Q1 2025 BrightSpire Capital Inc Earnings Call
Good day and welcome to the bright spire capital, Inc. First quarter 2025 earnings call.
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Speaker Change: I would now like to turn the conference over to David Palomar General Counsel. Please go ahead.
Speaker Change: Good morning, and welcome to bright spire Capital's first quarter 2025 earnings conference call, we will refer to bright spire capital as bright spire be RFP or the company throughout this call.
Mike Masih: On the call today are the company's Chief Executive Officer, Mike Masih, President and Chief Operating Officer, Andy Witt, Chief Financial Officer, Frank <unk>.
Mike Masih: Before I hand, the call over please note that on this call certain information presented contains forward looking statements. These statements, which are based on management's current expectations are subject to risks uncertainties and assumptions potential risks and uncertainties could cause the company's business and financial results to differ materially.
Mike Masih: 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.
Mike Masih: All information discussed on this call is as of today April 32025, 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.
Mike Masih: Such non-GAAP financial measures are useful to investors.
Mike Masih: Before I turn the call over to Mike I'll provide a brief recap on our results.
Mike Masih: The company reported first quarter GAAP net income attributable to common stockholders of $5 $3 million or four cents per share.
Mike Masih: Distributable earnings of $11.4 million or <unk> <unk> per share.
Mike Masih: And adjusted distributable earnings of $21 million or <unk> 16 per share.
Mike Masih: Current liquidity stands at $310 million of which $145 million is unrestricted cash.
Mike Masih: This is exclusive of approximately $56 million of approved but undrawn borrowings available on our warehouse lines.
Mike Masih: The company also reported GAAP net book value of $7 92 per share.
Mike Masih: And on depreciated book value of $8 75 per share as of March 31, 2025.
Mike Masih: Finally during this call management may refer to distributable earnings as D E.
Mike Masih: That I would now like to turn the call over to Mike.
Mike Masih: Thanks, David and welcome to our first quarter earnings call.
Speaker Change: So last call a couple of months ago, there's been tremendous market volatility primarily due to ongoing tariff discussions.
Mike Masih: The credit markets experienced spread widening across the board.
Mike Masih: We have all witnessed the neck breaking swings in both the equity and U S Treasury market.
Mike Masih: But at this very moment, given the headwinds commercial real estate has already been facing these past two plus years.
Mike Masih: We feel CRE lenders are much better positioned for this current environment.
Mike Masih: And while CRE credit spreads are wider direct lenders and warehouse banks have not withdrawn from the market.
Mike Masih: Despite these post quarter uncertainties, we're off to a productive start and our priorities and goals remain unchanged.
Mike Masih: Starting at the end of 2024 and continuing into this year.
Mike Masih: We have seen a considerable increase in loan inquiries.
Mike Masih: We are now actively evaluating on quoting new loans daily.
Mike Masih: However, the theory that markets are still flying out from the interest rate bubble, where many owners of dealing with their current debt levels.
Mike Masih: Ours are frequently seeking transactions the equity neutral to the existing financing, which poses some challenges for refinancing.
Mike Masih: On the acquisition financing side, we are seeing a pickup in investment sales, however transaction volume remain substantially below historic levels.
Mike Masih: That said, we remain optimistic as we continue to see more lenders encouraging borrowers to go to market to sell or refinance thus steadily increasing pipeline volume across the board.
Mike Masih: After years of loan modifications in credit reserves. This is now increasingly becoming a lender driven transaction market.
Mike Masih: Shifting gears to portfolio management, we are very encouraged by the progress we have made thus far.
For the first time since 2022, we have experienced year to date deployments outpacing repayments.
Mike Masih: Additionally, well Cecil levels have remained stable quarter over quarter.
Mike Masih: And we reduced our watch list exposure on the margin.
Mike Masih: Regarding Oreo assets, we're in the final stages of exiting our Phoenix multifamily property and anticipate selecting a buyer imminently.
Mike Masih: We are also experiencing an uptick in leasing inquiries for all along all city properties.
Mike Masih: The Manhattan leasing market continues to recover.
Mike Masih: On the supply side ongoing office to residential conversion combined with a decrease in sublet space. It along with the fact that many office owners lack the necessary capital to retain or compete for tenants.
Mike Masih: All contributed to a tightening of available space.
Mike Masih: These factors along with the return to work trends all leading to an increase in marginal demand for class B buildings, both inside and outside of Manhattan, including Long Island City.
Mike Masih: Finally, as I touched on earlier, we are currently navigating complex market dynamics.
Mike Masih: Since the start of April the mortgage REIT sector has experienced a significant decline in valuation.
Mike Masih: At quarter end, we repurchased approximately 200000 shares at an average price of $5 59.
Mike Masih: Specifically right spire is currently trading at a roughly 45% discount to its underappreciated book value.
Mike Masih: This equates to a discount of over $500 million to our book value, which is already inclusive of a peaceful reserve of $1 19 per share.
Mike Masih: Needless to say at a 13% dividend yield we find our stock price to be extremely compelling and we will express ourselves accordingly.
Mike Masih: In closing this quarter was steady and in line with our expectations or diesel and risk ratings remained stable and we continued to deploy capital into new loans.
Mike Masih: Recent turbulence, we remain very optimistic about continuing to improve our balance sheet and maintaining our dividend while we growing earnings.
Mike Masih: And with that I will turn the call over to our president Andy with Andy.
Andy: Thank you Mike focusing on the first quarter, we received $133 million repayments across nine months, including five payoffs of which two were office loans totaling $50 million.
Andy: Additionally, we sold one Oreo office property for $5 million, resulting in the aggregate repayments and resolution proceeds of $138 million.
Andy: New loan commitments during the quarter and subsequent to quarter end totaled $182 million across five new loan originations. In addition, we funded $8 million of future fundings during the first quarter.
Andy: As of quarter end future funding obligations stand at $111 million or four.
Andy: 4%.
Andy: Thanks.
Andy: The loan portfolio consists of 74 investments.
Andy: Average loan balance of $33 million.
Andy: During the quarter, we continued to make progress on the watch list loans and Oreo, Although most of the tangible results of those efforts will flow through our reporting in subsequent quarters.
Andy: As it relates to the owned real estate investments.
Andy: Phoenix multifamily property sales process has garnered significant interest by the investment community evidenced seeing robust demand for the property type.
Speaker Change: We believe the value add plan executed under Brian as far as ownership stabilizing the asset at market occupancy contributed meaningfully to the interest level received during the marketing process.
Speaker Change: Presently we are in the process of selecting a buyer and anticipate closing the transaction this summer.
Speaker Change: We anticipate the resolution of this investment will be substantially in line with our stated net asset value.
Speaker Change: We are using the successful execution of the Phoenix multifamily property value add plan.
Speaker Change: Blueprint for driving value as it relates to two remaining Oreo multifamily properties located in Arlington, Texas.
Speaker Change: And Fort worth, Texas as well, it's another property in Mesa, Arizona.
Speaker Change: In all cases, we have taken control of the property inserted new property level leadership and initiated value add business plans or business plans, which are well underway include rebranding improving curb appeal addressing deferred maintenance and renovating units.
Speaker Change: All of which will drive increased occupancy and cash flow.
Speaker Change: We anticipate marketing the properties for sale upon stabilization in late 2025.
Speaker Change: On the office front, we are encouraged by the recent leasing momentum in long Island City.
Speaker Change: We have signed one full floor lease and are in very early stage negotiations with a tenant or multiple floors.
Speaker Change: So New York City office market is becoming increasingly tight and this should trickle over to long Island City, we continue to make steady progress toward enhancing the value of the properties with the goal of ultimately disposing of our own real estate.
Speaker Change: Yes.
Speaker Change: Lastly, as it relates to the watch list or San Jose Hotel remains in default, although we have made substantive progress toward foreclosure. The borrower was successful in obtaining a T O.
Speaker Change: <unk>, which is expected to be resolved in short order.
Speaker Change: The total number of watch list loans for the quarter was unchanged at seven loans. However, the composition of our watch list changed.
Speaker Change: Due to one resolution and one addition to the watch list right spire in cooperation with the borrower executed on the sale of the Denver, Colorado multifamily loans in line with our seasonal adjusted basis, and we added one Austin, Texas multifamily loan.
Speaker Change: Uncertainty around the borrowers commitment to the property.
Speaker Change: Phase I of the pending interim mature.
Speaker Change: As of quarter end.
Speaker Change: Watchlist loan exposure stands at $396 million in aggregate or 16% of the loan portfolio, a reduction of $15 million quarter over quarter. As a reminder, the San Jose Hotel alone accounts for approximately one third of the remaining aggregate watchlist loan balance.
Speaker Change: With that I will turn the call over to Frank serves.
Frank: Our chief financial officer to elaborate on the first quarter results.
Speaker Change: Thanks.
Speaker Change: Thank you Andy and good morning, everyone.
Speaker Change: For the first quarter, we generated adjusted D E F 'twenty 1 million or <unk> 16 per share.
Speaker Change: First quarter, <unk> was $11.4 million or <unk> <unk> per share.
Speaker Change: <unk> includes a specific reserve on a senior alone.
Speaker Change: Of approximately $9 million.
Speaker Change: Additionally, we reported total company GAAP net income of $5 3 million or four cents per share.
Quarter over quarter total company GAAP net book value decreased to $7 92 per share from $8.08 in the fourth quarter.
Speaker Change: Unappreciated book value decreased to $8.75 per share from $8 89 shows the change is mainly attributable to equity granted as part of our annual compensation program and consistent with past practice.
Speaker Change: I would like to quickly bridge, the first quarter adjusted distributable earnings of 16 cents versus the 18 cents recorded in the fourth quarter.
Speaker Change: Change is primarily driven by lower interest rates repayments and placing our risk shrank five Santa Clara, California, multifamily pre development land loans on non accrual offset by lower borrowing costs and new originations.
Speaker Change: Looking at reserves during the first quarter, we recorded specific sheets of reserves of approximately $9 million related to the resolution of the Denver, Colorado multifamily loan Andy mentioned.
Speaker Change: As the law was resolved we charged off the reserves. Additionally, we charged off reserves associated with the Mesa, Arizona alone, where we took control of the property to a preferred equity instrument and moved it to ARIA.
Speaker Change: Our general seasonal provision stands at $156 million or 608 basis points of total loan commitments.
Speaker Change: This is a decrease of approximately $10 million from the prior quarter.
Speaker Change: As the seesaw provision is flat quarter over quarter decrease is primarily driven by the charge offs.
Speaker Change: Our debt to assets ratio of 64% and our debt to equity ratio is to Plano times, a small decrease from for Q.
Speaker Change: We have no corporate debt or final facility maturities due until 2027.
Speaker Change: Our debt to equity ratio for our senior loan portfolio only has two eight times a decrease from three five times leverage we had in Q4.
Speaker Change: Decrease is mainly a result of delevering.
Speaker Change: Lastly, our liquidity as of today stands at approximately $210 million. This comprises $145 million of current cash as well as 165 million under our credit facility.
Speaker Change: School, it's approximately $56 million of approved but undrawn borrowings available on our warehouse lines.
Speaker Change: This concludes our prepared remarks and with that let's open it up for questions operator.
Speaker Change: Thank you we will now begin the question and answer session to ask a question you May Press Star then one on your Touchtone phone. If you were using a speakerphone. Please pick up your handset before pressing the keys. If at anytime. Your question has been addressed and you would like to withdraw your question. Please press Star then two.
Speaker Change: In the interest of time, please limit yourself to one question and one follow up.
Speaker Change: We'll now pause momentarily to assemble our roster.
Speaker Change: And your first question today will come from Steve Delaney with citizens JMP. Please go ahead.
Steve DeLaney: Good morning, everyone. Thanks for taking my question could you first could you just let me know with the remaining buyback authorization was at March 31, or as of today that'd be appreciated. Thanks.
Speaker Change: David.
Speaker Change: Okay.
The share repurchase program was repurchased at $50 million.
Speaker Change: Reapproved, it $50 million for the upcoming year.
Speaker Change: That's for all of 2025.
Speaker Change: Alright, extending from now for a year from.
Speaker Change: The end of this month today, Okay, great right. Yeah. That's helpful. Thank you very much.
Speaker Change: And then just big picture stepping back I mean.
Mike commented about the kind of macro.
Speaker Change: What's in the last two or three weeks in.
Speaker Change: But tenures.
Speaker Change: Almost down 50 basis points over that period and it looks like it wants to go to four.
Speaker Change: The lower rate Youre in the real estate business, where you Linda real estate.
Speaker Change: Comment.
Speaker Change: Big picture.
Speaker Change: The impact of these lower rates on your portfolio, but I guess more importantly on your borrowers their demand for new loans and certainly in your Dcs and all.
Speaker Change: The impact of this move and in longer term rates on property values.
Speaker Change: Especially if you're trying to market you are yet thanks.
Speaker Change: Great. Thank you.
Speaker Change:
As we've said before.
Speaker Change: Lowering the short end of the curve, which we think has to happen.
Speaker Change: Given where and I believe my friend, Brian Howard made this comment on his call where the two year Treasury is now 70 basis points lower than fed funds and that that's kind of a signal that we think that that is going to follow suit. If not may certainly we think in July and with the GDP contraction number this morning.
Speaker Change: The employment number which everyone has eyes on for Friday, which could be weak.
Speaker Change: We expect that the fed will move in July and start easing more on the front end with regard to the long and the secretary of Treasury has made comments that they want to help main street.
Speaker Change: Long rates down.
Speaker Change: Think that there are headwinds against that with the amount of supply that has to come in the deficit that we still have but with these recessionary winds out there and the behavior of consumers and corporate Ceos, who are pausing on Capex. We're concerned that those are the workings of a recession or starting to go into place now.
Speaker Change: Where there's a pullback so you could start to see that we'd be reflected in rates and all that is very good unless we get into a oh unemployment situation, where we're seeing unemployment levels go up much higher than that that will affect all of real estate. So as long as we don't see any massive pop in unemployment.
Speaker Change: Generally coming back on these rates is going to help borrowers get refinancing spreads may widen as rates come down spreads tend to widen but.
That'll be great for borrowers unless there's something underlying the economy, that's really showing some some weakness and it's better for the credit performance of our portfolio. The fact that our borrowers.
Speaker Change: Borrowers are short term borrowers that maturity date or extension data, where they can go out and purchase interest rate caps at much lower levels than they're doing today, that's all super positive.
Mike Masih: Thanks, Mike appreciate everybody's comments.
Speaker Change: And your next question today will come from Jason Weaver with Jones trading. Please go ahead.
Jason Weaver: Hey, good morning, guys. Thanks for taking my question.
Jason Weaver: First you mentioned in your prepared remarks.
Jason Weaver: Yes.
Jason Weaver: Pipeline out there, but I'm curious, if you've had any conversations or any sort of indications.
Jason Weaver: Among borrowers in terms of hesitancy to take down loan demand with all the sort of macro uncertainty.
Jason Weaver: Okay.
Jason Weaver: Borrowers need to get out from their existing debt today period, and so there's a need there's definitely a need for refinancing as I said on the call. The issue is the inquiry is is pretty massive.
Jason Weaver: But in terms of actionable deals, where we're finding that borrowers really obviously want to get out with or without putting equity into the properties and that's been a headwind and headwind right. Now. The question is how much is an existing lender requiring from that borrower from a pay down versus what that borrower can get in the open.
Jason Weaver: Market can the borrower get better terms than what an existing lender is asking for in terms of a reduction in debt at a maturity date or reserves or things like that or equity in the deal. So we're seeing a lot of inquiry the.
Jason Weaver: The amount of.
Jason Weaver: Pause a little bit with the towers are issue that we had in April and certainly we had two weeks of the holiday.
Jason Weaver: So we we are going to see a little bit of a dip on our side in origination score for Q2, but by and large the inquiries. There. It's just a matter of finding the right deals where we feel like are the borrowers either putting in equity or we feel that the aspirations for the property or a positive a positive enough, where we can take them out of that.
Jason Weaver: That current debt.
Jason Weaver: Thank you that's very helpful actually.
Jason Weaver: And then for the $182 million originated during the quarter, where would you ballpark just levered return there.
Jason Weaver: Ro.
Jason Weaver: Yes.
Jason Weaver: We're always targeting a 12.
Jason Weaver: Got it thank you very much.
Speaker Change: And your next question today will come from Jon Nicodemus with D. T. I G. Please go ahead.
Speaker Change: Good morning, everyone.
Speaker Change: You mentioned on your last call that based on your repayment schedule. The time do you need to do about $1 billion in originations this year to sustain and hopefully grow your dividend. So two questions is that still the case based on the current repayment schedule and then if so how was your origination pipeline trending to meet this goal. Thanks.
Speaker Change: Thank you.
Speaker Change: A little bit hard to to forecast.
Speaker Change: As I said in the prepared remarks, the market is still flying out and this is becoming a very lender driven market.
And b the.
Speaker Change: The drivers behind that are much different than a typical market. So little hard to forecast as I said loan inquiries up but the number of actionable deals still remains a little bit on the challenge side as borrowers don't want to put equity into the deal to recapitalize. The properties. Let me make this a lot easier, but we need to do to get back.
Back to circa 20 cents a share is we need to get the portfolio back up to $3 $5 billion and right now it stands at 2.4 billion. So we need to keep abreast of original of payments and we have to have a net gain on the portfolio between now and let's say a year from now of about a billion dollar in that game to about.
Speaker Change: $3 5 billion, which would bring us up to about <unk>.
Speaker Change: Low three times leveraged 3.3 times leverage on the portfolio, if we get there.
Speaker Change: Over the course of the year, we expect that there could be some leakage as the timing of all this in terms of originations resolution on the watch list resolution on the Oreo and repayments. We do expect that there will be some leakage. We could obviously avoid that if we have a big pull forward on origination but.
Speaker Change: We think Q2 is going to be relatively quiet compared to Q1.
Speaker Change: So the business plan right now is maintaining the dividend we have no plans to cut the dividend get the portfolio from 2.42, $3 5 billion and get the leverage from roughly a high twos to low threes three three times.
Speaker Change: And that should get us that coupled with.
Speaker Change: Resolution of the watch list in Oreo that should get us back to something.
Speaker Change: Something in the area of 20.
Speaker Change: Great. Thanks, so much Mike that's super helpful.
Speaker Change: And then my follow up also has to do with the originations going forward specifically the $70 million you committed subsequent to quarter end on one new loan. We noticed that this is now one of your largest loans in the first you've done of this size. Since early 2021, just be curious to hear about this deal kind of how it came about and what compelled the team.
Speaker Change: To pursue such a large loan for the first time in years. Thank you.
Speaker Change: Okay.
Andy: Andy do you want to take that.
Speaker Change: Sure Mike.
Related to this loan this was a repeat sponsor on a stabilized property.
Speaker Change: And it really does fall within our our loan size range, where usually targeting loans somewhere between.
Speaker Change: <unk> and $80 million so.
Speaker Change: I think it's very consistent with what we're doing and it's.
Speaker Change: Stabilized property the business plan is to hold the asset do some things at the margin and then ultimately.
Speaker Change: So.
Speaker Change: Okay.
Speaker Change: Now this was a transaction that was done at a slightly tighter spread.
Speaker Change: And what we were seeing in the market, but regarding tight spreads we agree that we spreads had gotten very tight and we were skeptical about transacting at these levels.
Speaker Change: But the bank warehouse lenders have really kept abreast of the market and so we were able to get financing on this asset that kept the ROE targets in line with our goals.
Speaker Change: Great. Thank you so much Mike and Andy I appreciate the color.
Speaker Change: Again, if you have a question. Please press star and then one and.
Speaker Change: And your next question today will come from Randy Binner with B Riley. Please go ahead.
Randy Binner: Hey, good morning. Thanks.
Randy Binner: Just just looking at page 13 of the deck.
Randy Binner: The San Jose Hotel property, we had seen some reports in the media that.
Randy Binner: There could be some progress happening.
Randy Binner: For a refinancing there and so just wondering if we can get an update on that particular property.
Randy Binner: Because it is a relatively large.
Randy Binner: <unk> of the overall watch list.
Speaker Change: Yes. Thank you. It is it is a one third of the watch list.
Speaker Change: That is an asset where we actually de Levered b asset and paid off the the financing on that which is one of the bigger uses of cash this quarter. So that asset is unlevered and so that's why we're anxious to repatriate that capital I really don't want to comment too much because.
Speaker Change: It wouldn't be commercial to do so given the fact that we have.
Speaker Change: I have a foreclosure process going on with the asset as Andy said in the prepared remarks, there was a T O ROE that was granted we expect that to get resolved.
Speaker Change: Very soon I'm not going to comment on what the borrowers trying to do.
Speaker Change: We applaud efforts there, but I really think it's not commercial for me to go any deeper than that we do think though this has been going on for awhile and we think the resolution and I know, we sound like a broken record because we've been talking about this for quarters, but we really are at we think at the end of the rope here.
Speaker Change: A resolution of the asset.
Speaker Change: Okay. Thank you and then on just one on the model.
Speaker Change: The.
Speaker Change: Property operating expense in the quarter was.
Speaker Change: There's a little bit elevated relative to our expectation and kind of as a percentage of.
Speaker Change: Just overall NII was there any thing.
Speaker Change: Kind of maybe it's a million bucks, but but.
Speaker Change: Was there anything unusual this quarter that would that be non tradable.
Speaker Change: I mean remember we are we foreclose on a property up in the fourth quarter. So you'd have some of that and then there was the one that we took ownership up to control up during the quarter. So that added operating expense as well. So two kind of new items that you only had part of in the fourth quarter and the new one in the first quarter. Okay. That's helpful. Thank you.
Speaker Change: Yeah.
Speaker Change: And your next question today will come from Gaurav Mehta with Alliance Global Partners. Please go ahead, yes.
Speaker Change: Yeah. Thank you good morning I.
Speaker Change: I wanted to follow up on your comments around leverage.
Speaker Change: <unk> earnings call, you talked about expectations of new CLO issuance, maybe second half of 2025, just wanted to get an update on the CLO market.
Speaker Change: Is it still your expectation to have a CLO issuance this year.
Speaker Change: That's still that's still the goal, but we do think that we'll get more done in the second half of the year and originations.
Speaker Change: And it's always a plan too.
Speaker Change: Clean out the warehouse lines, where we can execute on our CLO.
Speaker Change: I think executing on a CLO in the fourth quarter of the year is all part of getting the portfolio Levered to the point, where we can get back to that 20.
Speaker Change: 20th cents a share in earnings so the expectations are that we'll continue to do that we do recognize that the CLO market and widened during the month of.
Speaker Change: April but that has slowly started to tighten over the course of the end of the month and into today. So our expectations are that we will plan to do a CLO in the fourth quarter.
Speaker Change: Okay, and then second question I wanted to ask on the earning I don't know if I missed in your prepared remarks, but what are the earnings from cash flow this quarter.
Speaker Change: I'm sorry, your earnings for R&D item below this quarter or 11 cents.
Speaker Change: Okay.
Speaker Change: Alright. Thank you that's all I had.
Speaker Change: This concludes our question and answer session I would like to turn the conference back over to Michael Masih for any closing remarks.
Speaker Change: Well, thank you for joining us and we want to pose to you that we will be at NAREIT on June 13th what's the those that are here in the city would like to schedule a.
Speaker Change: A meeting or a virtual meeting please don't hesitate to reach out otherwise we will see you again in July thank you.
Speaker Change: The conference has now concluded. Thank you for attending today's presentation you may now disconnect.
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