BrightSpire Capital, Inc. Q2 FY2021 Earnings Call

Greetings and welcome to the BrightSpire Capital Incorporated second quarter 2021 earnings call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. The operator provided instructions to participants. As a reminder, this conference is being recorded.

Good afternoon and welcome to BrightSpire Capital's second quarter 2021 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 President and Chief Executive Officer, Mike Mazzei, Chief Operating Officer, Andy Witt, and Chief Financial Officer, Frank Saracino. Before I hand the call over, please note that on this call, certain information presented contains forward-looking statements. These statements are based on management's current expectations and are subject to risks, uncertainties and assumptions. Potential risks and uncertainties could cause the company's business and financial results to differ materially including the potential adverse effect of and heightened risks associated with COVID-19. For a discussion of risks that could affect results, please see the Risk Factors section of our most recent 10-Q and other risk factors and forward-looking statements in the company's current and periodic reports filed with the SEC from time to time. All information discussed on this call is as of today, August 04, 2021 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 its supplemental presentation, which was released this morning and is available on the company's website, presents reconciliations to the appropriate GAAP measures and an explanation of why the company believes such non-GAAP financial measures are useful to investors. And now, I would like to turn the call over to Mike Mazzei, President and Chief Executive Officer of BrightSpire Capital. Mike?

Thank you David. Welcome to our second quarter earnings call. I would like to start by wishing everyone well and I thank you for joining us today. The company's momentum from last year has carried into 2021 and continues to build. We are rapidly deploying capital into our more focused investment strategy while we resolve specific assets and execute on key business objectives. In doing so, we have grown earnings and our quarterly dividend. Today is our first earnings call as BrightSpire Capital. On behalf of the BrightSpire team, we are very excited about our company's rebranding following the internalization of our management and operating functions. Right out of the gates, we issued our first CLO under the BrightSpire name in July. We announced the sale of five co-invest assets. And today, we announced an increase in our quarterly dividend to $0.16. With respect to the internalization, BrightSpire is rapidly becoming a fully operational standalone company and is on track to realize the anticipated cost savings from this transformative event. As previously stated, we believe being an internally managed company is simply a better structure for shareholders. As the company grows its equity base, our shareholders will benefit from increased scale and operating efficiencies. The internally managed structure is a more transparent organizational model with improved alignment between the company and our shareholders. Turning now to some key financial highlights. For the second quarter, we had adjusted distributable earnings of $0.20 per share. Our liquidity as of August 2 stands at $381 million. Our undepreciated book value per share for the second quarter is $12.66, down from $12.84. Our book value this quarter was negatively impacted by the transaction we entered into to sell certain assets that no longer fit our business model. However, when all aspects of this transaction are completed, the net result will be substantially in line with book value. Frank will provide greater detail in his remarks. With respect to our dividend, as I mentioned, our Board of Directors has approved an increase in our third quarter dividend to $0.16 a share. This is up from $0.14 in the prior quarter and is the second increase since reinstating our dividend earlier this year. The increase is supported by the cost savings realized from the internalization, continued successful execution of our overall business plan as well as the improved return on equity we have achieved as a result of our recently issued CLO. During this last quarter, we have continued to steadily redeploy capital into floating rate first mortgage loans. Since commencing new originations in the fourth quarter of 2020, we have closed on or committed to 50 loans totaling over $1.5 billion. While much of our lending activity has been on multifamily properties, we are beginning to see increased loan demand in other property types as the pandemic continues to wind down and investment sales activities increase. This is especially the case in office properties where we are seeing good risk-reward opportunities given that the middle market suburban office sector has been less impacted from the pandemic than most CBD office. For the remainder of 2021, our plan is to continue to redeploy company cash into new loan originations and further rotate our asset portfolio and liability structure with an eye toward issuing our third CLO. We will also look to close our recently announced asset sale transaction and utilize those proceeds to pay off the preferred equity financing the company completed in June of 2020. Finally, we will continue to focus on resolving any remaining non-earning or underperforming assets. In closing, BrightSpire is well on its way to evolving its asset base into a pure-play portfolio of first mortgage bridge loans that can deliver current and predictable earnings. We remain confident that the successful execution of our stated business plan throughout the remainder of 2021 will lead to additional growth and stability in both our earnings and our dividend. I would now like to turn the call over to our Chief Operating Officer, Andy Witt. Andy?

Thank you Mike and good morning everyone. My comments today will focus on BrightSpire's operational highlights and continued execution of our business objectives. As Mike underscored in his remarks, we have made meaningful progress on a number of fronts, most notably entering into an agreement to sell a portfolio consisting of five co-investments, executing on a managed CLO and continuing to originate new senior mortgages. Last month, the company entered into a transaction totaling approximately $223 million to sell seven loans associated with five co-investments. This transaction accelerates the disposition of longer dated equity-oriented investments that are no longer core to our strategy. Upon completion, the total transaction is expected to be substantially in line with the combined carrying value for these assets. Four of the five investments included in the sale serve as collateral for the five-pack preferred financing the company executed in June of 2020. As such, we anticipate using the proceeds from this transaction to retire this financing. In July, the company successfully executed on our second CRE CLO. The $800 million managed CLO is collateralized by interests in 31 floating rate mortgages secured by 41 properties with an initial advance rate of 83.75% and a weighted average coupon at issuance of L+149 before transaction costs. The structure also features a two-year reinvestment period. The transaction further diversifies our funding sources and reduces our cost of capital while generating approximately $49 million of liquidity for new origination opportunities. Additionally, our existing $1 billion managed CLO executed in October of 2019 continues to perform and benefit from LIBOR floors at the underlying loan level. We have also been replacing loans in that vehicle, as the reinvestment window remains open through October of this year. Our originations platform remains active. During the second quarter and through today, the team has originated 25 new senior loans with an aggregate commitment amount of $729 million. All of these investments are first mortgages, the majority of which are acquisition financing on cash-flowing assets. As highlighted last quarter, the investment portfolio is now presented as three distinct segments. One, senior and mezzanine loans and preferred equity. Two, net lease real estate and other real estate. And three, CRE debt securities. As of June 30, 2021, excluding cash and net assets on the balance sheet, senior and mezzanine loans and preferred equity comprised 75 investments in an aggregate at-share net book value of approximately $1 billion or 83% of the portfolio, up from 81% last quarter. The loan portfolio remains diversified in terms of size, collateral type and geographies. Given our recent originations activity, the portfolio has lower average loan balances with a higher focus on multifamily and office properties. We anticipate allocating the majority of our capital toward this segment of our portfolio and more specifically to senior mortgages as we continue to build company earnings. Net lease real estate and other real estate is comprised of 12 investments in an aggregate at-share net book value of approximately $157 million or 13% of the portfolio, in line with last quarter. CRE debt securities, a segment which includes CMBS and one remaining private equity interest, is comprised of six positions and an aggregate at-share net book value of $48 million or 4% of the portfolio, down from 6% at last reporting. During the quarter, the company sold four CMBS positions related to one B-piece transaction for net proceeds of $29 million. The majority of the remaining value in this reporting segment is associated with bonds subject to risk retention provisions through June 2022. Pro forma for the previously highlighted portfolio sale, non-accrual assets in our portfolio will be reduced to loans associated with two significant investments. The two remaining investments include the $165 million San Jose, California hotel senior loan and preferred equity investment and the $98 million Los Angeles mixed-use loan. The San Jose hotel loan was placed on non-accrual during the first quarter of this year after the borrower closed the hotel and filed Chapter 11 bankruptcy. We expect the borrower to emerge from bankruptcy in the third quarter at which time the loan would become a performing senior mortgage investment. With respect to the Los Angeles mixed-use loan, it has passed its July 9 maturity date and the lending group is in discussions with the borrower. This loan will remain on non-accrual. Additional information on these and other specific loans will be included in the asset-specific summary section of the company's Form 10-Q filing. In summary, the company has made substantial progress rotating the portfolio composition towards loans and more specifically senior mortgage loans. We will continue to remain focused on the existing portfolio while building and executing on a pipeline of new origination opportunities in order to drive earnings growth to support increasing dividend payments to shareholders. With that, I will turn the call over to our Chief Financial Officer, Frank Saracino, to elaborate on the second quarter results.

Thank you Andy and good morning everyone. Before discussing our second quarter results, I want to mention that we expect to file our Form 10-Q tomorrow. In addition, I would like to draw your attention to our supplemental financial report which is available in the shareholder section of our website. The supplement continues to provide asset-by-asset details as does our Form 10-Q. With that, let's turn to our second quarter results. We reported total company adjusted distributable earnings, which excludes realized losses and fair value adjustments, of $27 million or $0.20 per share in the second quarter 2021. We also reported a total company GAAP net loss attributable to common shareholders of $19.7 million or $0.15 per share and a distributable loss of $27.1 million or $0.20 per share. The GAAP net loss attributable to common shareholders of $19.7 million and the distributable loss of $27.1 million reflects our recording of $54 million in fair value adjustments. These adjustments are primarily associated with two items. First, the July announcement to sell certain co-investments. I want to highlight that GAAP accounting principles require us to value each individual investment at the lower of cost or market. As such, three investments with allocations below carrying value resulted in a second quarter fair value write-down. Additionally, there are two investments with expected gains relative to their carrying value that will be recognized at closing. The second item is the sale of four CMBS positions related to one B-piece transaction, which resulted in a realized net loss of approximately $22 million. I want to note that $31 million was already recorded as an unrealized loss and as a result, there was a gain of $9 million relative to our most recent markdown basis. During the second quarter, total GAAP net book value decreased from $11.98 to $11.75 per share and undepreciated book value decreased from $12.84 to $12.66 per share. This change is primarily due to the fair value adjustments associated with the sale transaction. As Mike and Andy both mentioned in their remarks, with the close of the sale transaction, we plan to utilize the proceeds to pay off the five-pack preferred financing. The result of doing so is a net projected increase of over $0.50 relative to our June 30, 2021 undepreciated book value. This increase reflects the combination of recording the investment gains associated with the sale as well as the result of the remaining asset under the five-pack preferred financing reverting back to BrightSpire 100% ownership. Looking in more detail at the second quarter adjusted distributable earnings, the quarter-over-quarter growth primarily reflects the company's significant deployment of idle cash during the first half of the year, including a full quarter's impact of first quarter originations of $475 million as well as contributions from the $402 million invested in the second quarter. We also started realizing the cost saving benefits from the internalization of our management contract, which was completed on April 30. On a run-rate basis, we continue to anticipate generating operating cost savings of approximately $16 million per year or approximately $0.12 per share. Turning to our dividend. Given our growth in adjusted distributable earnings, along with our improved operating performance and business outlook, we declared a dividend of $0.16 per share for the third quarter of 2021, up from $0.14 per share last quarter. The third quarter dividend is payable on October 15 to shareholders of record as of September 30, 2021. Moving to our balance sheet. Our total at-share undepreciated assets stood at approximately $4.3 billion as of June 30, 2021. Our debt to assets ratio was 57% and net debt to equity ratio was 1.3 times at the end of the second quarter, a slight increase compared to the first quarter. This increase was primarily driven by new loan originations. In addition, our liquidity as of today stands at approximately $381 million between cash on hand and availability under our bank credit facility. Looking at risk rankings and CECL reserves, our overall risk ranking at the end of the second quarter improved to 3.5 compared to 3.6 at the end of the first quarter. This change is primarily related to the improved performance of certain loans and second quarter loan originations which have a day-one '3' rating. Our CECL provision was $42.9 million and represents approximately 1.4% reserved against our loans. This is a quarter-over-quarter increase of $1.2 million and is primarily driven by new originations. That concludes our prepared remarks. And with that, let's open the call for questions. Operator?

The operator provided instructions to participants. Our first question comes from Tim Hayes with BTIG. Please proceed with your question.

Hi guys. This is Ethan, on for Tim. Thanks for taking my questions. My first question would be, you guys have made significant progress on your strategic initiatives since the end of the first quarter by completing internalization, increasing capital deployment, divesting non-accrual loans and raising the dividend. So I want to kind of get a feel for how you guys rank your strategic initiatives today. What's your greatest focus? And how quickly do you think you will be able to accomplish those goals?

Hi. How are you? Thank you for joining. We realize there are a couple of calls going on at the same time. Thank you for being here. With regard to the rest of 2021, as we pretty much said in the remarks, the goals are to continue to deploy the cash balances we have on the balance sheet today. I think we were projecting getting somewhere down to about $125 million of actual cash and then determining how much we think we need to manage liquidity from that point forward. We are also trying to evolve away from multifamily and look for other opportunities in other property types. We think those opportunities will present themselves as investment sales activity, especially in other property types expected to pick up dramatically as we get into Q4. Perhaps different property types and some more structured, highly structured transitional loans to add incremental ROE around the edges. The overall plan, though, is to continue to evolve the portfolio toward more of, as I said in the remarks, a pure-play commercial mortgage REIT portfolio. So continue to do first mortgage loans and on transitional assets, with an eye toward potentially executing our third CLO. And then this asset sale that we have undertaken here will also further move the portfolio because as those assets move off and these new first mortgages come on, that kind of counts as a full game there because we have assets that are coming off as more pre-development type, non-income producing assets versus the first mortgages we are putting on today. So continued portfolio evolution toward more of a pure-play commercial mortgage REIT are the goals, issue the third CLO, increase earnings as we said and hopefully the dividend will follow and the stock price will follow as well. If everything fell into place, potentially towards the end of the year, we could look at what we could potentially do around more capital, whether maybe that's a small preferred equity issue to increase the capital base and to really more fully maximize the benefits of being internally managed. As we said in the remarks, as we grow the capital base we are no longer paying that external management fee of 1.5 points plus a kicker above a preferred return. And so all that flows to the bottom line. So those are kind of the basic goals between now and the end of the year.

All right. Great. Thank you. And then my next question is, the weighted average risk rating for you guys improved slightly quarter-over-quarter and the CECL reserve as a percentage of the portfolio declined. Can you just touch on any notable loan upgrades or downgrades this quarter? And what drove those changes?

Yes. I don't think there was one notable loan. We had five loans that went from a four to a three and one went from a three to a two, all kind of small movements where it was kind of offset by some new loans coming on. But there wasn't any one particular loan that moved drastically.

I think you are seeing generally as the pandemic improves, albeit we are all concerned about the Delta variant spike, but generally as the economy has improved and the pandemic's effects on the economy have moderated, we felt it was appropriate to add higher risk ratings going into the pandemic. You are starting to see some of that, if you will, melt away as we emerge from the pandemic.

All right. Great. Thanks guys.

Thank you. Our next question comes from Stephen Laws with Raymond James. Please proceed with your question.

Hi. Good morning. Mike, I guess to follow-up on that, it kind of seems like across the group there are kind of two ways to go. You can do the multifamily, industrial, life sciences that fits well into CLOs on lighter transitional stuff or some are looking at taking more ROE on some stuff that maybe doesn't go into CLOs. I wanted to get your thoughts on the mix there and what is that incremental return you need to start looking at loans that maybe don't fit into a CLO? I know you have said in your prepared remarks you are targeting or thinking about a third CLO. So I know that is a focus.

Hi. How are you, Steve. Thank you for joining us and thanks for the question. I think there is a selective amount of capital that we would use for non-CLO assets. We have had some very good experience in some loans that we have created that were behind some development loans. I think the key there is to make certain that any mezzanine loan we do is behind a senior loan that either we are doing the senior and laying it off or it's a senior loan that we can step in and fund and cure, i.e., something that we would have done directly but have chosen to do the mezzanine. So we will look for those more selective transactions and we do think that we will see more of those opportunities as investment sales pick up. Overall, when we entered the market in Q4, multifamily lending spreads in general were very robust. Over the past several quarters, origination spreads have probably come in by a solid 50 basis points into the low 300s. However, commensurately with that, we have seen the bank lines improve as well. So the advance rate on the warehouse lines have come in roughly five, in some cases 10 points depending on the deal. And in terms of spread, lending spreads have compressed somewhere between 25 to 40 basis points. In addition to that, our AAA on our CLO executed at a rate of LIBOR+115. The only spreads that were better than ours were pools that were 100% multifamily, not only in the first pool but in the reinvestment parameters as well. Those are priced a nickel to a dime tighter. But we priced best-in-class for a mixed pool of assets. The advance rate was also very good at close to 84%. So while we have seen a compression in some lending spreads, we have also seen a compression on the liability side as well. To give you an example, the loans that we originated post-COVID that we started in the fourth quarter of last year are closing; we probably saw those ROEs improve several hundred basis points from warehouse line into the CLO. A lot of that is attributable to the advance rate being 84%. Going forward, we are seeing the level of interest in multifamily as being enormous and it's reflected in the valuations of the underlying assets. We are seeing our borrowers and investors starting to acknowledge that and pull back. While multifamily valuations have been supported by the lack of building, population growth, wage growth and demographic shifts toward the South, we are starting to see some pushback from investors on valuation and you are starting to see us push back on credit. Consistently across the line, other lenders are drawing the line in the low 300s. Finally, it really comes down to investment sales. What we are hearing from the brokerage community is that there's a backlog, that assets are coming to market now and will be coming to market after Labor Day most notably. So we are expecting to see a dramatic uptick in investment sales and we hope that in that we will see a lot more opportunity and more diverse lending away from the multifamily sector.

Great. Thanks for the detailed color there, Mike. Frank, I had a couple of questions around the kind of expenses under the internal structure. Two specifically. How do I think about non-cash comp, equity comp, as it's running kind of maybe an average of $5 million a quarter the first half of this year? Under the internal structure, how do I think about that line item going forward? And the second one is, any one-time expenses in 3Q we need to account for around the CLO? Or are all of those expenses going to be amortized over the life of the transaction?

Okay. So thanks, Steve. The equity compensation that's running through that's getting adjusted out of the distributable earnings— that amount will remain constant. The equity award that we received at the beginning of the year should be consistent going forward into future years. So I think that's kind of a number you can use right now. As far as one-time items of 3Q, the CLO and those other costs will be amortized over a period of time. So that really won't move the needle, and we're not expecting any one-time abnormal expenses for 3Q.

Great. I appreciate the clarity there. Thanks for taking my questions this morning.

Thank you. Our next question comes from Matthew Howlett with B. Riley. Please proceed with your question.

Hi. Thanks for taking my questions. Mike, I really like the comments in terms of maybe accessing a non-dilutive preferred at the end of the year. So can we assume that you are going to be deploying all your excess cash by the end of the year? And you could look to access some preferred equity towards the end of the year?

First of all, welcome to the call. Thank you for the question. I think that's something that we absolutely can have an eye toward. When you look at how far we have come in terms of evolving the portfolio, the internalization, the CLO, all the things that we have accomplished, we will probably look at doing something with our bank line at the end of the year in terms of extending that. So I think at that point in time toward the end of the year, we will look at the capital structure and see where the stock price is and see what we can do. The goal is— the whole point of being internally managed is to reap the benefits of those economies of scale. So first and foremost, we want to grow earnings, grow the dividend and hopefully the stock price follows suit. If we can get there, then other doors will open and we will look at that. When we get down to about $100 million to $125 million of cash, we have to stop thinking about other ways to stay active and expand the balance sheet. So that may come through a preferred issuance that we do at the end of the year. We will absolutely consider that. I want to expand on this: the advantage of being internally managed is the operating scale with our equity base. An externally managed company generally uses preferred equity and many times that gets included in what's calculated for the management fee. For us, if we issue that, we get the cost-of-capital benefit by not paying that management fee, and that scale really accrues to our benefit. So we will have an eye to look at that at the end of the year, yes.

So you said there's really no additional overhead you need to incur if you raise extra capital?

That's correct.

It means you have a pretty big balance. You referenced small. But any idea of the range you could issue? I am sure you are getting calls from investment banks. Any idea where the market is for you?

We understand where the market is. But at this point, I would say that we are suspending our judgment until we get through the initiatives for this quarter. Right now, we have got a number of assets that we think are going to transition this quarter, which are key. We have the sale that we have agreed to that we would like to get accomplished this quarter depending on the machinations that have to go on there. Once that dust settles, we will be in a much better position to assess whether or not we want to add capital.

All right. We will look for it. We certainly look forward to that. And then just moving back to the impact on book value with the sale of the remaining two assets, are we going to pick up the total of $0.24 we lost in the second quarter? Could you walk me through that again?

Are you asking about related to the transaction? What I said in my prepared remarks is, we are going to pick up about $0.50 greater on our undepreciated book value. It's a combination of the gains as well as the one asset in the GSAM five-pack that will now come back to 100% ownership. So we will get over $0.50 back.

Great. Okay. So $0.50 addition to the $12.6. Great, thank you for clarifying that.

If you look back at previous quarters, you will see that when we executed that last year, the book value was reduced by assets being contributed to this preferred equity structure vehicle. Now that we are unwinding that, we are recapturing some of that back. Some of it was taken away via a write-down of an asset in previous quarters which we stated, but the balance that Frank is referring to gets repatriated back to us once that preferred structure is collapsed.

Correct.

And so again that's an SPV and you get it back when you retire it?

That's right. Because many of the assets involved in the sale, as Andy said, are also involved in that preferred equity financing vehicle. That's why you will see the proceeds from this sale used to collapse the entirety of that vehicle.

And just for GAAP accounting, you elected lower of cost or market so you couldn't recognize it on June 30?

Correct. Under GAAP principles for this type of transaction, you have to take the lower of cost or market, which is why we have the write-downs and we will get the benefit of the gains when fully closed.

Great. Okay, great. We will definitely adjust for that. And I guess it's the last question. With the stock at a discount to what's even now at greater than a 30% discount to undepreciated pro forma book, you've been asked about buybacks. Could you do something strategically where you sell, repurchase stock, tender for common shares? Could you return capital via buybacks over the next few quarters?

I think at these levels and given the ROE we had in the CLO, deploying the capital into new loans and growing the balance sheet is the goal. Buying back stock at these levels is probably a lower ROE versus where we can execute return on equity in the CLO. We made an investment for roughly $0.80 a share, $100 million to buy back the manager to improve the overall operations and efficiencies of the company. Now we want to take a step forward and try to grow the capital base so we can enjoy those efficiencies. A stock buyback at these levels, versus our competing use of capital, doesn't make sense. The operating scale is important to us.

It makes complete sense and as you said, the ROEs are well over 11% on the CLOs and I know you want to get bigger at the inflection point.

The ROE on the CLO, many loans have floors that were, let's call them, pre-COVID loans, so we could establish the vintage. Those contributed highly to the ROE. If you strip out those and just focus on the post-COVID loans, we saw a three-handle move in the ROE on those loans to something in the mid-teens. When you look at the stock price today and how the buyback affects your ROE accretion to book versus deploying that capital and growing the balance sheet, I think the preference is to do the latter.

The operator provided instructions to participants. Thank you. Our next question comes from Steve Delaney with JMP Securities. Please proceed with your question.

Thanks. Hello everyone and congrats on the progress on the balance sheet clean up and also the rebranding. I think it's a very important step for you and we really like the new name. BrightSpire has sort of an aspirational feel to it, to my ear anyway. Just one thing, because a lot has been covered. Your current debt to equity leverage, 1.3 times at June 30, clearly you are in transition, but that's a very low level relative to peer group where you would normally see 2.5 to even three times debt to equity. The CLO obviously does a lot because you are initially close to five times leverage there. But looking maybe forward a couple of quarters or early next year, where do you think that settles in if you do a third CLO? What should we, in terms of modeling, think about as far as a range around debt to equity including the CLOs?

It's Frank. I will take that. As we continue to deploy the cash on our balance sheet, we expect that level to grow somewhere into the 60s for debt-to-assets. Depending on if we pursue some type of offerings, as Mike previously mentioned, that will help drive some of those numbers. But we expect these numbers to move closer in line with our peers.

Steve, thank you. I would also point out we have a number of unencumbered assets in the portfolio. As Frank said, it's not just deploying the cash. We are focused this quarter on getting certain assets resolved. For instance, one of the larger ones, the San Jose hotel, will have a bankruptcy confirmation hearing. The borrower is endeavoring to pull that out of bankruptcy as quickly as possible. We expect that to happen this quarter. In doing so, that loan, which is now completely unencumbered at call it $170 million to $175 million including the preferred, will do two things. One, it will be an accruing asset again, a loan that's reinstated as current. And secondly, it will be a loan that we can finance. So there will be more cash that comes out of that that we can utilize for new originations. You will see our leverage tick up as we utilize cash on the balance sheet and as we resolve some of the unencumbered underperforming or non-earning assets and repatriate that capital into new loans.

Makes sense. Thank you both for the comments.

Thank you. Our next question comes from Jade Rahmani with KBW. Please proceed with your question.

Hi there. Thanks for taking the question. I wanted to ask if you still view the CMBS conduit business as attractive and something you want to create?

Hi Jade. How are you? We haven't ruled it out. We have the tools to do it, but we haven't looked at it this year. The goal for the year has been to turn the portfolio more toward a pure-play commercial mortgage REIT with first mortgages and more consistent earnings. We will have an eye toward CMBS conduit. In looking at the landscape, a substantial amount of issuance this year has been SASB and CLO versus conduit CMBS. That market is very competitive and right now there is not a lot of product. We hope that as we get into the fourth quarter and first quarter, investment sales pick up and that will generate demand for CMBS conduit product. But right now, being a later entrant to that market and seeing how competitive it is, I don't see us doing that in 2021. It is something we reserve the right to do. We have the people—our Chief Credit Officer George Kok, our Head of Capital Markets Matt Heslin, and the team—to execute, but for 2021 it's probably third in priority relative to continuing to evolve the portfolio into a pure-play. We will check that box and look at it in 2022 when hopefully the market will be more open and demand will be stronger.

I appreciate that. You mentioned transitional loans with more structured components. Are you talking about construction loans? Heavily transitional loans? What are you referring to there?

Quite frankly, the multifamily loans we have been doing are fairly straightforward—interior and exterior improvements, fairly light transitional and easy to monitor. As you move into office, there is more tenant roll with repositioning of assets and potentially more CapEx. We will look to do more of that. We have had some success in multifamily development where we have done mezzanine behind construction loans. In the cases where we've had success, it's been where the construction loan size is something we could have done directly but chose to do only the mezz. So maybe smaller deals and selective mezzanine behind senior loans. Overall, we want to evolve away from construction at this point and maybe move into office and industrial where the rent roll and CapEx dynamics are more value-add and more transitional than the modest transitional work we've been doing in multifamily.

There are no further questions at this time. I would like to turn the floor back over to management for any closing remarks.

Well, thank you for joining us today on our first BrightSpire Capital earnings call and we look forward to seeing you at the end of the third quarter. Thank you for joining us today.

Ladies and gentlemen, this concludes today's webcast. You may now disconnect your lines at this time. Thank you for your participation and have a great day.