BrightSpire Capital, Inc. Q4 FY2021 Earnings Call

Greetings. Welcome to the BrightSpire Capital Inc. Fourth Quarter 2021 Earnings Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. Please note, this conference is being recorded. I'll now turn the conference over to David Palamé, General Counsel. Thank you. You may begin.

Good morning, and welcome to BrightSpire Capital's Fourth Quarter and Full Year 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 Chief Executive Officer, Mike Mazzei; President and 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. 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, February 22, 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 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, before I turn the call over to Mike Mazzei, Chief Executive Officer of BrightSpire Capital, I'll provide a brief recap on our results. The company reported fourth quarter 2021 GAAP net income attributable to common stockholders of $81 million, or $0.63 per share, and distributable earnings of $22.9 million or $0.17 per share. Excluding realized gains and losses, and provision for loan losses adjusted distributable earnings for the fourth quarter of 2021 was $36.1 million or $0.27 per share. The company reported GAAP net book value of $11.22 per share and undepreciated book value of $12.37 per share as of December 31, 2021. With that, I'd now like to turn the call over to Mike.

Thank you, David. Welcome to our 2021 fourth quarter and full year earnings call. I would like to start by wishing everyone well, and I thank you for joining us today. I will provide a high level overview of the BrightSpire team's accomplishments in 2021 as well as our key objectives as we look ahead to 2022. Earlier this year, our Board of Directors elected to purchase the firm's management contract to become a fully integrated, internally managed company. This structure provides for a more transparent organizational model, with improved alignment between the company and our shareholders. All operational functions are now under one roof. And we are delivering annualized G&A cost savings of $16 million or $0.12 a share. Post-internalization, we rebranded under the BrightSpire flag and we hired 11 professionals across all areas of the firm, bringing our total headcount to 55 people. In addition, we have added further experienced leadership and diversity to the BrightSpire Board of Directors, with the additions of Cathy Long and Kim Diamond, along with the elevation of Cathy Rice to the position of Chairman. We are very pleased with the team's efforts in 2021 in transforming the BrightSpire portfolio. We actively managed and sold select pre-COVID-19 assets, which also resulted in paying off our COVID-19 related preferred equity financing at the end of the year. We further evolved our portfolio by pruning select non-strategic assets, while ramping up mortgage loan originations. During 2021, we originated 64 loans, totaling $1.9 billion; in doing so we grew the loan book to $3.5 billion and further diversified by reducing average loan size to $36 million from $48 million. In addition, we made other improvements in our portfolio by resolving higher risk and non-accrual loans, while substantially increasing our exposure to newly originated first mortgages on multi-family properties. The result improved our average risk rating to 3.1 from 3.7. We were also active on the liability side of the balance sheet, issuing an $800 million CLO in the third quarter. And most recently, earlier this month, we right-sized and extended our corporate revolver. The combination of this activity has resulted in significant growth in adjusted distributable earnings for the full year 2021, which enabled us to reinstate our quarterly dividends and grow it throughout the year to $0.18 per share for the fourth quarter. Looking ahead to 2022, the BrightSpire team has successfully positioned the firm to be a pure-play commercial mortgage REIT, focused on first mortgages backed by high-quality assets and sponsors. Going forward, this business model will generate current and predictable earnings to support our dividend. After all of this effort, over the past two years, the mission for 2022 has finally been narrowed down to net deployment of capital and growing assets. To maintain and grow earnings, we need to substantially deploy the remaining cash on hand, while staying ahead of loan repayments, by increasing our origination volume from 2021. This year we will also continue our focus on closing the gap between our current stock price and undepreciated book value. Now, let me briefly touch on current market conditions. Over the course of 2021 and into 2022, the overall commercial property markets have continued to stabilize. Within that macro context there has emerged several important trends. Notably, performance has varied by property type and by region. Multi-family has been a clear win, while regionally there is a continued population migration out of higher taxation states. The most notable wins there have been Florida, Texas and Arizona. While some CLO rating agencies generally give more credit to larger MSAs, we at BrightSpire are not ignoring the continued trend of population and income growth in more localized regions. This thesis holds true not just for multi-family properties, we have also been targeting office properties in these regions, where population growth exceeds the national average and where taxes, lifestyle and commuting are more appealing than many larger cities. While overall rent growth in 2022 has been very impressive we are now also facing inflation rates at their highest levels in 40 years. The Fed has been very clear about its plan to increase interest rates in order to subdue inflation. Therefore, we need to be mindful that rent growth may eventually decelerate and cap rates may gradually adjust to the new rate environment. On the loan pricing side, despite fixed income investors’ increased appetite for more defensive, shorter-duration, and floating-rate bonds, the recent issuance calendar for CRE/CLOs has led to spread widening over the last 60 days. Therefore, we've been adjusting loan pricing accordingly. In closing, I am very grateful for the hard work and dedication of the BrightSpire team. We're delighted to have reached this inflection point and I am confident we will succeed in meeting our objectives for 2022. And with that, I would now like to turn the call over to our President, Andy Witt. Andy?

Thank you, Mike and good morning everyone. 2021 was a transformational year for BrightSpire. We set out to simplify the business and grow company earnings. During the fourth quarter, BrightSpire continued to execute on its business plan focusing on capital deployment and portfolio management. During the fourth quarter, the company deployed $490 million in aggregate loan commitments across 17 newly originated senior mortgage loans. On the portfolio management front, most notably, BrightSpire completed the $223 million sale of five co-investments across seven legacy positions. The proceeds from this transaction were used to retire the five-pack preferred financing entered into June of 2020. Completing these transactions goes a long way towards further simplifying our balance sheet. Our originations platform remains active with a continued focus on middle market in high growth geographies. During 2021, the team originated 64 loans in an aggregate commitment amount of $1.9 billion. All of these investments are floating-rate first mortgages on cash-flowing assets, the majority of which are acquisition financing, often with repeat borrower relationships. During the fourth quarter, we received $138 million in pre-payments across two subordinate loans and one partial senior pay down. Subsequent to the fourth quarter, we have closed seven investments for an aggregate commitment amount of $303 million. Currently, there are an additional 12 loans in execution with an aggregate commitment amount of approximately $355 million, resulting in 19 loans totaling $658 million of aggregate commitments that have either closed or are in execution so far during the first quarter of 2022. As Mike noted in his prepared remarks, our primary focus in 2022 is the net deployment of cash on the balance sheet and staying ahead of prepayments. Throughout 2021, our stated goal has been to simplify the portfolio by focusing on senior mortgages with in-place cash flow, generating current and predictable earnings. Following are a couple of data points highlighting the portfolio transformation. During fiscal year 2021, we grew our loan portfolio by 46% from $2.4 billion to $3.5 billion, while reducing our average loan size from $48 million to $36 million and reducing the overall risk rating from 3.7 to 3.1. We increased multi-family exposure from 34% to 52%, reduced development exposure from 16% to 4%, reduced bridge loan exposure from 7% to 2%, and reduced non-performing loans from 6% to 0%. The new loans now constitute 96% of our loan portfolio, up from 86% a year ago, and multi-family and office are 85% of the portfolio, up from 68% a year ago. Our investment portfolio is presented in three distinct segments: one, junior and mezzanine loans and preferred equity; two, net lease real estate and other real estate; and three, CRE debt securities. As of December 31, 2021, excluding cash and net assets on the balance sheet, senior and mezzanine loans and preferred equity are comprised of 98 investments with an aggregate gross book value of $3.5 billion and a net book value of $1 billion, or 82% of the portfolio. Although gross deployments were positive quarter-over-quarter, net book value for this segment remained relatively flat, primarily as a result of two subordinated debt positions paying off. Net lease real estate and other real estate is comprised of 12 investments with an aggregate gross book value of $873 million and a net book value of $190 million, 15% of the portfolio. This segment of our portfolio grew as a result of paying off the preferred financing; this ultimately increased BrightSpire’s ownership position to 100% of the at-share value in the triple-net industrial portfolio. CRE debt securities, a segment which includes four remaining CMBS positions, all subject to risk retention provisions through June 2022 and one remaining private equity interest, had a gross-to-net book value of $41 million or 3% of the portfolio at year-end. We continue to manage the liability side of our balance sheet through a combination of financing sources, which include warehouse facilities across five primary banking relationships, totaling $2.05 billion and two outstanding CLOs, totaling $1.8 billion. As of today, availability under warehouse lines stands at approximately $904 million. Early in the third quarter of 2021, the company successfully executed on its second CRE CLO featuring a two-year reinvestment period. The $800 million CLO is currently collateralized by interests in 33 floating-rate mortgages, with an initial advance rate of 83.75% and a weighted average coupon at issuance of L plus 1.49% before transaction costs. Our first $1 billion managed CLO executed in October 2019 had an initial advance rate of 83.5%. Now that the reinvestment window for the CLO is closed, it will function like a static CLO, with each loan payoff resulting in a reduction in the advance rate and increasing the go-forward cost of funds, which currently stands at 82.8% and SOFR plus 161. We are now focused on a third CLO that we expect to execute in the mid-2022 timeframe. In summary, we continue to make good progress building our pipeline of new investments and executing our business plan. Looking ahead, the focus is simple: deploy excess liquidity on the balance sheet in order to grow earnings and support increasing dividend payments. With that, I will turn the call over to our Chief Financial Officer, Frank Saracino to elaborate on the fourth quarter and full year results.

Thank you, Andy, and good morning, everyone. Before discussing our fourth quarter and full year results, I want to mention that we expect to file our form 10-K later today. 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-K. As previously mentioned, this quarter concludes a remarkable year with strong results across our key metrics. For the fourth quarter, we reported total company adjusted distributable earnings, which excludes realized gains and losses, of $36.1 million, or $0.27 per share. We also reported full year adjusted distributable earnings of $0.87 per share. Additionally, for the fourth quarter, we reported total company GAAP net income attributable to common shareholders of $81 million or $0.63 per share and distributable earnings of $22.9 million or $0.17 per share. The GAAP net income reflects the $52.9 million net gain associated with the Co-Invest Portfolio sale. This includes the combination of recording the investment gain associated with the sale and a gain on related hedge positions, offset by tax payments related to these gains. Distributable earnings mainly reflects a $13.2 million realization of a previously recorded unrealized loss on mortgage loans and obligations held in a securitization trust and excludes the impact of the Co-Invest Portfolio sale. During the fourth quarter total GAAP net book value increased to $11.22 from $11.04 per share and undepreciated book value increased to $12.37 from $12 per share. This increase is primarily due to the combination of recording the net gains from the Co-Invest Portfolio sale and our triple-net industrial distribution portfolio reverting back to BrightSpire 100% ownership as a result of repaying our five-pack preferred financing. Looking in more detail at the fourth quarter adjusted distributable earnings, the results primarily reflect the following: first and foremost, the company's continued deployment of capital. During the fourth quarter, we originated 17 new loans totaling $490 million during the quarter. In addition, the company recorded income from a non-recurring profit participation and equity kicker related to the repayment of a mezzanine loan and a preferred equity investment, respectively. Profit participation income or an equity kicker reflects our receiving a portion of the gain generated from the borrower sale of the underlying collateral. This typically occurs concurrent with repayment. Additionally, both repayments occurred during the last week of December, resulting in our ability to recognize a full quarter of interest income related to these unlevered investments. Adjusting for these one-time items and their associated late-December repayments, heading into 2022 our adjusted distributable earnings quarterly run rate is close to $0.22 per share. As Andy mentioned in his remarks, our investment strategy focuses predominantly on floating-rate first mortgages. This positions the earnings from our loan book to generally be positively correlated with rising interest rates. When interest rates dropped in 2020, our income benefited because of the LIBOR floors associated with our in-place loans. We entered 2021 with a weighted average senior loan LIBOR floor of 185 basis points and with portfolio turnover throughout 2021 it declined to 88 basis points at year end. As such, floor income has become substantially less material to our earnings. Illustratively, a 75 basis point increase in the benchmark rate would increase earnings by approximately $0.03 per share annually based on the in-place portfolio today. However, with incremental portfolio turnover, we expect to experience continued pay-offs particularly related to loans that are in the money with respect to LIBOR floors. As those floors roll off, the portfolio is positioned to benefit from a rising interest rate environment. Turning to our dividend, given our growth in adjusted distributable earnings, along with our improved operational performance and business outlook, we increased our dividend four times during 2021, paying out a well-covered $0.58 per share for the year. For the fourth quarter, we paid a dividend of $0.18 per share versus $0.16 per share in the third quarter. Going forward, consistent with our commercial mortgage REIT peers, we will declare our dividend approximately two weeks prior to quarter end with our first quarter 2022 dividend announcement expected in mid-March. Moving to our balance sheet, our total at-share undepreciated assets stood at approximately $5 billion as of December 31, 2021. Our debt-to-assets ratio was 63% and debt-to-equity ratio was 1.9 times at the end of the fourth quarter, up from 1.7 times as at the end of the third quarter. This increase was primarily driven by new senior loan originations. Our liquidity as of today stands at approximately $434 million between cash on hand and availability under our bank revolving credit facility. As Mike noted earlier this year, we amended the terms of our revolver with our bank syndicate. The new terms include a rightsizing of the facility to $165 million, with an accordion feature enabling it to extend to $300 million. Importantly, the borrowing base on the new facility is better suited for our current investment strategy as we're able to secure improved advance rates and favorable concentration limits on certain assets. Overall, we believe this new arrangement will provide us the liquidity and flexibility we need to manage and grow our business for the foreseeable future. Looking at risk rankings and CECL reserves, our overall portfolio risk ranking at the end of the fourth quarter improved to 3.1 compared to 3.2 at the end of the third quarter and 3.9 during the depth of the pandemic. The quarter-over-quarter change reflects the impact of the co-invest portfolio sale, as well as loan resolution. Additionally, an improved outlook in other loans resulted in upgrades to 12 risk-ranking assets. Only two loans were downgraded from the third quarter, one of which has since been resolved. And finally, our CECL provision was $35.8 million, a reduction of approximately $7.9 million from the prior quarter and $2.7 million from December 31, 2020. This represents approximately a 0.96% reserve against our loans, which is down from 1.3% in the third quarter and 1.6% as of December 31, 2020. In addition to certain asset repayments and resolutions, the lower CECL reserve reflects our borrowers continuing to execute their business plans and other improvement in our collateral performance metrics. That concludes our prepared remarks. So with that, let's open up the call for questions. Operator?

Thank you. Our first question is from Tim Hayes with BTIG. Please proceed.

Hey good morning guys. First question, just around the dividend. Look, I know that you're on a different schedule now with declaring it. I know it's a Board decision, but Mike you made some comments in the press release about expecting to continue to grow it. I know that kind of the run rate going forward is about $0.22 of adjusted EPS versus $0.18 quarterly dividend. Off to a nice start in the first quarter with some portfolio growth. So, just if you can maybe put into context how you at the management level think about the trajectory of the dividend would certainly be helpful?

Let me have Frank touch on that. And then I could follow through.

Sure. Tim, we factor in the increase of our run-rate earnings, our new originations, the fully realized G&A savings from internalization. And we look at the coverage we're getting from adjusted distributable earnings and obviously our net cash flow. Origination volume and prepayments continue to affect our potential to increase our run-rate earnings and allow us to recommend an increased dividend to our Board.

So really Tim, where we are right now is our expectations are that we will increase the dividend in 2022. But right now, we're at that inflection point where it's originations and net deployment and we do have some prepayments coming in. What we experienced during COVID was a stall effectively in prepayments. And so now what you're seeing are the assets that were expected to pay off during that timeframe are starting to pay off now. And what we're also experiencing is, given, as I made in the prepared comments, we've had really robust rent growth. In fact, some of our value-add borrowers are actually experiencing rent growth before they actually initiate the programs. And so we are starting to see some loans in the post-COVID vintage potentially pay off. Our asset managers are away from doing the hand-to-hand combat on loan modifications that they did during COVID; they are staying very close to every borrower and trying to gauge if any of those loans are paying off. That's really where we need to stay ahead of it, to see if any of the loans that were put in place post-COVID are paying off because they're way ahead of their business plans. And that's the balancing act that we're at right now. The economy is doing very well, and so loans aren't going out for the initial term of two to three years; they're actually paying off earlier. So I think what we need to do in terms of maintaining and growing that dividend is we need to do more originations than we did last year. Last year we did $1.9 billion, 64 loans. We probably need to grow that average loan size a little higher. And we need to do about 10% to 20% more in loan originations than we did last year, depending on how fast the prepays come in, and how fast these business plans are accelerating.

That's helpful guys. I appreciate it. Maybe there's a couple questions around that. But do you feel confident in the platform's ability to originate 10% to 20% more loans while also maintaining the credit parameters that you want to? I mean, I know it's pretty competitive out there. And you guys have done a good job growing through increasing competition, but just wondering if you still think you can maintain the asset quality and grow the portfolio to the amount that you're targeting?

Yes and yes. We think we could do that. We did 64 loans pretty seamlessly this year, in many ways starting off as a new organization with my arrival two years ago. So we actually think we have the capacity to do that. Our pipeline for the first quarter is looking pretty solid. And I do think we have to try to do some larger loan sizes. We are trying to balance the path of growth and rating agency preference for larger MSAs, so we get to those larger loan balances. Sometimes it gets more competitive and spreads compress, but they can benefit your CLO. I will say that we did not do much at all below LIBOR plus or L plus 300, and some of our competition did that. With the spreads widening the way they did in this first quarter, you may see some CLOs getting less than their targeted ROE because they had a substantial amount of loans that were below the 300 threshold, despite their advance rates. And so we're really trying to keep an eye on making sure that if we do a CLO that we get additional lift beyond what our warehouse lines are providing us in terms of ROE. So, we're trying to balance that, but that's what we do.

Got it. I mean when you originate a loan today, are you assuming that CLO takeout is the target? But do you still think going a little bit tighter on spread and having to put that on repo for a bit, can you achieve the ROEs that you're looking for?

Yes. When we originate a loan, we are looking at both executions. We're looking at the warehouse line to make sure it's giving us an adequate ROE on the warehouse line, and we're not doing an execution that is substantially through our ROE targets on the warehouse line with anticipation that CLO spreads will tighten. We're looking at current CLO spreads all the time and looking at adequate ROEs on the warehouse line first and foremost.

Okay, got it. And then just one last question and I'll hop back in the queue, just around repayments. I know that they're tough to predict, but I think we saw a couple of multi-family loans, one in Arlington, Texas, one in Jersey City, upgraded to a 2. Are those signs that those loans might be getting kind of ripe for repayment? And also if you're having some newer vintage loans repaid, you expect you could benefit from some nice prepayment income this year as well?

Andy, do you want to talk about some of these upgrades? There may be a correlation there now. Let me have Andy address that and I'll pick it up if there's anything left to say.

Thank you, Mike. In terms of repayments, this year we're expecting somewhere between $300 million and $400 million of repayments each quarter. That's based on looking at the underlying business plans, how they're tracking to underwriting and what the borrower's plan for the asset is. So, we do anticipate repayments. It's something that we're constantly looking at. And yes, when you do see our risk rankings tighten up a little bit, that's evidence of borrowers being ahead of business plan and the assets performing, so that could be an indicator of increased prepayments going forward.

All right. Well, I appreciate the comments this morning.

Thank you, Tim.

Thanks Tim.

Our next question is from Steve Delaney with JMP Securities. Please proceed.

Thanks. Good morning everyone. And Andy congratulations on your well deserved promotion to President.

Thank you.

Sure. So, obviously, bridge loan demand across the board has been really strong throughout most of 2021 and as you said, early this year. I'm just curious, the Fed is going to be in play here, and whether we get 100 basis points or 150 basis points, we could get something meaningful. Is this generally based on past experience in these markets and this type of borrower, a lot of acquisition, buyers — property buyers — what's the psychological and bottom-line impact of the Fed being in play and taking rates up pretty aggressively over the next 12 to 18 months? Thank you.

Hey, thank you, Steve for your question. It's a dynamic issue. You've got a yield curve flattening here as the Fed increases rates. There are a number of factors like inflation, some supply chain constraints, and energy demand affecting inflation. On our side, generally speaking, rates going up could lead to some economic slowdown, a deceleration in rent growth, and potentially adjustments in cap rates. Some borrowers may decide to go fixed rate if they can, but that's not the sector we're playing in. We're playing in the value-add sector. We are seeing areas of the economy, where I mentioned the states that were winners. Arizona has seen some multi-family price appreciation comparable to Texas and Florida. We are seeing properties that have appreciated significantly. The debt yields on new loans remain attractive. We recently quoted a deal in Arizona with a strong going-in debt yield. We're seeing most of that property appreciation in moderately priced workforce housing B- and C-quality properties, where there could be an upgrade in rents relative to the comp set. But we are being very mindful of the risk. Trees don't grow to the sky, and we're focused on that. So generally speaking, there may be a deceleration in NOI growth, which we would actually welcome to some extent because assets might remain on our balance sheet longer, allowing us to benefit from them across two to two-and-a-half years rather than 15 months. I'll also mention that we are doing more in office and non-multi-family lately. Andy, why don’t you comment on how much we've done in office and non-multi-family relative to multi-family?

Sure. Throughout the course of 2021, 71% of our activity was in the multi-family sector. If you look at our latest quarter, actually 52% was office. So we are starting to do more in the office sector and looking forward as we look into Q1 our pipeline is showing more activity in other asset classes, including industrial, so we're seeing the opportunity set broaden out across asset classes.

Thank you. Appreciate the color. And just one final thing for me, you guys may have noticed that iStar sold its large net lease book to Carlyle for $3 billion. Obviously, it's a very stable, consistent, predictable source of revenue for you. So I'm not so much thinking you know that, you didn't see that, you saw that as a core asset is, what I want to confirm and unlike the five investment portfolio. But could you comment—you carried it at a depreciated book value and rightly added the depreciation back to your book value calculation. Do you expect, just looking at where things are trading there, that there is unrecognized value? You're not marking it to market, but do you think that there is value in that portfolio that exceeds your depreciated basis?

So the short answer is yes, but there are two different assets there. We've spoken at length about the industrial asset, which is the Albertsons facilities. That has a long-term lease and strong NOI, and the financing runs until 2028. There's some locked-up value, but the defeasance aspect of the CMBS financing makes it a longer timeline play. It's a core industrial asset and provides recurring earnings. The other asset is non-U.S. based — the Equinor headquarters in Stavanger, Norway — a high-credit tenant with a lease expiring in 2030, and we have a currency hedge in place for about another two years. The debt matures in 2025, and we're getting mid-9s ROE on that position with the hedge in place. We would revisit that as we approach the debt maturity to see if we can extend the lease to get a better refinancing outcome. We sold most non-U.S. assets earlier, and Equinor is the last one we have. If we can get an extension closer to maturity it might be an asset we would consider selling given it's non-U.S. based. So look at those assets as different bookends: one with substantial locked-up value and the other with value but potential refinancing considerations in 2025.

Yes. Well, certainly, those are not assets that you have any trouble sleeping at night when you've got those on your books. I appreciate everybody's comments. Thank you.

Thank you.

Our next question is from Stephen Laws with Raymond James. Please proceed.

Hi. Good morning. I think you've touched a little bit on this Mike and Andy in your answer to Steve Delaney's question. But kind of thinking about the volumes, it looks like the portfolio mix, I think I saw in the supplement office is largely unchanged, but multi-family has grown significantly at the expense of all the other property types. Is that simply what you talked about, multi-family is where you're seeing most of the transaction volume? Is it the focus on the CLO financing and you're looking at getting multi and office assets to put into those CLOs? Are there other things that are pushing you away from hotel or retail or other property types that you really haven't done much of the past few quarters?

It's a little bit of both. We try to balance CLO execution and what the CLO market wants. Andy, why don’t you give additional context?

So, what you've seen in our underlying portfolio is more exposure to multi-family and that's been a function of a couple of things. One, it was a strategic initiative to get more exposure to the asset class; and two, it's really been where the majority of the investment sales and the trading activity has been. You touched on the CLO market — a lot of what's happening there is skewed toward multi-family; many of the offerings are heavily multi-family. So that seems to be where we're seeing the opportunity. That being said, in Q4 you saw more activity on the office front, and other asset classes like hospitality are starting to become more attractive as there's more visibility post-COVID. So it's been a function of both wanting exposure and where the opportunity set is moving.

Great. Thanks, Andy. And Andy, kind of thinking about the balance sheet where you're operating I think leverage, you mentioned ex-securitizations is kind of 1.9x now. That's up like 1.1x I believe from the end of last year. Kind of where do you see that going? Where are you comfortable operating the portfolio for that metric?

Hey Steve. We're very clear: we are at 1.9 today and we see that over the course of the year increasing based on our projections; it could get as high as 2.4 times. That would put us in line with where comps are trading; that's kind of a high side where we see that ratio going.

That's helpful. Thanks very much, Frank. Appreciate it.

Our next question is from Matthew Howlett with B. Riley. Please proceed.

Good morning, everybody. Thanks for taking my question. First one for you, Mike. On closing this discount to the stock price and undepreciated book, how do you look at buybacks as a potential use of excess capital? Why wouldn't that be considered if there is significant runoff and I know you want to deploy, but why wouldn't that be looked at as a source of excess capital to repurchase shares here?

First of all, thank you for your question, and welcome to the call. I don't think buying back a million shares of a $5 billion company in a quarter is really going to move the needle. When DBRG executed its secondary offering, the management team stepped up and bought shares at roughly a $9.50 price. Right now, DBRG is our largest shareholder and they are a potential seller; they'll address their holdings in their call. I think that situation is an overhang on the share price. Whenever we approach that $10 level we seem to pull back. Obviously, dividend yield is going to be a big driver, which we're working on. With regard to DBRG, it's a unique scenario: they've sold already roughly 9.5 million shares this past year. Our expectation is they may come back to the market again. Right now, DBRG has been incredibly supportive of this team here at BrightSpire, and we appreciate and look to earn that support every day from them as our largest shareholder. We have increased our dividend three times in 2021, so we've taken some opportunity cost out of the holding element for DBRG. Perhaps they will be more deliberate in thinking about when they would execute more of a secondary. If DBRG does come to market again with another secondary, we would contemplate whether we could participate. At that point we would look at factors such as how much cash we have on the balance sheet, how much they are selling, what they would be left with, and most importantly pricing. Right now, the business plan is to deploy cash on the balance sheet into loans. Balancing that deployment is the number one focus. If DBRG raises their hand to do a secondary, we would consider whether we could do something larger than buying small amounts of shares back during any quarter. If that opportunity doesn't arise, we can reassess toward the end of the year depending on where the stock price is.

Well, first of all, I'm pleased to hear that the company would consider something like that. On the subject of pricing, hypothetically, I know pricing is an issue, but if they saw anything near the last deal they did, wouldn't it be significantly accretive to repurchase those shares given you're at like $12.50, $13 undepreciated?

Again, I want to emphasize we have no information about DBRG's plans. What I'm saying are my thoughts. They've sold in 2021 and have been supportive of this management team. We don't have any information as to whether they will sell more. If the opportunity presented itself and our balance sheet had the liquidity, we would evaluate the math and could participate, but we can't make that call until the situation arises.

Just to follow on that, on the subject of capital markets, where are we in terms of the perpetual preferred market? We've seen some peers come out with offerings. Would BrightSpire look at perpetual preferred if you needed capital? And then last, on operating expense guidance: you mentioned the internalization and hiring to get to about 55 people — any guidance on the cash G&A run rate for 2022?

We've looked at the preferred market, but given the cash we have on hand, we don't expect that to be accretive in the near term. It's not likely something we would consider until late 2022 or 2023. Interest rate moves could affect the attractiveness of a preferred issuance. Another consideration is what DBRG might do with its holdings. So in short, do not expect a preferred issuance during the course of the year; it's something we might look at year-end or early 2023. I'll let Frank address expenses.

On the expense side, we had spoken to a $36 million annual run rate, or about $9 million per quarter, which we achieved during the year. That will tweak up a little as we go into the year for pay increases, D&O insurance, and other items, but we're going to stay around that $9 million to $9.2 million per quarter on a cash basis run rate.

So, in other words, no significant hiring planned beyond what's already been announced to achieve origination expectations?

I don't think there will be anything that would materially move that number.

Great. Thank you.

Our next question is from Derek Hewett with Bank of America. Please proceed.

Good morning everyone and congrats on the quarter. Most of my questions were already addressed. But could you provide some additional color on that Houston multi-family loan that was resolved in January and specifically was it resolved at the year-end carrying value?

Okay. That was a student housing deal. It was part of a three-property collateralized loan where the borrower was liquidating assets one-off and that was the last remaining asset. The net result was a $1 million loss versus book, and that factors in the CECL reserve that was included.

That's correct.

Great. Thank you.

We have now reached the end of our question-and-answer session. I would like to turn it back over to management for closing comments.

Well, thank you everyone for joining us today and we look forward to speaking again in May for our first quarter earnings. Have a great day.

Thank you. This does conclude today's conference. You may disconnect your lines at this time and thank you for your participation.