Q3 2024 BrightSpire Capital Inc Earnings Call
Speaker Change: and the
Speaker Change: [inaudible]
Speaker Change: Good morning, and welcome to bright inspired capital's third quarter 2024 earnings conference call, we will refer to bright spire capital as bright spire B R. S P or the company throughout this call speaking on the call today are the company's Chief Executive Officer, Mike Madden, President and Chief operating Officer, Andy Wet and Chief Financial Officer.
Speaker Change: Sir Frank Sarah C now.
Speaker Change: 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 material.
Speaker Change: For 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.
Speaker Change: All information discussed on this call is as of today October 30 of 'twenty 'twenty four and the company does not intend and undertakes no duty to update for future events or circumstances and.
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 company believes such.
non-GAAP financial measures are useful to investors.
Speaker Change: Before I turn the call over to Mike I will provide a brief recap on our third quarter 2024 results. The company reported GAAP net income attributable to common stockholders of $12 $7 million or 10 cents per share distributable.
Speaker Change: Beatable earnings of $17 $9 million or <unk> 14 per share and adjusted distributable earnings of $27 million or 21 cents per share.
Speaker Change: Current liquidity stands at $416 million of which $251 million is unrestricted cash. The company also reported GAAP net book value of $8 39 per share and underappreciated book value of $9 11 per share as of September 30th 2020.
Speaker Change: Four.
Speaker Change: Finally during this call management may refer to distributable earnings as D E.
Speaker Change: With that I would now like to turn the call over to Mike.
Thank you David.
Mike Madden: Welcome to our third quarter 2024 earnings call and thank you for joining us this morning.
Mike Madden: I am pleased to report that central last call not only have market conditions improved but our continued focus and ongoing efforts on the portfolio have yielded tangible results this quarter.
Mike Madden: Meaningful progress on our existing portfolio on balance sheet has strengthened <unk> position as a result, we have started new loan originations, while maintaining our financial flexibility to proactively manage remaining watch list loans and Oreo.
Mike Madden: The commercial real estate debt markets are very active well see MBS and CLO capital markets issuances have made a strong comeback year over year with.
Mike Madden: We are also seeing tightening of both loan and securitization credit spreads.
Mike Madden: In addition bank warehouse spreads have been following suit.
Mike Madden: Furthermore, the ongoing reduction in short term rates, obviously bodes well for the commercial real estate market.
Mike Madden: Within this pause with context, we can confidently say that our warehouse banking partners as well as CLO investors are incredibly supportive of bright spire underscoring the broad confidence in our brand.
Mike Madden: On that note during the quarter bright spot completed its third CLO.
Mike Madden: This transaction was $675 million and features both in 85 billion dollar web as well as a two year reinvestment period for further expanding on London capacity and flexibility for future investments.
Mike Madden: This market leading transaction was the first CRE CLO comprised entirely of seasoned loans.
Mike Madden: The collateral for this new CLO, where a combination of loans from our warehouse lines as well as our 2019 CLO used.
Mike Madden: These loans have a remaining final term of just 24 months.
Mike Madden: Therefore, given the short tenor of the loans the likelihood of a complete turnover joined the CLO two year reinvestment period.
Mike Madden: Hi.
Mike Madden: Importantly, the optionality embedded in the CLO further enhances our asset and liability profile.
Mike Madden: This transaction was well received with 20 investors participating across all offered tranches, including the sale of the lowest rated investment grade tranche.
Mike Madden: Lastly, this transaction meaningfully added to our cash liquidity, which as of today is 251 million. This is our largest cash balance in 18 months.
Mike Madden: On our last earnings call, we mentioned that we would restart loan originations on that note.
Mike Madden: Sequential quarter end, we closed on our first loan and another loan is in process.
Mike Madden: It may seem insignificant to mentioned one loan closing it marks an inflection point for our company.
While still early in the process. Our team is now consistently quoting new loans as we work to rebuild our pipeline.
Mike Madden: Well capital market conditions for CRE lending have dramatically improved and should continue demand for CRE credit is still gradually recovering, but the continued improvement in the capital markets along with ensuing rate cuts will serve as the much needed catalyst for CRE asset sales and demand for credit in 2025.
Mike Madden: It's a very exciting time to be back on offense with a view toward growing the loan portfolio and earnings.
Mike Madden: Moving to the watch list.
Mike Madden: During the quarter, we reduced our exposure on a net basis through a combination of asset resolutions.
Mike Madden: Loan upgrades and conversions to Oh, Yeah. In addition, we have begun resolving existing Oreo assets as we sold the Washington D. C office property and have started marketing the Oakland office asset given our cash liquidity position, we've elected to delay the sale of our Phoenix multifamily asset until the second.
Mike Madden: A 2025.
The property is stabilized we expect to achieve further near term performance improvements, while also gaining to benefit from the impending rate cuts.
Mike Madden: During the course of 2025, we anticipate exiting a number of our assets that are Oreo well currently a foreclosure.
Mike Madden: Our current liquidity position and low leverage allow us to pursue resolutions in a measured way with an eye toward maximizing value.
Mike Madden: Regarding our stock price the current dividend yield of approximately 12% is roughly 200 basis points higher than the average for our peer group.
Mike Madden: Further be RSP is trading at a roughly 40% discount on our unappreciated book value of $9 11.
Mike Madden: As a reminder, this book value includes the seasonal reserve of $1 20 per share as well as the cash balance of $2 per share.
Mike Madden: This discount to book value equates to almost $4 for sure and implies a nearly $500 million additional haircut to our common equity capital of 1.18 billion the.
The market price also implies no value attribution to being internally managed.
We acted on this disconnect during the quarter and Opportunistically repurchased one 2 million shares at an average price of 552.
Mike Madden: This buyback emphasizes our conviction of the embedded value in our current share price.
Mike Madden: Before I turn the call over to Andy I would like to underscore the significant progress we made in the third quarter.
Mike Madden: But the new CLO and our enhanced liquidity position through the share buyback the return of loan originations and the positive results and I'll watch list the bright spot our team has hit on all cylinders.
Mike Madden: We will continue to build on this progress and are encouraged about our ability to further strengthen and grow our loan book over time.
And with that I will turn the call over to our President and Chief operating Officer, Andrew What Andrew.
Andrew: Thank you Mike during the third quarter, we received $146 million in repayments and resolution proceeds across 11 investments.
Andrew: For the quarter and subsequent to quarter end totaled $41 million inclusive of the recent news on origination and <unk>.
Andrew: $15 million of future funding obligations during the quarter.
Andrew: As of quarter end future funding obligations stand at $108 million or 4% of outstanding commitments.
Andrew: The remaining loan portfolio.
Andrew: 76 investments with an average loan balance of $34 million.
Andrew: For the remainder of my prepared remarks, I will focus on the substantive progress we have made on the existing portfolio and more specifically the watchlist.
Andrew: During the quarter, we initiated action on a significant portion of the watch list loans. Some of these we've been able to address in totality during the quarter. As a result of these efforts. The total number of watch list loans on a net basis has been reduced to nine.
Andrew: <unk> 12 last quarter.
Andrew: Closer of one downgraded Denver multifamily.
Andrew: We fully resolved two multifamily watch list loans moved one loan to Oreo and upgraded one loan from a risk ranking for two or three.
Andrew: Phoenix multifamily loans underlying property was under contract for sale closed during the quarter. Additionally, during the quarter, we received a pay off in line with our seasonal adjusted basis.
Andrew: Milpitas.
England, which was placed on nonaccrual in Q1 of 2024.
Andrew: Last quarter, we downgraded the Las Vegas mezzanine loan given uncertainty around the borrowers go forward plan.
Andrew: The borrowers since committed significant additional capital to the property, which will see the property through stabilization given this development and a renewed confidence in our loan basis, we upgraded below from a risk ranking for two or three.
Andrew: The loan is expected to perform consistent with its original terms with no modifications in aggregate. These three loans were held on our books at a collective $81 million as of Q2 2024.
Andrew: As for the 48 million dollar Dallas multifamily loan, which was added to the watch list in the second quarter of 2023, we took control of the property during the third quarter of 2024 via preferred equity structure and the borrower as such we were able to quickly move it from a watch list.
Speaker Change: Well I'm sorry.
Speaker Change: The go forward plan for this property is a bright spot to continue.
Speaker Change: Executing.
Speaker Change: Now you add gives us plan to stabilize the property and ultimately.
Speaker Change: Using our in house vertically integrated asset management capabilities, we seek to follow a playbook consistent with the success, we experienced with the Phoenix multifamily Oreo property.
Speaker Change: It closed late in the fourth quarter of 2020.
Speaker Change: Lastly, as it relates to our watch list.
Speaker Change: Our San Jose Hotel loan for $136 million is currently in default and we have taken additional steps in pursuit of a foreclosure.
Speaker Change: During the second quarter of 2024 bright spot placed the loan on non accrual and downgraded the wound to a risk ranking of five from a floor and commenced foreclosure proceedings.
Speaker Change: Not in a position nor do we think it would be prudent to provide incremental detail at this time.
Speaker Change: This alone accounts for approximately one third of our total watch list exposure as of quarter end.
Speaker Change: As Ferrari yellow updates.
Speaker Change: Washington D C office property sold as anticipated early in the quarter.
Speaker Change: As Mike highlighted we are also in the process of marketing for sale. The Oakland office property, we are continuing to pursue value enhancing strategies onto long Island City properties. Lastly, as previously mentioned, we have made substantial progress on our Phoenix multifamily Oreo property we have.
Speaker Change: Cable is the property and occupancy currently stands at approximately 90% when we took over the asset occupancy was in the low sixty's.
Speaker Change: We anticipate continuing to operate the property pushing occupancy up by another couple of hundred basis points, and we will look to list the property for sale in the first half of 2025.
Speaker Change: The progress made this quarter on our existing portfolio was substantial.
Speaker Change: We anticipate the investment portfolio, we'll continue tracking positively as we add newly originated loans and resolved our watchlist and Oreo.
Speaker Change: The actions taken during the quarter are further reduced uncertainty related to the underlying portfolio and its carrying value.
Speaker Change: We look forward to growing the portfolio and driving earnings for new originations.
Speaker Change: With that I will turn the call over to Frank <unk>, Our Chief Financial Officer.
Speaker Change: Library on the third quarter results right.
Frank Sarah: Thank you Andy and good morning, everyone.
Frank Sarah: Before discussing our third quarter results I wanted to mention that our third quarter 2020 core supplemental financial report is available on the Investor Relations section of our website.
Frank Sarah: But the third quarter, we generated adjusted EBITDA of 27 million or 21 cents per share.
Frank Sarah: Third quarter, <unk> was $17 9 million or 14 cents per share.
Frank Sarah: They include specific reserves of approximately $9 $1 million.
Frank Sarah: Additionally, we reported total company GAAP net income of $12 7 million or 10 cents per share.
Frank Sarah: Quarter over quarter total company GAAP net book value decreased to $8.39 from $8 41 per share.
Frank Sarah: Unappreciated book value increased to $9.11 from $9 eight per share.
The increase is mainly driven by adjusted D in excess of dividends declared and share repurchases during the quarter.
Speaker Change: Well can you have reserves.
Speaker Change: The third quarter, we recorded specific see some reserves of $5 1 million.
Speaker Change: Related to both the Phoenix, Arizona, and Milpitas, California multifamily loans.
Speaker Change: As Andy previously mentioned, both loans were resolved in line with our seasonal adjusted basis.
Speaker Change: As both was were resolved in the third quarter, we charged off their specific reserves.
Speaker Change: Additionally, we charged off reserves associated with the Dallas multifamily lung, where we took control of the property through a preferred equity instrument and moved it to ARIA.
Speaker Change: Our general seasonal provision stands at $155 $7 million or 578 basis points of total loan commitments, a decrease of $16 $1 million from the prior quarter <expletive>.
Speaker Change: The decrease in the general seasonal was primarily driven by the resolution of the three laws referenced above.
Speaker Change: Net net.
Speaker Change: The general see some provision for the third quarter totaled $1 million.
Speaker Change: <unk> increased from the conservative levels established all the prior quarters.
Speaker Change: Turning to our dividend and earnings from cash flow for the third quarter, we paid a dividend of 16 cents per share and that earnings from cash flow of <unk> 17 per share.
This concludes our prepared remarks and with that let's open it up for questions operator.
Speaker Change: We will now begin the question and answer session to ask a question you May Press Star then one on your Touchtone phone.
Speaker Change: If you are using a speakerphone please pick up your handset before pressing the keys.
Speaker Change: If at any time. Your question has been addressed and you would like to withdraw your question. Please press Star then two.
Speaker Change: We ask that you please limit yourself to one question and one follow up.
For any additional questions. We ask that you. Please rejoin the queue at.
Speaker Change: At this time, we will pause momentarily to assemble our roster.
Speaker Change: And our first question today comes from Stephen laws with Raymond James. Please go ahead.
Stephen Laws: Hi, good morning.
Stephen Laws: First off congrats on the inactive quarter you guys clearly got a lot done the past few months and I appreciate the updates on all of the assets Andy.
Mike.
Stephen Laws: Want to start maybe on the the new investment kind of the return to offense you mentioned closed one loan in October and other ones.
Stephen Laws: It looks like here soon can you talk about your outlook for portfolio size, you know or is this a place where you're looking to kind of reinvest repayments and maintain leverage or kind of given the the ramp feature in the CLO you know in current leverage levels do you expect to see lever.
Stephen Laws: <unk> grow over the next couple of quarters.
Speaker Change: Hey, Thanks, Great to see you here you are.
Speaker Change: Yes, we expect leverage to grow it did it did that with the CLO. In fact, yes, we took that up a portion of the portfolio up to something like 86% library. So we picked up a little bit there, but yeah, we have under leverage across a lot of the assets you are spot on.
Speaker Change: Our watch list.
Speaker Change: Some of our shell assets are totally unencumbered. So we expect our leverage to tick up to two 5%, maybe north of that and closer to where a normalization level should be as easy as we redeploy absolutely.
Speaker Change: Great and then I wanted to ask about capital allocation you know clearly you know stock reacting to the positive comments and the results you know a significant discount to book you know how do you think about capital allocation between new investments and stock repurchases.
Speaker Change: Is it a situation where you continue to have the capacity to do both for some period of time just curious how you think about the trade off from a return standpoint, and best use of capital.
Speaker Change: We have we have the capital to buy back stock and still have I think over $40 million of approval from the board to do so are the stock out to a level that we felt was kind of ridiculous.
Speaker Change: <unk> percent plus dividend yield.
Speaker Change: And some of the points, we made in the prepared remarks about.
Speaker Change: 911, you know never say never you know, yes, there could be some things that happened in the portfolio I don't think anyone can tell you that a.
Speaker Change: Surprises can happen even this late in the game regarding shoots of reserves or some adjustments to your book value, but when you look at the dollars 20 per share, which was pretty relevant and you look at the cash balance we have in the cash balance really is what you need to maneuver assets on the balance sheet from a liquidity standpoint.
Speaker Change: What assets need to get pulled out of the cielo like we've done in the past that liquidity allows us to harvest, the book value and and and and get closer to book on.
Speaker Change: Resolution of assets and as I said, it's almost four box below the 911, so okay got it.
Speaker Change: I'll take that all material take out our supplement.
Speaker Change: Ausiello offerings, even the CLO that we collapsed a lot there's a lot of information about assets, there and and go through it yourself would give a lot of disclosure and a challenge you to come up with small box. So we kind of looked at it looked at it the same way.
Speaker Change: It's the sockets cheapest cheaper than what we could make in terms of investments right. Now we have the capital. So we did that did that we much prefer.
Speaker Change: To do our business, which is bank loans, but the market for loans right. Now are all tied it's still flying out to talk about that later in this conversation.
Speaker Change: But at this point, we entered the market we bought back two 1.2 million 2 million shares the window closed and.
Speaker Change: We will continue to reassess that and they have to stop Gibson These levels that we bought back.
Speaker Change: Yeah, We think that's a we've made a statement we think that's an attractive level.
Speaker Change: Great appreciate the comments around the your thought process there. Thanks, Mike.
Speaker Change: Thank you for asking.
Speaker Change: Our next question today comes from Steve Delaney with JMP Securities. Please go ahead.
Speaker Change: Thanks.
Speaker Change: Good morning, everyone. Congrats on the progress made in the third quarter, it's really nice to see the stock market reward your.
Speaker Change: Sure I'll be RSP shares this morning up about 10%.
Speaker Change: Just curious about the the bridge loan opportunity, Mike and as you like as you laid it out with the.
Speaker Change: Kurt pick up in demand your portfolios that $2 6 billion at September 30, if we look out to say the end of 2025 since this year is almost done.
Speaker Change: It's just been rough dollar terms do you have a figure in mind as to where that portfolio could could reach in terms of.
Speaker Change: Principal balances outstanding by the end of next year I'm talking about the bridge book. Thanks.
Speaker Change: Well this is where we want it to be and where it can be and so obviously you know the market is just so as I said just.
Speaker Change: In the previous answer it's still playing out but we'd like that to be a you know a $1 billion bigger.
Speaker Change: Building, where it was more of a drop of it.
Pinpoint that yeah, no. There's no reason why we have the capacity to get with the cash we have on hand.
Speaker Change: Even if you look at even if you look at saying we want to maintain a cash balance of liquidity too to support the portfolio's needs going forward and pick a number but about 75 million. We also have the revolver, which we can use and we have not ever tapped.
Speaker Change: But we have it there, but if you look at that our cash balance of something like $50 million to $75 million. When you look at the cash we have today and you look at some of the under Levered assets, we have the L. I see or I should say I'm, sorry, I'm, a new Yorker, so I say, Oh, I see I should say long Island city, but long island city assets are unencumbered.
Speaker Change: The.
Speaker Change: San Jose a hotel asset is its very low levered.
Speaker Change: So we have a lot of equity embedded in some of those assets are in addition to the cash that we have so you just take.
Speaker Change: You take 150 Bucks tour in a box and you say, okay put put a warehouse multiple on that and you could get to a billion dollars.
Speaker Change: New loans.
Speaker Change: So yeah, we expect that now that we could talk about market conditions I'll. Let you do the follow up question, but we don't you know then there's the market right.
Speaker Change: Your life comes at you.
Speaker Change: So Mike I can't remember, but I, probably asked you this before on the call and I apologize, but you know given your work experience.
Speaker Change: And knowledge of the market.
Stephen Laws: Do you see a day, where you would see bright spire balding into doing fixed rate lending CBS conduit lending for Takeouts on your bridge book.
Speaker Change: Is there a <unk>.
Speaker Change: Evolution naturally from from the bridge portfolio into.
Speaker Change: Writing C and B S ones.
Actually you just gave me a flashback to like 30 years of my career, which that's all I really did was Oh securitization all language right.
Speaker Change: And.
Speaker Change: When I was working with my friend, Brian that was a big part of my my my duties at that company and.
Speaker Change: You know when you look at these transactions Stephen you've got seven or eight participants and one deal and I will say that St has done a fantastic job in the conduit business and healing it but that is a very competitive market right now and I you know knowing what it takes to be in that market.
Speaker Change: And managed risk.
Speaker Change: Manage the rating agency process manage b piece buyers manage your shelf partners that takes an enormous amount of effort and when you look at the dollars that these contributors are putting in deals at range between.
Speaker Change: No one loan to maybe 50 million and so while it is enticing to see that folks are making a two and a half points on five year loans.
The you really have to look at the barriers of entry there.
Speaker Change: They are they're pretty hot we would love to have our Trs business, it's something that we definitely have the resources and capability of drilling you saw the execution. We had on our CLO was the first time, a CRE CLO had 100% of its collateral with the preexisting season loans.
Speaker Change: When you.
Speaker Change: Look at what we got there we've got the $85 million ramp in the two year reinvestment period. So in terms of a brand I think that we would be very welcome into somebody's shelves and we have the capability, but in terms of allocation of resources and risk I don't see I don't see a good return on that based on the resources, we have to put into it right now.
Speaker Change: Yeah, and you've got plenty sorry for being so long winded.
Speaker Change: That's quite all right and then you know that.
Speaker Change: Ben can evolve I think I'm hearing on the call the opportunities that you guys have to grow earnings over the next 12 to 18 months just by <unk>.
Speaker Change: Managing your own assets and resolving issues, there's probably.
Speaker Change: A much better use of your time and effort you could always look at more strategic things you know down the road once you've optimized your balance sheet. So congrats on the progress made in thank you.
Well, we could do it I mean, we do have we do have the the people here that are in the systems that can do it I will also just add there are some loans in the portfolio, where we saw as those loans to conduit standards.
Speaker Change: To see what those takeouts can be and then maybe some loans that if the opportunity does arise well, we can convert to borrow up to fixed and sell that law to our conduit contributor or sharing the upside in that we absolutely will do that.
Speaker Change: Got it.
Speaker Change: Thanks, so much Mike.
Speaker Change: Again, if you have a question. Please press star and then one.
Speaker Change: And our next question today comes from Jason Weaver with Jones trading. Please go ahead.
Jason Weaver: Hey, guys. Thanks for taking my question.
Jason Weaver: Thanks for the commentary on the watch list transitions I Wonder if you could talk a bit more about the timelines for resolutions that you expect over the next couple of quarters and if you have any color on if that could lead to further general seasonal reserve releases.
Jason Weaver: Yeah.
Speaker Change: Oh I think.
We're pretty comfortable with our CSO right now you know there are.
Speaker Change: There are potentially laws, where you might be overseas. So all of that so to speak I just invented a word I guess, but.
Speaker Change: Generally speaking, we're comfortable there and I.
Speaker Change: I think where we're close enough to home if something were to deviate, but we feel that she saw substantial regarding resolutions.
Speaker Change: You see that we moved alone to a risk five let's say, that's a Texas multifamily, Texas has very fast foreclosures. So we expect that to by next quarter to be in in our Oreo bucket by then for sure.
Speaker Change: We are in the process of closing foreclosing on sorry, the San Jose a hotel.
Speaker Change: That is a public records there is a public sale filing date.
Speaker Change: At this point I wish I could say more about that but I I'm gonna be a judicious and not comment on that well, let that play out but generally speaking if you look at our August five that's about <unk>.
Speaker Change: 40% of our watch list is in foreclosure. So we are moving those as quickly as possible and they are what I would call actionable and the risk weighted for if you look at.
Speaker Change: But there are two multi families and that there is a the.
Speaker Change: The Vegas, one and the one we just downgraded which is in Aurora, Colorado, we expect faster resolutions on that that that one one of them may result in an upgrade.
Speaker Change: And we are in the Vegas, one, but we would go either way on that one we liked that property.
Speaker Change: The other one we think will get resolved it got into the watch list.
Speaker Change: Unexpectedly given I'll just say, it's in Aurora, Colorado, we don't have any issues at the asset at all.
Speaker Change: There was a little bit of a chilling effect battle with a scale that we are now are following through with so we moved it down a category to list four but we expect those she got resolved quickly. So there you've got about a between those four assets you have about 60% of the remaining watchlist, which we think is.
Speaker Change: Could be moved on relatively quickly like I said, the San Jose Hotel loan.
Speaker Change: They're they're there that isn't full closure, we have a cell noticed state and we're gonna play that through but that's 60% of the Washington, So it's pretty meaningful.
Speaker Change: Got it that's helpful. And then you know it would seem after the dividend cut at least to me. It seems like their trajectory remains for you to continue to over earn looking ahead.
Speaker Change: Any implications for policy going forward and would that in retrospect would that'd be reflective of better than expected performance. Since when you set that back in the end of July.
Well when we set it back but right now this quarter, we covered dividend on D. E N on cash and we have we were really focused on on the cash coverage aspect.
Speaker Change: And when we when we cut the dividend it was really more like a coverage cash covers that we felt we would hover around breakeven and there is a chance that we can.
Speaker Change: Dip slightly below that and that we may have leakage over the course of <unk>.
Speaker Change: The next 12 months and that really depends on.
Speaker Change: Capital deployment, so the sooner we get dollars out the door and the sooner we can get into the market and execute our fourth CLO that will really support our earnings a lot better and and and it's what that dividend.
Speaker Change: As I mentioned earlier, we have a number of under Levered assets, which are drag. So the bottom line is we're going to hover around that number that could be some leakage and it all depends on how fast we can deploy.
That's helpful. Thank you for that time right now right now as far as we can say.
Speaker Change: We cut that dividend, we understood when we cut it with the board everything I, just said and so there's nothing out there out me that tells me things will change.
Speaker Change: And that's in that horizon.
Speaker Change: Got it thanks, Mike.
Speaker Change: And our next question today comes from Eric <unk> with Bank of America. Please go ahead.
Speaker Change: Hey, everyone. Good morning.
Speaker Change: Mike you've kind of thought.
Speaker Change: I've talked around this but it was just curious about your insight onto the pipeline growth.
Speaker Change: You talked about how demand is kind of gradually building, but was curious about timing on you know how long it's going to take to kind of build out that pipeline any areas. You guys are focused on specifically and then kind of timing on when we go from the pipeline filling up to seeing originations kind of really tick up.
Speaker Change: Okay. So.
Speaker Change: Well I'll give you some I'll give you some.
Speaker Change: Insights as to how we see the landscape I think this will be consistent to what.
Speaker Change: You've heard on previous calls this quarter and Andy can tell you a little bit about what we're seeing in terms of product type and.
Speaker Change: And I don't want you to.
Speaker Change: To get to the end of your answer obviously, we don't we don't have a handle on that.
Speaker Change: As we rebuild the pipeline I don't think anybody really can.
Speaker Change: The landscape right now is you know when we're seeing about.
Speaker Change: I guess a third.
Speaker Change: In terms of inquiry of what we've seen and kind of like late 'twenty one.
Speaker Change: Early 'twenty, two youre seeing billions of dollars of problems that come in the door absolutely, but it is in terms of actionable product actionable loans, that's a little bit of a different story.
Speaker Change: On the acquisition side consistent what you may have heard on other calls we are seeing a pickup in acquisitions.
Speaker Change: Acquisition financing I think that has a lot to do with the capital markets with the fed and spreads tightening and we think that we know I've I've spoken to with our team a lot of the brokers out there on the investment sales side. They think are that in Q1 activity is going to pick up dramatically and I think some of them.
Speaker Change: Earnings calls for some of the larger national brokers are indicating are indicating the same with regard to the refi market the smaller banks.
Speaker Change: They're not selling assets, they're trying to reduce commercial real estate exposure.
Speaker Change: But they're really not reducing risk, meaning they're not selling the assets that are that are fully performing they're going to try to kick. The can on those so you have this kind of like long walk.
Speaker Change: And in commercial that you have in single family only for different reasons borrowers are locked into their loans from a not just a rate perspective, but from a credit perspective. So from the smaller banks, we're seeing refi inquiry you come out of those banks, mostly out of construction loans, where the bank is not rolling into them.
Speaker Change: Mini Perm for lease up.
Speaker Change: They want out of a construction the borrower wants out of the construction loan because say well watch out from under the construction loan guarantees.
Speaker Change: What they want from us and from the lending market is they wanted to get the same proceeds they had in their construction loan. They want you to fund closing costs and if they had a fun overruns and construction they want that equity back too.
Speaker Change: So it's just that's just not happening and so we're seeing a lot of inquiries come in for refi, but Oh I'll use the word that others have used in previous calls we have not yet seen that reset yet.
Speaker Change: Yet and something has to force that reset that happened certainly the banks are pushing these borrowers out saying, we don't want to roll into our into the into the mini Perm.
Speaker Change: Now when you look at the other side, we when we think about how you. How you look at the pipeline going forward. There is a huge supply of credit out there.
Speaker Change: So the non banks are back in the market and as we are this quarter others are already and others are entering so there was a tremendous supply of credit, but the reset is still on the demand side has still been a there's still been gradual you're seeing a lot of a lot.
Of activity in the MBS market, but it's still a fraction of what it's been in the past I would also add that we are.
Speaker Change: We're very constructive on spreads for a lot of reasons just the as I said there is a huge supply of credit that means willingness to land and investors' willingness to buy securities. So.
Speaker Change: So we expect the cost of funds.
Speaker Change: Our CLO and warehouse lines to continue to drop commensurately with spreads on the lending side and we think that spreads will continue to tighten there's a dearth of product out there, whether it's whole loan products wholesale product.
Speaker Change: Securitized product, there's a dearth of product.
Speaker Change: The banks are very much willing to lend on the warehouse side.
Speaker Change: Our warehouse lending has been their best performing asset.
Speaker Change: Not only does it get the lowest risk rating.
Speaker Change: Versus whole loan, but also in terms of ROE and default rates, it's truly outperformed the banks are generally their loan portfolio. So very.
Speaker Change: Truck div on spreads, but in terms of supply, we still we still need that falling out.
Speaker Change: Andy can you what can you give a little bit of a context, because I think we could ask for a lot and this one question here can you give some context on what we're seeing product wise.
Speaker Change: Sure Mike So in terms of our pipeline, where we're focused as are our browser and on primarily multifamily.
Speaker Change: Industrial and then to a lesser extent retail and hospitality and in terms of the housing opportunity to residential opportunity. What we're seeing is construction take out opportunities. We're seeing are the recapitalization of the existing multi family housing stock and then we're also.
Speaker Change: <unk> seen quite a bit of a build to rent product and I would say in terms of our portfolio or rather the pipeline about 50% of what we're seeing a little bit over 50% has been in the residential sector.
Speaker Change: The rest of the asset classes makeup.
Speaker Change: The remaining.
Speaker Change: Got it Super really appreciate all that color that's really great.
Speaker Change: And then I guess going from really watch a little more narrow focused them. It seems like the Oreo is kind of moving quickly, which is which is great to hear well just kind of curious about the long Island city.
Speaker Change: Assets and maybe a little color on kind of the plan there and it sounds like that one might be a little bit of a longer process. So any color there would be would be great.
But you know when you you were saying that the Oreo assets are moving quickly I immediately thought about the long Island city assets and you got there and then second later.
Speaker Change: The long island city assets have been a little bit on the slower side than we'd liked obviously, we are getting a little bit more traction in terms of inquiry.
Speaker Change: Certainly on the <unk> on the what what I would call the Paragon building.
Speaker Change: Which is the building that sits on top of the AR the subway system.
Speaker Change: We have a number of schools that we're interested in and the AR and the site and we got it getting a lot of government agency a type of type of interest in the asset.
Speaker Change: So that's a long way of saying we've got interest inquiry, but we're not we're nowhere near where we want to pay I think there is an end date on that where we've got a lot of capital tied up in those when you look at computing like a 12 or are we in terms of what you want to do in terms of the cost of that capital and the opportunity away from that there's going to be a point in time, where we were kind of cut.
Speaker Change: That often say you know what let's give this to somebody else. We think the valuations we have reflect that we've got in <unk>.
Speaker Change:
Speaker Change: Oh wait wait.
Cuts. So we think that that's a cost of capital and negative carry improve that that.
Speaker Change: All of those assets will be easier than when we attempted to sell them a year and a half ago. So I would say some will give it probably somewhere around midyear and if we don't have the leasing traction that we want we will fishing cutback a cut.
Speaker Change: Cut date I'm sorry.
Speaker Change: Fishing.
Speaker Change: Great. Thank you guys.
Our next question today comes from Matthew Howlett with B Riley. Please go ahead.
Matthew Howlett: Oh, Hi, Mike Hi, everybody. Thanks for taking my question.
Matthew Howlett: Mike you referenced.
Mike Madden: Funding costs are going to tighten in conjunction with loan spreads we've seen tightening.
Matthew Howlett: Asian markets, particularly in the multifamily side can you just kind of walk over when you do a CLO I'm, assuming you're targeting mid next year, you know something that $6 million to $700 million what type of Roe.
Matthew Howlett: Do you think you can generate nice yellow, where if you put them on warehouse lines.
Matthew Howlett: Todays origination market, where spreads are I guess, but sub 300 on multi.
Speaker Change: I think I think you could let's talk about the relative value pick up I think it gets picked up.
At least several hundred basis points and our CLO. The advance rates are roughly 80, 687% versus 2021 for instance, where they were kind of low eighty's, 81% to 3%. So are the advance rates are higher.
Speaker Change: And we think that we think that CLO spreads will really outperform all lending spreads. So we do think that there's going to still be a pick up or not concerned that.
Speaker Change: With spread tightening and Ken I'll always diminish.
Speaker Change: Seen spreads tightened at least commensurately.
Speaker Change: On the CLO side, let me give you. An example, so you could be 300 multifamily spreads maybe have gone out of $2 75, not maybe they've got a 275 and can they go tighter yes. They can but when you look at or CLO in 2021, with a with a lower advance.
Right.
Speaker Change: Cost of funds and that was a weighted average of <unk> of about $1 50, a spread of 150.
Speaker Change: And when you look at the CLO, we just did the weighted average cost of funds is probably 100 about 100 wider than that with a higher advance rate.
Speaker Change: Spreads on on on solos.
Speaker Change: Cost of funds were 100 tighter.
Speaker Change: In 2021, the base rate. So sofa was zero there was an awful amount of supply coming and the.
Speaker Change: The collateral had you know much lower going in dividend yields different meals that were you know three or four per cent or sometimes lower with exits of like 6% dividend yield 7% everything else, you've got better collateral you've got a higher base rate and spreads are.
Speaker Change: Wider so you've got and you've got a dearth of visuals. So I would expect that securitization spreads well outpace any tightening in.
Speaker Change: In the whole loan market.
Speaker Change: So you're talking sort of mid teens.
Speaker Change: You know our lead on this yeah, yeah, yeah, yeah mid teens I'm, sorry, I'm, sorry, I gave you the relative I didn't give you the absolute yes mid teens.
Speaker Change: That's obviously very attractive it I thought it would be less than that but.
You said you did a managed deals so you're saying is you're gonna be like reinvestment windows for the deal you're going to do next year or is that just the one specific towards the refinancing you did this year.
Speaker Change: We expect the reinvestment period and every deal we do yes, and certainly given that we've gotten a reinvestment in a deal as I said in the prepared remarks, where we expect the entire portfolio.
Speaker Change: It's gonna turnover investors did comment to us that they're giving us effectively a blank check.
Speaker Change: They know that what they see today is not going to be the portfolio. They see tomorrow, because those loans will mature all with inside the reinvestment window.
Speaker Change: So that give it once they've given us that and it should give us a reinvestment Linda I want a new deal.
Speaker Change: It is.
Speaker Change: We use the word a lay up compared to the leap of faith that investors gave us and the reason why they get they made that leap with us is because they saw the performance that we had and supporting our first two CLO, we did not let loans the lingo and the CLO debt that went sideways, we pull them out and using our balance sheet over the course of two years and investors remember.
Speaker Change: And we did that for that reason that we wanted to protect our brand and demonstrate to investors that we view them as as all Linda effectively and that we were going to treat them that way.
Speaker Change: So that brought that Halo effect, and then you've got that Halo effect in this deal and we expect to get that going forward.
Speaker Change: No I appreciate that and that really leads me to my next question. We can do the math. It tells me you can generate with your position.
Currently manage operating basis, you could probably do a double digit Roe.
Speaker Change: After expenses on those type of returns my questions. If you'll look at the stock when he's a big discount to adjusted book, we see the higher dividend with the peers you guys internalized structure. Several years ago. You went through this rate cycle I Wonder here Mike.
Speaker Change: What you think the differentiation with Bryce spire is versus the others out there I mean, you didn't really get you know rates are rising up to internalize it.
Speaker Change: Is it the utilization is it the vertically integrated asset manager, what's the differentiator is you get going would you kind of you know.
Speaker Change: Stick your head at the same you get going again, what's what can you tell investors is the differentiator between Bruce power versus the others.
Speaker Change: I would say that.
Speaker Change: Our asset management and the fact that we are a special servicer with a name and waited special servicer, our all of our CLO because again the market not just the rating agencies, but investors have given us a huge thumbs up as a special not only as an issue, but as a special servicer on a long deals I mean you.
Speaker Change: Kerry that infrastructure internally and to managing our own assets I think the team has done an amazing job and we've gotten a lot of high marks from the brokers community, where they correspond with borrowers. They are clients, who have also given us the thumbs up how we handle the process with them dealing directly.
Speaker Change: With us.
Speaker Change: Directly with our leadership team and all asset managers. There are no third parties involved everything is contained inside lifestyle. So from origination credit underwriting all the way through our asset management and at the tail end securitizing alone and becoming the special servicer, a borrower contact from from.
Speaker Change: From cradle to refinancing or sale is a is a high touch all the way through the process and that is a big differentiating factor factor for us.
Speaker Change: I'm, assuming you could double the portfolio you wouldn't really have that many incremental operating costs when they're either.
Speaker Change: Absolutely.
Speaker Change: Given the given what we just went through.
Speaker Change: What others have gone through in this period of time, where everything is high touch.
Speaker Change: So you can have any loans that felt like he had three times the number of those loans because of the amount of effort you were watching the putting into watching over the portfolio corresponding with borrowers on extensions and buying caps and things like that so no managing a much larger portfolio.
We have the resources to do that and so as I said, adding adding $1 billion in loans out of $30 million average loan balances would be very useful.
Speaker Change: Really appreciate it no no additional.
Speaker Change: Infrastructure needs.
Speaker Change: Absolutely. Thank you.
Speaker Change: Concludes our question and answer session I would like to turn the conference back over to Mike Masih for any closing remarks.
Thank you all for joining US today, we're very excited as you can hear from us in the prepared remarks and answers that we are very excited about what's coming ahead in the fourth quarter and we look forward to reconnecting with you all in 2025. Thank you.
Speaker Change: The conference has now concluded. Thank you for attending today's presentation you may now disconnect.
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Yeah.
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Speaker Change: Yeah.
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