Non-Listed REIT (CRE Debt)
A Simplified Framework for Initial Screening
Happy Sunday! Hope your 2025 is off to a good start.
Today, I’ll show you a quick and dirty way to gauge a credit fund. I bet you can guess which investment firm operates this fund - share your guesses in the comments below!
The fund in question is an externally managed non-listed credit REIT (which means you’ll pay someone for the privilege of buying shares on your behalf). The nomenclature doesn’t matter for our purposes too much: you can use the same methodology to do a quick screen of private or publicly traded mREITs, BDCs, private credit funds, etc.
What’s important to you is quickly figuring out whether any given fund is worth a closer look. And this is exactly what I’ll show you how to do. Don’t fret: the math is not complicated, and ChatGPT can do most of it (I included prompts).
Please note: this is not a substitute for proper due diligence. It is simply a quick screen to assess the margin of safety and decide whether you want to spend more time on fund financials.
Smaller funds that don’t issue shares (nor file with SEC) will have financial statements that look different. This article will teach you how to interpret them:
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Deal or No Deal?
Please remember, the deal is presented as a case study, and all relevant information has been changed to protect the identity of the sponsor. This is not investment advice.
Brief recap of the deal:
The business operates as follows:
raises money from investors (via share issuance);
borrows money from banks and other credit providers;
lends money to finance commercial real estate (by originating loans or buying them in the secondary market).
90% of credit funds operate very similarly (of those, there are significant variations in amount of leverage used). The so-called NPL (non-performing loan) funds warrant a separate discussion.
Quarterly Report (From 10-Q)
To save yourself time, start with the most recent quarterly report (Form 10-Q). In our case, the fund originated most loans in Q3 of 2024, so earlier reports will not have much meaningful data.
First, take a look at the schedule of loans receivable:
I highlighted the important information:
We will use principal outstanding for our calculations: $812.5M;
Maturity date: pay attention to any loans maturing in the next two quarters. AI does a brilliant job calculating weighted average maturity using the screenshot.
See that “Quarterly I/O”? It’s a large loan (nearly 25% of the fund) - given that the borrower is not required to make monthly payments, I’d be very curious to find out when the fund manager would flag it as delinquent (if necessary).
Next, let’s take a look at the schedule of loans payable:
What we are looking at:
Total debt outstanding: $616,192;
Available capacity: important to see how much more the fund can borrow. This allows them to increase loans receivable (lend money) without having to secure additional financing.
Maturity dates: ALWAYS pay attention to this, esp for maturities coming up in the next two quarters.
Doing the Math
Why do the math instead of looking this up in the quarterly statements?
Early-life funds (like this one) can have recently originated loans (like this one does) and the interest earned shown in the reports could be partial. This applies to mature funds that had material changes in loans outstanding (originations or payoffs).
Of note: the fund targets leverage of 60-75%, but can go higher during the ramp up period. It’s currently at 78%, and we will assume the ratio will remain at around this level.
It’s worth reminding you that we aren’t performing neurosurgery here. Instead, we are looking for margin of safety, and thus don’t need to calculate everything to the third decimal.
Estimating Income
Think in simple terms: the fund borrows money, lends money to borrowers, lives off the spread (ideally, the spread is positive, i.e. they can borrow at a lower rate than they lend at). Simple.
To prevent you from throwing your calculator at the computer screen, let’s use ChatGPT to do the actual math. Here are the prompts:
Upload a screenshot of loans receivable [calculate weighted average interest rate] - 8.18%
Upload the schedule of loans payable [calculate weighted average interest rate] - 7.18%.
[Subtract debt amount outstanding from principal balance of loans outstanding] - $812,519-$616,192 = $196,327. On this money, the fund makes the full 8.18%; on the portion of the fund that’s levered, the fund makes the spread (or 1%). IMPORTANT: we can only simplify the spread on funds that borrow AND lend at fixed or floating rates (they both must be either fixed or floating).
What the fund earned in interest (roughly): $196,327*.0818 + $616,192*.01 = $22,220.92
Estimating Distributions
For simplicity’s sake, you can take the most recent distribution amount, and annualize it. In our case: the most recent monthly distribution was $.1336 (or $1.6032 annually, which represents around 8% forward yield, by the way).
There are 9,170,815 shares outstanding (you can easily find this in the quarterly report): so if the fund stopped originating loans/borrowing money/issuing shares, it would need to pay $14,702,650 in distributions to maintain the 8% yield at current NAV. Not all share classes earn the same amount, but we disregard the minor differences for the purposes this screen. Let me repeat: if 25 basis points make the weather for you, the margin is too thin.
Estimating Expenses
Annualize the most recent quarterly numbers. The highlighted numbers are (roughly) the cost of keeping the fund alive. Annualized, they equal $7.36M (btw, that management fee might go up, funds often defer or waive fees for the first few months, check that in the footnotes later).
We are disregarding financing fees because we are assuming a fund will stop originating loans/obtaining financing. And remember, we already accounted for the interest payable because we are simply calculating the spread.
The Result
Distributions estimate: $14.703 + operating expenses estimate: $7.36 = $22.1M
Interest income estimate: $22.2M
I hope you made it this far, because I have bad news: if you are interested in earning 8% in a non-liquid fund (with RIA fees on top), you can now start doing deeper due diligence. This is where you will want to start:
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