Q3 2021 Brightspire Capital Inc Earnings Call
[music].
Greetings and welcome to the bright spot here capital third quarter 2021 earnings Conference call.
At this time all participants are in a listen only mode.
A brief question and answer session will follow the formal presentation.
If anyone should require operator assistance during the conference. Please press star zero on your telephone keypad.
As a reminder, this conference is being recorded.
It is now my pleasure to introduce your host David Palo My General Counsel. Thank you Sir you may begin.
Good morning, and welcome to bright spire capitals third quarter 2021 earnings conference call, we will refer to bright spire capital bright spire, b RSP or the company throughout this call.
On the call today are the company's President and Chief Executive Officer, Mike <unk>, Chief operating Officer, Andy Wet and Chief Financial Officer, Frank <unk>.
Before I hand, the call over please note that on this call certain information presented contains forward looking statements. These statements are based on management's current expectations and are subject to risks uncertainties and assumptions potential risks and uncertainties could cause the company's business and financial results to differ materially.
Really including the continuing potential adverse effects associated with COVID-19.
For a discussion of risks that could affect results. Please see the risk factors section of our most recent 10-Q.
And other risk factors and forward looking statements in the company's current and periodic reports filed with the SEC from time to time.
All information discussed on this call is as of today November three 2021, and the company does not intend and undertakes no duty to update for future events or circumstances.
In addition, certain financial information presented on this call represents non-GAAP financial measures the company's earnings release and supplemental presentation, which was released this morning and is available on the company's website presents reconciliations to the appropriate GAAP measures and an explanation of why the company believes such now.
Non-GAAP financial measures are useful to investors.
And now I'd like to turn the call over to Mike Madden, President and Chief Executive Officer of bright spire capital.
Mike.
Thank you David.
Welcome to our third quarter earnings call I would like to start by wishing everyone well and I. Thank you for joining us today.
Starting off with some key financial highlights for the third quarter. Adjusted distributable earnings were 26 cents per share up 30% from last quarter. Our current liquidity as of November 1st stands at 367 million and our unappreciated book value per share was $12.
The reduction in book value from the prior quarter reflects the write off of the la mixed use mezz loan, which I will discuss in my remarks later.
With respect to our dividend I.
I am pleased to report our board of directors approved an increase in our fourth quarter dividend to <unk> 18 cents a share.
This is up from 16 cents in the prior quarter and is the third increase since reinstating our dividend earlier this year.
The increase is supported by the cost savings realized from the internalization of management and the continued successful execution of our overall business plan. Our goal is to further increase our dividend as we reach full deployment of our cash balances.
Looking at our third quarter performance, we had a solid quarter in capital deployment, which Andy will discuss in more detail.
A high level in the last 12 months, we have closed on or committed to 69 loans totaling $2 1 billion also in the third quarter, our largest nonaccrual loan the San Jose Hotel has been reinstated to accrual status without loss.
The borrower is emerging from bankruptcy and the property will open as a newly rebranded Cigna hotel under the Hilton hotels umbrella.
During this last quarter, we have steadily increased our loan originations outside of multifamily to include more middle market office properties. Further subsequent to quarter end, we have committed to a multifamily mezzanine loan with a repeat borrower that has a strong performance track records with lifestyle.
Going forward, we will continue to selectively consider mezzanine lending opportunities, but only have situations, where we have the wherewithal to fund the first mortgage if necessary.
For the remainder of 2021 and into 2022. Our plan is to continue to redeploy company cash into new loan originations and substantially complete the rotation of our asset portfolio and liability structure with an eye toward issuing our third CLO.
Finally, I would like to discuss the write off of the remaining book value of $98 million and the mezzanine participation interest on the L. A mixed use property.
As you May recall, we retain a junior mezzanine participation and interest in connection with rescue capital that came in the form of a $275 million senior participation in that mezzanine loan.
This was funded and controlled by a substantial third party investor in September of 2020.
The existing first mortgage mezzanine and he'd be five loans wanted to maturity default this past July.
Just last month, we were notified that the same private investor in that senior mezzanine participation exercise their rights to purchase the defaulted first mortgage loan.
This mortgage had a loan balance of approximately $950 million and a fully committed amount of one point or three 5 billion.
While the hotel at the property has officially open for business with sell the hotel has still not yet been achieved.
Furthermore, sales of additional condo units have also been nonexistent.
We have been in dialogue with the key parties regarding a possible restructuring and the situation remains very fluid.
However, with this recent change in the ownership of the first mortgage there is an increased likelihood of a mortgage foreclosure on the entire capital stack.
While we have not yet received a formal foreclosure notice we have been advised that this may occur.
A foreclosure action will clearly result in a substantial negative impact on any potential recovery.
This recent change in circumstances, along with continued stagnate property and condo unit sales has resulted in a write off of the investment.
Please refer to the past and current disclosures in our Form 10-Q for more details.
Now before turning it over to Andy I would like to close by mentioning an important New addition to the plight spire board.
Last month, we announced the appointment of Tim Diamond as a new board member.
A former founding executive of Kroll Bond rating agency and managing director at standard and Poor's, Tim has more than 30 years of experience in commercial real estate and risk oversight.
Following her appointment the bright spot our board will now have five independent directors.
We look forward to working with Jim and drawing upon her vast experience as we continue to grow our business.
And with that I would now like to turn the call over to our Chief operating officer, Andy with Eddie.
Thank you, Mike and good morning, everyone. My comments today will focus on bright spires operational highlights and the ongoing execution of our plan to simplify the business, while continuing to grow earnings the company made substantial progress during the third quarter on a number of key objectives, including capital.
<unk> and asset and portfolio management initiatives, we remain focused on managing the existing portfolio, while continuing to deploy capital in our middle market lending strategy.
As previously reported during the third quarter, we executed on the company's second managed CLO in the first under the bright spot our capital brand. Additionally, we continued efforts to resolve non accrual positions a number of which are included in the pending $223 million loan.
Folio sales consisting of five co investments across seven physicians, we anticipate closing this transaction in late 2021 or early 2022.
Early in the third quarter the company successfully executed on its second manage CRE CLO the $800 million CLO is collateralized.
By interests in 31 floating rate mortgages secured by 41 properties with an initial advance rate of 83, and three quarters percent and a weighted average coupon at issuance of L. Plus 149 before transaction costs <unk>.
The structure features a two year reinvestment period, and further diversifies, our funding sources and reduces our cost of capital.
Our first $1 billion managed CLO executed in October 2019 continues to perform and benefit from LIBOR floors.
We have been actively replacing loans in the CLO, which at present is fully invested.
Throughout the two year reinvestment period, which ended October 19, 2021, bright spire replaced 13 loans for a total aggregate loan amount of $537 million with the reinvestment window now closed on our first managed CLO, we have begun focusing on our third CLO, which we expect to.
To execute in the mid 2022 timeframe.
Our originations platform remains active with a continued focus on the middle market and high growth geographies. During the third quarter. The team originated 18 senior loans with an aggregate commitment amount of $513 million of which $458 million was.
Really funded.
All of these investments are first mortgages on cash flowing assets the majority of which are acquisition financing.
During the third quarter, two loans paid off for a total of $179 million, resulting in positive net deployment of approximately $280 million.
Subsequent to quarter end, we have closed on four investments for an aggregate commitment of about of $86 million.
There are an additional 13 loans and execution with an aggregate commitment amount of $405 million, resulting in a total of 17 loans totaling $491 million a day scheduled to close in the fourth quarter.
We anticipate an uptick in loan repayment activity over the next several quarters for a number of reasons, including pent up demand due to COVID-19 combined with the attractive relative rate environment.
Economic expansion.
As previously highlighted our portfolio is presented as three distinct segments one.
Senior and mezzanine loans and preferred equity two net lease real estate and other real estate and three CRE debt securities.
As of September 32021, excluding cash and net assets on the balance sheet senior and mezzanine loans and preferred equity is comprised of 90 investments and an aggregate at share net book value of approximately $1 billion or 84% of the portfolio.
The loan portfolio remains diversified in terms of size collateral type and geography, given our recent originations activity.
The portfolio has lower average loan balances with a higher focus on multifamily and office properties. Looking ahead. The majority of the company's capital will be allocated towards this segment and more specifically to first mortgages. However, as Mike mentioned we.
We are starting to see mezzanine debt opportunities and are currently in execution on a multifamily mezzanine loan.
Net lease real estate and other real estate is comprised of 12 investments and an aggregate at shared net book value of approximately $153 million or 12% of the portfolio in line with last quarter.
CRE debt Securities segment, which includes <unk> MBS and one remaining private equity interest was comprised of six positions and in aggregate at share net book value of $48 million or 4% of the total portfolio at quarter end.
Subsequent to quarter end, we sold one position for $5 million of proceeds resulting in a small gain.
89% of the pro forma remaining value in this reporting segment is associated with bonds subject to risk retention provisions through June 2022.
At that point, we will explore a sale of the risk retention securities.
In summary, we continue to make good progress in transforming our portfolio composition towards senior mortgage loans that deliver current and predictable earnings looking ahead, the execution of certain portfolio management initiatives, coupled with a strong fourth quarter loan pipeline has bright spire.
<unk> well positioned to continue the positive momentum as we head towards the year end.
With that I will turn the call over to our Chief Financial Officer, Frank <unk> to elaborate on the third quarter results.
Thank you Andy and good morning, everyone before discussing our third quarter results I wanted to mention that we expect to file our Form 10-Q today.
In addition, I would like to draw your attention to our supplemental financial report, which is available in the shareholder section of our website to supplement continues to provide asset by asset details as does our Form 10-Q.
With that let's turn to our third quarter results. We reported total company adjusted distributable earnings, which excludes realized losses and fair value adjustments of $35 million or 26 per share.
We also reported a total company GAAP net loss attributable to common stockholders of $70 1 million or <unk> 54 per share and the distributable loss of $68 4 million or <unk> 51 per share.
Both the GAAP and the distributable loss reflects the $98 million fair value adjustment associated with our mezzanine loan participation interests in the L. A mixed use property that Mike described in detail.
During the third quarter total company GAAP net book value decreased from $11 75 to $11 four per share an underappreciated book value decreased from $12 66 per share to $12. This change is primarily due to the fair value adjustment noted earlier.
As Andy mentioned in his remarks to close on the loan portfolio sale transaction is anticipated in late 2021 early 2022, we plan to utilize the proceeds from the transaction to pay off the <unk> preferred finance.
The result of doing so is a net projected increase to our September 32021 on depreciated book value of over <unk> 50 per share. This increase reflects the combination of recording the investment gains associated with the sale as well as our triple net warehouse distribution portfolio reverting back to bright spire, 100%.
Sure ownership, we haven't provided a narrative summary of this investment and this quarters Form 10-Q.
Looking in more detail at the third quarter adjustable distributable earnings quarter over quarter growth primarily reflects.
The company's appointment of vital cash.
Reinstatement of our largest one to accrual status and the full realization of the cost saving benefits from the internalization of our management contract, which was completed midway through the second quarter.
On an annualized basis, we anticipate generating operating cost savings of approximately $16 million per year or approximately <unk> 12 per share from the internalization.
Turning to our dividend.
Given our growth in adjusted distributable earnings along with our improved operational performance and business outlook, we declared a dividend of <unk> 18 per share for the fourth quarter of 2021 up from <unk> 16 per share last quarter.
The fourth quarter dividend is payable on January 14th 2022 to shareholders of record as of December 31, 2021.
Moving to our balance sheet, our total at share underappreciated assets stood at approximately $4 4 billion as of September 32021.
Our debt to asset ratio was 61% and net debt to equity ratio was one six times at the end of the third quarter up from one three times at the end of the second quarter. This increase was primarily driven by new loan originations.
In addition, our liquidity as of today stands at approximately $367 million between cash on hand, and availability under our bank facility.
Looking at risk rankings, and <unk> reserves, our overall loan portfolio risk ranking at the end of the third quarter improved to three two compared to three five at the end of the second quarter.
This change is primarily related to the borrower of our largest senior loan emerging from bankruptcy and reinstatement of the loan to accrual status as well as third quarter loan originations.
And finally, our seasonal provision was $43 7 million and represents approximately one 3% reserved against our wealth. This is essentially flat to the second quarter.
That concludes our prepared remarks, and with that let's open up the call for questions operator.
Thank you we will now be conducting a question and answer session. If you would like to ask a question. Please press star one on your telephone keypad.
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Participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys, one moment, please while we poll for questions.
Thank you. Our first question comes from the line of Tim Hayes with Pete <unk>. Please proceed with your question.
Hey, good morning, guys.
First question around century Plaza I appreciate all the color on the prepared remarks, and being prudent with the write down to zero, but Mike can you maybe just walk through a scenario, where you might have some recovery there.
Now that the hotel is open and you had previously mentioned that there were.
Or was a potential buyer lined up and I'm just curious what happened with those conversations and what it might take for you guys to see some recovery. Thanks.
Thanks, Tim and thank you for the question can you hear me okay.
Sure Ken.
Thank you.
So.
This was a transaction that when I first joined the firm I spent I think the first five months.
But the tremendous amount of disproportionate amount of my time focused with the group on the rescue capital here. So this is it is a disappointment for us to have gotten to this spot.
The underlying value of the asset is there when I say better I mean.
Into our piece of the junior participation matters as well there's value there.
Finally, we do not have the capital.
And the wherewithal to play that through hence why we brought the rescue capital and last year, albeit expensive.
Yeah.
The backdrop is also with inflation and supply chain issues and replacement costs going up.
So we really believe that there is value in our piece.
But the culmination.
The senior Mezz participant buying the first mortgage for $950 million, which was the outstanding balance as I said in my prepared remarks.
Along with the fact that the hotel sale.
Has not yet been completed and that would that would be at $1 billion of room, and 400 rooms that would significantly pay down the senior debt. So I have been saying on previous calls that the sale of that hotel and the closing of that as it is critical that has not yet occurred.
And there was also a lack of traction and sale of <unk> and pre sale of condo units.
So I think with all of that information and the delays that we've had.
Especially with the acquisition of the first mortgage that happened in October it would be unreasonable.
Do not anticipate that there is a foreclosure that's looming.
And then that would be a binary outcome potentially there.
A heavy bias towards a binary outcome.
We're in continued contact with the mortgage and senior mezzanine participants who are the same party.
Is it possible for a recovery.
As I said, there is value in rfps, but time and cost of funds matter and so we think based on what we've seen thus far that that is most likely unlikely.
There is a potential restructuring path.
With with.
With the private Investor, where a UCC foreclosure is done.
And we're part of the mez. So we would be preserved in that in that process and that may allow us to play through longer.
There is still a very high cost of capital that will be imputed upon us now that now.
Now that the private investor owns the first mortgage so discussions have stopped at this time it doesn't mean that they can't pick up at a later date, but we have we have spent considerable time on that with them and come at an impasse thus far.
It is also possible that through a mortgage foreclosure theres a public auction that could occur.
Would occur.
We are a third party bidders can see that there is value beyond the senior and mezzanine participation.
But that would have to happen quickly because.
Time, and the cost of capital will weigh on the value of our piece. So it is possible that if.
There was a mortgage foreclosure and now that moved along quickly other bidders would see that there is value.
In the property and the collective property beyond beyond the senior participation and if they did that you've done it's plausible that excess cash flow.
Would come through but there are a number of variables involved with that to make that very hard.
To predict so in all cases.
The time delays are really and the cost of capital destroy our value.
The lack of sales momentum has been a big part of that.
So the takeaway for their small the story is that lenders should not be in.
And the Mezz cap stack, where they don't have the ability to do the first and protect and that was the situation here.
And this is the result.
Yeah.
Did that answer your question Oh.
Oh, yes definitely yes.
You're walking through the different paths here potentially so.
Right now it's at zero, so no economic impact to the financials going forward, which is good but just wanted to get a sense for if there there could be some upside so thanks for that.
Now just maybe turning to some of the other watch list loans you highlighted in the Q previously long Island office.
City office excuse me Claremont.
Clermont Berkeley in the student housing portfolio, just wondering if there are any updates to any of those assets worth passing along and.
Now that century positive net zero in the fortress sale is under.
Scheduled to close at some point.
And fair amount has been resolved you don't really have any more outsized non accruals. So I'm just curious if.
And if you see any of these watch list loans, maybe taking that spot or if theres any constructive updates to get.
Well as we pointed out the San Jose asset is now back.
On accrual status.
Claude the borrowers efforts to get through bankruptcy quickly, we applaud the borrowers efforts to keep funding the property, which is the reason why we stuck by that borrower and we did not charge that borrower default interest. During this period because that was our that was our stance during COVID-19. The borrower was funding and we value that considerably.
We've had situations where the borrowers have acted differently.
And so is our response has been very different we've sold loans where.
Where we felt the borrowers would not we're not helping.
The issue.
The only other asset really that is worth is worth discussing is the long island city deals.
Both of those deals are with the same sponsor.
They are on crossed.
There is overall improvement.
Both assets and the one asset where we.
Got capital contribution from the borrower that we mentioned.
Theres been more leasing.
And the retail.
And then the other asset there is more activity in the office.
And the lesser occupied asset the borrower did put up capital to fund negative carry and that was one where we were considering potentially selling them alone.
But the borrower came to the table with enough cash to do so.
And we felt that that would make sense.
To work with the sponsors given that over the next 12 months, we felt that would be far greater visibility into New York Metro leasing versus today.
Selling alone into into this uncertainty so we felt that that was a compelling.
Our compelling modification, we did a partial repurpose some of our future advances first the borrowers money. The sponsor's money will go ahead of US and then we'll repurpose some of our future advances to assist with negative carry on the back end and then the sponsor will then go ahead of Us and fund.
Future Good news money and Ti capital.
If needed so we made that arrangement with them, which we thought was.
<unk>. So again, we thought that getting another year's worth of visibility and long Island city, given the borrowers contribution of capital made a lot of sense. The second property has more occupancy to begin with and there is another lease in the works and so the negative carry on that is far less of a borrower already has.
Until February to talk to us about the next step on that.
But we are seeing some activity that is positive. So that's that's pretty much it on those assets.
I think the fact that tomorrow will put up money does say a lot and I do think that 12 months will time will give us a ton more visibility than we have today.
Great. That's a good update there. Thanks, and then just my last question.
Around Fairmont, San Jose how much when did you start putting out loan back on accrual I'm. Just curious how much interest income was recognized this past quarter from that asset and relative to what we should expect next quarter.
Sure, Hey, Hey, Tim it's Frank so the.
The phone went back on accruing.
In September as it emerged from bankruptcy, but we picked up seven months of interest income.
So that was about $6 $8 million or <unk>.
We expect it when it goes to paint all FERC moving forward will be about $2 4 billion, a quarter, which is a little under two <unk> per share and thats before financing.
Okay got it thanks Frank.
I'll leave it to where we are in the process.
In the process of procuring financing.
For that long at this point.
A good deal we'll stay tuned on that thanks again for the for the time. This morning appreciate it.
Okay.
Our next question comes from the line of Stephen Laws with Raymond James. Please proceed with your question.
Hi, good morning.
First off appreciate the color on those assets that Tim went through so thanks for the details there.
Andy.
Andy Your Frank as we think about leverage and growth from here.
You talked quantified the pipeline for US I think just generally said prepayments will probably pick up in the next couple of quarters.
Can you talk about the kind of net portfolio growth expectation.
And then maybe quantify what's your leverage targets are with assuming that the majority of investments are in senior loans.
Eddie do you want to touch on what we're experiencing and.
And prepayments over the next few quarters, and frankly pick up the leverage please.
Sure sure. So we had relatively modest prepayments in the recent quarters and as we highlighted in the prepared remarks, we expect that activity to increase over the coming quarters. So here in the fourth quarter may see $2 million to $300 million of prepayments and then.
Going into next year, we anticipate seeing higher prepayments on a quarterly basis and so obviously the focus of our originations.
Originations program is to continue to add assets on a net basis to the portfolio and we see our portfolio growing from where it is today to about $3 5 billion in loans here in the fourth quarter somewhere in that neighborhood and then continuing to grow throughout the course of 2022.
And Frank I'll turn it over to you for the the impact for sure and you know and as far as Stephen leverage.
Our debt to assets is at 57% last quarter at <unk> 61 this quarter.
That will continue to grow into the fourth quarter and as you can take the 2022.
Getting into that high <unk>, maybe touched 70, just yet again, depending on our ability to play in.
And the timing of the repayments.
Great appreciate the color there.
Mike.
You talked last quarter about some attractive.
Some of the suburban office and you mentioned in your prepared remarks that you guys have been more active there.
Can you give us a little more color property type geography, where you're seeing the best.
Most attractive investment opportunities and kind of what we should look to what we should expect to see increases.
And the mix of the portfolio going forward.
Okay.
First let's kind of talk about where we are targeting row, we're still despite all the movement that's going on in shifting to property types, we are still targeting low double double digit Roe.
On balance sheet.
Hopefully achieving above that maybe not seeing 100 150 basis points higher if we're able to execute.
Our CLO, we saw credit spreads continuing to tighten.
In the third quarter around other property types.
Warehouse spreads.
The banks also came in as in their advance rates have increased and have kept abreast.
With the overall market in Q3, we did start to see multifamily spreads.
Three hundreds.
And the office of <unk>.
<unk> is more in the mid to high mid to mid threes high threes in some cases, 4%.
Depending on the leasing at the property hotels are high threes to fours and we're starting to see activity in hotels, we've actually been on a couple but haven't been haven't been successful.
The real story is the credit demand and multifamily remains.
Widening now and Thats, partly due to the fact that there's been so much CLO supply that we're seeing CLO AAA spreads widened as we back into into year end.
And a lot of issuers are trying to trying to issue this year.
Based on LIBOR, so that that has caused a backup in spreads and multifamily.
In terms of underlying asset valuations, what we're experiencing now is that.
In multifamily.
Rents have grown considerably almost everywhere.
And new acquisition borrowers are and we're seeing this in our own portfolio of loans that we've just done over the past year borrowers are actually popping spreads before they even put in a new counter top well refrigerator before the renovation program has kicked off.
Popping rents on existing.
Tenants as is so that has been.
Kristin to see almost every component of replacement cost is up further exacerbated by supply chains and time delays.
Which we think is a big headwind for future development and bodes well for existing supply, but we're also thinking that some of our existing portfolio that we're doing now they have a longer duration on it because borrowers may be behind in their business plans by.
By 345 months because of appliances and labor shortages.
So we're not concerned about that because the loans, we're doing have debt yields where.
Theres coverage at the property so we're not worried about interest.
Advancing or shortfalls with that but we do think there'll be longer duration in the portfolio multifamily cap rates have dropped considerably.
We're seeing cap rates in the three handles and in some cases, we're seeing cap rates.
In the two handles.
And where where we have double digit rent growth.
The cap rate compression is a little bit alarming.
In some instances.
And this is happening in the face of a fed.
That is becoming more hawkish and will eventually taper and tightened.
So that is that is something that were being watchful love, we're pushing off on multifamily deals.
Where we're seeing increase in valuations.
And compression in cap rates, not only occur but at current rates of speed.
That.
That we are we're getting some alarms on so were pushing back on some multifamily deals.
Later in this fourth quarter here as we see cap rates compress.
Very tight.
And the concern that we have is that the fed is going to play catch up with inflation and have to tighten or taper more considerably while buyers are stepping into low 3% cap rate. So that's something to keep an eye on.
And that's why I think there is another reason widespread.
Of valuation with regard to other property types.
We're continuing to find value and path of growth suburban office.
The rating agencies and CLO two heavily favor.
Stronger markets, where there is higher market rankings and lead to higher advance rates on close, but we're finding the most risk reward value and in middle market office, where there is a drive to work.
As opposed to mass transit commute and Theres more value and we're getting loan sizes that we'd like to play in that are more in the $50 million and below loan sizes. As I said, we are seeing some hotel that has just started but because of the few assets that are out there.
They are getting actively bid flow.
That's great color. Thanks for the comments this morning, Mike.
As a reminder, if you would like to ask a question press star one on your telephone keypad.
Next question comes from the line of Matthew Howlett with B Riley. Please proceed with your question.
Thanks, everybody for taking my question.
Mike just a big picture question, I mean, you're over a year into this transition.
You've talked about getting the dividend up to peer.
Peer levels trading above NAV, I mean, where are you.
How long do you think it will take to you like the cigar so to speak where are we how far away are we.
Just some general color if you will.
Okay. So I think 2022 is the year, we think that happens.
Where the basic strategy is very simple we want to continue along the lines of a pure play commercial mortgage REIT and deploy the cash that we have into first mortgages.
And selective mezzanine loans, where we can defend.
Ourselves.
And protect.
And to try to stay one step ahead of the of the prepayment Sharaf, which we think.
That prepayments were budgeting for prepayments to pick up we don't know that they will we're budgeting for that and when Youre seeing what I, just described and valuations and cap rates are.
Along with what Andy mentioned, there's pent up COVID-19 demand for credit.
Those are the things that we're looking at.
Borrowers ahead of schedule on their rent increases before their renovation programs have begun.
That is giving us a bias toward anticipating more prepayments it doesn't necessarily mean that that will happen, but we're budgeting.
Budgeting for that but that still does not take us off of our plan.
Of getting to that approximately buck of share.
In 2022, I do think that we will try to increase our average loan size as well, especially as we do a little bit more office.
With regard to triple net where basically holding the positions that we have we did add some further disclosure on the albertsons Triple net lease deal we have.
One because it's going to be coming out of the G sand preferred financing when this sale of assets to <unk>.
Fortress occurs this quarter or probably first quarter of.
Next year. So we wanted to give more disclosure on that asset because it's going to be coming out of that financing vehicle.
100% on the balance sheet when that occurs.
We own that asset out of roughly.
7% cap rate it is throwing off about an 11%.
ROE based on the depth is in place today.
We have been asked a lot of questions about that and so we look at 2022 that is not something that we anticipate selling one because it's a great deal for us.
To also because they have <unk> in place until I believe 2027, 28, and Theres a theres a large defeasance payment associated with that and so we would not really consider selling that asset until that maturity date got much closer and the defeasance payment.
Smaller and then the last thing I'll say, we're still.
Not yet engaged on the conduit business.
Again on sale business, the soft part of the budget.
Net for 2022 and the reason for that is that we think that market the supply is light.
Three or four various see MBS silos out there. It is the one that has the least amount of issuance versus single asset single borrower in cielo. So competition in that business as tight supply is tight.
So that is something that we havent factored into our budget for 2022.
So you're thinking about re entering that business.
Our conduit business.
We're not that's not when when Franco through his bridge.
To get to the path to the earnings in 2022. It is not the conduit business gain on sale business is not part of that budgeting and the reason for that is as I said, we think that business is very competitive right now.
And the amount of effort it would take versus the yields you would get on our EPS.
It's not relevant enough for us to consider it is something we can look at for 2022, but it's not part of our earnings expectations.
It's certainly nice to hear you the capabilities.
Potential process in that business. Thanks.
Thanks for that and I think you answered my question on the net lease is just sort of get asked.
<unk> seen the tight bid on it why don't you just sort of you know.
Put it out for bid.
You could probably get something even above on depreciated book value, but I think you answered that so I wanted to go to the bigger picture is a technical issue I know I know you get this on every call and I know you can't control, what's your largest shareholder selling now to do.
And then maybe you can give us in terms of the technical issue with what they have conveyed to you and is there anything that you can do on your end such as at some point buying some of their stake back.
I think the best thing that we can do on our end is to perform.
And have that hopefully reflected in the stock price.
We are very <unk> digital is very supportive of bright spire.
Certainly evidenced that when they.
Gave us the Green light to go ahead and do the internalization.
They have stated.
Publicly that they are sellers.
Everything non digital so we do expect that they will continue to sell but we are not aware of any specific timetable.
They have reduced their holdings by 13 million shares about 10 of it came from the secondary offering that they did and I think 3 million units were embedded in the sale of other assets.
That took place at the company, so they're down to about $35 million plus or minus in terms of in terms of shares.
I do think that given the fact that they've achieved a reduction can allow them.
To be perhaps more deliberate I can't speak on their behalf. This is just my speculation.
It can be more deliberate and certainly given the fact that we are paying a dividend and have just increased the dividend. This quarter I think that allows them at least to get income on the asset.
And two to factor that into into their timetables. I also think that you know given that we are trading below book I do think that the firm is a believer in our thesis that we will get to book.
Via the execution of our plan and getting our earnings up and dividend up but that would be speculation on my part as to why they're holding and what their timeframe is.
So the.
The best thing we can do here is perform in terms of a buyback.
With the shares trading where they are closer to book value.
And Unfortunately, we got closer to book value of the long way today I acknowledged that fully.
But based on where the shares are trading.
I don't think the buyback is compelling and that is also because we just bought back the management contract and we think we have to go the other way in terms of shareholder equity and realize on the benefits of the internalization and the operating.
Economies that that gives us so the goals are.
Simple with regard to the buyback we don't think that it's a smart thing right now we don't want to reduce our scale and have our cost of G&A as a percentage of shareholder equity go up so the goals are simple for 2020 to deploy the capital grow. The earnings then maybe do a press and then maybe.
Ducommun above book value, but that is just as every commercial mortgage REIT should do.
Yeah, No look I mean, if all of that sort of making system and they should trade in line to above the peer group I'd love to see you get there I. Appreciate the answer I know you can't control, but I certainly appreciate the color you said their share count was down 3 million post secondary to that they did in September.
So.
It was down to 38 million post secondary but they have included about 3 million shares or embedded in their wellness business that they sold.
Two high gain and Aurora early this year that transaction will close at the beginning of 2022.
Great. Thanks, a lot thanks, everyone.
Yeah.
Our next question comes from the line of Steve Delaney with JMP Securities. Please proceed with your question.
Hey, good morning, everyone. Thanks for taking my question good to be on with you. This morning.
Cap rates, we're seeing at hearing it everywhere and Mike you alluded to it with respect to multifamily.
When we look at the <unk>.
Plan for going forward sort of a simplification basic blocking and tackling around the bridge loan business.
Does kind of raise the question of the net lease in the or a portfolio of 700 million and you did comment on that generally, but obviously cap rate compression is certainly creating value and there is as we've seen.
Across the space could you comment specifically on that large 300 million asset in Norway.
Just given sort of the uniqueness of that the size of that is.
Is that specifically something that you think you could find a strong bid for given that it hasn't gone year duration.
Thank you Steve walked through on the call.
Nothing against Norway.
Owning an asset there is something that we probably are not ask to do.
So I think that's got a CEO that was.
We'll look at doing something with at a later date, there is and one of the reasons why the disclosure on that is important.
Direct on that is that we've got a 15 year lease that was financed with a 10 year.
Debt maturity and I believe that comes up in about 2025, So we have a five year lease overhang.
That needs to be addressed so we don't have a dilutive event and having to pay down the debt at a later date.
To refinance the asset so that would entail working with the borrower, which is done often to go back and extend that lease and work out some sort of beneficial mutually beneficial transaction, where we extend that lease long enough. So.
So that we can we can.
We could extend that financing I do not think that we should sell that before that is done because that is something that needs to be addressed.
And I'm not sure what you're saying, yeah, you're leaving some value on the table.
If youre doing that having said that.
This is this is their world headquarters.
They are effectively if you will the private the public company.
Ecuador.
They are very prominent stock has done very well this year as you would expect with some energy stocks.
And so we do think that given who the credit is given this is their headquarters.
There would be a bit for the asset, but we do need to get to that point closer to 2025, where we can renegotiate that lease.
And then extend the.
In the meantime, we've got we've got hedged we've got the euro hedged for about another two and a half years and we will look at that extending that hedge is possible.
If it goes back to the money that hedge is a good hedge right now we hedged it when the kroner was in the low $8 and now it's in the mid $8.
It's been very volatile, but as I said, we're substantially hedged for the next two and a half years.
Great. That's wonderful color. Thanks, so much and just lastly, just in a very broad general sense.
Gosh on calls the last week or so.
Just commentary people are making it seems like hotels or so.
Back in favor at least there must be a lot of maybe opportunistic or you call. It distressed money something coming in to that space.
We certainly didn't see 12 months ago, and maybe not even six months ago, but it just seems like we were seeing loans transfer at par.
In property selling and I'm just curious you know your personal thoughts and the team is youre looking at your hotels or just the market generally.
Are you feeling about that sector just given the for the right property you would I would think the debt yields are pretty darn attractive relative to multifamily and office.
Andy would you like to comment on that.
Sure sure Mike.
So in terms of what we're seeing in the hotel sector is we are seeing.
A rebound in the sector, we're seeing performance in the hotels that are in our portfolio.
Increase and get better over time and.
On the origination side, we have started to look at select opportunities. So we've we've been active in that particular space. It's a space that I think we all thought we would become more active in this time of year kind of the second half of 2021, and we are starting that process, we have yet to.
To connect on any of those opportunities, but there are.
Some very compelling.
Yes.
Can you spot in in the hospitality space and we'll look to do more there.
Yeah. Thanks, Andy appreciate that color.
Marriott had Mary I had great earnings this morning.
So we agree with you.
Need to see more asset sale activity occur.
So that so that credit demand follow suit.
Got it so just a benchmark values yeah listen thanks, Thanks for the comments stay well.
Thank you Susie.
We have reached the end of the question and answer session I would now like to turn the floor back over to management for closing comments.
Thank you all for joining us and we look forward to speaking again at the end of quarter four of them have a good day.
Ladies and gentlemen, this does conclude today's teleconference. You may disconnect. Your lines at this time. Thank you for your participation and have a wonderful day.