Good morning, and welcome to BrightSpire Capital's third quarter 2023 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, which are based on management's current expectations, are subject to risks, uncertainties and assumptions. Potential risks and uncertainties could cause the company's business and financial results to differ materially. For a discussion of risks that could affect results, please see the Risk Factors section of our most recent 10-K and other risk factors and forward-looking statements in the company's current and periodic reports filed with the SEC from time to time. All information discussed on this call is as of today, October 31, 2023, and the company does not intend and undertakes no duty to update for future events or circumstances. In addition, certain financial information presented on this call represents non-GAAP financial measures. The company's earnings release and supplemental presentation, which was released yesterday 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. Finally, during the call, management may refer to distributable earnings as DE. With that, I would now like to turn the call over to Mike.

Thank you, David. Welcome to our third quarter earnings call, and thank you for joining us this morning. I'll start by making some brief comments about the third quarter and then turn the call over to Andy. Everyone is well aware of the current geopolitical and economic issues; therefore, I'll keep my macro remarks brief. Let's first turn to BRSP's results. For the third quarter, we reported GAAP net income of $12.4 million, or $0.09 per share. Distributable earnings of $31 million, or $0.24 per share, and adjusted distributable earnings of $35.8 million, or $0.28 per share. Our dividend coverage for the third quarter was 1.4 times. Our liquidity as of today stands at approximately $348 million. This is comprised of $183 million of current cash and $165 million under our credit facility. During the quarter, our overall leverage stood at 1.9 times, flat with the second quarter. Quarter-over-quarter, our undepreciated book value increased by $0.02 to $11.55, largely driven by the 1.4 times dividend coverage this quarter. Turning briefly to the financial markets. Many believe the Fed is most likely done increasing the Fed funds rate. However, interest rates are becoming less anchored to the Fed's tightening policy and increasingly tied to U.S. fiscal policy. If you look at the term premiums associated with longer-dated treasury yields, they are starting to become unhinged from the Fed's monetary policies. The U.S. Treasury market is now becoming more preoccupied with Washington's out-of-control deficit spending. This has led to the federal debt increasing by $600 billion in one month, bringing it to nearly $34 trillion. The deficit spending is another reason why inflation has been very difficult to obtain. With the old long bond trading below a price of $50, this will mark the first time that the US treasuries have had three consecutive years of losses. Today's treasury bond issuance calendar is now larger than ever. Therefore, it makes sense that interest rates have been very volatile. The 10-year treasury yield has had intraday moves as much as 15 basis points and hit 5% just two weeks ago. Should that yield stick above 5%, that could be the threshold for a risk-off environment. But against this context, BRSP will continue to proactively manage our loan portfolio and look to maintain our cash liquidity as we navigate through these circumstances. In fact, I would now like to turn the call over to our President, Andy Witt.

Thank you, Mike, and good morning, everyone. Throughout the third quarter, the BrightSpire team has remained steadfast in our focus on proactive asset and portfolio management. During the third quarter, we received $58 million in repayments across two investments consistent with expectations, as repayment volume has been relatively muted. Year-to-date, we have received approximately $321 million in loan repayments. Looking ahead to the fourth quarter, we anticipate repayments to remain relatively low. Overall, our weighted average risk ranking increased slightly from 3.1 last quarter to 3.2 in the third quarter with 82% of our loans risk range three or better. Our weighted average risk ranking for the four prior quarters has remained relatively consistent at 3.2. We now turn to our watchlist update. Sequentially, the number of watchlist loans increased by NAV 3. We had one loan upgraded off the watchlist for $28 million and one loan was removed, as we took ownership of the property underlying the Oakland office loan. Five loans were downgraded to a risk ranking of four, totaling $145 million. The loans that were downgraded were as a result of properties falling meaningfully behind on their business plans and where the borrower may not be in a position to support the asset. In addition, one loan was downgraded from a risk ranking four to five. The multifamily property collateralizing this loan has faced operational challenges, despite the borrower's recent efforts to raise additional equity for debt service and capital expenditures. It now appears they are unable to secure the incremental funds needed to execute the remainder of the business plan. However, as of today, this loan remains current and performing. Additional details regarding this quarter's watchlist are included in our supplement. In terms of specific loan updates, we anticipate taking ownership of the Washington D.C. risk rank five office loan asset during the fourth quarter. Once we take control of the property, we expect to commence the sales marketing process. Our current carrying value is $20 million. With respect to the San Jose hotel property, we previously noted that a sales process was underway for the hotel Annex tower comprised of 264 rooms. The borrower anticipates the sale and corresponding partial pay down of our loan to occur in the fourth quarter. The loan remains risk ranked four. We will continue to maintain the current ranking on the remainder of the loan until we see a clear path to resolution. This loan financing advance rate is less than 50%. As of September 30, 2023, excluding cash and net assets on the balance sheet, the portfolio is comprised of 92 investments with an aggregate carrying value of $3.1 billion and the net carrying value of $874 million or 80% of the total investment portfolio. The average loan size is $34 million. Our weighted average risk ranking is 3.2 and the loan portfolio has minimal future funding obligations, which stand at $200 million or 6% of outstanding commitments. First mortgage loans constitute 97% of our loan portfolio, of which 100% are floating rate, and all of which have interest rate caps. The multifamily portion of our portfolio remains our largest segment with 53 loans representing 52% of the loan portfolio or $1.6 billion of aggregate carrying value. Office comprises 32% of the loan portfolio, consisting of $1 billion of aggregate carrying value across 30 loans with an average loan balance of $34 million. The remainder of our loan portfolio is comprised of 9% hospitality with industrial mixed-use collateral making up the remainder. With that, I will turn the call over to Frank Saracino, our Chief Financial Officer, to elaborate on the third quarter results.

Thank you, Andy, and good morning, everyone. Before discussing our third quarter results, I want to mention that our third quarter 2023 supplemental financial report is available on the Investor Relations section of our website. As Mike mentioned, for the third quarter, we reported adjusted DE of $35.8 million or $0.28 per share. Third quarter DE was $31 million or $0.24 per share. DE includes a specific reserve on one loan of approximately $5 million. Additionally, for the third quarter, we reported total company GAAP net income attributable to common stockholders of $12.4 million or $0.09 per share. Quarter-over-quarter, total company GAAP net book value decreased one-half of 1% from $10.16 per share to $10.11 per share. However, undepreciated book value increased from $11.53 to $11.55 per share. The increase is a result of adjusted DE in excess of dividends acquired; partially offset by increases in our CECL reserves. The third quarter change in adjusted DE of $0.28 versus this $0.25 recorded in the second quarter was driven by the impact of rising interest rates and income from our operating real estate portfolio. Turning to our dividend. For the third quarter, we declared a dividend of $0.20 per share, in line with the second quarter. Our dividend remains well covered at 1.4 times. Looking at reserves. Our specific CECL reserves decreased to $35 million from $55 million, a decrease driven by the charge-off of the Milpitas, California mezz B note and our taking ownership of the property underlying the Oakland office loan. This was offset by a specific reserve increase of approximately $5 million on the Washington, DC office loan. As Andy mentioned in his comments, we expect to take control of the Washington, DC office asset in short order. Finally, no specific reserve was required on the multifamily loan downgraded to a five. Our general CECL provision stands at $55 million, an increase of $3 million from the prior quarter. The increase in the general CECL was driven by economic conditions as well as specific inputs on certain office and multifamily properties. The combination of asset-specific and general CECL reserves at third quarter end was $90 million or 268 basis points on the total loan commitments, an overall decrease from $107 million or 311 basis points in the last quarter. As a reminder, these are point-in-time assessments that we evaluate each quarter. Looking at watchlist highlights. Our two risk ranked 5 loans represent approximately 2% of the total loan portfolio carrying value. 10 loans equating to 16% of the total loan portfolio carrying value are risk rank 4. While the majority of loans are current performing loans, we see potential for increased risk and accordingly are monitoring these investments and working with sponsors to ensure the best possible outcomes. Moving to our balance sheet. Our total at-share undepreciated assets stood at approximately $4.5 billion as of September 30th, 2023, steady with last quarter. Our corporate leverage levels remain at the low end of the sector. Our debt-to-assets ratio is 63% and our debt-to-equity ratio was 1.9 times, flat quarter-over-quarter. We have no corporate debt or final facility maturities due until the second quarter of 2026. That concludes our prepared remarks. And with that, let's open it up for questions.

Thank you. Ladies and gentlemen, at this time, we will be conducting a question-and-answer session. Our first question comes from the line of Sarah Barcomb with BTIG. Please proceed with your question.

Hey everyone. Thanks for taking the question. So, you discussed in the prepared remarks, the decision to downgrade some of those multifamily loans I'm just curious what the debt yield is on those roughly? And were there any modifications on those agreements during the quarter?

Hey Sarah, how are you? Thanks. First of all, all those loans are current pay right now. And we've had, I think, most of them an indication from the borrower that they're going to continue to support the asset. In fact, in one case, we have preferred equity that's stepping in as well, supporting the assets. So, all of those loans are current. I think where we have an issue is that there are some execution issues at the property-level, and so in an abundance of caution, we've downgraded the loans. I think we've commented before that our biggest concern is going from a 3 to 5 where there is a default on a loan. And while that could happen and anyone could be surprised, we want to demonstrate to the market that we're erring on the side of being conservative. So those properties, we're expecting new equity to come in. They fell behind on their business plans, some of them fell behind in their occupancies. But everything we're hearing from the borrower, in one case, the preferred equity, is that they are going to step in. And as I said, all those loans are current. We had one loan that was a risk rated 4 that we upgraded to a 3 because the occupancy picked up dramatically over the quarter. And the loan that we downgraded, the multifamily loan that we downgraded to a five, that borrower, in fact, raised equity very recently, but there are real execution issues at the property. So the comment on the debt yield really is there was a real execution in terms of bad debt and turning around the units for refurbishment. And so at this point, despite the fact that the borrower raised equity and the fact that the loan is still current, we downgraded the loan because we're going to plan on taking action around that asset. So really regarding the debt yields, all these properties are transitioning, and the issue has been execution at the property level. But as I said, every indication we have at this point, even with the downgraded loans, is that the borrowers, or in this one case, the preferred equity, are going to support the asset and get it back on track.

Okay. Great. Maybe just switching gears to office for a second. It appears the specific CECL reserve on the five-rated DC assets increased during the quarter and you're now anticipating taking title. Could we see a charge-off in excess of that specific reserve taken in Q3 during Q4 results? Just trying to see how that will shake out in the model. And then what's the occupancy on that building, if you have it?

We expect to foreclose on that building in November. Its current occupancy doesn't matter because we believe it needs to be converted to residential, considering its location and the current state of the DC office market. There is enough occupancy to cover expenses, but the leases are very short. Unlike other office properties, where the rent roll might hinder conversion, we see this as a good candidate for conversion. The markdown we took reflects our anticipation of this change. We have valued the loan based on current market conditions for construction loans, marking it close to land value per square foot for both office and residential conversion. Our plan is to foreclose in November and likely market the property for sale in the New Year.

And to answer the second half of your question, yes, we would charge-off the CECL related to that in the fourth quarter.

Our next question comes from the line of Stephen Laws with Raymond James. Please proceed with your question.

Yeah. Hi. Good morning. I just wanted to touch base really around how you think about capital allocation decisions, a number of options, you CRE loans, you can repurchase part of your capital stack, comment our debt, you can look at liquidity and paying down lines. Mike, it seems like that's what you kind of pointed to maybe in your prepared remarks is just maintaining liquid given this environment. But you can also look at things outside of CRE loans, other equity investments or securities. So when you look out there at this opportunity set, kind of what do you think looks interesting? And what do you think the timeline is of starting to maybe do more new originations?

Thanks for the question. I think what looks the most interesting to us is closing the gap between market value and book value. Right now, the market is clearly pricing in uncertainty. So our job is to provide as much transparency and certainty in execution on the assets and the balance sheet to close that gap. So in terms of allocation of capital, first and foremost, it's liquidity and staying working with our warehouse lenders or working with our borrowers to make sure we know what's coming, and we have ample liquidity to address anything that may be required. Secondly, when you look at the opportunities out there, yes, there are going to be a lot of opportunities or regional banks are all cutting back. They are the largest component of construction lending in the market. So with them cutting back, we expect construction loans to fall dramatically, which will be beneficial for the market as they work through vacancies, especially on the multifamily side over the next couple of years. So we think the opportunity is out there between regional banks cutting back and between this Basel endgame that's going to be enforced at the bigger banks, there'll be plenty of runway to execute on new transactions. But right now, I think our best focus is, as I said, is closing the gap between market and book value for our shareholders. And that's really that bridge is liquidity.

Great. Appreciate the comments. And maybe as a follow-up around the modifications. It seems like at a simple level, it's borrowers putting in more capital in return for more time. But can you talk about some of the other gives and takes that you're seeing come up consistently, and around floors and the loans if you're not moving those to market in the modifications have you thought about using some of your high coverage on the dividend to maybe buy your own floors in case rates move the other way and lock in some of this outsized asset yields?

So, for the modifications, let's hand that over to Andy, and then we'll proceed from there.

Great. In terms of modifications, I mean, they've been relatively consistent with what we've seen in previous quarters. Some of those modifications are just addressing at maturity a rate cap and interest reserve to carry the loan through the subsequent term. Others are more complicated and may include a pay down and some modification of future hurdles and so forth. But I think in terms of what we're seeing quarter-over-quarter, it's a lot of the same types of modifications, giving the borrower runway to complete the execution of their business plan and ultimately, get to a better capital markets environment. So that's what we've been trying to facilitate, and we do that in connection with the borrower, generally doing something to move the asset forward, whether that's a paydown, whether that's funding reserves, buying interest rate caps, which is a prerequisite for extension. So it's really an effort that we go through with each borrower in each particular instance.

Our next question comes from the line of Matthew Howlett with B. Riley. Please proceed with your question.

Thank you for taking my question. Are you being conservative with the watch list this quarter regarding multifamily assets? It seems like you might be getting equity, but you are cautious about classifying them as watch list names.

Thanks for the question. Yes, we have been focused on this, as mentioned in previous calls. We aim to ensure that nothing jumps from one risk ranking to default. By taking a conservative approach to risk rankings, even though the loans are current and borrowers have plans to raise more capital, we remain cautious. In some cases, preferred equity is preserving value, and all loans are current. However, when we analyze the property level, we see issues. For example, with the office loans we've downgraded, there are good aspects, but there is also a history of lagging in business plan execution. This could be due to accumulated debt or rising operating expenses, affecting not just insurance but also utilities, taxes, and payroll. They may have fallen significantly behind and will require considerable effort to get back on track. Therefore, we decided to downgrade them. We did upgrade one this quarter but downgraded it again due to a drop in vacancy. We prefer not to frequently change risk ratings. Regarding the San Jose hotel loan, as Andy mentioned, there might be a sale in the next 30 days that could facilitate a meaningful reduction of the mortgage loan. Nonetheless, even after that, I anticipate we will keep its risk ranking at four until stabilization is achieved. We want to avoid fluctuating the risk ratings, so if it’s at four, we are likely to maintain that until we are confident it won’t revert.

Yes. Look, I really appreciate the conservative. I know everyone has risk ratings mean something different for when that puts them out and you guys are just being very conservative historically. So I appreciate that. And on that loan, I mean, on the San Jose hotel, you mentioned in advance 50%. I mean what do you think that will free up in terms of liquidity? And I think you said last quarter that the entire hotel might be marketed, any update there?

I need to be cautious with my comments since we don't own the hotel. While I can't speak for the borrower, there is a public process that you can follow in the local Berkeley or San Jose newspapers. The buyer is backed by San Jose University, which is the ultimate user of the tower. We aren't fully aware of the details between the buyer and San Jose, but this will lead to a significant paydown of the loan, allowing us to recover a decent amount of that capital since the advance rate is below 50%, around 47%. As for the remainder of the hotel, that's contingent on the borrower's decisions. There have been protective advances made, and the mezzanine on the loan has also provided some assistance. However, a resolution is necessary for the larger remaining asset, but I can't comment on the borrower's behalf. There could be a sale in the second quarter of next year or a significant recap of the hotel, with some of our loans remaining in place while new capital enters. In the event of a sale, we'd be taking out the full amount, which would return a substantial amount of capital to us for redeployment.

Look, it could be a windfall for you on that final note, I mean, we're scratching our heads with the...

Yes, it could be a significant amount of liquidity that comes back. However, if the borrower recapitalizes the entire property in a way that makes it appealing for us to continue financing, we can consider that at that time, but we would need to be presented with the facts when it occurs.

Mike, you're maintaining the dividend and covering it, but the disconnect with the stock price at NAV, which actually was up in the quarter, how – how eager are you to just start buying back stock? Do you foresee a scenario, if you look at 2024 and liquidity – you're getting more liquidity from the portfolio. Could you just commence a buyback? I mean it seems like that's – that would be the best way to kind of close the gap between NAV and both…

No. There are differences of opinion on that. We have seen folks buy back stock, and it's a great investment, and we think it's a very compelling investment at these levels, given - if you just do the math, book value versus where the stock is trading and what the implications of that are. So we think there's a massive gap there. Having said that, the best way to harvest that gap to close that gap, to harvest the discount here is liquidity. And so kind of buying back stock is a one-time thing that really, at the end of the day, it might move the needle for a day or might have a nice halo effect for a quarter. But in terms of the long-term mission of really closing that book gap versus market substantially, we think you need the liquidity to do that. And so spending money on a one-time purchase of stock, the metrics look fantastic. It's still something that from a corporate finance perspective, we would lean towards the longer-term view, maintaining liquidity, so the market has confidence in your balance sheet, and we think that will have far greater impact on market price than buying back some shares.

Look, look, in these times...

Our next question comes from the line of Steve Delaney with JMP Securities. Please proceed with your question.

Good morning, Mike, Andy, and Frank. Thank you for the question. The distributable EPS estimate for the third quarter was $0.16, which was the low point. This figure included an estimated realized loss of $11 million, or $0.08 per share, related to the Oakland office loan, based on your commentary during the second quarter call. I won't delve too deeply into the accounting details, but it's worth noting that CECL reserves, whether specific or general, do not impact distributable EPS. However, two scenarios could affect it: selling a loan at a loss would reduce distributable EPS, and for foreclosures, REO is carried at fair value. Typically, we see an effect on distributable EPS when a loan with a specific reserve has been foreclosed upon. At that time, the CECL reserve disappears, but we incur a charge. So, regarding distributable EPS, whether in the base or adjusted form, it stands at $0.04 higher. Frank, could you please discuss any impact, if any, that the foreclosure of the Oakland office building had on the third quarter results? Thank you, and if I mistakenly referred to it as a hotel, I apologize.

The foreclosure of the office building affects our specific reserves, which impact our distributable earnings in the quarter they are taken. During the second quarter, we implemented a specific CECL, which was reflected in our distributable earnings for that quarter and will be added back in the third quarter. The CECL change related to 14 Oakland is not reported on the income statement; it is simply a charge-off on the balance sheet. In the third quarter, the only effect would be any earnings from that property after we took ownership that would contribute to our distributable earnings for the quarter.

Got it. We'll discuss that later. I apologize for not remembering the previous charge for distributable earnings, but other companies tend to wait until they foreclose and have it in REO before taking the charge against distributable EPS. Thank you for clarifying. Regarding the D.C. Hotel, should we expect that when you foreclose on it in the fourth quarter, which seems likely, there will be an impact on distributable? Or would your specific reserve already cover that? Will it be treated the same way as Oakland?

That's correct. We don't expect that foreclosure to have any more effect on our distributable earnings. The additional $5 million we took this quarter should cover that.

Okay, great. And just remind me, the $0.04 difference between distributable and adjusted distributable, what is that item?

That is…

Just incremental specific reserves on the D.C. asset that we took during the quarter.

Got it. Okay. Thank you for the comments and we'll talk in a bit anyway. We'll go into this a little more. Thank you very much.

Our next question comes from the line of Matthew Erdner with JonesTrading. Please proceed with your question.

Hey, thanks for taking the question. So, you have $71 million in fully extended maturities this year, $58 million of which come from two separate office properties in Miami and Blue Bell. Can you talk a little bit about those and their expected to pay off on time and just kind of the overall thoughts on those two loans? Thanks.

We're working with those borrowers on extensions on those properties.

Got you. Thank you. And then is there any update on the Long Island assets? I believe that you guys were stabilizing them last quarter and then eventually going to mark for sale. Are those in part of the REO for sale? Or are they still being held?

REO is always for sale. The assets in Long Island City, Queens include the Paragon and Blanchard buildings, which are located on either side of the Long Island Expressway at the entrance of the midtown tunnel. We have appointed a new property manager for these buildings since taking them back. There has been strong interest in the Paragon building, which is conveniently located near mass transit—just 100 feet from one subway station and a block away from another, as well as directly above a busy Long Island Railroad station. We are currently in discussions with two full office building users who are considering the property, but it may take around 90 to 120 days to determine if there is a solid opportunity there. We also have some partial building leases we are examining and would prefer to gain traction with those before listing the asset for sale. Therefore, we plan to allow 90 to 120 days to see if any substantial interest develops. As for the other asset, the Plants are building, it currently covers operating expenses, which may result in a longer timeline for selling. However, we intend to sell it without having any leasing activity. There is a possibility that some tenants interested in the Paragon building may also be interested in the Blanchard building, so we are monitoring that potential as well. Our goal is to sell both buildings as soon as it is financially advantageous. These are not intended for long-term lease holds, and we will act quickly once we have clearer insights on these assets.

Got it. Thank you.

That concludes our question-and-answer session. I'd like to hand the call back to Michael Mazzi for closing remarks.

Well, thank you all for joining us today. As always, feel free to contact us if you'd like to have a one-on-one conversation or meeting and dig into more of the details. If not, please have a great holiday season, and we will see you in February.

Ladies and gentlemen, this does conclude today's teleconference. Thank you for your participation. You may disconnect your lines at this time, and have a wonderful day.