Q4 2023 BrightSpire Capital Inc Earnings Call

Greetings and welcome to the conference Bright spire capital fourth quarter 2023 earnings call. At this time, all participants are in a listen only mode.

Operator: Greetings and welcome to the conference, Brightspire Capital's fourth quarter 2023 earnings call. At this time, all participants are in a listen-only mode.

Operator: 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 to you David Palame, General Counsel. Thank you, David. You may begin.

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 to you David Palo <unk> General Counsel. Thank you David you may begin.

David Palame: Good morning, and welcome to Brightspire Capital's fourth quarter and full year 2023 Earnings Conference call. We will refer to Brightspire Capital as Brightspire, BRSP, or the company throughout this call. Speaking on the call today are the company's Chief Executive Officer, Mike Mazzi, President and Chief Operating Officer, Andy Witt, and Chief Financial Officer, Frank Starr.

Good morning, and welcome to bright spire capital's fourth quarter and full year 2023 earnings conference call.

We'll refer to bright spire capital was bright spire B R. S P or the company throughout this call.

On the call today are the company's Chief Executive Officer, Mike Madden.

President and Chief operating Officer, Andy Witt, and Chief Financial Officer, Frank Sparacino.

David Palame: Before I hand the call over to you, please note that on this call, certain information presented contains forward-looking statements. The statements, which are based on management's current expectations, are subject to risk and uncertainties, and potential risks and uncertainties could cause the company's business and financial results to differ materially. For a discussion of risks that could affect us, please see the risk factor section of our most recent 10K 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, February 21st, 2024, and the company does not intend and undertakes no duty to update it 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, present reconciliations to the appropriate gap measures and an explanation of why the company believes such non-GAAP financial measures are useful to. Finally, during this call, management may refer to distributable earnings as D. With that, I would now like to turn the call over to Thank you, David. Welcome to our fourth quarter and full year 2023 earnings call. And thank you for joining us this morning.

Before I hand, the call over please note that on this call certain information presented contains forward looking statements. These statements, which are based on management's current expectations are subject to risks uncertainties and assumptions potential risks and uncertainties could cause the company's business and financial results to differ materially.

A discussion of risks that could affect results. Please see the risk factors section of our most recent 10-K 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 February 20, <unk> 2024, 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.

non-GAAP financial measures are useful to investors.

Finally during this call management may refer to distributable earnings at D E with that I would now like to turn the call over to Mike.

Thank you David welcome to our fourth quarter and full year 2023 earnings call and thank you for joining us this morning.

I'll start by giving a brief update on the fourth quarter and what we anticipate for this year.

Mike Mazzi: I'll start by giving a brief update on the fourth quarter and what we anticipate for this year. Then I will turn the call over to Andy for more specifics on the portfolio. Let's first turn to Brightspire's results. For the fourth quarter, we reported a net loss of $16.3 million, or $0.13 per share.

Then I will turn the call over to Andy for more specifics on the portfolio.

Let's first turn to <unk> results for the fourth quarter, we reported GAAP net loss of $16 3 million or 13 cents per share.

Mike Mazzi: DE of $25.4 million, or $0.20 per share, and adjusted DE of $35.9 million, or $0.28 per share. Our dividend coverage for the fourth quarter was 1.4 times. Now, let's briefly discuss the financial market. While the Fed has been backpedaling on the timing of rate cuts, it is now clear that the "hire for longer" policy has come to a close.

<unk> of $25 4 million or 20 cents per share and adjusted D. E F $35 9 million or 28 cents per share.

Our dividend coverage for the fourth quarter was one four times.

Now, let's briefly discuss the financial markets.

While the fed has been backpedaling on the timing of rate cuts. It is now clear that the higher for longer policy has come to a close.

Mike Mazzi: This pivot has caused a significant risk on in credit spreads, long-duration bonds, and big cash. Even office suites have come off their loads from several months ago. The 10-year Treasury yield initially dropped over 100 basis points and is currently about 75 basis points lower versus the October earnings call.

Let's pivot, that's causing significant risk on and credit spreads long duration bonds and big Chuck.

Even office suites have come off their lows from several months ago.

The 10 year Treasury yield initially dropped over 100 basis points and is currently about 75 basis points lower versus the October earnings call.

And the commercial real estate debt markets C. Ibs Triple A's have tightened by roughly 50 basis points and we saw a very strong investor demand and for the first CRE CLO print a 2024, which was also an actively managed structure.

Mike Mazzi: In the commercial real estate debt markets, CNBS AAAs have tightened by roughly 50 basis points, and we saw very strong investor demand for the first CRE CLO print of 2024, which was also an actively managed truck. The CLO cost of funds has tightened roughly 75 basis points over the past four months.

The CLO cost of funds has tightened roughly 75 basis points over the past four months.

Mike Mazzi: Furthermore, most of our line lenders have expressed interest in increasing their warehouse balance sheets for new loans. And for good reason, as through this cycle, these banks have seen their best credit performance in this segment of their lending portfolio. For commercial real estate owners, these are clear signals that help is on the way. During the second half of this year, we expect the beginnings of a meaningful reduction in the pricing of interest rate caps, and while lower rates alone will not solve all market issues. It will go a long way in reducing credit stress across all asset classes.

Furthermore, most of all line lenders have expressed interest in increasing their warehouse balance sheets for new loans and for good reason as through this cycle. These banks have seen their best credit performance in this segment of their lending portfolio.

For commercial real estate owners. These are clear signals that help is on the way.

During the second half of this year, we expect the beginnings of a meaningful reduction in the pricing of interest rate caps.

And while lower rates alone will not solve all market issues. It will go a long way of reducing credit stress across all asset classes.

Mike Mazzi: Turning back to Brightspire, 2023 was challenging, but we continue to protect the balance, maintain higher levels of liquidity, and now have one of the lowest leverage ratios in the peer group. Maintaining these liquidity levels, coupled with our smaller average loan size of approximately $34 million, has helped us navigate the last 18 months. As we have stated in the past, it is problematic for liquidity when large loan concentrations constitute multiples of shareholder equity. On that note, Andy will provide an update on our two largest loans, the ultimate resolutions of which will further reduce our own concentration. Looking ahead, with rates expected to decrease in the second half of this year, we're all looking forward to the positive bias this will have on credit quality. Alternatively, our entire sector has experienced earnings increases from the 500 basis points at rate hikes. And now, with the coming rate reduction of the Fed funds rate, this positive trend will begin to reverse itself in the latter portion of 2024.

Turning back to bright spire 2023 was challenging but we continue to protect the balance sheet.

Maintaining higher levels of liquidity and now have one of the lowest leverage ratios in the peer group.

Maintaining these liquidity levels, coupled with our small average loan size of approximately $34 million. That's helped us navigate the last 18 months.

As we have stated in the past it is problematic for liquidity when large loan concentrations constitute multiples of shareholder equity.

On that note and he will provide an update on our two largest loans.

Resolutions of which will further reduce our own concentrations.

Looking ahead with rates expected to decrease in the second half of this year. We're all looking forward to the positive bias. This will have on credit quality.

Alternatively, our top of our sector has experienced earnings increases from the 500 basis points in rate hikes.

And now with the coming weight reduction of the fed funds rate. This positive trend will begin to reverse the latter portion of 2024.

Mike Mazzi: In addition, over the last 18 months, the sector, along with Brightspire, has recognized White Downs and Capitol Hill. Furthermore, we experienced capital inefficiencies due to a combination of maintaining higher cash balances, lower leverage from both loan payoffs and warehouse line paydowns, as well as an increase in unencumbered assets. These factors will be headwinds for earnings later this year. Therefore, the SEC's 2023 dividend coverage levels should not be used as a guide for future earnings.

In addition over the last 18 months the sector along with bright spire has recognized write downs in capital.

Further we experienced capital inefficiencies due to a combination of maintaining higher cash balances.

Lower leverage from both loan pay offs and warehouse line pay downs as well as an increase in unencumbered assets.

These factors will be headwinds for earnings later this year.

Therefore, the factors 2023 dividend coverage levels should not be used as a guide for future earnings piece.

Mike Mazzi: These coverage should narrow for most as the year progresses. Now, looking forward. It will be about re-optimizing your existing capital base to offset these factors. Accordingly, in 2024, we will need to reverse the balance sheet trends of the past two years. As I previously stated, overall leverage stands at 1.8 times, and our unrestricted cash is approximately $203 million. We also have low or non-earning capital in REO and some other assets. During 2024, we will work to monetize and redeploy this capital more effectively. Importantly, the resolution of watchlist assets and providing more certainty on our loan book should also help close the gap between our market price and book value, as we execute our plan to further stabilize the balance. We will also begin to assess new lending opportunities. The actual deployment of capital will most likely be a second half of the year objective; lending opportunities should further open up in 2024, along with the Fed easing rates. Additionally, regional banks will be seeking to reduce their CRE exposure.

These coverages should narrow for most as the year progresses.

Now looking forward it.

It will be about optimizing your existing capital base to offset these factors.

Accordingly in 2024, we wont need to reverse the balance sheet trends over the past two years.

As I previously stated overall leverage stands at one eight times and our unrestricted cash is approximately $203 million.

We also have low or nonwriting capital in Oreo and some other assets.

During 2024, we will work to monetize and redeploy the capital more effectively.

Importantly, the resolution of watchlist assets and providing more certainty on our loan book should also help close the gap between our market price and book value.

As we execute our plan to further stabilize the balance sheet, you'll also begin to assess new lending opportunities.

The actual deployment of capital will most likely be a second half of the year objective.

Lending opportunities should further open up in 2024.

Along with the fed easing rates the regional banks will be seeking to reduce their CRE exposures.

Mike Mazzi: Keep in mind that regional banks hold about 70% of the commercial mortgages in the banks, so as loans mature, especially construction loans, these banks will be far less incentivized to refinance these loans in their battle on... In addition, more regional banks will be included under the new Basel III rule. These factors will become tailwinds for non-bank lenders. In closing, we're becoming more positive about the Opportunity Center. In the not-too-distant future, we will look to play offense for the first time in almost two years.

Keep in mind that regional banks hold about 70% of the commercial mortgages and the bank system.

So as long as mature, especially construction loans. These banks will be far less incentivized to refinance these loans on their balance sheets.

In addition, more.

Our regional banks will be included under the new Basel III rules.

These factors will become televisions for non bank lenders.

In closing, we're becoming more positive about the opportunity set.

Because they're not too distant future, we will look to play offense for the first time in almost two years now.

Andy Williams: And with that, I will now turn the call over to our president, Andy Williams. Thank you, Mike. Good morning.

With that I will now turn the call over to our President Andy Witt.

Thank you Mike Good morning, and thank you all for joining.

Andy Williams: And thank you all for joining us. Throughout the fourth quarter, much like the rest of 2023, our focus was on asset and portfolio management. During the fourth quarter, we received $132 million in repayments across four investments, which included a partial repayment of $57 million for the San Jose Hotel loan as a result of sales proceeds from the South Tower. The loan has been paid down to $136 million. The remaining collateral consists of the original 540-room hotel, including all back-of-house infrastructure, amenities, and conference space.

The fourth quarter much like the rest of 2023, our focus was on asset portfolio management.

During the fourth quarter, we received $132 million in repayments across four investments, which included a partial repayment of $57 million.

It's a hotel.

Results of sales proceeds from the South tower.

The loan has been paid down to 136 million.

The remaining collateral consists of the original 540 room hotel, including all back of house infrastructure amenities and conference space.

Andy Williams: The hotel is currently being marketed for sale by the borrower. In addition, during the quarter, we received repayments on two office loans and a multifamily loan. Subsequent to quarter end, we received an additional $27 million in loan repayments.

<unk> is currently being marketed for sale by the borrower. In addition, during the quarter, we received repayments on two office loans multifamily loans.

Subsequent to quarter end, we received an additional $27 million in loan repayments.

Andy Williams: Looking ahead, we received a repayment notification from the borrower of our largest office loan and expect to be paid off in March. The loan has a current balance of $87 million and a future funding obligation of an additional $13 million. We also anticipate several more loan payoffs or paydowns in the office segment of our portfolio in the coming months, further reducing our exposure to this. Additionally, the sponsor on the South Pasadena, California office loan recently completed upzoning entitlements on land surrounding the existing and fully occupied office building.

Looking ahead, we received repayment notification from the borrower of our largest office loan and expect to be paid off in March alone has a current balance of 87 million and a future funding obligations of an additional 13 million.

We also anticipate several more loan payoffs or pay downs in the office segment of our portfolio in the coming months.

Further reducing our exposure to this asset class. Additionally, the sponsor on the South Pasadena, California Office recently completed zoning entitlements on land surrounding the existing fully occupied office buildings.

This zoning.

Andy Williams: This upzoning is for residential senior living, and it's far exceeded expectations, substantially increasing the value of our collateral. While we still maintain this asset in the office segment of our portfolio at year-end, we intend to recharacterize the loan next quarter, given the value creation and transformation of the underlying collateral. Lastly, as it relates to office exposure within the portfolio, the Washington, D.C. office property, which we took ownership of during the fourth quarter, is currently being marketed for sale. We should have more definitive information to share by the next conference call. The multifamily portion of our portfolio has largely remained resilient in the face of a difficult macro backdrop, although we are seeing a slowdown in top-line growth after years of outsized rental rate increases. We expect top line growth in the sector to remain relatively flat over the next 12 to 18 months as new supplies absorb. However, certain policies adopted during COVID have been detrimental to the sector.

As for residential senior living and has far exceeded expectations substantially increasing the value of our collateral.

While we still maintain this asset in the office segment of our portfolio at year end, we intend to re characterize next quarter, given the value creation and transformation of the underlying collateral.

Lastly, as it relates to office exposure within the portfolio, the Washington D. C office property, which we took ownership during the fourth quarter is currently being marketed for sale.

We should have more definitive information to share by next conference call.

The multifamily portion of our portfolio has largely remained resilient in the face of a difficult macro backdrop.

We are seeing a slowdown in top line growth after years of outsized rental rate increases we expect top line growth in this sector to remain relatively flat over the next 12 to 18 months as new supply is absorbed.

Certain policies adopted during Covid has been detrimental to the sector. However, as those policies wind down operators are making progress on their value add business plans.

Andy Williams: However, as those policies wind down, operators are making progress on their value-add business. We have been working very closely with borrowers on loan extensions and rate cap requirements. Looking ahead, we continue to believe the fundamentals for housing remain strong, and once the product currently under construction is absorbed, there is very little in the pipeline behind it, which bodes well for the set. Turning to our watch list update, the list remains relatively consistent with last quarter. First off, two risk-ranked five loans were removed from the list. As previously mentioned, we took ownership of the property underlying the Washington, D.C., office loan. Additionally, we also took ownership of the property underlying a previously risk-ranked five Phoenix, Arizona, multifamily. As we discussed last quarter, the borrower was unable to secure the incremental funds needed to execute the remainder of the business plan. We are in the process of executing a value-enhancing business plan, which we expect will take several quarters to implement, after which time we anticipate taking the property to market. We were able to retain our financing on this Phoenix multifamily property.

Been working very closely with borrowers on loan extensions and raised capital requirements. Looking ahead, we continue to believe the fundamentals for housing remains strong.

The product currently under construction, it's absorbed there.

There is very little in the pipeline behind it which bodes well for the sector.

Turning to our watch list update the list remains relatively consistent with last quarter first off two risks right five loans were removed from the list. As previously mentioned, we took ownership of the property underlying the Washington D C office.

Additionally, we also took ownership of the property underlying it previously risk rated bonds Phoenix, Arizona multifamily loan.

As we discussed last quarter.

Borrower was unable to secure the incremental funds needed to execute the remainder of the business plan.

We are in the process of executing a value enhancing business plan, which we expect will take several quarters to implement after which time, we anticipate taking the property to market.

We were able to retain our financing on this Phoenix.

Family property.

We had only one watch list loans downgraded during the quarter at Denver, Colorado multifamily loan, which was placed on nonaccrual.

Andy Williams: We had only one watchlist loan downgrade during the quarter, a Denver, Colorado, multifamily loan which was placed on non-accrual and downgraded from a risk ranking of four to a five. The borrower is currently marketing the property for sale. As of December 31, 2023, excluding cash and net assets on the balance sheet, the portfolios comprised 87 investments with an aggregate carrying value of $2.9 billion and a net carrying value of $855 million, or 78% of the total investment portfolio. Our weighted average risk ranking remained flat quarter over quarter at 3.2.

Downgraded from a risk ranking of four to five the borrower is currently marketing the property for sale.

As of December 31, 2023, excluding cash and debt assets on the balance sheet. The portfolio is comprised of 87 investments with an aggregate carrying value of $2 9 billion and the net carrying value of $855 million or 78% of the total investment portfolio.

Our weighted average risk rating remained flat quarter over quarter at $3 two.

Frank Saraceno: The average loan size is $34 million, and the loan portfolio has minimal future funding obligations, which stand at $168 million, or 5% of outstanding commitments. First mortgage loans constitute 97% of our loan portfolio, of which 100% are floating rates, and all of which have interest rate caps. The multifamily portion of our portfolio remains the largest segment with 51 loans representing 53% of the loan portfolio, for 1.5 billion of aggregate carrying value. Office comprises 33% of the loan portfolio, consisting of 960 million of aggregate carrying value across 27 loans with an average loan balance of 36 million. The remainder of the portfolio is comprised of 7% hospitality, with industrial and mixed-use collateral making up the remainder. I will turn the call over to Frank Saraceno, our Chief Financial Officer, to elaborate on the fourth quarter results.

Average loan size was $34 million in the loan portfolio has minimal future funding obligations, which stand at $168 million or 5% of outstanding commitments first mortgage loans constitute 97% of our loan portfolio of which 100% are floating rate and all of which.

Interest rate caps.

The multifamily portion of our portfolio remains the largest segment with 51 loans, representing 53% of the loan portfolio.

$1 5 billion.

Carrying value office comprises 33% of the loan portfolio, consisting of 960 million of aggregate carrying value across 27 loans with an average loan balance of $36 million at.

The remainder of the portfolio is comprised of 7% hospitality with industrial and mixed use collateral making up the remainder.

I will turn the call over to Frank <unk>, Our Chief financial officer to elaborate on the fourth quarter results Frank.

Frank Saraceno: Thank you, Andy, and good morning, everyone, for discussing our fourth quarter and pulling your results. I want to mention that our fourth quarter 2023 supplemental financial report is available on the investor relations section of our website. As Mike mentioned, for the fourth quarter, we generated adjusted DE of $35.9 million or $0.28 per share, flat to the third quarter. North quarter D was 25.4 million or 20. DE includes a specific reserve on one multifamily loan of approximately $10 million, where we also took ownership of the underlying property during the quarter. Additionally, we reported a total company gap net loss of $16.3 million, or $0.13 per share, which reflects a sequential increase in our CECL reserves and a small impairment taken on one REO asset for the full year of 2023. We generated adjusted DE of $138.2 million, or $1.06 per share, representing a return on underappreciated shareholders' average equity of approximately $9.2%. Our dividend for the year of $0.80 was well covered at $1.32. Quarter over quarter, total company gap net book value decreased to $9.83 from $10.11, and unappreciated book value also decreased to $11.35 from $11.55.

Thank you Andy and good morning, everyone.

Before discussing our fourth quarter and full year results I want to mention that our fourth quarter 2023 supplemental financial report is available on the Investor Relations section of our website.

As Mike mentioned for the fourth quarter, we generated adjusted D. E F $35 9 million or 28 cents per share flat to the third quarter.

Fourth quarter D was $45 4 million or <unk> 20 per share.

They include the specific reserve on one multifamily loan of approximately $10 million. We also took ownership of the underlying property during the quarter.

Additionally, we reported total company GAAP net loss of $16 3 million or <unk> 13 per share, which reflects a sequential increase in our reserves and a small impairment taken on one R. E L F.

For the full year of 2023, we generated adjusted D E $138 2 million or $1 six per share representing a return on underappreciated shareholders average equity of approximately nine 2%.

Our dividend for the year of 80 cents was well covered at 1.33 times.

Quarter over quarter total company GAAP net book value decreased to $9.83 from $10 11 per share.

Unappreciated book value also decreased to 11 35 from 11 55 per share.

Frank Saraceno: The change is mainly driven by an increase in our CECL reserves and partially offset by adjusted DE in excess of dividends. Looking at the reserves, our specific CECL reserve decreased from $35 million to zero. The decrease was driven by the charge-offs related to our taking ownership of the properties underlying the Washington, D.C., office loans and Phoenix, Arizona multi-family... No specific reserve was required on the Denver, Colorado multifamily loan that was downgraded. Our general Cecil provision stands at $76 million or 246 basis points on total loans, an increase of $21 million from the prior quarter. The increase in the general sea salt was primarily driven by economic conditions as well as specific inputs on certain hotel and multi-family properties, looking at the watchlist low.

The change was mainly driven by an increase in our reserves and partially offset by adjusted D E in excess of dividends declared.

Looking at reserves are specific seasonal reserve decreased from $35 million to zero.

The decrease was driven by the charge offs related to our taking ownership of the properties underlying the Washington D C office loan and Phoenix, Arizona multifamily alone.

No specific reserve was required under Denver, Colorado multifamily loan that was downgraded to a five.

Our general seasonal provision stands at $76 million or 246 basis points on total loved commitments, an increase of $21 million from the prior quarter.

The increase in the general seasonal it was primarily driven by economic conditions as well as specific inputs on certain hotel and multifamily properties.

Looking at watch list loans.

Frank Saraceno: Our one Rich Rank 5 loan represents 1% of the total loan portfolio carrying value, nine loans, equating to 15% of the total loan portfolio carrying value, a risk-ranked while all restraints for loans are current performing loans, potential for increased risk, and accordingly, we are monitoring these investments and working with sponsors to ensure the best outcome, moving to our ballot. Our total at share undepreciated assets stood at approximately $4.4 billion as of December 31, 2020, a flight decrease in the last. Our debt to assets ratio is 62%, and our debt to equity ratio is 1.8%, a slight decrease quarter over. We have no corporate debt or final facility maturities due until the second quarter. In addition, our liquidity as of today stands at approximately $368 million. This comprises the $203 million of current cash that Mike referenced earlier, as well as $165 million on our credit. This concludes our prepared remarks, and with that, let's open it up to questions, Operator. Thank you.

One rich ranked five alone represents 1% of the total loan portfolio carrying value.

Nine loans equating to 15% of the total loan portfolio carrying value a restraint for.

While all of our shrink for our loans are current performing loans, we see potential for increased risk and accordingly.

Monitoring these investments and working with sponsors to ensure the best outcomes.

Moving to our balance sheet, our total at share underappreciated assets stood at approximately 4.4 billion as of December 31, 2023, a slight decrease in the last quarter.

Debt to assets ratio was six 2% and our debt to equity ratio is one eight times, a slight decrease quarter over quarter.

We have no corporate debt a final facility maturities due until the second quarter of 2026.

In addition, our liquidity as of today stands at approximately $368 million.

Comprises $203 million of current cash that Mike referenced earlier as well as $165 million under our credit facility.

This concludes our prepared remarks and with that let's open it up 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, a confirmation tone will indicate your line is in the question queue.

Operator: We will now be conducting a question and answer session. If you would like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star 2 if you would like to remove your question from the queue.

You May press Star two if you would like to remove your question from the queue for participants using speaker equipment and labor necessary to pick up your handset before pressing the star keys.

Sarah Barcomb: For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. The first question comes from Sarah Barcomb with BTIG; please go ahead. Hey, everyone. Thanks for taking the question. I just wanted to dig into the multifamily portfolio here. Those additional downgrades related to sponsors not willing or unable to buy new interest rate caps, for the most part. And can you provide any commentary on your overall exposure to syndicated sponsors that might have bought these properties during that low interest rate period? Hey, Cyrus Massey.

First question is has your Sarah Viacom with B T. I G. Please go ahead.

Hey, everyone. Thanks for taking the question I'm, just trying to dig into the multifamily portfolio here.

Those additional downgrades related to sponsors I'm, not willing or unable to buy new interest rate caps for the most part.

And can you provide any commentary on your overall exposure to syndicated sponsors that might've bought these properties during that low interest rate period.

Yeah.

Hey, Sarah Massie I'll start off with that I think Andy can add some color there as well.

Mike Mazzi: I'll start off with that. I think Andy can add some color there as well. Yeah, so the downgrades were, there are some syndicators in that. Yes, I think that syndicator exists across many portfolios. There are issues with execution on those specific properties.

Yeah. So the downgrades were they're awesome syndicators and that yes, I think that syndicator.

That's across many portfolios.

There are issues with execution on those specific properties. Some of them are related as Andy said and as stated remarks. They were COVID-19 related policies that are inhibited owners from.

Mike Mazzi: Some of them are related, as Andy said in his stated remarks, there were COVID-related policies that inhibited owners from moving tenants out of the assets. So there were value-add issues in terms of the business plans, in terms of executing on value-add. So we had some of those issues with regard to the property that went REO. As Andy said, it could take us a couple of quarters, several quarters, to move out of that. So yeah, we had some issues with the syndicator.

From moving tenants out of the assets are and so there were value add issues in terms of the business plans in terms of executing on value add so we had some of those issues are.

With regard to the the property that went all rigo as Andy said it could take US a couple of quarters several quarters.

To move out of that so yeah, we had.

Some issues, where the syndicator, we are closely monitoring that we've had our exposure is limited.

Mike Mazzi: We are closely monitoring that. We've had, our exposure is limited. It's been a handful of assets that we've had. One of the assets on the watch list is being supported by the preferred equity behind the asset, but we continue to have it on the watch list as well. In terms of interest rate caps across the portfolio, multifamily borrowers are buying caps.

Been a handful of assets that we've had one of the assets on the watch list is being supported by the preferred equity behind the asset, but we continue to have it on on the watch list as well.

In terms of interest rate caps are across the portfolio.

Multifamily borrowers are buying caps they are seeing visibility.

Mike Mazzi: They are seeing visibility in terms of ultimately getting across the bridge, as Andy said, through the supply and getting on with their programs. So borrowers generally in multifamily have been sticking with the assets and buying caps. Andy, anything you'd like to add to that? No, I think Mike covered that.

In terms of ultimately getting across the bridge.

As Andy said through the supply and and and and getting on with their programs. So borrowers generally in multifamily have been sticking with sticking with the assets and buying cats.

Andy anything you'd like to add to that.

Well I think Mike you covered it but the one asset that went from the risk rate by two Oreo is.

Andy Williams: The one asset that went from a risk rank five to REO is currently in the process of going through, you know, renovations and lease-up. And that's a process that we expect to transpire over the next, you know, couple of three quarters, after which time we expect to take that asset to market on a more stabilized basis. Okay, great.

Is currently in the process of going through.

Renovation and lease up and that's a process that we expect to transpire over the next couple three quarters after which time, we expect to take that asset to market on a more stabilized basis.

Okay, Great. Yeah, you know we've seen some of these multi family you know noise across the space this quarter and that's to be expected just given where so for is these days, but just shifting over to office on it seems like there is some positive telegraph.

Mike Mazzi: Yeah, you know, we've seen some of this multifamily, you know, noise across the space this quarter, and that's to be expected just given where SOFR is these days. But just shifting over to office, it seems like there's some positive telegraphs here for the office portfolio. You know, expecting some repays in the future here. There was one downgrade, but it wasn't watch listed.

For for the office portfolio.

You now expecting some repays in the future here.

There was one downgrade, but it wasn't watch listed basically my question is at this stage do you feel that would be our first credit its pretty well ring fenced at this point.

Mike Mazzi: Basically, my question is, at this stage, do you feel that the office credit is pretty well ring-fenced at this point? I wouldn't go as far as to say that, honestly, I don't think anybody can, given the work from home issues that are out there. The issue with offices is going to be getting taken out of those assets with refinancing. And so I think right now that has proven to be very difficult, and you're seeing that being reflected in some of the severities on loans that have been taken back. So generally on office, I'd say, as Andy said, we are in the process of selling the Washington, D.C. asset. I think we have some encouragement there from the number of bids we got, and we're working through reviewing those bids now, and we'll have something more to say on that. Generally, in the office portfolio, Q4, it was SARA stable. We didn't see anything that was slipping materially.

I wouldn't go as far as to say that I don't honestly I don't think anybody can given the work from home issues that are out there the issue with office is going to be.

Getting taken out of those assets with refinancing and so I think right now that has proven to be very difficult and you're seeing that being reflected in the in some of the severity as long as I've been taken back. So generally on office I'd say is as Andy said, we are we are in the process of selling.

The Washington D. C asset I think we have some encouragement down the number of bids we got and we're working through them reviewing those bids now and we'll have something more to say on that generally in the office portfolio for Q4. It was Sarah stable, we didn't see anything that was slipping materially.

Mike Mazzi: We have had some successes, as Andy said, the largest asset that we have has indicated that they're paying off the loan. The South Pasadena asset, with the upsizing and zoning, was so substantial that we actually may recharacterize the loan. The Baltimore asset, which we've talked about in previous quarters, is now 90 percent leased with what will be, when the tenant takes occupancy, a very high debt yield. In San Francisco, we have two assets that are smaller. Both are fully occupied with new leases.

We have had some successes as Andy said the largest asset that we have has indicated that they are paying off alone are the the south Pasadena asset with the upsizing and the zoning was so substantial that we actually made we characterize alone.

The Baltimore asset, which we we've talked about in previous quarters is now 90% leased with what will be when when the tenant takes occupancy of very high debt yield.

San Francisco, we have two assets that are smaller bolt on fully occupied with new leases. We did expect deal in L. A for a single tenant that is now going to be fully occupied and.

Mike Mazzi: We did a spec deal in L.A. for a single tenant that is now going to be fully occupied. And, as Andy also mentioned, there are assets on the horizon that we think are going to pay off, most notably an asset, an office asset in Florida. So we've seen some good positive movement there. But for the rest of the portfolio, it's about visibility for the borrowers. And unlike what I just said about multifamily, where borrowers see housing shortages and over the horizon, they say, these are assets that we know will ultimately perform, so they're sticking with them generally, and we're seeing a lot of liquidity in that market. The REO asset that we are working with the borrower on, he's marketing the asset for sale on that, and I think they're seeing a lot of interest in that asset.

And he also mentioned is that there are assets on the horizon that we think are going to pay off most notably an asset and office asset in Florida. So we've seen some good a good positive movement, there, but for the rest of the portfolio.

It's about visibility for the borrowers and unlike what I, just said about multifamily where borrowers see housing shortage and over the horizon. They they say you know these are assets that we know will ultimately perform so they're sticking with them generally and we're seeing a lot of liquidity in that market. The asset the Oreo asset that we are working with the borrower he's he's marketing the asset.

Well on that and I think they're seeing a lot of interest in that asset and there's not much more I can say, but theres a lot of interest and a lot of liquidity on the multifamily side. The office assets. Those are the assets will be watching more closely in terms of confidence around deploying capital. So while we've had some market improvement this quarter.

Mike Mazzi: There's not much more I can say, but there's a lot of interest and a lot of liquidity on the multifamily side. The office assets, those are the assets we'll be watching more closely in terms of confidence around deploying capital. So while we've had some market improvement this quarter in terms of what will be a reduction in the portfolio, I still think going forward, that's the area that we'll be watching more closely because those borrowers have the least liquidity in terms of refinancing. But otherwise, the quarter was about the balance of the portfolio. The quarter was absolutely stable.

In terms of what will be a reduction in the portfolio.

I still think going forward. That's the area that we will be watching more closely because those borrowers have the least liquidity in terms of refinancing.

But otherwise the quarter was for the balance of the portfolio of the quarter was absolutely stable yes.

Sarah Barcomb: Yes. Great. Thank you for all that detail. I appreciate it. Anything else?

Great. Thank you for all that detail I appreciate it.

Anything else Dave.

Thank you we ask that you limit your questions to one and one follow up our next question comes from Stephen laws with Raymond James. Please go ahead.

Operator: Thank you. We ask that you limit your questions to one and one follow-up. Our next question comes from Stephen Laws with Raymond James. Please go ahead. Hi, good morning.

Hi, good morning.

Steven Laws: I'm Mike, I guess to start, you know, seems like you're, you know, incrementally positive as you look out later into this year. But, what prevents you from going on offense sooner given the very low leverage and liquidity position? You know, do you want to see the expected repayments on office get across the finish line? Is it something else that you don't want to see macro rates start to roll over and get better visibility kind of, you know, given the kind of seems like improving tone? Kind of, you know, why do you feel the need to wait another four to six months to kind of go back to being awesome?

Mike I guess to start you know it seems like you're incrementally positive as you look out later into this year.

What prevents you from going on offense sooner given the very low leverage and liquidity position. You know do you want to see the expected repays on office get across the finish line is it something else that that you don't want to see macro maybe rates are start to roll over and get better visibility kind of you know what given the.

Kind of it seems like improving tone kind of you know why do you feel the need to wait another four to six months to kind of go back on offense.

Well first of all I don't think we're missing anything in the next.

Mike Mazzi: Well, first of all, I don't think we're missing anything in the next four months. I think the transaction levels are still low because borrowers cannot get the proceeds out of their existing assets, and transactions have been a lot slower because of rates. In terms of us and why we're waiting, you know, first of all, we have to get more confidence around the stability of the portfolio. As I said in my prepared remarks, we want to see more stabilization there because the first thing that we look at is our banks. We want to make sure the banks are protected, and we have the cash to do so. Without banks, there would be no mortgage rates.

Four months I think the transaction levels are still low because borrowers cannot get the proceeds out.

For their existing assets and transactions have been a lot slower because of rates in terms of us and why we're waiting you know first of all we have to get more confidence around.

The stability of the portfolio as I said in the prepared remarks, we want to see more stabilization there.

Because the first constituent that we look at it as all banks, we want to make sure that banks are protected and we have the cash to do so no banks no no mortgage suites, and let's just be direct about that so our banks are our priority number one.

Mike Mazzi: Let's just be direct about that. So our banks are priority number one. In terms of new investments, when we look at it, there's been a lot of talk about buybacks. We've repeatedly said that we don't see buybacks as really moving the needle. They're small.

In terms of new investments, but when we look at it.

A lot of there's been a lot of talk about buybacks are we've repeatedly said that we don't see buybacks is really moving the needle there small.

Mike Mazzi: They don't do much in terms of moving the stock price. But we don't want to shrink our capital base. And so really, we're looking at new investments over buybacks. And when we do the new investments, it's really about confidence and how we would spend our cash. And for the second half of the year, if we can get some of the things we talked about accomplished in the first half, improving the watch list, and getting some movement on the REO, then I think we'll have the confidence to start spending cash. And that's really more of a second half of the year thing.

Don't do much in terms of moving the stock price, we don't want to shrink our capital base and.

And so really we're looking at new investments over buybacks and when we do the new investments is really about the confidence and how we would spend.

Spend our cash and for the second half of the year. If we if we could if we could get some of the things we talked about accomplished in the first half improving the watch list getting some move up movement on the Oreo then I think we'll have the confidence to start spending cash and that's really more of a second half of the year thing and maybe we can look to deploying something like 50 to 70.

Mike Mazzi: And maybe we can look at deploying something like 50 to $75 million of cash in the second half if we can get some really good visibility on the balance sheet in the first half of the year. As we mentioned, we do have, and you mentioned, we have $100 million of REO that is under or totally not levered. Hopefully, we'll get some tailwind on the Long Island City REO.

$5 million of cash in the second half if we can get some really good good visibility on on the balance sheet in the first half of the year. As we mentioned we have we do have and you mentioned, we have $100 million of Oreo that is under or totally not levered hopefully, we'll get some tailwind on the long Island City Oreo we do.

Mike Mazzi: We do have a lot of interest in that asset, particularly one specific user that may have interest in the Paragon asset and overflow into the Blanchard asset. So right now, we are really looking to stabilize the portfolio further and gain confidence in the second half of the year. And I think, by the way, if we can deliver more certainty around asset performance, and we're all talking about stock prices, I think the largest thing embedded in our 60%, where we're trading 60% of book value, is uncertainty. So really, removing some of that uncertainty by stabilizing the portfolio and executing on the watch list and moving some of the REO, which we think is going to have the bigger impact on the stock price and getting it up over 60% of the books.

Have some a lot of interest coming on that asset, particularly one specific user that may have interest in and the paragon asset an overflow into the until the Blanchard asset. So right now really looking to stabilize the portfolio portfolio further and get the confidence in the second half of the year and I think by the.

If we can get if we can deliver more certainty around the asset performance and we were all talking about stock prices I think the the largest thing and better than our 60%, where we're trading at 60% of book value is uncertainty so really removing some of the better.

Better.

By Blackstone portfolio and executing on the watch list or moving some of the Oreo that we think it's going to be the bigger impact on on the stock price and getting it up over 60% of book.

But I'll also add in terms of opportunities as I said on the call. I mean, there are thousands of regional banks out there are smaller banks that we werent, even looking at that we're originating loans and participating in commercial real estate lending in virtually every bank that comes out on their earnings call has to lead off with our real estate exposure is only.

Mike Mazzi: But I'll also add, in terms of opportunities, as I said on the call, there are thousands of regional banks out there, smaller banks that we weren't even looking at that were originating loans and participating in commercial real estate lending. And virtually every bank that comes out on their earnings call has to lead off with, "Our real estate exposure is only X, and we don't have exposure to New York City multifamily." And so what we're seeing, coupled with Basel III, we're going to see banks not originate as much, maybe pull back. And as I said on the call, construction loans as they come due, they would normally refinance those into mini-perms, and then those loans would find permanent financing later.

<unk> X and we don't have exposure to New York City multi.

So what we're seeing that coupled with Basel three we're going to see the banks not originate as much maybe pull back and as I said on the call construction loans as they come due they would normally refi those with too many firms and then those loans would find permanent financing later, we think the evolution of those laws are gonna be from construction in there.

Mike Mazzi: We think the evolution of those loans is going to be from construction, and they're going to come off balance sheet, and the non-banks and debt funds will have an opportunity to do what would have been the mini-perms that the banks would have done. So we think that the will from the banks to originate loans has diminished greatly, and they're all going to have a bias toward shrinking their portfolios. And there are so many of them out there that we weren't even looking at, that we didn't even hear of, or know about.

Gonna come off that balance sheet, and the non banks and debt funds will have an opportunity to do what would've been the many times that the banks would have done so we think that's.

The well from the banks to originate loans has diminished greatly and they're all going to have a bias towards shrinking their portfolios and there are so many of them out there that we werent, even looking at that we didnt even hereof no. All I think all of that is going to be coming at us in 2024, So I think there'll be ample opportunity for banks to to have.

Mike Mazzi: I think all of that is going to be coming at us in 2024. So I think there'll be ample opportunity for the non-banks to have products, and appreciate the color. That'd certainly be interesting to watch the retention of those banks and opportunities that provide. Can you touch a little bit more on the property level and multifamily? You know, I've heard a couple of others mentioned, you know, some underperforming or non-performing tenants that have been stuck in assets due to some COVID policies. When did that start to change? And how, you know, is it easier now to get those tenants out and replaced with new tenants kind of, you know, can you talk about that process of what you're seeing kind of reinvigorating some of these multifamily? Andy, you want to lead off with that?

Alex.

I appreciate the color that'd be certainly interesting to watch the retrenchment of those those banks and opportunities that provides you now can you touch a little bit more on the at the property level of multifamily you know I've heard a couple of others mentioned.

You know some underperforming or nonperforming tenants that have been stuck in assets due to some COVID-19 policy as you know when did that start to change and how you know was it easier now to get those tenants out and replaced with new tenants kind of you know can you talk about that process and what you're seeing kind of re tenant in some of these multifamily assets.

Andy you want to lead off.

Okay sure. Thank you Mike.

Andy Williams: Sure. Thank you, Mike. So I think we have seen an easing of some of the COVID policies, which have oftentimes been regional in nature.

So I think we have seen an easing of some of the COVID-19 policies. Those are often times been regional in nature. So they rolled off over different periods of time, but generally what occurred was the inability to access units and start the renovation process and execution.

Andy Williams: So they've rolled off over different periods of time. But generally, what occurred was the inability to access units and start the renovation process and execute on the business plan, the value-added business plan. And so it affected the borrowers' cash flows and so forth. But what we're seeing now is borrowers are able to get to the assets, and you can go ahead and execute on that plan. Great. Appreciate the comments this morning. Thanks

On the business plan the value add business plan and so.

It affected the borrower's cash flows and so forth, but what we're seeing now as borrowers are able to get to the asset does.

Take them through right now.

Asian, and and get them stabilized so.

It was a period, where you know.

Steven Laws: Once again, if you would like to ask a question, please press star one on your telephone keypad. The next question comes from Matthew Erdner with Jones Trading. Please go ahead.

Often times the borrower just wasn't able to execute their business plan and it was a great expense to them.

Now, we're seeing lots of those impediments and.

The opportunity to go ahead and execute on that plan.

Great I appreciate the comments this morning. Thank you.

Once again, if you would like to ask a question. Please press star one on your telephone keypad.

Matthew Philip Howlett: Hey, good morning, guys. Thanks for taking the time to answer the question. So kind of following up on the prior one, you know, as loans kind of pay off and some REO gets sold, is there a minimum or, I guess, maximum amount of cash that you guys want to defend the portfolio before you start turning to offense and deploy some additional cash into new loans? Well, I think that we've had a policy in the past, I know that we've had a policy in the past, we want to maintain minimum cash. And we don't look forward to doing that.

Next question comes from Matthew <unk> with Jones trading. Please go ahead.

Hey, good morning, guys. Thanks for taking the question so kind of following up on the prior one.

You know as loans pay off and some are you'll get sold is there a minimum or I guess maximum amount of cash that you guys want to defend the portfolio before you start turning to offense and deploy some additional cash into new ones.

Well I think that we've had a policy in the past and now that we've had a policy in the past we want to maintain a minimum cash we really we have a revolver and we really have never tap the revolver and we don't look to doing that so I think in terms of minimum cash would be probably something like circa 100 million Bucks.

Mike Mazzi: So I think in terms of minimum cash, it'd be probably something like circa 100 million bucks in this market. I think previously, before the Fed's hikes, we were looking at more like 75 million. So I think we want to have a little bit more cash because of the uncertainties I outlined earlier. And as I said, there's a lot that we can tap into. Certainly, the REO, our largest asset, is also probably the least levered asset on our warehouse lines right now. So if that asset resolves itself, which we expect, then we should free up capital there that we can invest. And then overall, our leverage, at 1.8 times, is among the lowest in the peer group. Some folks are hovering around the mid-twos. Some folks are hovering in the fours.

In this market.

I think previously before the fed hikes, we were looking at more like $75 million. So I think we'd want to have a little bit more cash because of the uncertainties I outlined a I'd outlined earlier.

And as I said, there's a lot that we can tap into.

Certainly the Oreo R. A lot our largest asset is also probably the least levered asset on our warehouse lines right now so if that asset a resolves itself, which we expect then we should free up capital that we can re lever and the overall leverage at one eight times is among the lowest in.

The peer group some folks are harmful hovering around mid to some folks are hovering in the fours where at 1.8. So we have to figure out a way to lever up the portfolio. Some of that will be just doing new loans, and and and putting 70, 580% leverage a leveraged against those so right now $200 million of cash.

Mike Mazzi: We're at 1.8, so we have to figure out a way to lever up the portfolio. Some of that will be by just doing new loans and putting 75, 80% leverage against those. So right now, we have $200 million in cash. Hopefully, we'll harvest some of this REO over the next several quarters and be able to redeploy that, get resolution on our largest loan, which is very under leveraged. And I think the minimum is probably something about 100, maintaining about 100 million cash on the balance sheet, at least through the early parts of 2025.

Hopefully we will harvest some of this Ah Oreo over the next several quarters and be able to redeploy that get resolution on our largest law, which is very under Levered and I think minimum is probably something about 100, maintaining about 100 million cash on the balance sheet balance sheet.

You know at least through the early parts of 2025.

Mike Mazzi: Yeah, that's helpful there. And then in terms of new loans, are you guys kind of scouting out or looking at some deals in the marketplace, even though you might not take them until the second half? And if so, you know, what's the asset type and geographic region that you guys want to target when you do go back on offense? Yeah, I would say that the periscope is up.

Yeah. That's helpful. There and then in terms of new ones are you guys kind of scouting out or looking at some deals in the marketplace, even though you might not take them until second half and if so you know what's kind of the asset type and geographic region that you guys want a target when you do go back on offense.

Yeah, I would say that the periscope is up.

Mike Mazzi: And we're all looking, absolutely. We've been attending all the conferences, our originators have stayed in contact with their constituents, and are actively involved in getting color on the market today. I think, much like some of the other guys in the peer group have stated, we are focused on the multifamily hotel and not really the office. It would have to be a very, very unique opportunity for us to be involved in putting on an office asset. And we would need our bank lenders. It would have to be such an opportunity that our bank lenders would have to agree with us, and they'd want to finance it.

And we all looking absolutely we have been attending all the conferences our originators.

Have stayed in contact with their constituents are actively involved in getting color on the market today I think much like some of the other.

Guys in the peer group have stated we are focused on multifamily hotel and and and not really office. It would have to be a very very unique opportunity for us to be involved in and putting on an office asset and we would need our bank lenders. It would have to be such an opportunity that our bank lenders would have to agree with us and they'd want to finance that.

The CLO market, we've seen all multifamily come through to date and that is a great vehicle for that.

Mike Mazzi: The CLO market, we've seen all the multifamily come through to date, and that's a great vehicle for financing. Now, guide us to do more multifamily as well. I think that the opportunity is gonna be construction. The banks, as I said, normally did the mini-perms.

Financing that will guide us to doing a doing more multifamily as well I think that the opportunity is going to be.

Construction are the banks as I said normally did the many problems I think the banks are going to be running away from that in terms of region. You know everyone talks about the oversupply in the southeast and southwest.

Mike Mazzi: I think the banks are going to be running away from that. In terms of region, you know, everyone talks about the oversupply in the southeast and southwest. But I would still say that there are certain states that are doing the best that they possibly can to chase residents out of the state.

But I would still say that there are certain states that are doing the best that they possibly can to chase residents out of the state and we think that's going to actually continue and so as long as that continues and we're seeing quality of life issues and budget. So boring in some of these states, we think and taxes potentially going up.

Mike Mazzi: And we think that's going to actually continue. And so as long as that continues, and we're seeing quality of life issues and budgets soaring in some of these states, we think, and taxes potentially going up, while there is supply that is in the southeast that everyone is talking about, we think over the horizon, as Andy said in his prepared remarks, you know, you get out 18 months, the pipelines really dissipate. So we think those regions of the U.S. are still the best regions to lend in. Not to say that there won't be pockets that you'll find in other areas, but from a macro perspective, the south side is better than the north.

While there is supply that is in the South east everyone is talking about you know we think over the.

Horizon as Andy said in his prepared remarks, you know you get out 18 months. The pipeline's really dissipate. So we think those regions of the U S is still the best regions to London, not to say that there won't be pockets that you'll do in other areas, but from a macro perspective, the south side is better than the north side.

And that's helpful and thanks for taking the questions.

Matthew Philip Howlett: That's helpful. Thanks for taking the questions. Thank you. I would like to turn the call over to Mike Mazzi for closing comments. Well, thank you all for joining us today, and we look forward to speaking again in May, where we'll hope to make some progress on the items that we outlined. Thank you all for joining us. This concludes today's teleconference. You may disconnect your lines at this time, and thank you for your participation.

Thank you I would like to turn the call over to Mike Murphy for closing comments.

Well. Thank you all for joining us today, and we look forward to speaking again in May we will hope to make some progress on the items that we outlined thank you all for joining us.

This concludes today's teleconference. You may disconnect your lines at this time and thank you for your participation.

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