a bit harsh, the broader net lease REIT group trades for a high-teens AFFO on average, but I don't think this will trade like the others.  Based on the Form 10, I come up with about $170MM in NOI for the ONL portfolio, they're going get spun with $616MM in debt, if we put a 7% cap rate on that it should trade for ~$33.50/share and at an 8% cap rate it should trade for ~$27.80/share (the range where OPI is selling assets).  I could have a few mistakes in here, so please do your own work, but if ONL trades well below this range I'd be interested.  In post-covid/pre-merger calls, VEREIT was looking to sell office assets in the 6-6.75% range, possibly I'm being conservative again like CCSI.  

Other thoughts/notes:

• This is another lightly talked about spinoff, in this instance I couldn't even find an investor deck or any materials on either Realty Income or VEREIT's websites.  Realty Income in particular has a highly retail oriented shareholder base as it has marketed itself as "The Monthly Dividend Company", with low rates, many retail investors have migrated towards the net lease REITs as bond proxies and Realty Income is the king of retail net lease.  I expect most retail investors to sell ONL and treat it like a dividend since it will only be 3-4% of the total value of O if my estimates are in the right ballpark.
• All REIT spinoffs are taxable, another reason why O/VER shareholders are likely to sell because it is effectively a dividend anyway.  It also means that an acquirer doesn't need to wait the two year safe harbor period to avoid becoming taxable like regular spinoffs.  I don't have it in front of me, but back in 2016, two office REITs merged, Parkway and Cousins (CUZ), with the two entities doing a similar spin at the time of the merger.  Back then they spun off their Houston properties (this was shortly after the oil crash) in a "new Parkway" entity that was public only for a short while before it went private.  Something similar could happen here if the valuation precludes them from embarking on their growth plans.
• Orion does plan to pursue a growth strategy, they're going to have $616MM of debt at the time of the spin which seems fairly modest here and in relation to most spinoffs.  So I think that strategy seems reasonable, suburban office likely doesn't have a lot of buyers right now, they should at least have a chance to begin executing on that strategy immediately given their capital structure.

Disclosure: No position, but interested depending where ONL begins trading

Loyalty Ventures: Form 10 Notes

Alliance Data Systems (ADS), after a few years of speculation, is spinning off their LoyaltyOne segment as Loyalty Ventures (LYLT) in an attempt to become a more pure-play private label credit card company.  The spinoff's primary business (~80% of  EBITDA) is the Canadian loyalty program "AIR MILES" where consumers ("collectors" in LYLT speak) shop at participating retailers ("sponsors") and earn points that can be redeemed for travel, cash/gift cards or other rewards.  AIR MILES collects a fee from sponsors at the time of purchase but only recognizes revenue fully when the collector redeems the reward, creating an attractive negative net working capital business.

AIR MILES is similar to the old Blue Chip Stamps business that was a Warren Buffett favorite from a generation ago. AIR MILES is an independent rewards program, it is not formally connected to an airline or hotel chain which is common in the U.S., instead they partner with retailers offering rewards on everyday recurring consumer purchases like groceries and gas. The other business under the Loyalty Ventures corporate umbrella is "BrandLoyalty", it is more of a targeted short-term promotional business that primarily caters to grocery store chains globally. I haven't seen their promotions at any grocery stores I frequent, but the campaigns BrandLoyalty runs seem analogous to the Monopoly game promotion McDonalds occasionally does to generate a short-term bump in sales.  It doesn't appear to have the same float dynamics and its results are rather lumpy.

The spinoff setup reminds me a bit of the recent one from J2 Global, Consensus Cloud Solutions (CCSI), an historically underinvested yet steady cash flowing business the parent had harvested cash from to pursue M&A in other segments.  While I continue to have my doubts about Consensus (the market clearly doesn't share my view) not being a melting ice cube, Loyalty Ventures should be a low-single digit revenue grower inline with GDP.  It is not an exciting growth story but it will produce plenty of cash that now instead of sending up to ADS corporate, can be used to deleverage (starting off with ~3x net debt), invest in the business or return to LYLT's own shareholders (no plans for a dividend).

This is a business with some baggage and requires a little leap of faith to assume it will get back to its normalized earnings.  Back in 2016, the AIR MILES segment made a pretty terrible public relations blunder (here's a local news story on it), they had previously quietly added a 5 year expiration date in 2011 to their reward miles, all historically issued miles would then at year-end 2016 unless they were redeemed.  Due to the revenue recognition dynamics, this created a windfall in 2016 as collectors rushed to redeem their miles or have them expire, either outcome is generally good for the company's financials.  But people don't like the rules changed mid-game and AIR MILES faced significant backlash (they also reportedly didn't have enough rewards/merchandise to meet demand), eventually it became a legislative issue and the company caved to pressure a month before the deadline, removing the expiration feature from the program.  The miles once again never expire, but many long time collectors redeemed their miles for unwanted rewards just to risk not losing them and they weren't allowed to return their rewards after the expiration policy was reversed.  Naturally if you had been saving miles for a dream vacation for a decade and instead had to redeem for a fancy vacuum, you'd be upset.  Management in charge during this time have since moved on, it is not the same team that will be in charge of the spin.

The AIR MILES segment was just about back to normal when covid hit which reduced the appeal of a travel awards program and due to travel restrictions, mile redemptions (and thus revenue/earnings) dropped significantly in 2020 and 2021.  In Q2 2021 business is potentially inflecting, miles created is up (+8%) and redemptions (+32%) are following, albeit against an easy comparable Q2 2020.  The company is anticipating $187MM in adjusted EBITDA in 2021, but a normalized number is probably something closer to $200-210MM, this is something of a leisure travel recovery story.

There is not a great public peer for Loyalty Ventures currently public, Aimia previously owned Aeroplan (spun from Air Canada and repurchased by the airline a couple years back for $370+MM) and AeroMexico's loyalty plan that was sold for 9x EBITDA.  The U.S. airline carriers used their loyalty programs as collateral to raise financing for themselves last year, for example United raised financing with a 12x EBITDA multiple valuation on their rewards program.  Probably not apples-to-apples.  I have no clue where LYLT will trade, but I'm going to throw a 9x multiple on it as a guess.

When issued trading was supposed to start today under the symbol LYLTV but I didn't see any trades, regular way trading is set for 11/8.  As always, I'm very open to hearing from those more knowledgeable about the situation, especially those more comfortable with the accounting and piecing out the true cash flow of this business.

Other thoughts/notes:

• This spin seems a bit off the radar, ADS has been kind of quiet about it too, the investor deck is about as sparse on details as the Trump/DWAC one, there hasn't been an investor call made public (guessing there's one for the debt or will be one).  Most pitches for ADS (previously was a bit of a hedge fund hotel, some potential investor fatigue here) have always been focused on the card business and the loyalty segment has been a throw away afterthought.
• The company likes to tout that 2/3rds of Canadian households have an AIR MILES account, but many collectors are probably only loosely active in the program, the top 15% of collectors make up 70% of new miles created.  This is both good and bad, collecting miles seems like a habitual exercise, it gamifies shopping, you need the power users but you also need to keep them active and happy.
• BMO is their largest sponsor with 15% of revenue, I believe this is their primary credit card partner, their contract comes up again in 2023.
• ADS is retaining a 19% stake in LYLT, like other recent spins, they'll divest the retained amount over the next year or so to reduce debt.  ADS calls out that 27% of their shareholders are index funds that might be forced to sell LYLT, so there could be a bit of an overhang.  The distribution ratio is 1 share of LYLT for every 2.5 shares of ADS, if LYLT is worth $50 then its about $20 of ADS's $100 stock price.
• I don't know the full history, but LYLT pays a 1% royalty fee to Diversified Royalty Corp (DIV in Canada) for the use of the AIR MILES brand name, rather insignificant but also kind of odd.
• LYLT invests the "float" rather conservatively, mostly cash equivalents and some corporate bonds (most miles are redeemed after 2-3 years, so the portfolio probably matches the duration).  While their miles never expire if an account is active, miles do expire if an account is abandoned and not used for two years, so there is some breakage still despite the 5-year policy being reversed.
• It wouldn't surprise me if we see a goodwill write-down on the BrandLoyalty business, it accounts for $542MM of goodwill and is expected to generate $52MM of EBITDA, so that would value the segment at 10x EBITDA.  They acknowledge the risk in the Form 10 noting that the fair value is less than 10% above the goodwill carrying value.  Or one could spin it that if BrandLoyalty's intrinsic value is 10x, the overall company should be at least that as the AIR MILES segment is a more valuable business model.

Disclosure: I have a tiny position in ADS $100 Jan 2022 calls, basically just a FOMO trade in case LYLT takes off out of the gate similarly to CCSI (seems like one of those situations where both parent and spin will trade up), look to add LYLT directly once it starts trading.

Bluerock Residential Growth REIT: Messy Balance Sheet, Possibly Pursuing a Sale

Multi-family REITs have been one of the stronger real estate beneficiaries of covid, particularly those with properties located in the sun belt.  The WSJ recently reported that national asking rent rose 10.3% in August, with asking rents rising more than 20% year over year in sunbelt cities like Phoenix, Las Vegas (HHC!) and Tampa.  With the tailwinds of migration trends, increased inflation driving rent growth and plenty of liquidity looking for safe returns, all of these factors have driven down cap rates significantly to the 4.0-4.5% range.  

One bit of semi-surprising M&A news/rumors, in mid-September, Bloomberg reported that Bluerock Residential Growth REIT (BRG) was exploring a potential sale, the company hasn't commented on the report or confirmed they're exploring strategic alternatives.  Bluerock is a complicated story, one filled with related party transactions and a mess on both sides of the balance sheet, but if the reporting is accurate, Bluerock's common stock could be significantly undervalued.  BRG was formerly an externally managed REIT, however in 2017 the structure was technically internalized, but only kind of, management maintains several related interests in other Bluerock entities that earn fees off of BRG making the market skeptical of a sale.

Starting with the left side of the balance sheet, Bluerock has interests in 60 multi-family properties, mostly in the low class-A, high class-B range, think $1300-$1400/month garden and midrise style apartments in the first rung of the suburbs in sun belt cities like Phoenix, Austin, Atlanta, Raleigh, etc.  

Of those 60, 35 are consolidated properties where BRG owns the vast majority and operates the property like a normal multi-family REIT and the remaining 25 are more credit style investments where they have a preferred equity, mezz loan or ground lease interest in the multi-family property (some of these are new developments).  

This second credit investment bucket can cause issues when trying to screen BRG as you need to back out these investments to determine an implied cap rate for the operating portfolio when coming up with a sum-of-the-parts valuation.  The credit investments bucket also has the potential to make a sale trickier, the operating portfolio should have plenty of buyers, but if they insist on including the miscellaneous other credit stuff it would shrink the buyer pool.  The credit investments are also often tied to related party developments that management has an outside interest in (obvious question would be if these are truly market/arm's length terms), in a sale, management might have to take this pool and buy it into one of their other vehicles or sell it to a commercial mREIT like entity.

On the right side of the balance sheet, Bluerock has a heavy slug of preferred stock in their capital structure essentially making the common stock an equity stub.  There are currently four separate series of preferred stock outstanding, the series C and D preferred are pretty traditional in that they have a $25 liquidation preference and are exchange traded.  The series B (still outstanding, but discontinued) and T are non-traded and placed through RIA channels with investors (similar to a non-traded REIT) via an affiliate of management, Bluerock Capital Markets LLC, where management receives a 10% commission/fee (broken up into a 7% and 3% component) of the total money raised.  The B/T also have a strange feature where after 2 years, the company can redeem the preferred shares for common stock, so naturally management pitches this as an attractive capital raising method where they can continuously issue the preferred and then convert the preferred to common at opportune times.  There's some validity to that, but clearly some conflicts of interest too.  The problem is the stock has continued to trade at discount to peers and a theoretical NAV, they've converted some preferred over to equity this year, but where private assets are being valued after this recent spike in rent growth, it's probably value destructive to continue to convert the preferred stock.  

The the bull case is why management might actually be looking for an exit, they do own a lot of the stock (technically units in the operating partnership) thanks to their incentive plan and the 2017 internalization transaction, the capital structure is stuffed full of preferred stock, how much more can they realistically issue?  From the Q2 conference call (tikr.com):

We have a buyback in the market that provide support for the stock. So I wouldn't be surprised if you saw us redeem part of the B cash. I wouldn't be surprised if we take a break from redeeming the B, to a lot of stock -- the common to absorb and recover. We have -- as you know, we own north of 30% of the equity -- common equity here as management. So we're very sensitive to the stock price, making sure that we deliver value for the shareholders.  

Since the capital structure is so levered to the common, the upside if someone is willing to pay top dollar could be pretty huge.  On the bear side, management could keep issuing preferred stock, earn their 10% levy, continuously convert those shares after two years in perpetuity and drain a lot of value from minority shareholders.  Again, this is technically internalized structure but still feels externally managed.  Here is BRG mapped out in my typical back-of-envelope style, this is for a sale scenario so doesn't include overhead or some of the other accounting noise in BRG's financial statements, and there could be errors:

Then a super basic scenario analysis based on potential transaction cap rates and assuming the credit investments are valued at book value:

The combination of high upside in a sale scenario with the uncertainty that management would actually sell even if a great deal presents itself pushes me to like call options in this case.  I can participate in the upside if a deal happens and limit my downside if it ends up being an unfounded rumor or something management planted to get the stock price up so they could convert the preferred at more advantageous terms.

Other thoughts:

• REIT M&A activity is above or near all-term highs as a result of a combination of low rates, PE money sloshing around the system, plus it seems like private values for real estate didn't fluctuate nearly as much as publicly traded REITs did during the pandemic. Some of that mispricing is being fixed through take private transactions.  One example, Condor Hospitality's (CDOR) proxy statement came out, as expected there were plenty of buyers and they all coalesced around the same value (I'm also anxiously waiting for a similar result at CorePoint Lodging (CPLG)).  If BRG is indeed running a similar process, I'd expect similar results, plenty of buyers and offers coming in at or below a 4.5% cap rate.
• BRG has a value-add component to their portfolio, similar to the Nexpoint Residential Trust (NXRT) thesis, they can earn 20% IRRs on their capital by doing some surface upgrades to things like kitchens and bathrooms or adding smart-locks to their doors.  About 4,300 of their 11,500 operating units are still unrenovated, providing some additional growth levers, or it could be part of the thesis of a new buyer that makes paying a low 4s cap rate palatable.
• Another odd related party transaction that is probably nothing, but BRG does have an Administrative Services contract with other Bluerock entities where BRG pays another entity the expenses to the run the REIT, it is done at cost, but just another strange arrangement for a supposedly internally managed REIT.
• In 2018/2019, Harbert Special Opportunity Fund offered $12.25/share (below where it is trading today) but got the cold shoulder from management, likely another reason the market seems to be discounting the Bloomberg sale report.
• Management consistently talks about getting into the MSCI US REIT Index (RMZ in ETF form), they're currently outside the index, one of management's stated reasons they've converted the Series B preferred stock to common is to increase the float/market cap to meet index inclusion parameters.  I do sympathize with this thesis, I believe (don't have any real data) that REITs are over owned/represented in ETF/indices because retail investors like REITs and their yields.  It's another possibly reason other than the clear conflicts why BRG is undervalued, its also part of my NexPoint Strategic Opportunities (NHF) thesis, which should be officially converting soon to a REIT and shortly after will be eligible for the index.

Disclosure: I own call options on BRG (along with shares in CDOR, CPLG and NHF)

Capstead Mortgage Corp: Reverse Merger with BSPRT

Capstead Mortgage Corporation (CMO) is one of the oldest publicly traded mortgage REITs dating back to 1985.  Capstead has a fairly simple business model, they own adjustable rate residential mortgage securities issued by a government sponsored entity like Fannie or Freddie, then lever it up 7-8x and pay out substantially all the resulting net interest spread in the form of a dividend.  Capstead is historically well managed, they were one of the few mortgage REITs to maintain their dividend throughout the pandemic and didn't get portions of their portfolio liquidated due to margin calls like so many others.

But times change, the returns available doing this "arbitrage" aren't what they used to be, forcing higher and higher leverage to the point where it doesn't make a lot of sense.  In July, Capstead agreed to a reverse merger transaction with a public but non-traded traded REIT, Benefit Street Partners Realty Trust ("BSPRT"), with the proforma entity moving forward with BSPRT's management team and current middle market CRE loan strategy.  Capstead is currently an internally managed REIT, the market likes those better as the incentives are more directly aligned, but as part of this reverse merger, the new combined entity will switch to an externally managed structure.  To compensate Capstead shareholders and entice them to vote for the transaction, BSPRT and their management entity are paying a 15.75% premium over Capstead's book value in cash plus CMO shareholders will receive shares in the new entity on a book-for-book basis.  The new entity will be called "Franklin BSP Realty Trust" and trade under the ticker FBRT, the external manager Benefit Street Partners is a subsidiary of Franklin Resources (BEN).

The 6/30 book value of CMO was $6.35/share, 15.75% of that is approximately $1/share in cash.  The stock is trading for $6.77/share, if the proforma trades for book value, that's 8.5% upside for a deal that likely closes in the next month or two.  This is a fairly simple investment thesis, really two questions you need to have some confidence in answering:

1. How much, if any, has the book value moved in CMO since 6/30?
2. What premium or discount to book value should FBRT trade at?

For the first one, agency ARMs have little to no credit risk and less interest rate risk compared to other fixed income securities.  Just taking a glance through agency bond ETFs, they seem pretty stable since the middle of the summer, might be some slight fluctuation but I don't think its a stretch to think that the book value has been relatively stable.

The second is a little trickier, most of the larger (FBRT will be ~4th on this list in size) externally managed commercial mortgage REITs are trading near or above book value.  You can probably toss out the top and the bottom on this list, Starwood Property Trust is the original and best run of the bunch and STWD bailed out TPG RE Finance Trust during the pandemic as TRTX had a CMBS securities portfolio that was margin called and liquidated.

Most of these are household names, Benefit Street Partners is not what I would call a household name but they are a large CLO manager and have been utilizing the structure within BSPRT for some time now with success.  They launched the non-public REIT about 5 years ago, have had no losses in the portfolio in that time and the portfolio looks reasonably healthy today with only one potentially problem loan (rated 4 below, its a self storage loan, guessing its not materially underwater).  Despite being non-traded, BSPRT is public and does file with the SEC, you can find their filings here.

This is effectively a big capital raise for FBRT/BSPRT, they'll let the old CMO portfolio run off or sell opportunistically to fund their pipeline of new CRE loans, I like that they have a fairly clean portfolio free of legacy issues and dry powder to put to work in the post-covid world, there should be plenty of low risk opportunities as we know which sectors/markets are the most impacted by the pandemic, what developer business plans make sense, etc.  If you're a growing mREIT, problem assets if they pop up naturally become smaller and smaller.

Additionally, the reverse merger has two structural features as part of the deal that should help support the stock once the proforma company is listed:

1. $100MM repurchase program, with $35MM being funded by an affiliate of management, the repurchase program would kick in post close if FBRT is trading below book value.
2. Approximately 94% of BSPRT shareholders will be locked up for 6 months post merger, so there shouldn't be the fear that this is an immediate liquidity event and all BSPRT shareholders will sell at the first chance they get.

On top of those, they are also going to pay a significant dividend, they cite they've done over 10% ROEs and are going to pay it all out in a dividend, meaning if this trades even moderately below book value it would have a double digit dividend yield which should attract retail investors.  Overall, a pretty simple and hopefully short duration idea, I'll flip the shares if they trade for book immediately, otherwise I'll be content to wait a quarter or two, collect some dividends and wait for the discount to narrow.

Disclosure: I own shares of CMO