Q1 2022 Brightspire Capital Inc Earnings Call
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Greetings and welcome to the bright aspire Capital's first quarter 2022 earnings call.
At this time all participants are in a listen only mode.
A 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.
Reminder, this conference is being recorded.
Now I'd like to turn the call over to David Palomar General Counsel. Thank you you may begin.
Good morning, and welcome to bright spire Capital's first quarter 2022 earnings conference call, we will refer to bright spire capital as bright fire B R. S P or the company throughout this call.
Speaking on the call today are the company's Chief Executive Officer, Mike <unk> President.
President and Chief operating Officer, Andy Wet and Chief Financial Officer, Frank Sarah Sienna.
Before I hand, the call over please note that on this call certain information presented contains forward looking statements. These.
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.
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 may 3rd 2022, 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 reconciliation to the appropriate GAAP measures and an explanation of why the company Bill.
Such non-GAAP financial measures are useful to investors.
Before I turn the call over to Mike I will provide a brief recap on our results.
The company reported first quarter 2022 GAAP net income attributable to common stockholders of $27 $7 million or 21 cents per share and distributable earnings of $28 $8 million or 22 cents per share.
There were no realized gains and losses and no provision for loan losses during the quarter. So adjusted distributable earnings for the first quarter of 2022 was also $28.8 million or 22 cents per share.
The company reported GAAP net book value of $11 and <unk> 26 cents per share and underappreciated book value of $12.36 per share as of March 31, 2022.
With that I would now like to turn the call over to Mike.
Thank you David.
Welcome to our first quarter earnings call and thank you for joining us today.
Given the exceptional volatility over the past several months I will focus my comments on market conditions, while Andy will provide additional details regarding our deployment activity and balance sheet.
And then Frank will discuss our first quarter financial performance.
As a continuation of our momentum from Q4 loan originations during the first four months of 2022 remains very strong.
This has given us a solid head start and meeting our origination goals for the year.
On a year over year basis, our loan book has increased 36% to $3 8 billion in assets have grown 24% to $5 2 billion.
On our fourth quarter call I referenced the fed's intentions to aggressively increase interest rates in response to 40 year high inflation rates.
As the quarter progressed.
Its impact on interest rate and credit markets became more acute.
Public equity markets also have been very volatile and April was nasdaq's worst month since 2008.
Since our Q4 earnings call you've seen short term treasury yields was about 150 basis points, along with a continued widening of credit spreads.
We have bright spire had been responding to these market dynamics by also widening our lending spreads.
We also mentioned the property cap rates would need to adjust to reflect current interest rate expectations and.
And additionally, while multifamily rent growth make generally continued to increase due to housing supply constraints. We do however, expect a deceleration of rent growth given the affordability impact from overall increases in the cost of living and negative wage growth.
This confluence of factors has begun to manifest themselves across the commercial real estate debt markets.
Instance, the cost a bit to your interest rate cap, which is required for floating rate loans cause increased approximately five times in the past quarter.
Further commercial mortgage CLO credit spreads have widened about 45 basis points.
A AAA rated CLO at social plus 175 today will probably have an all in yield of 3.5% by July and over 4% in the fall.
Therefore, we think CLO credit spreads should tighten over the coming months as the fed's actions reduced the current differential between one month, so far and the two year Treasury.
The result of this overall increase in the cost of capital has caused current transaction metrics to become a bit more challenging.
This is because theres been a lagging effect and the commercial real estate investment sales market.
This is especially the case for multifamily assets that were recently brought to market. It did not fully reflect these quickly changing market factors.
We were still seeing some multifamily acquisition cap rates in the low mid to 3% range, along with an insufficient Catholic distinction between geographical markets and asset quality.
But that has begun to change as lenders and property buyers pushback on valuation metrics and this reverse feedback loop works to reset pricing expectations over the coming months.
This transitory period could temporarily taper origination volumes, but may also presents some unique lending opportunities, especially for non bank lenders.
Concurrently these volatile market conditions could also result in a slowdown of loan payoffs in our own portfolio, which we are monitoring closely.
Also worth noting there are tens of billions of C. N BS conduit loans set to mature in 2023.
Many of these loans may be open to prepayment later this year.
Therefore, these upcoming maturities could provide bridge loan lending opportunities later in 2022 as well.
In closing I would like to emphasize that our origination head start in the first four months of the year allows us to be more selective as the market recalibrates.
And finally, we continue to expect loan originations of about 2 billion for the full year and we're planning to execute our third CLO financing during the third quarter.
And with that I would now like to turn the call over to our President Andy with Andy.
Thank you, Mike and good morning, everyone Bright star continues to execute its business plan focused on net deployment in middle market opportunities across high growth geographies.
During the first quarter, the company committed to $589 million in aggregate.
Across 17 newly originated loans with an initial funding of $481 million.
All of these investments are floating rate first mortgages on cash flowing assets as well as one multifamily mezz.
With a repeat borrower relationship during the first quarter. We also funded $20 million of advances on existing loans and received $224 million in repayments across five loans. This resulted in approximately $275 million of positive net deployment in our loan portfolios growing there.
One portfolio to $3 8 billion in total assets to $5 2 billion.
While we made solid progress on that deployment in the first quarter. Our originations activity has tapered as a result of adjusting to the market conditions, Mike highlighted in his prepared remarks.
We went to the first quarter, we have closed four investments.
Aggregate commitment of $128 million.
Currently there are an additional six loans and execution with an aggregate commitment amount was approximately $203 million, resulting in 10 loans totaling $331 million of aggregate commitments that have either closed or in execution. So far during the second quarter of 2022.
The weighted average spread on clothes and an execution senior loans during 2022 as sofa plus 363 during the second quarter to date.
I've received 98 million and repayments, including the payoff of one mezzanine loan.
As for the remainder of 2022, our primary focus is the net deployment of cash on balance sheet and staying ahead of prepayments.
To date, we have seen approximately 900 investment opportunities totaling approximately $50 billion in investment value.
That in context. It represents the most significant deal flow, we've seen post COVID-19 and it is 152% increase in first quarter year over year.
Despite the substantial pipeline of investment opportunities, we have experienced a slowdown in the number loans, we've quoted over the past several weeks.
As of March 31, 2022, excluding cash and net assets on the balance sheet senior and mezzanine loans and preferred equity is comprised of 110 investments with an aggregate gross book value of $3 8 billion and a net book value of $1 billion or 82% of the portfolio.
During the first quarter, we grew our loan portfolio by approximately 8% from $3 5 billion to $3 8 billion. The average loan size is 34 million and our risk rating is 3.1 same as last quarter.
Exposure to multifamily currently stands at 54% senior loans now constitute 96% of our loan portfolio and multifamily office and industrial comprised 85% of the loan portfolio.
Weighted average LTV of our senior loans is 69%.
72% of the collateral is located in markets that are growing at or above the national average growth rate.
Net lease real estate and other real estate is comprised of 10 investments with an aggregate gross book value of $825 million and a net book value of $184 million or 15% of the portfolio.
CRE debt Securities segment, which includes four remaining key MBS positions all subject to risk retention for visits through June 2022, and one remaining private equity interests as a gross and net book value of <unk>.
$41 million or 3% of the portfolio.
We continue to manage the liability side of our balance sheet through a combination of financing sources, which include warehouse facilities across five primary banking relationships totaling 2.05 billion and two outstanding managed Clo's issued in 2019 and 2021 totaling one.
8 billion.
As of today availability under our warehouse line stands at approximately $714 million.
At present, 50% of our loan collateral has been contributed to <unk> with the remaining 50% on our warehouse lines.
Our 2019 and CLO as a total collateral balance of 951 billion the reinvestment window for the CLO has expired and as such each loan payoff will result in a reduction in the advance rate and the increase in the cost of funds, we anticipate collapsing the CLO at some point over the next year.
The timing of which will be dictated by loan payoff velocity and market conditions.
For the CLO, we issued in 2021, we continue to actively manage the investments.
At present, we have our sights set on a third CLO that we are targeting for the third quarter of 2022.
Summary, during the first quarter, we have made meaningful progress deploying capital on a net basis.
Looking ahead, our focus remains on prudently deploying excess liquidity on balance sheet in order to grow earnings and support increasing dividend payments.
Now I will turn the call over to our Chief Financial Officer, Frank Sparacino to elaborate on our first quarter results.
Thank you Andy and good morning, everyone.
Before discussing our first quarter results I wanted to mention that we expect to file our Form 10-Q later this week.
In addition, I would like to draw your attention to our supplemental financial report, which is available in the shareholder section of our website.
Supplement continues to provide asset by asset details as does our Form 10-Q.
For the first quarter, our distributable earnings and adjusted distributable earnings were <unk>, $28 8 million or 22 cents per share.
During the quarter, we did not record any realized gains or losses, and therefore distributable earnings and adjusted distributable earnings were equivalent.
Additionally for the first quarter, we reported total company GAAP net income attributable to common stockholders of $27 7 million or 21 cents per share.
During the first quarter total company GAAP net book value increased slightly by four cents to $11.26 from 11 22 per share while unappreciated book value decreased by just the penny to $12.36 from $12.37 per share.
I would like to quickly bridge, the first quarter adjusted distributable earnings up 22 cents versus the 27 cents recorded in the fourth floor.
Decline, primarily reflects the income and nonrecurring profit participations related to the repayment of the mezzanine loan and the preferred equity investment respectively.
Both investments were in leverage.
Additionally, both repayments occurred during the last week of December resulting in our ability to also recognize a full quarter of interest income related to these investments.
As of March 31st.
The weighted average floor in our portfolio with 70 basis points down from 159 bps in March 2021.
It is also worth noting that less than one month into the second quarter. One month LIBOR has already increased to approximately 80 basis points with that our earnings are now positively correlated to rising interest rates.
They provide more data in our supplemental financial report.
Illustrative 200, Bip increase in the benchmark rate for the March 31st spot rate would add roughly $5 million to our annual earnings are about four cents per share.
All else being equal this translates to an increase in our loan book value.
Only 53 basis points.
Turning to our dividend.
Given our adjusted distributable earnings performance for the first quarter, we declared a dividend of 19 cents per share versus <unk> 18 cents per share in the fourth quarter.
This equals an 89% payout for the first quarter.
Moving to our balance sheet, our total at share underappreciated assets stood at approximately $5 2 billion as of March 31st 2022.
Our debt to assets ratio was 65%.
Our debt to equity ratio was two one times at the end of the first quarter up from one nine times as of the end of the fourth quarter.
This increase was primarily driven by new water originations.
In addition, our liquidity as of today stands at approximately $431 million between cash on hand, and availability under our bank revolving credit facility at.
At present, we believe our financing arrangements provide us with the liquidity and flexibility, we need to manage and grow our business for the foreseeable.
Looking at risk ranking lets see so reserves, our overall loan portfolio and risk ranking at the end of the first quarter was 3.1 and unchanged from the prior quarter.
17 loans during the quarter and had five was payoff.
One of the payoffs of $37 million senior loan with a five for a strike.
Additionally, two loans experienced a quarter over quarter change in risk right.
First we upgraded one load two or three from a poor, noting the same loan repaid in April .
Next we downgraded a 12 million dollar New York Hotel mezzanine loan from a four to a five.
And finally, our seasonal provision was $34 9 million a reduction of approximately 900000 from the prior quarter.
This represents approximately 85 basis points reserved against our loan which is down from 96 basis points in the fourth quarter.
In addition to certain asset repayments of resolutions the lower seasonal reserve, but as our borrowers are continuing to execute their business plan and other improvements in collateral performance that.
That concludes our prepared remarks, and with that let's open the call for questions operator.
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One moment, please while we poll for your questions.
Our first questions come from the line of Eric Hagen with B T. I G. Please proceed with your questions.
Oh, Hey, thanks, good morning.
Can you maybe go into some detail from the opening remarks, when you say that cielo and commercial credit spreads could tighten as decided raises interest rates and maybe more generally.
Just how you expect CRE asset values to respond to fed hikes going forward. Thanks.
Hi, welcome to the call Eric Thanks mismatch.
Yeah.
So generally speaking.
When you look at short duration assets, where fixed income investors want to be sure CRE CLO paper has widened considerably.
But with the fed hikes, you're going to see absolute yields on that paper increase dramatically over the next ensuing months as I said in my prepared remarks, you can see overall yield on the CLO paper getting to 3.5% what could be a two year duration instrument or.
Or less and then going out into the fall that could be over 4% and so the short end of the curve needs to catch up.
Think that while there's a little bit of a risk cost in the fixed income markets and you're seeing rates rising.
Equities are falling.
And which is not usually the case I think you will see our appetite for CRE CLO increase as your overall yoga improves.
Over the coming over the coming months, we think I personally think that CLO AAA or among the cheapest fixed income instruments out there for investors. So we would expect appetite to increase.
We're faced with a lot of supply coming in the next quarter, but we're looking at third quarter. So we think by then CLO spreads will tighten, but we'll make a decision at.
At that point with regard to real estate valuations you know again in my prepared remarks interest rates go up it affects valuations everywhere, whether it's equity markets or real estate.
I appreciate that inflation is higher than replacement cost for assets.
Our are higher and so from a replacement cost perspective, the value of real estate is improving but from a cash flow perspective our.
Interest rates are.
Are affecting a bat.
Bat and cap rates need to move and we there is a lag typically in the investment sales market is as I said in my remarks, and we're starting to see that happen now. So we would expect cap rates to start to edge up.
Otherwise investors, who are buying properties are getting negative returns. If if this interest rate environment continues to go up and cap rates stay where they are.
Thank you for that very complete answer that was really good.
Liquidity on the balance sheet looks healthy I guess, how can you.
How would you describe or how would you.
We frame, our thinking about new loan commitments versus the option to build some liquidity on.
On the balance sheet going forward. Thanks.
Well, we've been operating with a lot of cash we've had a lot of lungs pay off some loans that were made post COVID-19.
<unk> paid off flight after their prepayment penalty of lapsed because the owner operators. We're way ahead of their programs and their ability to increase rents. So so we're still on a path to try to deploy as much capital as we can by the end of the year and the plan is as we always have said is to hold about 100 million of cash on balance sheet.
So that if we need to move assets in and out of financing vehicles that we have the wherewithal.
To do that so the goal is to still get the cash down to about 100 million. We did have a lag in the pipeline as Andy I discussed is we were pushing back on deals over the past 30 days waiting for the market to kind of recalibrate. So given the head start we had we need to pick it up again during the course of the late spring and the rest of the year.
And the goal again is to get down to about $100 million. We also still have something that we do not control, which is our largest shareholder digital bridge a they have a you know we we have looked at and examining doing something there with with a potential share buyback, but again this isn't there.
Hands, they own the stock Theres no timetable from them are our expectations as they've said on their own calls that they will act responsibly in and very deliberately and what they do with our stock they've been very supportive of the company, thus far but if theres an opportunity there.
Shoot digital decide to come to the secondary markets and sell some of the B RSP stock, we could use some capital to that but again, we don't control that outcome and we're going to try to deploy capital into loans as best we can and not anticipate that that happened.
That's great Mike Thanks, I appreciate it.
Thank you as a reminder, if you would like to ask a question. Please press star one on your telephone keypad.
Our next question is coming from the line of Steve Delaney with JMP. Please proceed with your questions.
Good morning, everyone and thank you for taking my questions I'd like to start off with a question to Frank you mentioned, the the $12 billion in New York City Hotel loan that was moved to a five from our four I'm curious if you have at this time is there a specific reserve on on that loan at this time.
Yeah, Hey, Steve It's right now Theres not that is still are captured within our RC soul Marci So reserves.
Got it and is the loan is the loan.
Non accrual around cost recovery or is are there payments being made.
The loan is not on cost recover cost recovery are not accrual and payments are being made.
Payments are being made okay. Great. That's good to hear who is saying okay. This is Steve.
You know that it was given it is a it's a new York City asset in New York City Hotel, the Cecil did capture.
Those nuances in the calculation. So the seasonal there is larger than a typical seasonal for instance on a new loan Oh God, there's more there's more of a substantial seasonal against that because of younger what what's the underlying asset is.
The model there is a government agency that does utilize the B a hotel at this time and has been supplying cash flow to the borrower to pay debt service and Theres been a lagging that payment our expectations are when when that agency catches up that the borrower will catch up and be able to meet this it's.
Extension criteria, but that that was not the case at quarter end was that we were starting.
Okay, alright, thanks for that color on that.
And my second question is I'm, just looking at the statement of operations on on page 24, the 10.3 million of other gains can you break that down I recall, you mentioned there was a net lease asset sold and then one other real estate assets I'm curious whether that.
That $10 3 million includes both of those items. Thanks.
Yeah.
This is Alex yes, those that line item at 10.3 million includes the gains on the two real estate sales noted in the supplement.
Okay and did you break those is that broken out anywhere I guess net lease we know what that is I think something was described as in other real estate asset can you give us some clarity on what.
Other than the net leased with the other asset the nature of that asset.
Yes that was the whole single asset that we sold during the quarter at the end of the Pip program and we realized a GAAP gain on both of those assets.
Okay now the hotel that was had you taken that back was that an Oreo property.
Yeah, Yeah yeah.
Got it okay.
Okay, very good well gosh I think that's I think that's it for me Yeah, we could talk about rates all day long, but I think Matt's you summed it up pretty good but you know.
I think the important take away from from you know what I heard you say was yeah markets have to adjust to the reality of the new environment and that means you know C. L o's et cetera, but also the actual underlying real estate market. So we'll we appreciate that insight in and it'll be an interesting six months or so.
Great. Thank you.
Okay.
Thank you. Our next question does come from the line of Derek Hewett Bank of America. Please proceed with your questions.
Good morning, everyone could you talk about a little more about your near term funding plans are you just looking to issue. Your your third CLO at this point or are you also potentially exploring other sources of funding.
Including our unsecured debt.
At this point, we're not exploring unsecured God, we're not exploring a press the game plan is to issue third CLO that.
That we pay down all warehouse facilities, we typically experience a slightly larger advance rate on the cielo by a couple of percent and what we're getting on the warehouse lines. So if spreads cooperate there would be some accretion there.
They are a way if we did a CLO issuance overall, there's a possibility that we issue a profit at the end of the year this really depends largely.
What happens with the D BRG stock holdings, and if there's an opportunity there for us to participate in that but other than that other than CLO potentially increasing some of our warehouse facilities.
A couple of hundred to several million dollars, but that's it no no expectation of doing unsecured at this point.
Okay, Great and then I'm not sure if you mentioned it in your prepared remarks, but any update on that mixed use mezzanine loan I think it's not number 189.
The L. A mixed use long yes, yes.
Yeah, No no update there we are we.
We wrote back to zero several quarters ago, we it's public record that we filed a complaint with the holder of the the mezzanine lender position and have that that document. That's public we are waiting to hear a response from that complaint and as far as <unk>.
No nothing really is happening at the asset level. The hotel was supposed to have been sold last summer that did not get completed and I have no information about the hotel being on the market.
Yet again, so time is not a friend or anyone's friend and that development Ah if assets are not getting sold so I think things have been still moving slowly, but I have no official color.
Okay.
<unk>.
Thank you there are no further questions at this time I would now like to turn the call back over to management for any closing comments.
Thank you for joining us today, we look forward to speaking you again for Q2 in early August have a good day.
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During the rest of your day.
Yeah.