Q2 2024 BrightSpire Capital Inc Earnings Call
Operator: Hello, and welcome to the BrightSpire Capital Inc. second quarter 2024 earnings call. If anyone should require operator assistance, please press star zero on your telephone keypad.
Hello, and welcome to the bright spire capital, Inc. Second quarter 2024 earnings call. If anyone should require operator assistance. Please press star zero on your telephone keypad.
Operator: A question and answer session will follow the formal presentation. You may be placed into the question queue at any time by pressing star 1 on your telephone keypad. We ask that you please limit yourselves to one question and one follower. As a reminder, this conference is being recorded. It's now my pleasure to turn the conference over to David Palamé, General Counsel. Please go ahead, David. Good morning.
Speaker Change: A question and answer session will follow the formal presentation.
He may be placed in the question queue at any time by pressing star one on your telephone keypad.
Speaker Change: We ask you please limit yourselves to one question and one follow up.
Speaker Change: As a reminder, this conference is being recorded.
Speaker Change: Now my pleasure to turn the conference over to David Paul and me.
David A. Palam: General Counsel. Please go ahead David.
David A. Palam: Good morning, and welcome to BrightSpire Capital's second quarter 2024 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 Mazzei, President and Chief Operating Officer, Andy Witt, and Chief Financial Officer, Frank Saracino.
David A. Palam: And welcome to bright inspired her capital's second quarter 2024 earnings conference call, we will refer to brighten aspire capital as bright spire.
Speaker Change: S P or the company throughout this call.
Speaker Change: Speaking on the call today are the company's Chief Executive Officer, Mike <unk>, President and Chief Operating Officer, Andy Witt, and Chief Financial Officer, Frank Sparacino.
David A. Palam: Before I hand the call over to you, 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. For a discussion of risks that could affect results, 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.
Speaker Change: Before I hand, the call over please note that on this call certain information presented contains forward looking statements.
Speaker Change: 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 for a discussion of risks that could affect results. Please see the risk factors section of our most recent 10.
Speaker Change: Kate and other risk factors and forward looking statements in the company's current and periodic reports filed with the SEC from time to time.
David A. Palam: All information discussed on this call is as of today, July 31, 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 yesterday afternoon 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. Before I turn the call over to Mike, I will provide a brief recap of our second quarter 2024 results.
Speaker Change: All information discussed on this call is as of today July 31, 2024, and the company does not intend and undertakes no duty to update for future events or circumstances.
Speaker Change: 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 yesterday afternoon and is available on the company's website presents reconciliations to the appropriate GAAP measures and an explanation of why the compass.
Speaker Change: We believe such non-GAAP financial measures are useful to investors.
David A. Palam: The company reported a GAAP net loss attributable to common stockholders of $67.9 million, or 53 cents per share, and distributable earnings of $17.0 million, or $0.13 per share. Adjusted distributable earnings of $28.8 million, or $0.22 per share, and cash earnings of $26.8 million, or $0.21 per share. Current liquidity stands at $317 million, of which $152 million is unrestricted cash. The company also reported a gap net book value of $8.41 per share and an undepreciated book value of $9.08 per share as of June 30, 2024. Finally, during this call, management may refer to distributable earnings as DE. With that, I would now like to turn the call over to Mike.
Speaker Change: Before I turn the call over to Mike I will provide a brief recap on our second quarter 2024 results.
Speaker Change: The company reported GAAP net loss attributable to common stockholders of $67 $9 million or 53 cents per share <unk>.
Speaker Change: Distributable earnings of $17.0 million or <unk> 13 per share.
Speaker Change: Adjusted distributable earnings of $28 $8 million or 22 cents per share and cash earnings of $26.8 million or 21 cents per share.
Speaker Change: Current liquidity stands at $317 million of which $152 million in unrestricted cash.
Speaker Change: The company also reported GAAP net book value of $8 41 per share and underappreciated book value of $9.08 per share as of June 32024.
Speaker Change: Finally during this call management may refer to distributable earnings at D E.
Speaker Change: With that I would now like to turn the call over to Mike.
Michael Joseph Mazzei: David, welcome to our second quarter 2024 earnings call. And thank you for joining us this morning.
Mike: Thank you David.
Mike: Welcome to our second quarter 2024 earnings call and thank you for joining us this morning.
Michael Joseph Mazzei: Throughout the second quarter, the BrightSpire team remained focused on asset management initiatives in order to improve certainty around the portfolio and position the firm to move forward. We, like most, welcome the anticipated interest rate cuts starting in September. This will provide further momentum for a watchlist and REO resolution. To note, in aggregate, our watch list has remained stable quarter over quarter, but with some underlying movement that we will discuss. Now, I would like to provide insights as to our results.
Mike: Throughout the second quarter, the bright spot our team remained focused on asset management initiatives in order to improve certainty around the portfolio and position the firm to move forward.
Speaker Change: We like most welcoming anticipated interest rate cuts starting in September.
Speaker Change: This will provide further momentum for our watch list and Oreo resolutions.
Mike: To note in <unk>.
Speaker Change: Obligate our watch list has remained stable quarter over quarter with some underlying movement, but we will discuss.
Speaker Change: Now I would like to provide insights as to our results.
Michael Joseph Mazzei: This quarter, we are taking impairments on certain legacy office equity investors. These investments were made roughly nine years ago by predecessor companies prior to the formation of BrightSpire. These have been highlighted in past filings and mentioned in my prepared remarks last quarter. In taking the impairments, we will write down these investments to zero. This write-off makes up approximately 80% of our book value adjustment during the second quarter. The remainder of the book value adjustment is attributable to the increase in our CECL reserve, which now stands at $1.32 per share. The most significant impairment of these equity investments is the Norway investment.
Speaker Change: This quarter, we are taking impairments uncertain legacy office equity investments. These investments were made roughly nine years ago quite predecessor companies prior to the formation of bright spire.
Speaker Change: Is it been highlighted in past filings I mentioned in my prepared remarks last quarter.
Speaker Change: And taking the impairments, we will write down these investments to zero.
Speaker Change: This write off makes up approximately 80% of our book value adjustment during the second quarter.
Speaker Change: The remainder of the book value adjustment is attributable to increase in our seafood reserve, which now stands at $1 32 per share.
Speaker Change: The most significant impairment of these equity investments is the Norway investment.
Michael Joseph Mazzei: As of this month, we are no longer receiving cash flow income from this asset. As a reminder, last quarter, we also stated that we anticipated losing cash flow income on the two other office equity investments in the coming quarter. Importantly, we have also recently commenced loan originations and will redeploy capital, which will, in part, offset the lost cash flow earnings associated with the legacy equity position. While the loss of these cash flows occurs over six months, our capital deployment is anticipated to have an impact over a longer time period. I highlighted this dynamic last quarter. This timing mismatch became a significant factor in the decision to reduce our quarterly dividend from $0.20 to $0.16 per share beginning in the third quarter of this year.
Speaker Change: This month, we are no longer receiving cash full income from this asset.
Speaker Change: As a reminder, last quarter. We also stated that we anticipated losing cash flow income on the two other office equity investments in the coming quarters.
Speaker Change: Importantly, we have also recently commenced loan originations and where we deploy capital, which will impart offset the lost cash flow earnings associated with the legacy equity positions.
Speaker Change: While the loss of these cash flows occur over six months, our capital deployment is anticipated to have an impact overall lengthier time period.
Speaker Change: I highlighted this dynamic last quarter.
Speaker Change: This timing mismatch became a significant factor in the decision to reduce our quarterly dividend from 20 to 16 cents per share beginning in the third quarter of this year.
Michael Joseph Mazzei: A reduction in our dividend will preserve shareholder equity in the near term. This will also allow the company to be more deliberate in pursuing value-enhancing strategies within the existing portfolio as we work through Watchlist and REO Invest. More specifically, as it relates to our Norway investment, although the debt comes due in June of 2025, a cash flow sweep went into effect this month. As a reminder, this is a net lease property in the global headquarters of Equinor, the state oil company in Norway. Equinor has been evaluating its future office requirements, and the options include remaining an island property, leasing an alternative building, or constructing a new headquarters.
Speaker Change: A reduction in our dividend will preserve shareholder equity in the near term. This will also allow the company to be more deliberate and pursuing value enhancing strategies within the existing portfolio as we worked through watch list and audio investments.
Speaker Change: More specifically.
Speaker Change: It relates to our Norway investment, although the debt comes due in June of 2025 cash flow sweep wanted to effect this month.
Speaker Change: As a reminder, this is a net lease property and the global headquarters of Ecuador, The state oil company of Norway.
Speaker Change: Ecuador has been evaluating their future office requirements.
Speaker Change: Options include remaining at all property.
Speaker Change: Leasing and alternative building constructing a new headquarters.
Michael Joseph Mazzei: For us to accomplish a sale or refinancing, we would need to be able to negotiate a lease extension beyond its current 2030 expiration. If Equinor decides to remain on our property under the current terms of the lease, the five-year remaining term beyond the debt maturity is insufficient to refinance the property without a significant paydown of the debt. Also, Equinor's timeline for its occupancy decision may not align with the maturity of our mortgage debt.
Speaker Change: For us to accomplish a sale or refinancing we would need to be able to negotiate a lease extension beyond its current 2030 exploration.
Speaker Change: If ethanol decides to remainder of property under the current terms of beliefs the.
Speaker Change: The five year remaining term you'll have a debt maturity is insufficient to refinance the property without a significant pay down of the debt.
Speaker Change: Also ecuador's timeline for their occupancy decision may not align with the maturity of our mortgage debt.
Michael Joseph Mazzei: We will continue to work alongside Equinor in that process. We will also engage with the lender group in an effort to modify the debt to improve the outcome. But at this time, investing more capital into this asset does not appear likely. Unlike Norway, the two U.S. office equity investments are multi-tenanted properties financed with CMBS mortgages.
Speaker Change: We will continue to work alongside Ecuador, and then our process.
Speaker Change: We'll also engage with the lender group in an effort to modify the debt to improve the outcome.
Speaker Change: But at this time investing more capital into this asset does not appear likely.
Speaker Change: Unlike doorway to T U S office equity investments or multi tenanted properties financed with see MBS mortgages.
Michael Joseph Mazzei: Although the respective underlying property cash flows provide more than adequate coverage on both interest and amortization, these investments fall short of the criteria necessary to refinance in today's market. A cash flow sweep on these assets is anticipated to commence at their respective loan maturities in October 2024 and January 2025. Therefore, we have proactively initiated discussions with the servicer to explore options for maturity extension. However, given the uncertainties, we took the prudent approach of incurring impairments on both of these investments.
Speaker Change: Although the respective underlying property cash flows provide more than adequate coverage on both interest and amortization.
Speaker Change: These investments fall short of their criteria necessary to recent demands in today's market.
Speaker Change: A cash flow sweep on these assets is anticipated to commence at the respective loan maturities in October 2024, and January 2025.
Speaker Change: Therefore, we have proactively initiated discussions with the servicer to explore options for maturity extensions.
Speaker Change: But given the uncertainties, we took the prudent approach of incurring apparent on both of these investments.
Michael Joseph Mazzei: During the second quarter and subsequent to quarter end, we successfully resolved a number of watchlist loans and REL. In addition, we continue to be conservative in our approach to risk ratings, and in doing so, we downgraded certain other loans. However, on a net basis, the watchlist loan count and aggregate loan balance remained constant. Furthermore, 65% of the aggregate watch list is current and interest-based. The largest portion of the non-accrual is attributed to our San Jose hotel loan, which Andy will discuss in his remarks. At this point in time, we do not anticipate meaningful migration onto the watch.
Speaker Change: During the second quarter and subsequent to quarter end, we successfully resolved a number of watch list loans and Oreo.
Speaker Change: In addition, we continue to be conservative in our approach to risk ratings and in doing so we downgraded certain other loans.
Speaker Change: However, on a net basis, the watchlist loan count and aggregate loan balance remains constant.
Speaker Change: Furthermore, 65% of aggregate watchlist is current and interest payments.
Speaker Change: Largest portion of the non accrual is attributed to our San Jose Hotel loan, which Andy will discuss in his remarks.
Speaker Change: At this point in time, we do not anticipate meaningful migration onto the watch list.
Andrew Elmore Witt: Alternatively, we believe that the remainder of the year will provide a window for significant resolutions and a reduction to the current watchline. As we headed to the second half of the year, we experienced improved visibility on our liquidity needs. And as a result, we have re-engaged loan origination efforts to deploy capital. While it is still early, we are encouraged to see opportunities emanating from the pullback by regional banks. We also expect that future rate cuts will provide a boost to dislodge more assets for refinancing.
Andrew Elmore Witt: Alternatively, we believe that the remainder of the year will provide a window for significant resolutions and reduction to the current watch list.
Andrew Elmore Witt: As we head into the second half of the year.
Andrew Elmore Witt: We have experienced improved visibility on our liquidity needs and as a result, we engage loan origination efforts to deploy capital.
Speaker Change: While it is still early we are encouraged to see opportunities emanating from the pullback by regional banks.
Speaker Change: We also expect our future rate cuts will provide a boost to dislodge more assets for refinancing.
Andrew Elmore Witt: The private credit sector should be a net winner in this pivot away from regional banks. Lastly, Restarting Originations underscores our continued progress and our anticipation of resolving underperforming loans and REO. Again, we believe the second half of the year will yield significant progress on this front. And with that, I will now turn the call over to our president, Andy Witt.
Speaker Change: The private credit sector should be a net winner in this pivot away from regional banks.
Speaker Change: Lastly, restarting originations underscores our continued progress in our anticipation of resolving underperforming loans and Oreo.
Speaker Change: Again, we believe the second half of the year will yield significant progress on this front.
Speaker Change: And with that I will now turn the call over to our President Andy Witt.
Andrew Elmore Witt: Thank you, Mike. During the quarter, we received $85 million in repayments and resolution proceeds across four investors. Deployment for the quarter totaled $18 million, consisting of $9 million of future funding obligations and a $9 million loan upside. As highlighted last quarter, proceeds from the loan upsize were used to consolidate collateral related to a mixed-use asset in Pasadena, California. The initial collateral includes a fully leased 94,000 square foot office building with developable land.
Andrew Elmore Witt: Thank you Mike during the quarter, we received $85 million in repayments and resolution proceeds across four investments.
Andrew Elmore Witt: Deployment for the quarter totaled $18 million, consisting of $9 million and future funding obligations and a $9 million loan upsize.
Andrew Elmore Witt: The upsized loan proceeds allowed the borrower to complete the purchase of the additional land parcels previously under contract and consolidate collateral underlying a fully entitled 310 units in your living development project. The borrower is currently evaluating a refinancing and or disposition of the office property and development site. In terms of the watch list progress, during the second quarter, we resolved the previously downgraded Miami, Florida office loan. Additionally, we completed the sale of the property collateralizing the RiskRank 5 Denver, Colorado multifamily.
Speaker Change: As highlighted last quarter proceeds from the loan upsize, we used to consolidate collateral related to our mixed used asset in Pasadena, California.
Speaker Change: Initial collateral includes a fully leased 94000 square foot office building with developable land.
Speaker Change: Outsized loan proceeds allowed the borrower to complete the purchase of the additional land parcels previously under contract and consolidate collateral underlying a fully entitled 310 unit senior living development project.
Speaker Change: The borrower is currently evaluating a refinancing <unk> disposition of the office property and development site.
Speaker Change: In terms of the watch list progress during the second quarter, we resolved the previously downgraded Miami, Florida office loan.
Speaker Change: Additionally, we completed the sale of the property collateralized the.
Speaker Change: The risk ranked by Denver, Colorado, a multifamily.
Andrew Elmore Witt: Additionally, we upgraded a Las Vegas multifamily loan as a result of sustained positive progress over the past quarter. As for REO updates, the Washington, D.C., office property is under contract, and subsequent to quarter end, we received a hard deposit, and the transaction is currently scheduled to close on August 1st at our net asset value. As Mike mentioned, we continue to have a conservative approach to our watch list.
Speaker Change: Additionally, we upgraded a las Vegas multifamily.
Speaker Change: As a result of a sustained positive progress over the past quarters.
Speaker Change: As Ferrari go updates the Washington D. C office property is under contract and subsequent to quarter end, we received a hard deposit and the transaction is currently scheduled to close on August 1st at our net asset value.
Speaker Change: As Mike mentioned, we continue to have a conservative approach to our watch list in doing so we downgraded three loans during the quarter, which included two mezzanine loans one located in Milpitas, California.
Andrew Elmore Witt: In doing so, we downgraded three loans during the quarter, which included two mezzanine loans, one located in Milpitas, California, and the other in Las Vegas, Nevada. Both loans had a PIC component to the payment structure. The Milpitas loan was placed on non-accrual in Q1, and the Las Vegas loan was placed on non-accrual subsequent to quarter end. We elected to move these investments to the watch list given where these loans sit within their respective capital structures combined with the current uncertainty in the capital market.
Speaker Change: Other in Las Vegas, Nevada, both loans had a pick component to the payment structure. The milpitas loan was placed on nonaccrual in Q1, and Melas Vegas loan was placed on non accrual subsequent to quarter end we.
Speaker Change: We elected to move these investments to the watch list given where these loans fit within their respective capital structures combined with the current uncertainty in the capital markets. The assets themselves are best in class.
Andrew Elmore Witt: The assets themselves are best in class. In the case of the Milpitas property, it is fully leased, whereas the Las Vegas property is nearing completion and is starting to lease up. The third addition to the watch list is the Dallas Multifamily Lot. In this case, the property has tracked behind the business plan, and the borrower is unable to capitalize the remainder of the business. As a result, we are evaluating our options, which include selling the property or taking control of the asset and executing a value-enhancing business plan utilizing our vertically integrated asset management platform.
Speaker Change: Case of the Milpitas property is fully leased whereas Las Vegas property is nearing completion and is starting to lease up.
Speaker Change: Third edition to the watch list the Dallas multifamily.
Speaker Change: In this case the property is track behind business plan and the borrowers unable to capitalize the remainder of the business plan.
Speaker Change: As a result, we are evaluating our options which include selling the property.
Speaker Change: Control of the asset and executing a value enhancing business plan utilizing our vertically integrated asset management platform.
Andrew Elmore Witt: Lastly, as it relates to the watchlist, our San Jose hotel loan for $136 million defaulted in June on both our first mortgage and the mezzanine loan, which is held by a third party. As a reminder, this loan was initially added to the watchlist in the first quarter of 2020 during COVID. The loan remained on the watchlist as a Risk Rank 4 even though the loan had been current on its interest payment.
Speaker Change: Our warehouse lenders have indicated they will cooperate with us should we elect to do the latter.
Speaker Change: Lastly, as it relates to the watch list or San Jose hotels for $136 million.
Speaker Change: A payment default in June on both our first mortgage and mezzanine loan which is held by a third party.
Speaker Change: As a reminder, this loan was initially added to the watch list in the first quarter of 2020 during Covid. The loan remained on the watch list as a risk ranked for.
Speaker Change: Although the loan has been current on its interest payments.
Andrew Elmore Witt: Despite a loan pay-down of $57 million in November of 2023, we did not reduce the general CECL reserve attributable to the loan given uncertainty. During the second quarter, BrightSpire placed the loan on non-accrual, downgraded the loan to a risk ranking of 5 from a 4, and has since commenced foreclosure proceedings. In coordination with our warehouse lender and in anticipation of this potential eventuality, we have secured a commitment from our existing lender to maintain funding throughout this process. Given the commencement of foreclosure, which is in the public domain, we will refrain from discussing this matter further.
Speaker Change: Despite your loan Paydown of $57 million in November of 2023, we did not reduce the general seasonal reserve attributable to long given uncertainty during the second quarter bright spot placed the loan on non accrual downgraded alone to a risk ranking of five.
Speaker Change: Before.
Speaker Change: <unk> commenced foreclosure proceedings.
Speaker Change: In coordination with our warehouse lender and in anticipation of this potential eventuality, we have secured a commitment from our existing lender to maintain funding throughout this process.
Speaker Change: Given the commencement of foreclosure.
Speaker Change: Which is in the public domain, we will refrain from discussing this matter further.
Andrew Elmore Witt: Although it was an active quarter as it relates to the watch list, the total number of loans did not change quarter over quarter at 12, and the corresponding watch list NAVs remained relatively flat quarter over quarter at $543 million, or 20% of the portfolio, 5% of which is attributable to the San Jose Hotel loan. As relates to the loan portfolio, as of June 30, 2024, excluding cash and net assets on the balance sheet, the loan portfolio is comprised of 83 investments with an aggregate carrying value of $2.8 billion and a net carrying value of $877 million, or 83% of the total investment portfolio. Our weighted average risk ranking remained flat quarter over quarter at 3.2.
Speaker Change: Although it was an active quarter as it relates to the watch list. The total number of loans did not change quarter over quarter at 12.
Speaker Change: Corresponding watchlist nous remained relatively flat quarter over quarter at $543 million or 20% of the portfolio, 5% of which was attributable.
Speaker Change: San Jose Hotel loan.
Speaker Change: As it relates to the loan portfolio as of June 32024, excluding cash and net assets on the balance sheet. The loan portfolio was comprised of 83 investments with an aggregate carrying value of $2 8 billion and the net carrying value of $877 million or <unk>, 83%.
Speaker Change: The total investment portfolio.
Speaker Change: Our weighted average risk ranking remained flat quarter over quarter at three two.
Frank Vito Saracino: The average loan size is $33 million. First mortgages constitute 97% of our loan portfolio, of which 100% are floating rate. The multifamily portion of our portfolio remains our largest segment, with 49 loans representing 54% of the loan portfolio or $1.5 billion of aggregate carrying value. Office comprises 30% of the loan portfolio, consisting of $821 million of aggregate carrying value across 24 loans with an average loan balance of $34 million. The remainder of our portfolio is comprised of 8% hospitality, with mixed use and industrial collateral making up the remainder.
Speaker Change: Average loan size is $33 million.
Speaker Change: First mortgages constitute 97% of our loan portfolio of which a 100% are floating rate.
Speaker Change: The multifamily portion of our portfolio remains our largest segment with 49 loans, representing 54% of the loan portfolio or a $1 five of aggregate carrying value.
Speaker Change: Office comprises 30% of the loan portfolio consisting of 800.
Speaker Change: $21 million of aggregate carrying value across 24 loans with an average loan balance of $34 million.
Speaker Change: The remainder of our portfolio is comprised of 8% hospitality with mixed use and industrial collateral making up the remainder.
Frank Vito Saracino: As of quarter end, remaining future funding obligations stand at $127 million, or 4% of total outstanding commitment. With that, I will turn the call over to Frank Saracino, our Chief Financial Officer, to elaborate on the second quarter results. Frank?
Frank Vito Saracino: As of quarter end remaining future funding obligations stand at $127 million or 4% of total outstanding commitments with that I will turn the call over to Frank Sparacino, Our Chief financial officer to elaborate on the second quarter results right.
Frank Vito Saracino: Thank you, Andy, and good morning, everyone. Before discussing our second quarter results, I want to mention that our second quarter 2024 Supplemental Financial Report is available in the Investor Relations section of our website. For the second quarter, we generated adjusted DE of $28.8 million, or $0.22 per share. Second quarter DE was $17 million, or $0.13 per share. DE includes a specific reserve of approximately $12 million. Additionally, we reported a total company gap net loss of $67.9 million, or $0.53 per share, which reflects operating real estate impairments, as well as increases in our CECL reserves. Quarter over quarter, total company Gap Netbook value decreased to $8.41 from $9.10 per share, and unappreciated book value decreased to $9.08 from $10.67 per share.
Frank Vito Saracino: Thank you Andy and good morning, everyone.
Frank Vito Saracino: This change is mainly driven by impairments taken on our operating real estate assets and an increase in our CECL reserves, partially offset by adjusted DE in excess of dividends. Looking at reserves. During QQ, we recorded a specific CSO reserve of $13 million related to the Miami, Florida, office. As Andy mentioned, this one was downgraded to a 4 in 1Q and resolved during 2Q.
Frank Vito Saracino: Before discussing our second quarter results I want to mention that our second quarter 2020 core supplemental financial report is available on the Investor Relations section of our website.
Frank Vito Saracino: For the second quarter, we generated adjusted EBITDA of $28 8 billion or 22 per share.
Frank Vito Saracino: Second quarter D was $17 million or <unk> 13 per share.
Frank Vito Saracino: <unk> includes a specific reserve of approximately $12 million. Additionally, we reported total company GAAP net loss of $67 9 million or <unk> 53 per share, which reflects the operating real estate impairments as well as increases in our seats of reserves.
Frank Vito Saracino: Quarter over quarter total company GAAP net book value decreased to $8 41 from $9 10 per share.
Speaker Change: I'll depreciated book value decreased to $9 eight.
Speaker Change: From $10.07 per share.
Speaker Change: This change is mainly driven by impairment taken on our operating real estate assets and an increase in our seasonal reserves, partially offset by adjusted D E in excess of dividends declared.
Speaker Change: Looking at reserves during Q2, we recorded a specific T cell reserve of $13 million related to the Miami, Florida Office what.
Speaker Change: As Andy mentioned this one was downgraded to a hard <unk> and resolved during Q2.
Speaker Change: As the Denver, Colorado multifamily alone was also resolved QQ, we charged off the specific reserves related to both ones during the quarter and as a result ended the second quarter with no specific reserves.
Speaker Change: Our general Seesaw provision stands at $172 million or 597 basis points of total loan commitments, an increase of $28 million from the prior quarter. The increase in the general Seesaw was primarily driven by specific inputs on certain ones.
Speaker Change: Looking at our watch list loans are one risk ranked five long represents 5% of the total loan portfolio carrying value.
Speaker Change: 11 loans equating to 15% of the total loan portfolio carrying value or risk ranked four.
Frank Vito Saracino: As the Denver, Colorado multifamily loan was also resolved to Q, we charged off the specific reserves related to both loans during the quarter, and as a result, ended the second quarter with no specific reserves. Our General CECL provision stands at 172,000,597 basis points of total loan commitments, an increase of $28 million from the prior quarter. The increase in the General CECL was primarily driven by specific inputs on certain loans. Looking at our watch list loans, our one risk rank five loan represents 5% of the total loan portfolio carrying value. 11 loans equating to 15% of the total loan portfolio carrying value are risk-ranked. This concludes our prepared remarks, and with that, we open it up to questions. Operator
Speaker Change: This concludes our prepared remarks and with that let's open it up for questions operator.
Operator: Thank you. We'll now be conducting a question and answer session. If you'd like to be placed into question Q, please press star 1 on your telephone keypad. A confirmation tone will indicate your line is in question Q. You may press star 2 if you'd like to remove your question from the Q. As a reminder, in the interest of time, we ask that you please limit yourselves to one question and one follow-up, then return to the Q. Our first question today is coming from Stephen Laws from Raymond James. Your line is now live.
Speaker Change: Thank you, we'll now be conducting a question and answer session if you'd like to be placed in the question queue. Please press star one on your telephone keypad, a confirmation tone will indicate your line is in the question queue.
Speaker Change: Press Star two if you'd like to move your question from the queue. As a reminder, in the interest of time. We ask you. Please limit yourself to one question and one follow up then return to the queue.
Speaker Change: Our first question today is coming from Stephen laws from Raymond James Your line is now live.
Stephen Albert Laws: Hi, good morning. Appreciate the comments so far. I'll definitely be jumping into the transcript to get some of the details, Andy. But as you think about the watchlist loans, as we move through the back half of the year, you know, which of those 12 do you think are potential second half resolutions? And which ones do you think we continue to work through as we move into 25?
Stephen Albert Laws: Hi, good morning.
Speaker Change: The comments, so far definitely be jumping in the transcript to get sort of details Andy but as you think about the watch list loans as we move through the back half of the year, which of those 12 do you think are potential second half resolutions and which ones do you think.
Andrew Elmore Witt: We continue to work through as you move into 'twenty five.
Michael Joseph Mazzei: You know what, let me let me take that first, Stephen. It's Mike. I would say that out of the 12 out of the 12.
Speaker Change: No, but let me let me take that first Steven its Mike.
Mike: I would say that out of the.
Mike: Out of the 12.
Michael Joseph Mazzei: I would say the majority of them are in various stages of progress, and we think, as we said in the prepared remarks, we'll make significant progress between now and the end of the year, the back half of the year. I don't want to identify, you know, specific loans on the watch list, other than the fact that the largest one, the San Jose Loan, is now in default on its interest payment.
Mike: I would say the majority of them are in various stages of progress.
Speaker Change: And we think as we said in the prepared remarks, we will make significant progress between now and the half of the year the back half of the year I don't want to identify specific loans on the watch list.
Speaker Change: Other than the fact that the largest one the San Jose alone is now in default on its interest.
Michael Joseph Mazzei: And so we have started, and it's public. We started a foreclosure process on that property. So we are moving toward a resolution. It's in the state of California.
Speaker Change: Interest payment and so we have a star.
Speaker Change: Started in its public we started the foreclosure process on that property.
Speaker Change: So we are moving toward a resolution.
Speaker Change: It's in the state of California, So that typically takes.
Michael Joseph Mazzei: So that typically takes, call it, about 120 days. And we're into it for about, about, approximately 30 days. So that's another example of something that, you know, we are clearly moving in the direction of resolution on. So I'd say a substantial number of the assets on the watch list are in various states of play. And we're really looking for the second half of the year to give us a significant.
Speaker Change: About 120 days, we're into it for about about approximately.
Speaker Change: Approximately 30 days. So that's another example of something that we're clearly moving in the direction of resolution. So I'd say a substantial number of the yes. It's on the watch list or in various states of play and where we're really looking for the second half of the year to give us significant progress.
Stephen Albert Laws: Great, appreciate the comments, Mike, and then to follow on that note, Steven, I'm sorry, also, just to reiterate the fact that Steven DeLaney, Steven Laws, David Palam, Michael Mazzei, Andrew Witt, Frank Saracino, Yeah, no, that's a good point. I appreciate you pointing that out about the 65%, Mike. As my follow up question, I wanted to touch on your comment about, you know, you've got better visibility into your liquidity needs, you've re-engaged discussions on new originations, you know, can you maybe talk about your your pipeline of deploying capital and then how that balances against expected repayments in the second half of the year kind of getting to an answer of kind of net, net portfolio growth, net portfolio flat, or see some shrinkage here in the back half before you get Originations ramped back up.
Speaker Change: Great I appreciate the comments, Mike and then all of them.
Steve: No Steve.
Stephen: Stephen I'm, sorry, also just to reiterate the fact that.
Speaker Change: 65% of the loans are current and so you know we don't have a full saying that as long as the borrowers are maintaining payments.
Speaker Change: They're somewhat in the driver's seat so 65% of that portfolio is current and the largest as we said non accrual is the San Jose alone.
Speaker Change: Yeah, No. That's a good point I appreciate you pointing that out about the 65% Mike.
Speaker Change: As my follow up question I wanted to touch on your comment about you know you've got better visibility into your liquidity needs you Reengage discussions on new originations can you maybe talk about your pipeline of deploying capital and then how that balances against expected repayments in the second half of the year kind of getting to them.
Speaker Change: An answer of kind of net net portfolio growth net portfolio flat or do you think you'd see some shrinkage here in the back half of 40 get originations ramp back up.
Michael Joseph Mazzei: Now, we expect the portfolio to start growing. We have $152 million of cash on the balance sheet.
Speaker Change: No we expect the portfolio to start growing we have $152 million of cash on the balance sheet and as we continue to execute on.
Michael Joseph Mazzei: And as we continue to execute on the plan for under-leveraged loans, unlevered REO or loans, the watch list, that is going to generate more cash to reinvest. So we think that this, as I said in the prepared remarks, will happen over the period of the reinvestment and refinancing between now and through next year. So it'll be a steady flow, if you will, of deployment. And again, $152 million is on the balance sheet now in cash, and the rest of it will come from asset resolutions, which we feel the visibility on that, along with the stability in the portfolio at this point, where we don't think anything that we can see is going to move onto the watch list, we feel confident in redeploying. And I also think that we should look to hopefully accumulate enough by mid-year 2025 to execute on a 2025 CLL.
Speaker Change: On the plan for under Levered loans, Unlevered Oreo for loans. The watch list that is going to generate more more cash to reinvest. So we think that this as I said over the.
Speaker Change: Repaired remarks over the period of the reinvestment and re levering between now and in through next year.
Speaker Change: So it'll be a steady flow if you will of deployment and again $152 million on the balance sheet now in cash and the rest of it will come from asset resolutions, which we feel the visibility on that.
Speaker Change: Along with the.
Speaker Change: Stability in the portfolio at this point, but we don't think anything that we can see is going to move on to the watch list. We feel confident and are redeploying and I also think that we look to hopefully accumulate enough by midyear.
Speaker Change: 2025 to execute on the 2025.
Speaker Change: Hello.
Stephen Albert Laws: Great. I appreciate the comments this morning, Mike. Thank you.
Speaker Change: Great I appreciate the comments this morning, Mike Thank you.
Steven Cole DeLaney: Thank you. The next question today is coming from Steve DeLaney from J&P Securities. Your line is now live.
Speaker Change: Thank you next question today is coming from Steve Delaney from JMP Securities. Your line is now live.
Steven Cole DeLaney: Thanks. Good morning, everyone.
Steven Cole DeLaney: Thanks, Good morning, everyone.
Steven Cole DeLaney: Appreciate all the detail on the impairments. Just looking at the comments on Norway, looking at the debt, just trying to reconcile here on page five, the $1.32 of total impairments, and then on page six, we get the non-GAAP impairment of 98 cents. Is the 98 cents simply Norway and the difference, or the other impairments and charges that you took? Time to reconcile this two-year thing.
Steven Cole DeLaney: I appreciate all the detail on the impairment just looking at the comments on Norway.
Steven Cole DeLaney: Looking at the debt just trying to reconcile here on page five the $132.32 of total impairment and then on page six we get the non-GAAP.
Speaker Change: Impairment of 98.
Speaker Change: 98 cents simple.
Speaker Change: Simply Norway, and the difference or the other impair.
Speaker Change: Impairment charges that you took.
Speaker Change: I'm trying to reconcile this here thank you.
Frank Vito Saracino: Chersee, this is Frank. So 34 cents of that impairment came through as a gap-related impairment. And as you know, GAAP has certain rules requiring what you can take as far as impairment, and you can only impairment down to a GAAP value. And really, the difference between, you know, undepreciated book value and GAAP book value is the accumulated amortization and depreciation that gets added back to GAAP book value. So we're eliminating that and saying, don't add that back from GAAP book value.
Speaker Change: Sure. This is Frank so 34 cents of that impairment came through as a GAAP related impairment.
Steven Cole DeLaney: Got it. Okay. Thanks very much.
Speaker Change: And as you know GAAP has certain rules, requiring which you can take as far as impairment and you can only and pare down to GAAP value and really the difference between.
Speaker Change: Unappreciated book value and GAAP book value is D.
Speaker Change: Accumulated amortization and depreciation that gets added back to GAAP book value. So, we're eliminating that and saying don't don't add that back from GAAP book value in.
Speaker Change: And that across to 98 cents.
Steven Cole DeLaney: And then switching to new lending, obviously, you're seeing some repayments. So the portfolio is shrinking near term. Just comment on where you stand with evaluating new loans? Do you actually have a pipeline at this time? I know you commented on the opportunity, Mike, when you were at NAREIT, but just curious how close we are to actually issuing commitment letters and funding new loans. Thanks. Bye.
Speaker Change: Got it okay. Thanks, very much and then just switching to the new lending, obviously youre seeing some repayments so the portfolio shrinking near term.
Speaker Change: Could you just comment on.
Speaker Change: Where you stand with.
Speaker Change: Evaluating new loans do you actually have a pipeline at this time.
Speaker Change: I know you commented on the opportunity Mike when you were at NAREIT, but just curious how close we are to actually issuing commitment letters and funding new loans.
Michael Joseph Mazzei: Thanks. Yes, we are active. Looking at product today. We're meeting on investment committees and quote committees every week. Nothing has been committed to yet, but that process has been fully engaged, and we're out there speaking to mortgage bankers, brokers, and all of our borrowing constituents out there looking for new products. And, as I said in the script, we are seeing a lot from the regional banks. We don't expect anything, or any game to break there.
Speaker Change: Yep. Thanks, Yes, we are actively.
Speaker Change: Looking at <unk>.
Speaker Change: Today.
Speaker Change: We're meeting our investment committees and quote committees every week nothing has been committed to yet but that process has been fully engaged and we're out there speaking to mortgage bankers brokers and all of our borrowing constituents out there looking for new product and as I said in the in the.
Speaker Change: And he's a script that we are seeing a lot from the regional banks, we don't expect anything any gam to break there we don't expect massive bulk sales.
Michael Joseph Mazzei: We don't expect massive bulk sales unless banks go under, which we don't see at this point. But we are seeing banks allowing what I would call runoff, where there is a construction loan or a mini-perm, the bank is not renewing that loan without some sort of significant paydown, and they're not letting borrowers off the hook for recourse on a construction loan. And so those loans are starting to come into the non-bank market.
Speaker Change: Unless you know banks go under which we don't see at this point, but we are seeing the banks, allowing what I would call one off where there is a construction loan or mini Perm. The bank is not renewing that long without some sort of significant pay down and they're not letting borrowers off the hook for recourse on the construction.
Speaker Change: And so those loans are starting to come into the non bank market and I think after we get a fed cut and as we move into the fourth quarter, that's going to enable a lot of those borrowers to start to get refinancing away from the banks. So we're we're still encouraged about.
Michael Joseph Mazzei: And I think after we get a Fed cut and as we move into the fourth quarter, that's going to enable a lot of those borrowers to start to get refinancing away from the banks. So we're still encouraged about the flow that we're going to see from the regional banks and the community banks. But we are actively engaged, absolutely, but we haven't made any commitments yet.
Speaker Change: The flow that we're going to see from the regional banks I mean, the community banks, but we are actively engaged absolutely, but no commitments yet.
Steven Cole DeLaney: Encouraging. Okay. And while the banks don't want that paper on their books, do you sense they're still more than willing to finance you on repo lines to carry the loans on your balance sheets?
Speaker Change: Encouraging okay, and while the banks don't want that paper on their books, you sense theres still more than willing to finance you on repo lines to carry the loans on your balance sheet.
Michael Joseph Mazzei: Yeah, these are regional and more community banks where you're seeing commercial real estate loan exposure at, you know, 300 times their tier one capital or an excess of that. And there could be hundreds.
Speaker Change: Yeah. These are these are regional and more community banks, where youre seeing.
Speaker Change: Our commercial real estate loan exposure at.
Speaker Change: 300 times their tier one capital or at or in excess of that and there could be hundreds of those.
Michael Joseph Mazzei: The Money Center banks are not in that position. The Money Center banks are probably somewhere as a fraction of loan exposure relative to their Tier 1 capital, and our Money Center banks who finance us on a warehouse are very actively engaged in that. This asset class has probably been their best performing asset class in commercial real estate warehouse lending. In terms of risk-reward, I think they probably have suffered no or very few losses there. So they're very actively engaged with us and would like to grow their exposure to us.
Michael Joseph Mazzei: The money center banks are not in that position in the money Center banks.
Speaker Change: Somewhere as a fraction of loan exposure relative to their tier one capital and our money center banks to finance us on warehouse.
Speaker Change: Very actively engaged in that.
Speaker Change: Asset classes, probably been their best performing asset class in commercial real estate warehouse lending.
Speaker Change: In terms of risk reward I think they probably have suffered no or very little losses. There. So we've been very actively engaged with us and we'd like to grow their exposure to us yes.
Steven Cole DeLaney: Well, thanks for the clarification between the regionals and the money. And, you know, I know asset management is a hand-to-hand combat. It's the only way to get through it, right? And get to the end and get your portfolio and your balance sheet cleaned up. So all the best.
Speaker Change: Well, thanks for the clarification between the regionals and the money centers.
Speaker Change: And.
Speaker Change: I know asset management is hand to hand combat right.
Speaker Change: That's the only it's the only way to get through it right and get to the end and get your your your portfolio and your balance sheet cleaned up so so yeah, all the best in what we've been doing that.
Michael Joseph Mazzei: Well, we've been doing this for a while. We've been doing this for two years now, and so I think at this point in time, we see enough stability in the portfolio. As we said earlier, we don't see anything in the front window that is going to come onto the watch list, and we see more of the resolutions because we've been working on these assets for quite some time. We see more resolutions toward the second half of the year, so I think we're feeling encouraged about, with the cash on the balance sheet that we have today and the cash that we're going to generate from these resolutions, that we should go full throttle on origination.
Speaker Change: We've been doing this for two years now and.
Speaker Change: And so I think at this point in time.
Speaker Change: We see enough stability in the portfolio as we said earlier, we don't see anything in the front window that is going to come onto the watch list and we see more of the resolutions because we've been working on these assets for quite some time, we see more resolutions toward the second half of the year. So I think we're feeling it.
Speaker Change: <unk> about with the cash on balance sheet that we have today and the cash that we're going to generate from these resolutions that we should go full throttle on origination.
Speaker Change: Thanks for the comments Mike.
Mike: Thank you.
Matthew Philip Howlett: Thank you. As a reminder, it's Star One to be placed into question Q. Our next question is coming from Matt Howlett from B. Riley Securities. Your line is now live.
Speaker Change: Thank you as a reminder, its star one to be placed in the question Hugh.
Speaker Change: Our next question is coming from Matt Howlett from B Riley Securities. Your line is now live.
Matthew Philip Howlett: Okay, guys, thanks for taking my question. Hey, Mike, just on the comments with the current loan portfolio, you feel pretty good about, you know, the status going forward. And then the general CECL that you took this quarter, the reserve. I don't want to, you know, hold you to it. But is this it in terms of just an increase in general fees? So meaning, where is the core EPS now? Where are the dividends going to be? I mean, book value should be basic.
Matthew Philip Howlett: Oh, Hey, guys. Thanks for taking my question, Hey, Mike just on the comments with the current loan portfolio you feel pretty good about.
Speaker Change: The status going forward and then the general seasonal that you took this quarter the reserve.
Speaker Change: I mean, I don't want to hold you to it but is this it in terms of just.
Speaker Change: An increase in general see so, meaning where the core EPS now where the dividend's going to be I mean book value should be basically.
Matthew Philip Howlett: at the bottom or near the bottom.
Speaker Change: At the bottom or near bottom.
Michael Joseph Mazzei: What I would say is that we feel pretty, pretty, pretty good that it's on the high side at 6% of the loan book and roughly 15% of the book value, and with the fact that we think that we're going to make a lot of progress in the second half of this year. I think we feel that that is on the high side.
Speaker Change: But I would say is.
Speaker Change: That.
Speaker Change: We feel pretty pretty pretty good that it's on the high side.
Speaker Change: At 6% of the loan book and.
Speaker Change: Roughly 15% of the book value.
Speaker Change: And with the fact that we think that we're going to make a lot of progress on the second half of this year I think we're feeling that that that is on the high side I also would underscore the part of that.
Michael Joseph Mazzei: I also would underscore part of that is due to the fact that we have a very low average loan balance, and our loan concentrations are low, and we will not have any loans over 100 million after the resolution of the San Jose loan. So that's giving us more confidence as we look at what we have now in our existing portfolio. And as we emphasize with the San Jose Hotel Loan. When that loan was reduced in balance last year by 30%, we maintained the CECL amount on that loan. We did not reduce the CECL on a pro rata basis.
Speaker Change: Due to the fact that we have a very low average loan balance in our loan concentrations are low and we will not have any loans over 100 million. After the resolution of the San Jose loans, So that's giving us more confidence as we look at what we have now in our existing portfolio.
Speaker Change: And as we emphasized with the San Jose.
Speaker Change: Tell loan when that loan was we do see imbalance last year by 30% we maintained the Cecil amount on that long, we did not reduce the C. So on a pro rata basis. So that's another reason why we're feeling like.
Speaker Change: We were relatively conservative on our seasonal reserves right now.
Michael Joseph Mazzei: So that's another reason why we feel like we're relatively conservative on our CECL reserves right now. And then, in terms of the office portfolio, You know, we have a number of office loans on the watch list, and we think that the office portfolio is probably going to shrink a little bit more over the course of the remaining part of the year and into next year. So that is giving us some confidence in our CECL reserves at the levels that they're at now.
Speaker Change: And then in terms of the office portfolio.
Speaker Change: We have a number of office loans on the watch list.
Speaker Change: And we think that the office portfolio is probably going to shrink a little bit more over the course of the rain remain part of the year and into next year.
Michael Joseph Mazzei: So that is giving us some confidence on our seasonal reserves at the levels that they're at now and I want to also mention that we don't have any life science.
Michael Joseph Mazzei: And I want to also mention that we don't have any life science. I know that our peer group emphasizes that they have an office category and a life science category. We do not have any life science loans, and we kind of view life science as an office product that has three times the amount of loans per square foot for refrigeration and turbo HVAC. But we don't have that exposure here, and so we see that loan exposure in the office sector dropping over the course of the next six months and into next year as well. So overall, I'm not going to never say never, but we feel that it is on the high side at 6% of the loan.
Michael Joseph Mazzei: Know that our peer group emphasizes that debit office category and our life Science category, we do not have any life science loans, and we kind of view life science.
Speaker Change: As office product that is three times the amount of loan per square foot.
Speaker Change: Refrigeration and turbo HVAC, but we don't have that exposure here.
Speaker Change: And so we see that loan exposure in the office sector dropping Oh.
Michael Joseph Mazzei: Over the course of the next six months or into next year as well so overall.
Michael Joseph Mazzei: I'm not going to never say never.
Speaker Change: We are feeling that it is on the high side Thats X percent of the loan book.
Matthew Philip Howlett: And then we look at sort of, you know, adjusted EPS and the dividend now at $0.16 a day. You should be, we'll run our models, but I mean, you should be covering it. There shouldn't be any sort of degradation of not covering it on a core basis.
Speaker Change: And then when you look at sort of adjust.
Adjusted EPS and the dividend now at 16 since that date.
Speaker Change: You should be you know, we'll run our models, but I mean, you should be covering it shouldn't be any sort of degradation of not covering it on a core basis.
Michael Joseph Mazzei: Yeah, we feel good about maintaining the dividend here. We feel it was the right size, primarily to prevent leakage. We looked at it from a negative coverage basis on cash flow at www.brightspirecapital.com.
Speaker Change: Yeah, we we feel good about maintaining the dividend here, we felt it was right sized.
Matthew Philip Howlett: Primarily to prevent leakage, we looked at it from a negative coverage basis on cash flow.
Michael Joseph Mazzei: Not just not just D, but an actual cash flow.
Speaker Change: Of the book.
Speaker Change: And we feel we'll get back into positive comp, which on a cash flow basis and retained earnings.
Speaker Change: As a result of executing on the build back to a hopefully a 20 cent dividend in.
Speaker Change: In the future. So right now we feel confident that we can maintain the dividend where it is.
Matthew Philip Howlett: I appreciate those comments, and it's great to hear that you guys want to take it back up to 20 cents when you can do it. I figured I'd ask the question because, look, it's great to hear that you're back in the market. We all know the opportunity with non-banks in the market and you guys being internally managed, being efficient, and being out there with rate sheets. It's great to hear, but I want to ask you something. We've heard a lot of your peers talk about, you know what? Hey, in the meantime, things aren't that busy. They're busy, but they're not that busy.
Speaker Change: No I appreciate those comments.
Speaker Change: It's great to hear that you guys want to take it back up to 20 sense. When you when you can do it.
Speaker Change: I figured I'd ask the question because look it's great to hear that you're back in the market. We all know the opportunity with Nonbanks.
Matthew Philip Howlett: The market and you guys being currently manage being efficient.
Speaker Change: Out there.
Speaker Change: That's great to hear but I wanted to ask a question. We've heard a lot of your peers talk about you know hey in the meantime, things aren't that busy they're busy but they're not that busy we're going to buy a AAA. So won't be that's where we can get 20% yields <unk>.
Matthew Philip Howlett: We're going to buy AAA CNBS, where we can get 20% yields. Or, I'll take it to the other side. We could buy back stock here. If you think book is good at $9, you're trading at under $6. Hey, why don't we buy back stock until we get things done?
Speaker Change: Take it.
Speaker Change: To the other side, we could buy back stock here. If you think book is good at $9 <unk>.
Speaker Change: Trading at under six Hey, why don't we buy back stock until we get things going.
Michael Joseph Mazzei: Well, in terms of the buyback, we are looking at that. But having said that, we're reducing our scale.
Speaker Change: Well in terms of the buyback.
Speaker Change: We are looking at that.
Speaker Change: He said that.
Michael Joseph Mazzei: And when we look at loan origination and potentially executing CLOs, and the ROE on that looks pretty compelling versus the buyback, the buyback would make sense. Really, if you look at doing a secondary equity offering in the near-term horizon, I mean, that makes it absolutely compelling. But just in terms of the deployment of capital, rather than scale. I think we feel that originating loans and executing on a CLO in 2025 will give us a better ROE.
Speaker Change: We're reducing our scale and when we look at loan origination and potentially executing CLO and the ROE on that looks pretty compelling.
Versus the buyback.
Speaker Change: Buyback would make sense.
Speaker Change: Really if you look at doing a secondary equity offering in the near term horizon, I mean that makes it absolutely compelling, but just in terms of deployment of capital.
Michael Joseph Mazzei: Rather than reduce scale I think we feel about originating loans and executed on our CLO in 2025 will give us a better ROE with regard to buying AAA is we haven't done that in the past others might be doing it but we don't think you can get that and enough scale when you lever those up 75% 80%.
Michael Joseph Mazzei: With regard to buying AAAs, we haven't done that in the past. Others might be doing it, but we don't think you could get that on enough scale. When you lever those up 75%, 80% on a securities warehouse line, you're really not deploying a lot of them. So putting out $10, $15, $20 million in AAA securities and leveling them up 80%, you really don't move the needle.
Michael Joseph Mazzei: <unk>.
Speaker Change: On our Securities warehouse line, you're really not deploying a lot of equity.
Speaker Change: So.
Michael Joseph Mazzei: Putting out 10, 15 $20 million in AAA securities and levering up leveling that about 80%.
Michael Joseph Mazzei: You really don't move the needle that much.
Matthew Philip Howlett: Right, sub-beta, get involved with that. Okay, then just on that CLO amount, can you give us a sense of what size and what we're... What could you tell us? Could you talk about a $400 million plus deal? I mean, what would you tell us in terms of your marketing? This is, we're talking out of 2025.
Michael Joseph Mazzei: Right.
Michael Joseph Mazzei: Go get involved with that.
Speaker Change: And then just I guess on that CLO.
Speaker Change: Can you give us a sense of what size I mean, what would you what could you tell us could you check in about 400 million plus deals, but what would you tell us and try to this is when were talking out into 2025. So.
Michael Joseph Mazzei: So I think we would look at what traditionally gets done. If you're looking at a CLO, you're probably trying to do something, you know, greater than $500 million, maybe shy of a billion dollars, which is what we did in the first two CLOs. But I think that when you look at the ROE that we've typically gotten after executing a CLO, you're probably adding several hundred basis points, or maybe more, to your returns on your loan book.
Speaker Change: I think we would look at what traditionally gets done if youre looking at a CLO is probably trying to do something.
Speaker Change: Greater than $500 million, maybe shy of $1 billion, which is what we've done.
Speaker Change: First to close but I think that when you look at the euro debt.
Michael Joseph Mazzei: We've typically gotten after executing a CLO, you're probably adding several hundred basis points or maybe more to your returns on your loan book and so that's where when you look at.
Michael Joseph Mazzei: And so that's where we look at, originating loans, and then executing the CLO versus a buyback of stock. As we move into 2025, we think that the CLO execution is something we prefer because, again, we really don't want to necessarily reduce our scale at this point. So right now, Yes, we'll look at buybacks, but right now, we think just executing on the business plan gives us an attractive better return. Great. I appreciate the comments.
Michael Joseph Mazzei: Originating loans, and then executing the CLO versus a buyback of stock as.
Michael Joseph Mazzei: As we move into 2025, we think that the CLO execution is something we prefer because again, we really don't want to necessarily reduce our scale at this point so right now.
Michael Joseph Mazzei: Yes, we'll look at buybacks, but right now we think just executing on the business plan gives us as attractive or better returns.
Michael Joseph Mazzei: Great I appreciate the comments.
Speaker Change: Yeah.
Jason Weaver: Thank you. The next question today is coming from Jason Weaver from Jones Trading. Your line is now live.
Speaker Change: Thank you next question today is coming from Jason Weaver from Jones trading your line is now live.
Jason Weaver: Hey, Mike, taking your few last answers regarding originations into account, you know, we've heard a lot about new private capital coming into the space on the sidelines. So, you know, how are you thinking about the competitive environment going into year-end and beyond?
Speaker Change: Hey, good morning, So Mike taking your few last answers regarding originations into account you know we've heard a lot about new private capital coming into the space on the sidelines. So you know how are you thinking about the competitive environment going into year end and beyond.
Michael Joseph Mazzei: It's going to be competitive, you know, flat out. I'm still trying to get my arms around what private credit means outside of leveraged finance. It absolutely means real estate. I guess it means anything that's on the wholesale lending side of a bank, not consumer-related that the private credit groups want to get into. But yeah, we see a lot of demand for credit coming out of that sector. Also, though, we've seen hundreds of banks execute on commercial real estate loans over the course of the last three, four plus years, where we didn't know who these banks were. And I make the analogy that it's like watching the sea level rise.
Mike: It's going to be competitive.
Speaker Change: Flat out.
Speaker Change: I'm still trying to get my arms around what private credit means outside of leveraged finance.
Mike: Yeah, absolutely means real estate.
Mike: I guess it means anything that's in our wholesale lending side of the bank not.
Michael Joseph Mazzei: Not consumer related got the private credit groups want to get into but yeah, we see a lot of demand for credit coming out of that sector.
Michael Joseph Mazzei: Also though we've seen hundreds of banks.
Michael Joseph Mazzei: Execute on commercial real estate loans over the course of the last three four plus years.
Speaker Change: We didn't know who these banks law.
Speaker Change: And I.
Michael Joseph Mazzei: I think the analogy, it's like watching the sea level rise you can't tell because all of these banks are doing loans and youre not seeing these repeat banks come up.
Michael Joseph Mazzei: You can't tell because all these banks are doing loans, and you're not seeing these repeat banks come up. And roll the tape forward, here we are, after several banks go under, and you realize that there are hundreds of banks out there with commercial real estate exposure that is many multiples times their tier one capital. We didn't see that happening over the past three or four years; we may have seen 10 banks, or some of New York's big banks that went under here, like Signature Bank and what happened at New York Community Bank.
Michael Joseph Mazzei: Well, we'll take forward here, we are after several banks the longer you're realizing that there are hundreds of banks out there with commercial real estate exposure, but there are many multiples times their tier one capital we didn't see that happening over the past three or four years, we may have seen 10 banks.
Michael Joseph Mazzei: Some of the New York Big banks that.
Michael Joseph Mazzei: That went went Andre here signature bank and what's happened at New York Community Bank, but outside of those banks, we really couldn't detect that that volume and so we think there's a lot that's going to come off of those regional and community banks, that's enough to satisfy all peer group in 2025 26.
Michael Joseph Mazzei: But outside of those banks, we really couldn't detect that volume. And so we think there's a lot that's going to come off of those regional and community banks that's enough to satisfy our peer group in 2025-26.
Jason Weaver: Thank you, that's helpful, Culler. And then, I know we just discussed it only recently, maybe it narrowed, and you've only had them for a year, but do you have any update on the repositioning or the lease up of that Long Island City asset?
Speaker Change: Thank you that's helpful color and then I know, we just discussed it only recently maybe it maybe at NAREIT and you've only had them for a year, but do you have any update on the repositioning or the lease up of that long Island city asset.
Michael Joseph Mazzei: We continue to work on that, and we are one, as we said in the past, not to hold on to REO for this protracted period of time, and so I think that based on how long we've held on to it, we feel like there's something there that's worth holding on to for, and so we should have something to report, as we said, the back half of this year we think will be significant, and I would put the Long Island City assets in that category.
Speaker Change: We continue to work on that and we are one as we said in the past not hold onto Oreo for this protracted period of time and so.
Speaker Change: Think that based on how long these hold onto it.
Michael Joseph Mazzei: Feel like there's something there.
Michael Joseph Mazzei: That we are that's worth holding on to four and so we should have something to report as we said the back half of this year.
Michael Joseph Mazzei: We think will be significant and I would put the long island city assets in that category.
Speaker Change: Alright, Thank you very much.
Tom Catherwood: Thank you. The next question is coming from Tom Catherwood from BTIG. Your line is now live.
Michael Joseph Mazzei: Thank you next question is coming from Tom Catherwood from <unk>. Your line is now live.
Tom Catherwood: Thank you and good morning everybody. Maybe starting with Andy, you've made opportunistic investments in the past. Is there a chance BrightSpire could take a more direct position in the South Pasadena office land asset as the sponsor looks to refinance that project?
Michael Joseph Mazzei: Thank you and good morning, everybody, maybe starting with Andy.
Speaker Change: You've made opportunistic investments in the past is there a chance bright spire to take a more direct position in the South Pasadena office land asset as the sponsor looks to refinance that project.
Tom Catherwood: Yeah.
Andrew Elmore Witt: So, right now, that particular asset is fully entitled. It's really an office building that's fully leased and a development site. And the borrower is in the process of looking to either refinance or capitalize the development project. And we've looked at it a number of different ways and really don't think it fits our strategy and mandate moving forward. But we agree it's a tremendous project.
Speaker Change: So right now that that particular asset is fully entitled it's really.
Speaker Change: Office building, that's fully leased and a development site.
Andy: And the borrower is in the process of looking to either refinance or capitalize the development project and we've looked at it a number of different ways and really don't think it fits our strategy and mandate moving forward.
Andrew Elmore Witt: But we agree it's a tremendous project.
Tom Catherwood: It makes total sense. Then maybe, Mike, I know you said you're confident in watchlist stability, but is there a potential scenario where a pickup in transaction activity, especially if we get the rate cuts, actually accelerates watchlist migration as price discovery drives certain sponsors to back away from assets sooner than would otherwise be expected?
Speaker Change: Makes total sense then.
Andrew Elmore Witt: And then maybe Mike you know I know you said you're confident in watch list stability, but is there a potential scenario, where a pickup in transaction activity, especially if we get the rate cuts.
Speaker Change: Actually accelerates watchlist migration as price discovery drive certain sponsors to back away from assets sooner than would otherwise be expected.
Michael Joseph Mazzei: Anything can happen. But when we look at that portfolio right now, we do not see anything migrating onto the watch list in the near term. And so that's why I think we're comfortable with our CECL reserve at this point. But anything can happen over the course of next year, particularly around the office loans. But right now, as I said, we see that portfolio shrinking, and we don't see anything there that will migrate onto the watch list in the next coming quarters. So I think the Cecil Reserve feels, as I said, on the high side at 6% of book value, and I would say that we feel very reasonable about where we are.
Mike: Anything can happen, but when when you look at that at that portfolio right now.
Speaker Change: We do not see anything migrating onto the watch list.
Mike: Near term and so that's why I think we're comfortable with our seasonal reserve at this point.
Michael Joseph Mazzei: But anything can happen over the course of next year, particularly around really the office loans, but right now as I said, we see that portfolio shrinking.
Michael Joseph Mazzei: And we don't see anything there that will migrate onto the watch list for the next in the next coming quarters.
Michael Joseph Mazzei: So.
Michael Joseph Mazzei: I think the seasonal reserve fields as I said on the high side at 6% of book value and I.
Speaker Change: I would say that we feel very weak is little about where we are.
Tom Catherwood: I appreciate those thoughts. That's it for me. Thanks, everyone.
Speaker Change: Appreciate those thoughts that's it for me thanks, everyone.
Michael Joseph Mazzei: Thank you. We have reached the end of our question and answer session. I'd like to turn the floor back over to Mike for any further or closing comments.
Michael Joseph Mazzei: Thank you we reached end of our question and answer session I'd like to turn the floor back over to Mike pretty further or closing comments.
Michael Joseph Mazzei: Well, thank you all for joining us today, and thank you for your continued support. As always, we are available for one-on-ones as requested. Otherwise, we will see you in November.
Speaker Change: Well. Thank you all for joining us today and thank you for your continued support as always we are available for one on ones as requested otherwise we will see you in November.
Operator: Thank you. That does conclude today's teleconference. You may disconnect your line at this time and have a wonderful day. We thank you for your participation today.
Speaker Change: Thank you that does conclude today's teleconference. You may disconnect. Your line at this time and have a wonderful day, we thank you for your participation today.