Greetings, ladies and gentlemen and welcome to BrightSpire Capital's Second Quarter 2022 Earnings Call. At this time, all participants are in listen-only mode. A question-and-answer session will follow the formal presentation. As a reminder, this conference is being recorded. I'd now like to turn the call over to your host Mr. David Palame, General Counsel.

Good morning, and welcome to BrightSpire Capital's second quarter 2022 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, August 3, 2022, 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, I'll provide a brief recap on our results. The company reported second quarter 2022 GAAP net income attributable to common stockholders of $34.3 million, or $0.26 per share, and adjusted distributable earnings of $31.48 million or $0.24 per share. The company also reported GAAP net book value of $11.26 per share and undepreciated book value of $12.42 per share as of June 30, 2022. With that, I'd now like to turn the call over to Mike.

Thank you, David. Welcome to our second quarter earnings call and thank you for joining us today. Given the exceptional market volatility in this past quarter, I will focus my comments on market conditions as a segue into Andy's comments on capital deployment and portfolio activity. Finally, our CFO Frank Saracino will discuss our second quarter financial performance. Starting first with the headline. We had another quarter of earnings growth. Distributable earnings increased from $0.22 per share in Q1 to $0.24 per share in Q2, more than fully covering the quarterly dividend of $0.20 a share. The lending strategy that BrightSpire has undertaken since emerging from the pandemic was designed for challenging market conditions. Our portfolio is more diversified than ever before with an average loan size down from $50 million in 2020 to $35 million today. Over that same period, our Multifamily segment has grown from 30% to 52% of our loan portfolio and 80% of all new loan originations have been acquisition financing. Our middle market lending program targets higher population growth regions driven by work markets and value-add asset-level strategies. This portfolio strategy was designed to reduce large loan risk concentrations, with a focus on assets whose underwritten NOI growth projections should outperform these rate increases. On our previous two earnings calls, I specifically referenced record levels of inflation and the Federal Reserve's well-advertised plans to increase interest rates. Rather than rehash macro events of the last quarter, it will simply state that it is abundantly clear that these market dynamics have begun to permeate the economy. The capital markets' reaction has been to shift into risk-off mode brought on by these sharp interest rate increases. Just recently, the treasury yield curve inverted to its widest spread in 20 years, while credit spreads have continued to widen. Overall market sentiment has become extremely bearish. And this was validated with last week's report, indicating GDP declined again during the second quarter. With two quarters in a row of GDP contraction, we have technically entered into a recession, although its ultimate length and depth remain uncertain. If the current strong employment numbers can hold up, it will make any downturn more shallow. Separately, there also seems to be a disconnect between public equity markets and the treasury and credit bond markets. Equities are rallying on recession news, while 10-year treasury rates have moved lower and credit spreads have widened. Based on history, we think the bond markets have it right. Turning now to commercial real estate lending. The market volatility along with higher costs of capital in both benchmark indices and credit spreads caused commercial real estate investment sales and lending activity to meaningfully contract during the second quarter. Accordingly, at BrightSpire, our origination volume has been trending lower. This is not just lenders being more cautious. As I mentioned on the last earnings call, the reverse information feedback loop from lenders to mortgage bankers back to borrowers and asset sellers has worked to substantially shrink transaction sales and refinancing pipelines. Therefore, the demand for commercial real estate credit has contracted. CMBS and CLO mortgage loan securitization volume has followed suit and declined in June and July, while CLO spreads have widened further during the quarter. Given these market conditions, we will be delaying the issuance of our third CLO in the near term, and we'll reassess the market in the next few months. We concur with others that the dearth of new issuance, along with AAA CLOs already yielding over 5%, should lead to spread tightening in the coming months. It makes sense that these market dynamics would also result in a slowdown in existing loan payoffs, which we are, in fact, seeing in our own portfolio. Borrowers who have engaged in selling properties have suspended the marketing process in favor of maintaining their existing financing while continuing to execute on their asset-level business plans. All of our loans have built-in extension options, subject to meeting certain criteria. In the meantime, with interest rates and replacement costs both higher, construction development and single-family home sales should continue to slow. We therefore expect that multi-family occupancy rates will continue to benefit from both sides of supply and demand. As a result of these risk-off market conditions, BrightSpire has shifted its focus with an eye toward maintaining higher levels of cash liquidity. While we will continue to selectively quote new loans, actionable lending opportunities have become increasingly scarce. This will continue to be the case until lenders and property owners see signs of market and valuations stability. This will require meaningful indications of downward inflationary trends along with more visibility as to the length and extent of the Fed's rate increases. Until that visibility occurs, maintaining higher levels of cash liquidity is prudent. This is a time to closely monitor our balance sheet and stay especially close to our borrowers and banking counterparties. With that, I would now like to turn the call over to our President, Andy Witt.

Thank you, Mike, and good morning, everyone. After averaging nearly $500 million of new originations in each of the five previous quarters, the pace of capital deployment has slowed as a result of the themes Mike highlighted. During the second quarter, the company closed on $306 million in aggregate loan commitments across nine newly originated loans, with an initial loan funding of $279 million. All of these investments are floating rate first mortgages on cash flowing assets. During the month of June, we did not close any loans. However, subsequent to quarter-end, we have closed three loans for a total commitment amount of $91 million. During the second quarter, our loan portfolio grew slightly and currently stands at $3.8 billion and total assets of $5.3 billion. As highlighted last quarter, the number of loans quoted has declined. As a result, we are committing to fewer loans. As expected, our pipeline of actionable opportunities has declined as market participants adjust to the new normal, most notably higher interest rates and the associated implications. We anticipate a slow Q3 in terms of new originations, as we are quoting new loans on a highly selective basis. Counterbalancing the decline in new originations has been a slowdown in loan repayments. During the second quarter, we received $248 million in repayments across eight loans and one partial paydown. Given the macroeconomic environment, we now anticipate loan repayments for the remainder of the year to be approximately $200 million per quarter, significantly less than the $400 million to $500 million we anticipated at the start of the year. Being ahead of prepayments and deploying capital on a net basis was the focus going into 2022. At this point, we feel it more prudent to temporarily shift our stated business plan of deploying company liquidity, which currently stands at $438 million, in favor of maintaining higher levels of cash on the balance sheet. We believe this best positions the company to take advantage of future opportunities. In the meantime, earnings continue to benefit from the tailwinds associated with rising SOFR, as earnings are positively correlated with increasing interest rates. The composition of our portfolio in terms of segment weightings remains relatively constant with the previous quarter. During the second quarter, there were a number of notable events within the loan portfolio, including the disposition of an equity kicker, the partial paydown of a predevelopment land loan, and an increase in our CECL reserve. In the beginning of the second quarter, we executed on the sale of an equity kicker related to a portfolio of industrial assets previously sold in 2019, generating a $22 million gain on sale. The company also received a substantial paydown of $51 million on a risk-rated foreign investment that also reduced our exposure to predevelopment land loans. The remaining balance for this loan is $57 million with the net exposure of $30 million. Frank will elaborate on the increase in our CECL reserve. As of June 30th, 2022, excluding cash and net assets on the balance sheet, the loan portfolio was comprised of 110 investments with an aggregate gross book value of $3.8 billion, and the net book value of $946 million or 82% of the portfolio. The average loan size is $35 million. And our risk rating is 3.1, unchanged from last quarter. First mortgage loans now constitute 97% of our loan portfolio, of which 100% are floating rate. Multifamily loans represent 52% and office and industrial combined comprise 33% of the loan portfolio. 73% of the collateral is located in markets that are growing at or above the national average growth rate. 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 $2.25 billion. During the quarter, the company upsized two of its warehouse facilities by $200 million in total. As of today, availability under our warehouse line stands at approximately $712 million, which represents a 68% aggregate utilization rate. Additionally, we have two outstanding CLOs totaling $1.7 billion. At present, 43% of our loan collateral has been contributed to CLOs. 54% is on our warehouse lines and 3% is unencumbered. Our 2019 CLO has a total collateral balance of $867 million. The reinvestment window for the CLO has expired and as such each loan payoff will result in a reduction in the advance rate and an increase in the cost of funds. We anticipate collapsing the CLO at some point over the next 12 months. The timing of which will be dictated by loan payoff velocity and market conditions. As for the CLO we issued in 2021, we continue to actively manage reinvestment. In summary, the company had a productive second quarter, modestly growing our portfolio and increasing recurring earnings. Our near-term focus has pivoted from net deployment to now maintaining higher levels of liquidity, given the macroeconomic backdrop. Now, 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. 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. For the second quarter, our distributable earnings and adjusted distributable earnings were each $31.4 million or $0.24 per share. Additionally, for the second quarter, we reported total company GAAP net income attributable to common stockholders of $34.3 million or $0.26 per share. GAAP net income includes the $22 million gain Andy referenced earlier, and is therefore higher than distributable earnings and adjusted distributable earnings, which exclude this gain. Company second quarter GAAP net book value of $11.26 per share remained unchanged from the prior quarter, while undepreciated book value increased by $0.06 to $12.42 from $12.36 per share. The increase is primarily driven by share purchases and the asset sale previously highlighted, partially offset by an increase in our CECL reserves, FX translation related to our Norway office net lease asset, and our annual ordinary course employee share grant. I would like to quickly bridge the second quarter adjusted distributable earnings of $0.24 versus the $0.22 recorded in the first quarter. The increase is primarily driven by the full quarter impact of loans originated during Q1 and the increase in the benchmark rates. Additionally, during Q2, we received a non-recurring prepayment fee related to a loan repayment. Adjusting for this one-time item and heading into Q3, our adjusted distributable earnings quarterly run rate is closer to $0.23 per share. As of the remainder of the year, the rapid pace and level of deployment over the last 18 months, combined with slower than expected repayments has us well-positioned to maintain higher levels of cash while continuing to produce adjusted distributable earnings that support the $0.20 per share quarterly dividend. Furthermore, our earnings are now directly correlated to performance from rising interest rates. We provide more data in our supplemental financial report, but in illustrative terms, a 150 basis point increase in the benchmark rates from the June 30th spot rates would add roughly $10.8 million to our annual earnings or about $0.08 per share. All else being equal, this translates to an ROE increase in our loan book of approximately 110 basis points. It is also worth noting that one month into the second quarter base rates already increased by approximately 60 basis points. Turning to our dividend. Given our adjusted distributable earnings performance in the second quarter, we declared a $0.20 per share versus a $0.19 in the first quarter. This implies a year-to-date payout of approximately 85%. Moving to our balance sheet. Our total share undepreciated assets stood at approximately $5.3 billion as of June 30th, 2022. Our debt-to-assets ratio was 66% and our debt-to-equity ratio was 2.2 times at the end of the second quarter, up from 2.1 times at the end of the first quarter. This increase was primarily driven by new senior loan originations and share repurchases. As for common stock repurchases, during the quarter and as previously announced, our Board of Directors authorized a $100 million stock repurchase program. To date, we have repurchased approximately 5.3 million shares, totaling $44 million at a weighted average price of $8.31 per share. This resulted in the $0.16 of undepreciated book value per share accretion. The repurchase shares include 25.4 million of OP units and 18.3 million shares of BRSP common stock. The OP units were owned by a third party, going back to the data formation. In addition, our liquidity as of today stands at approximately $438 million between cash on hand and availability under our bank revolving credit facility. At present, we believe our financing arrangements provide the liquidity and flexibility we need to manage and grow our business for the foreseeable future. Looking at risk rankings and CECL reserves, we had neither any impairments nor any non-accrual loans during the quarter. One loan changed risk ranking from a two to a three due to a refinancing as all new loans initially begin with a three ranking. Altogether, our average loan portfolio risk rank at the end of the second quarter was 3.1. This is unchanged from 1Q level. And finally, our CECL provision was $45.1 million, an increase of approximately $10.2 million from the prior quarter. The higher CECL reserve is driven by the current macroeconomic outlook as well as newly originated loans. That concludes our prepared remarks. And with that, let's open the call for questions.

Thank you very much, sir. Ladies and gentlemen, at this time, we will be conducting a question-and-answer session. The first question comes from Eric Hagen of BTIG.

Good morning, everyone. I hope you are all doing well. I have a couple of questions. First, is there a minimum level of liquidity you expect to maintain based on your opening comments? How should we view the dividend and expectations for stock buybacks in this context? Secondly, when you mention a reduction in loan sizes, what do you see as the benefits of this, and why should investors find it appealing, especially in the current market? Does this reflect the quality of the sponsor or the financing you can secure with those loans? Thank you.

Hey, Eric. Good morning. It's Mike. Thank you for your question. Let me address the loan size first. Our focus has always been on the middle market, specifically targeting loan sizes that range from the 20s to under $100 million. This strategy is informed by our company's experience and the amount of shareholder equity we have. We believe that more diversification is crucial for managing risk. By lowering the average loan size, we aim to reduce the impact of any single loan on the company. This approach also aids us during securitizations, as our diversified portfolio means we are not heavily invested in larger loan markets. We prefer office locations that are seeing higher occupancy rates, such as areas in Dallas with 65% to 70% occupancy, compared to lower rates in cities like New York and San Francisco. We're cautious about larger markets due to the increased risk associated with office assets there. Concerning cash, as a mortgage REIT, it's important not to be fully invested at all times because of our long-term credit exposure. We're monitoring the market closely. Many of our peers are also holding onto cash, which they refer to as dry powder, and we are ready to seize opportunities. However, at the moment, as we noted in our prepared remarks, there are very few actionable opportunities available. After more than a decade of the Fed supporting the market, that support is now being withdrawn. Consequently, pipelines at brokers have diminished significantly, making actionable opportunities scarce. We didn't set a specific target for cash reserves; we're simply observing the market and preparing for potential changes. This is a unique market; we have $9 trillion on the Fed's balance sheet, something that isn't widely discussed. We are in an unprecedented interest rate and inflation environment, following a 40-year rally in the treasury market. Sitting on cash seems wise right now, and while we don't have a specific target amount, we are currently around $270 million. We've previously stated our intention to maintain $100 million on the balance sheet for asset management flexibility. That leaves us with $175 million earning a 2%, a figure we haven't seen in years, and we are considering deploying some of that cash. AAA CLO loans have become quite inexpensive, yielding 5% last quarter when we initially anticipated a yield of 4.5% by the third quarter. We are closely monitoring this situation. If we can find a way to deploy some cash there with modest leverage, we could achieve a 7% yield. We're observing the CLO market, as we anticipate that increased issuance will narrow spreads. Currently, with $275 million in cash, we are holding onto it with no predetermined amount allocated. The extra cash stands at $175 million, and we will continue managing this over the next few quarters until we gain more visibility on lending opportunities.

That's very helpful color. I appreciate that. If I could sneak in one more here. On the 2021 CLO, is there any room for reinvestment that you expect to manage there? Like as you supposedly delever again, based on kind of what you talked about in the opening remarks, is there a composition change to the leverage that we should anticipate to? Thanks.

There is no change in leverage that you should be concerned about. I did not address your question regarding the buyback. I will let Frank explain what we did and our perspective on the buyback.

Yeah. So just to the buyback, look, I think as we said, Eric, there's just a bias around the cash right now. And as we have clarity in the coming quarters, we'll look to be opportunistic as far as buying back our stock, but nothing planned at the moment beyond kind of where we are.

And we had an opportunity to buy back units from one holder at a price. And we took advantage of that. So, we didn't have to move the market. So, we were able to get something done at good levels in May. But as the market started to get a little bit crazy in June, you would've thought we would've stepped in to buy more, but we were seeing other things happening in the market, enormous spread widening and things like that, and a risk-off in the market where we felt that we should pause for a minute. So, we can revisit the stock buybacks when we get a little bit more visibility. We had a great window to buy back stock lower than we thought we could. And we'll see where the market goes. If the market improves, stock price improves and we're going to risk on, we'd much rather put the money out in loans.

Thank you. The next question comes from Chris Muller of JMP Securities.

Hey, guys. Thanks for taking the questions. I'm on for Steve today. Can you talk about how loan spreads on new loans have changed over the last six months? And are you guys getting wider spreads on new loans compared to loans that are paying off?

The spreads have widened significantly. We're currently seeing spreads around four for multifamily and even wider for office and industrial properties. The banks we work with have adjusted their perspectives, particularly regarding the CLO market, and they have increased their cost of funds by about a solid hundred basis points. Additionally, banks are becoming more cautious, and some are even syndicating their warehouse lines. Currently, the spreads we're able to quote based on our execution with banks and CLOs lead to borrower costs around 7%, which is challenging given the previous decade of aggressive monetary policy. As Andy mentioned in his prepared remarks, we're all anticipating the emergence of a new normal. With spreads at 400 over, the opportunities for actionable lending are limited. There may be potential for stretch mortgage lending, allowing for a higher percentage financing, but mezzanine lending is not feasible right now due to significantly increased costs. The pipelines for brokers concerning transaction sales or refinancing have really shrunk, and I expect a slow period until September. After Labor Day, we might see some transactions start to come back to market, but for now, the next quarter looks sluggish.

Got it. That's helpful. Thank you. And then, on your comments about the banks, how are they reacting in terms of widening spreads versus just slowing lending overall from what you guys are seeing?

Well, widening spreads is their throttle on the engine, right? So, by widening spreads, they're basically expressing to us that they want to be more cautious. And they're not jumping up and down saying, oh, gee, we can get stuff at 300 spreads. They're really kind of quoting those spreads to be more defensive and more selective. You have a lot of banks who have warehouse facilities that they're expecting to be unwound in CLOs. And they've got a lot of SASB positions that they're long, that they were not able to execute on. So, the banks themselves are looking at their real estate positions and saying there's probably some indigestion there, and they're expressing it to their borrowers, like the commercial mortgage REIT, by widening the spread. So, it's not just a cost of funds issue. It's the banks' way of expressing themselves that they'd like to be more cautious and they'd like to slow it down.

Got it. Helpful. Thanks for taking the questions.

Thank you. Ladies and gentlemen, we have reached the end of the question-and-answer session. We have a follow-up question from Eric Hagen of BTIG.

Hey, thanks. I thought I'd sneak in one more. When a sponsor goes to extend their loan, can you talk about any of the terms that may change when they explore doing that, or whether there's any thresholds that they need to meet from an operational standpoint for them to extend their loan?

Yeah. We could answer that. Andy Witt, would you like to address that please?

Sure. So, typically, what happens is when a borrower comes back for an extension, there are certain covenants in the loan that they have to cover. And then, as part of the extension, we get a rate cap. So that's really the process. And those levels are determined on a loan-by-loan basis based on the underlying business plan at the time of underwriting.

Gotcha. That's helpful. Thanks for sneaking me in.

Thank you. Ladies and gentlemen, we have now reached the end of the question-and-answer session. I will now turn the call back over to Mr. Mike Mazzei for closing remarks.

Well, thank you. We appreciate you attending today. We realize there were other competing earnings calls at the same time. So, thank you for your attendance. We look forward to speaking to you again on our third quarter earnings call in November. Thank you.

Thank you. Ladies and gentlemen, that concludes today's conference. Thank you for your participation and you may now disconnect your lines.