Q2 2021 Brightspire Capital Inc Earnings Call
Served against their loans. This is a quarter over quarter increase of $1.2 million and it's primarily driven by new originations.
That includes our prepared remarks, and with that let's open the call for questions operator.
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1 moment, please let me now poll for questions.
Yeah.
Our first question comes from Tim Hayes with BTG. Please proceed with your question.
Hey, guys. This is ethan on for Tim Thanks for taking my questions.
First question would be you guys have made significant progress on your strategic initiatives since the end of the first quarter.
Excuse me by completing internalization, increasing capital deployment divesting non accrual loans on raising the dividend just wanted kind of get a feel for how you guys rank your strategic initiatives today, what's your greatest focus and how quickly do you think youll be able to accomplish those goals.
Hi, how are you.
Thank you for joining us.
We realize there are a couple of calls going on at the same time, thank you for being here.
With regard this is Mike.
With regard to the rest of 2021 as we can.
Pretty much said in the remarks.
The goals are.
To continue to deploy the cash balances we have on balance sheet. Today, I think we were projecting getting somewhere down to about $125 million of actual cash and then figuring out how much we think we need to manage liquidity.
From that point forward.
Also trying to evolve away from our multifamily and look for other opportunities in other property types, we think those opportunities will present themselves.
Investment sales activity, especially in other property types.
Expect it to pick up dramatically as we get into Q4.
And so perhaps different property types and some more struck more structured highly structured.
Transitional loans to add incremental Roe.
Around the edges. The overall plan, though is to continue to evolve the portfolio.
Toward more of a as I said on the remarks, a pure play commercial mortgage REIT portfolios, who continue to do first mortgage loans.
And on transitional assets with an eye toward potentially executing our third CLO.
And then this asset sale that we've we've undertaken here that will also further move the portfolio because as those assets move off on these new first mortgages come on that kind of accounts as a full game there because we've got assets that are coming off at a more development pre development type on.
On non income producing assets versus the first mortgages were putting on today. So continued portfolio evolution towards more of a pure play commercial mortgage REIT on the goals issued a third CLO.
Increased earnings as we said and hopefully the dividend will follow on the stock price will follow as well and then I think if everything fell into place.
<unk> towards the end of the year, we could we could look at what we could potentially do around.
More capital, but maybe thats, a small prep equity issue too.
To increase the.
The capital base and to really more fully maximize the benefits of being internally managed whereas we said on the remarks as we grow the capital base, we're no longer paying that external management fee of a point and a half.
And as a kicker above a prep return and so on all of that falls to the bottom line. So those are kind of the basic goals I would say between now and the end of the year.
Alright, great. Thank you and then my next question is the weighted average risk rating you guys improved slightly quarter over quarter on the CCL reserve as a percentage of the portfolio declines can you just touch on any notable loan upgrades or downgrades this quarter on what drove those changes.
Yes, I think we had.
There was 1 notable low we had 5 loans that went from 4.3 in 1 went from a $3.2.
All kind of small moving and what I was kind of offset by some new loans coming on but there wasn't any 1 particular loan debt move drastically I.
I think you're seeing generally.
As the pandemic improves, albeit we're all concerned.
About the Delta variant.
Pike, but generally as the economy has improved and the pandemic has improved in terms of its effects on the economy.
We were very we felt it was appropriate to add higher risk ratings going into the pandemic and I see you're starting to see some of that if.
If you will melt away as we emerge from the pandemic.
Sure.
Alright, great. Thanks, guys.
Thank you.
Our next question comes from Stephen Laws Raymond James. Please proceed with your question.
Hi, good morning.
Mike I guess to follow up on that kind of seems like across the.
On the group there is it's kind of.
2 ways to go I guess Ray you can do the multifamily industrial life sciences that fits well into close on lighter transitional stop or some are looking at.
Taking more on row E on on some stuff that maybe doesn't go on to solos.
So kind of wanted to get your thoughts on the mix, there and kind of what does that incremental return you need to start looking at loans that maybe.
Don't fit into a CLO I know you said in your prepared remarks, you are targeting or thinking about a third CLO. So I know that is a focus.
Hi, how are you Steve Thank you for joining us on thanks for the question. This is Mike.
Okay. So I think there is a selective amount of capital that we would use for non CLO assets. We've had some very good experience and some as.
Loans that we've created that we're behind some development loans I think the key there is to make certain that any mezz loans. We do is behind the senior loan that either were doing the senior loan and laying it off or it's a senior loan that we can step in and fund and cure is something that we would've done directly but have chosen just to do the.
So we will look for those more selective transactions and we do think that we will see more of those opportunities as investment sales.
As divestment sales pick up overall.
When we entered the market in Q4, our multifamily lending.
Lending spreads in general were very robust we've seen over the past several quarters loan origination spreads will probably come in a solid 50 basis points to the low 3 hundreds.
However, commensurately with that we have seen the bank lines improve as well so the advance rate on the warehouse lines have come in roughly 5 in some cases 10 points, depending on the deal and in terms of spread lending spreads those spreads have come in somewhere between 25 to <unk>.
40 basis points. In addition to that our AAA on our CLO executed.
At a rate of LIBOR plus 115, the only spreads that were better than ours in the market where spreads that we're 100% multifamily not only in the first pool, but in the reinvestment parameters as well and those price a.
Nickel to a dime tighter, but we price best in class for a mixed pool of assets.
On the advanced rate was also very good at close to 84%. So while we've seen a compression in some lending spreads. We've also seen a compression on the liability side as well and to give you. An example, the loans that we originated post COVID-19 that we started in the fourth quarter of last year closing, we probably saw those Roe.
Improve several hundred basis points from warehouse line into the CLO a lot of that is attributable to the advanced rate being 84% going forward we are seeing.
The level of interest in multifamily has been enormous and it's reflected itself in the valuations of the underlying assets. We are seeing all borrowers slash investors are starting to acknowledge that and pull back and while multifamily valuations have been supported by the lack of building.
<unk> growth wage growth.
And we're learning materially in the path of growth in the south. So we're seeing that that demographic shift is also giving us a lot of support in valuations. We are starting to see some pushback from investors on valuation and you're starting to see us pushback on credit and I will say that consistently across the.
Align we're noticing other lenders are drawing the line in the low 3 hundreds.
And finally, what I'd say on multifamily. So finally, what I'd say is it really comes down to investment sales.
What we're hearing from the brokerage community is that there is a backlog that assets are coming to market now and will be coming to market. After labor day, most notably so we are expecting to see a dramatic uptick in investment sales and we're hoping that and that we will see a lot more opportunity and more diverse lending away from the multifamily sector.
Great. Thanks for the detailed color there Mike.
Frank I had a couple of questions around the kind of expenses under the internal structure.
To specifically kind of how do I think about.
Non cash comp equity comp, it's running kind of maybe an average of $5 million a quarter of the first half of this year.
Under the internal structure, how do I think about that line item going forward and the second 1 is any onetime expenses in <unk>, we need to account for around the CLO are all are all of the expenses related on the label to be amortized over the life of the transaction.
Okay.
Thanks, Steve.
On that.
The first question the equity.
Compensation that's being.
Thats running through it it's getting adjusted out of distributable earnings that'll Mountain will remain constant the equity award.
We received at the beginning of the year.
It should be consistent kind of going forward into future years.
That's kind of a number you can you can use right now.
As far as 1 time items for <unk>.
CLO notes other costs will be amortized over a period of time, so that really won't move the needle, but not expecting any onetime abnormal expenses from <unk>.
Great I appreciate the clarity there thanks for taking my questions. This morning.
Yeah.
Thank you.
Our next question comes from Matthew Howlett with B Riley. Please proceed with your question.
Okay. Thanks, Thanks for taking my question on.
Mike I really like the comments in terms of you know.
Maybe accessing a non dilutive preferred at the end of the year. So can we assume that youre going to be for sort of repeat sort of depending on your excess cash by the end of the year and you could look to access some preferred equity towards the end of the year.
I think thats something that first of all welcome per call. Thank you for the question.
I think that's something that we absolutely can have an eye towards when you look at how far we've come in terms of evolving.
Portfolio.
Internalization the CLO all the things that we've accomplished.
We'll probably look at doing something with our bank line at the end of the year in terms of extending that so I think at that point in time towards the end of the year, we'll look at the capital structure.
And see where the stock prices and see what we can do the goal is the whole point of being internally managed.
Is to reap the benefits of those economies of scale. So first and foremost we want to grow earnings grow the dividend and hopefully the stock price follow suit, we can't dictate that we hope it does.
And if we can get there than other doors will open and we'll look at that and at that point in time, when we get down to about $100.125 million of cash we have to start thinking about other ways to stay active and expand the balance sheet. So that may come through.
Through a press.
That we do at the end of the year, Yes, we'll absolutely consider that and again I think I want to.
Expand on this that the advantage of being internally managed as the operating scale with our equity base. So.
And externally managed generally just preferred equity anytime.
Many times that gets included in what is calculated from the management fee.
So for us if we issue that debt.
We get the cost of capital benefit by not paying that management fee and that scale really a <unk> benefit. So we will have an eye to do look at that at the end of the year yes.
So you're saying, there's really no additional terms that the exit capital putting it to work there's no really additional overhead that you need to incur if you raise that extra capital.
That's correct.
You have a pretty big balance sheet man.
You referenced the small but any idea sort of.
How much range of what you could you could issue I mean I've seen.
Sub 6% rates in substance been coming coming out on any any idea what I'm sure you're getting inundated with calls from me. That's a day theres any idea on where the market is for you.
We understand where the market is but at this point I would say that we are suspending our judgment until we get through the initiatives for this quarter.
Right now we've got a number of assets that we think we're working on that are going to.
Transition this quarter, which are key we've got the scale that we've agreed to that wed like to see if we can get that accomplished this quarter on it.
Depending on the machinations that have to go on there and I think once that dust settles, we'll be in a much better position to assess whether.
Whether or not we want to add capital.
We look we look forward, we look forward certainly look forward to that and then just moving back to the on the low com with the sale of the remaining 2 assets or we get a pick up the 24 sensory loss in the second quarter could you just walk me through that again.
Are you asking about the low.
Weighted to the transaction yes.
Yes.
No what I said in my prepared remarks is we're going to pick up about 50, 50 or greater on our book value on on depreciated book value and it's a combination of the gains as well as the 1 asset.
In the <unk> 5 pack that will now come back to a 100% ownership.
We'll get over 50 back.
Okay.
<unk> addition.
Great. Okay. Thank you. Thank you for thank you for clarifying that.
If you look if you look back at the previous quarters Youll see that when we executed that last year. The book value was reduced by.
The assets being contributed to this preferred equity structure vehicle and and now that we're under winding that work.
Recapturing some of that back some of it was it was taken away via a write down of an asset.
In previous quarters, which we stated.
But the balance of Frank is referring to that gets repatriated back to us once that preferred structure is claps correct.
If I can an SPV and you get it back with when you retire it.
That's right because many of these assets that are in this involved on the sell as Andy said also involved in that preferred equity financing vehicle. That's why you'll see the proceeds from this sale used to collapse the entirety of that vehicle.
And just for GAAP accounting, you've elected low comps you can't you can recognize it.
On June 30th.
Correct under GAAP principles on this type of transaction you have to take the lower cost per market, which is why we have the write downs and we'll get the benefit of the gains on the close.
Oh, great Okay great.
Definitely adjust for that and I guess the last question with you on this.
<unk>.
The discount to whats, even now are greater than a 30% discount on depreciated sort of pro forma book.
<unk> been asked the question on buybacks I don't want to beat a dead horse, but could you look to you have this triple net lease portfolio that we can strong bids in the marketplace from people announcing 1 off sales of games.
Could you do something strategically we sell you repurchase stock you tender for common shares.
This doesn't make any sense for what the group, where it is and I know we on the other peers many of which are externally managed.
For you guys I know Youre, just internalization you get on the streets getting used to the story, but.
Is there anything you could do to return capital via buybacks and do something strategically.
Between now and over the next few quarters.
I think at these levels and given the ROE we had in the CLO.
That deploying the capital into new loans and growing the balance sheet.
Is the goal and buying back stock at these levels.
Is is probably a lower oreilly versus where we can execute.
Our return on equity in a CLO and again I want to emphasize.
The whole point of being internal is that we want to grow the capital base and at this point in time, we made an investment.
Well, roughly 80 cents per share of $100 million to buy back the manager.
To improve the overall operations of the company and the efficiencies of the company now we want to take a step forward and try to grow the capital base. So we could we can enjoy those efficiencies and a stock buyback at these levels.
Think vs are competing use of capital it doesn't make sense for that and for the other reason.
The operating scale is important to us.
Right.
It makes complete sense and yet you've said the ROE vs are well over 11% on the CLO debt and I know you wanted to get bigger and Fletcher ROE on this deal.
I mean, we are we on the CLO.
They're all loans in there.
That have floors.
From that debt.
Let's call them free Covid loans. So we can establish the vintage and those really contributed highly to the ROE, but if you're just that's why I mentioned, if you strip out those and you just focus on the post COVID-19 loans.
We saw a 3 handle move in the ROE on those loans to something thats in the mid teens and so when you look at the stock price today, and what the buyback and how the buyback effects you Roe accretion.
Accretion to book versus deploying that capital on growing the balance sheet I think the preference is to do the latter.
Absolutely that makes complete sense.
Really appreciate it thanks, Mike Thanks, everyone.
Thank you.
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Our next question comes from Steve Delaney with JMP Securities. Please proceed with your question.
Hello, everyone and congrats on the progress on the balance sheet cleanup and also the rebranding I think.
A very important step for you and we really like the <unk> the new name it's Scott.
Alright spire has sort of an aspirational feel to it tomorrow or in any way.
Just 1 thing.
A lot has been covered.
At your current debt to equity leverage 1.3 times at June 30 cash.
Clearly you're in transition, but that's that's a very low level relative to peer group, where you would normally see 2 and a half to even 3 times debt to equity.
The CLO, obviously does a lot because youre initially close to 5 times leverage there, but looking maybe forward a couple of quarters on early next year. What do you think that settles in if you do a third CLO, which which should be in terms of modeling what should we think about as far as a range around debt to <unk>.
QWERTY, including the CLO of course.
It's Frank I'll take that so look I think frankly as.
As we continue to deploy the cash.
On our balance sheet, we expect that level to <unk>.
ROE somewhere into the <unk>.
And depending on the item ticket I'm thinking more debt to assets and as we are.
I'll continue to put that money to work and obviously we.
We deeply pursue some type of RFA as Mike previously mentioned that will help drive some of that numbers, but we expect these numbers to move closer in line with our peers.
And we also have as Mike Hi, how are you Hey, Martin.
And thank you for.
Your optimistic view of our name greatly greatly.
That you've got a lot of smiles on them now, but now you got to live up to it right yeah, yeah. Its an interesting path good new rebrand.
Virtually every name is taken.
But I also would point you to we have we have a number of unencumbered assets on the portfolio. So as Frank said, it's not just deploying the cash.
And as I alluded to earlier, we're focused on this quarter on.
On getting those assets back for instance, 1 in particular 1 of the larger ones.
The San Jose Hotel that deal is that loan is going to have a bankruptcy confirmation hearing the borrower is endeavoring to pull that out of bankruptcy as quickly as possible. We expect that to happen this quarter and in doing so that loan which is now completely unencumbered at 100 and Paul at $70 million 70.
$5 million, including the press that we have with it.
Well, we'll do 2 things 1 will have an accruing asset again alone that's reinstated as current and then secondly.
We will have a loan that we can finance so there'll be more cash that comes out of that that we can utilize to originate loans. So you'll see our leverage tick up 1 as we utilized cash on our balance sheet and 2 as we resolve some of the unencumbered assets as I alluded to them underperforming or non earning assets and repatriate that capital to turn them into new loans.
<unk>.
Makes sense. Thank you. Thank you both on the comments.
Yeah.
Thank you.
Our next question comes from Jade Rahmani with K BW. Please proceed.
Alright.
Hi, there and thanks for taking the questions.
I wanted to ask if you still view the CMS conduit business is attractive.
Something you want to create.
Yes.
Hey, Jade however, you're welcome.
Thank you.
Thank you. Thanks for the question, we haven't we have the tools to do it we haven't looked at it this year.
The goal for the year has been too to really turn the portfolio more toward as we would say that a pure play commercial mortgage REIT, where we had first mortgages.
And more consistent earnings we will have an eye toward that that is something we can do I will tell you in looking at the landscape looking at the issuance in.
In the MBS market and taking note that a substantial amount of the issuance was SaaS.
And CLO vs conduit <unk> that market is very competitive right now theres not a lot of product, we do hope that as we get into the fourth quarter and first quarter debt investment sales pick up and that will generate the demand for our <unk> conduit product, but right now.
Being a late entrant to that market and seeing how competitive it is I don't see us doing that in 2021. It is something that we reserve the right to do.
Certainly have the people with our Chief Credit Officer, George Coca myself.
And our head of capital markets, Matt has land, we have the ability to do that but.
But right now we don't see it for 2021, we still see enough ahead of us and just evolving the portfolio into a pure play that will check that box and look at that in 2022, and hopefully the market will be a little bit more open and there'll be more demand for for credit. They are right now, it's probably ranking third in terms of.
The issuance like I said I think it is SaaS b is probably double what see MBS condo it has been.
And Thats, a complete inversion from what it's been historically in other years.
Okay.
I appreciate that.
You mentioned transitional loans with more structured component are you talking about construction loans are you talking about heavily transitional loans.
You're referring to there.
Well quite frankly, the multifamily loans that we've been doing all they're pretty they're pretty easy and straight down the middle of exterior work its interior kitchen, Bath, Washington, Dryer dishwasher, it's pretty.
I would say very light transitional and easier to monitor so I think as you're moving to office, where theres more tenant roll maybe repositioning of assets with Capex will look to do more of that and as I said earlier Jade we have had some good success.
In multifamily development, where we've done mezz behind construction loans.
In the cases, where we've had real success, it's been loans, where the loan size of the construction loans is something that we could've done directly.
In terms of the size and scope of the loan, but we chose to do the math, so maybe smaller deals, but I would say that that's probably a little bit further down the list in terms of highly structured I think we want to evolve away from construction at this point and just maybe moving to office and industrial where the rent roll on the Capex at the property.
Let's say more value add more transitional than the modest transitional that we've been doing with multifamily.
Thank you.
There are no further questions at this time I would like to turn the floor back over to management for any closing remarks.
Well, thank you for joining us today on our first bright spire capital earnings call on we look forward to seeing you at the end of the third quarter. Thank you for joining us today.
Ladies and gentlemen. This concludes today's webcast you may now disconnect your lines at this time thank.
Thank you for your participation and have a great day.