Good morning, and welcome to BrightSpire Capital's Second Quarter 2024 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 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, July 31, 2024, and the company does not intend and undertakes no duty to update for future events or circumstances. In addition, certain financial information presented on this call represents non-GAAP financial measures. The company's earnings release and supplemental presentation, which was released yesterday afternoon and is available on the company's website presents reconciliations to the appropriate GAAP measures and an explanation of why the company believes such non-GAAP financial measures are useful to investors. Before I turn the call over to Mike, I will provide a brief recap on our second quarter 2024 results. The company reported GAAP net loss attributable to common stockholders of $67.9 million or $0.53 per share, distributable earnings of $17.0 million or $0.13 per share, adjusted distributable earnings of $28.8 million or $0.22 per share and cash earnings of $26.8 million or $0.21 per share. Current liquidity stands at $317 million, of which $152 million is unrestricted cash. The company also reported GAAP net book value of $8.41 per share and undepreciated book value of $9.08 per share as of June 30, 2024. Finally, during this call, management may refer to distributable earnings as DE.

Thank you, David. Welcome to our second quarter 2024 earnings call, and thank you for joining us this morning. Throughout the second quarter, the BrightSpire team remained focused on asset management initiatives in order to improve certainty around the portfolio and position the firm to move forward. We, like most, welcome the anticipated interest rate cuts starting in September. This will provide further momentum for our watchlist and REO resolutions. To note, in aggregate, the watchlist has remained stable quarter-over-quarter, but with some underlying movement that we will discuss. Now, I would like to provide insights as to our results. This quarter, we are taking impairments on certain legacy office equity investments. These investments were made roughly 9 years ago by predecessor companies prior to the formation of BrightSpire. These have been highlighted in past filings I mentioned in my prepared remarks last quarter. By taking the impairments, we will write down these investments to zero. This write-off makes up approximately 80% of our book value adjustment during the second quarter. The remainder of the book value adjustment is attributable to the increase in our CECL reserve, which now stands at $1.32 per share. The most significant impairment of these equity investments is the Norway investment. As of this month, we are no longer receiving cash flow income from this asset. As a reminder, last quarter, we also stated that we anticipated losing cash flow income on 2 other office equity investments in the coming quarters. Importantly, we have also recently commenced loan originations and will redeploy capital, which will, in part, offset the lost cash flow earnings associated with the legacy equity positions. While the loss of these cash flows occurs over 6 months, our capital deployment is anticipated to have an impact over a lengthier time period. I highlighted this dynamic last quarter. This timing mismatch became a significant factor in the decision to reduce our quarterly dividend from $0.20 to $0.16 per share beginning in the third quarter of this year. A reduction in our dividend will preserve shareholder equity in the near term. This will also allow the company to be more deliberate in pursuing value-enhancing strategies within the existing portfolio as we work through watchlist and REO investments. More specifically, relating to our Norway investment, although the debt comes due in June of 2025, a cash flow sweep went into effect this month. As a reminder, this is a net lease property and the global headquarters of Equinor, the state oil company of Norway. Equinor has been evaluating their future office requirements. The options include remaining at our property, leasing an alternative building, or constructing a new headquarters. For us to accomplish a sale or refinancing, we would need to be able to negotiate a lease extension beyond its current 2030 expiration. If Equinor decides to remain on our property under the current terms of the lease, the 5-year remaining term beyond the debt maturity is insufficient to refinance the property without a significant pay down of the debt. Also, Equinor's timeline for their occupancy decision may not align with the maturity of our mortgage debt. We will continue to work alongside Equinor and in our process. We will also engage with the lender group in an effort to modify the debt to improve the outcome. But at this time, investing more capital into this asset does not appear likely. Unlike Norway, the 2 U.S. office equity investments or multi-tenanted properties financed with CMBS mortgages. Although the respective underlying property cash flows provide more than adequate coverage on both interest and amortization, these investments fall short of the criteria necessary to refinance in today's market. A cash flow sweep on these assets is anticipated to commence at their respective loan maturities in October 2024 and January 2025. Therefore, we have proactively initiated discussions with the servicer to explore options for maturity extensions. But given the uncertainties, we took the prudent approach of incurring impairments on both of these investments. During the second quarter and subsequent to quarter end, we successfully resolved a number of watchlist loans and REO. In addition, we continue to be conservative in our approach to risk ratings and in doing so, we downgraded certain other loans. However, on a net basis, the watchlist loan count and aggregate loan balance remained constant. Furthermore, 65% of the aggregate watchlist is current in interest payments. The largest portion of the nonaccrual is attributed to our San Jose hotel loan, which Andy will discuss in his remarks. At this point in time, we do not anticipate meaningful migration onto the watchlist. Alternatively, we believe that the remainder of the year will provide a window for significant resolutions and reduction to the current watchlist. As we head into the second half of the year, we have experienced improved visibility on our liquidity needs. As a result, we have reengaged loan origination efforts to deploy capital. While it is still early, we are encouraged to see opportunities emanating from the pullback by regional banks. We also expect future rate cuts will provide a boost to dislodge more assets for refinancing. The private credit sector should be a net winner in this pivot away from regional banks. Lastly, reselling originations underscores our continued progress in our anticipation of resolving underperforming loans and REO. Again, we believe the second half of the year will yield significant progress on this front.

Thank you, Mike. During the quarter, we received $85 million in repayments and resolution proceeds across 4 investments. Deployment for the quarter totaled $18 million, consisting of $9 million of future funding obligations and a $9 million loan upsize. As highlighted last quarter, proceeds from the loan upsize were used to consolidate collateral related to a mixed-use asset in Pasadena, California. The initial collateral includes a fully leased 94,000 square foot office building with developable land. The upsized loan proceeds allowed the borrower to complete the purchase of the additional land parcels previously under contract and consolidate collateral underlying a fully entitled 310-unit senior living development project. The borrower is currently evaluating a refinancing and/or disposition of the office property and development site. In terms of the watchlist progress, during the second quarter, we resolved the previously downgraded Miami, Florida office loan. Additionally, we completed the sale of the property collateralizing the risk rank by Denver, Colorado multifamily loans. Additionally, we upgraded a Las Vegas multifamily loan as a result of sustained positive progress over the past quarters. As for REO updates, the Washington D.C. office property is under contract, and subsequent to quarter end, we received a hard deposit, and the transaction is currently scheduled to close on August 1 at our net asset value. As Mike mentioned, we continue to have a conservative approach to our watchlist. In doing so, we downgraded 3 loans during the quarter which included 2 mezzanine loans, one located in Milpitas, California, the other in Las Vegas, Nevada. Both loans had a pick component to the payment structure. The Milpitas loan was placed on nonaccrual in Q1, and the Las Vegas loan was placed on nonaccrual subsequent to quarter end. We elected to move these investments to the watchlist, given where these loans sit within their respective capital structures combined with the current uncertainty in the capital markets. The assets themselves are best-in-class. In the case of the Milpitas property, it is fully leased, whereas the Las Vegas property is nearing completion and starting to lease up. The third addition to the watchlist is the Dallas multifamily loan. In this case, the property has tracked behind the business plan and the borrower is unable to capitalize on the remainder of the business plan. As a result, we are evaluating our options, which include selling the property or taking control of the asset and executing a value-enhancing business plan, utilizing our vertically integrated asset management platform. Our warehouse lenders have indicated they will cooperate with us should we elect to do the latter. Lastly, as it relates to the watchlist, our San Jose hotel loan for $136 million had a payment default in June on both our first mortgage and the mezzanine loan, which is held by a third party. As a reminder, this loan was initially added to the watchlist in the first quarter of 2020 during COVID. The loan remained on the watchlist as a risk rank for, although the loan had been current on its interest payments. Despite a loan paydown of $57 million in November of 2023, we did not reduce the general CECL reserve attributable to the loan given uncertainty. During the second quarter, BrightSpire placed the loan on nonaccrual, downgraded the loan to a risk ranking of 5 from a 4 and has since commenced foreclosure proceedings. In coordination with our warehouse lender and in anticipation of this potential eventuality, we have secured a commitment from our existing lender to maintain funding throughout this process. Given the commencement of foreclosure, which is in the public domain, we will refrain from discussing this matter further. Although it was an active quarter as it relates to the watchlist, the total number of loans did not change quarter-over-quarter at 12%. The corresponding watchlist NAV remained relatively flat quarter-over-quarter at $543 million or 20% of the portfolio, 5% of which is attributable to the San Jose hotel loan. As it relates to the loan portfolio, as of June 30, 2024, excluding cash and net assets on the balance sheet, the loan portfolio is comprised of 83 investments, with an aggregate carrying value of $2.8 billion and a net carrying value of $877 million or 83% of the total investment portfolio. Our weighted average risk ranking remained flat quarter-over-quarter at 3.2%. The average loan size is $33 million. First mortgages constitute 97% of our loan portfolio, of which 100% are floating rate. The multifamily portion of our portfolio remains our largest segment with 49 loans representing 54% of the loan portfolio or $1.5 billion of aggregate carrying value. Office comprises 30% of the loan portfolio consisting of $800 million and $21 million of aggregate carrying value across 24 loans with an average loan balance of $34 million. The remainder of our portfolio is comprised of 8% hospitality with mixed-use and industrial collateral, making up the remainder. As of quarter end, remaining future funding obligations stand at $127 million or 4% of total outstanding commitments.

Thank you, Andy, and good morning, everyone. Before discussing our second quarter results, I want to mention that our second quarter 2024 supplemental financial report is available on the Investor Relations section of our website. For the second quarter, we generated adjusted DE of $28.8 million or $0.22 per share. Second quarter DE was $17 million or $0.13 per share. DE includes a specific reserve of approximately $12 million. Additionally, we reported total company GAAP net loss of $67.9 million or $0.53 per share which reflects operating real estate impairments as well as increases in our CECL reserves. Quarter-over-quarter, total company GAAP net book value decreased to $8.41 from $9.10 per share. Undepreciated book value decreased to $9.08 from $10.57 per share. This change is mainly driven by impairments taken on our operating real estate assets and an increase in our CECL reserves, partially offset by adjusted DE in excess of dividends acquired. Looking at reserves, during Q2, we recorded a specific CECL reserve of $13 million related to the Miami, Florida office loan. As Andy mentioned, this one was downgraded to a 4 in Q1 and resolved during Q2. As the Denver, Colorado multifamily loan was also resolved in Q2, we charged off the specific reserves related to both loans during the quarter and as a result, ended the second quarter with no specific reserves. Our general CECL provision stands at $172 million or 597 basis points of total loan commitments, an increase of $28 million from the prior quarter. The increase in the general CECL was primarily driven by specific inputs on certain loans. Looking at our watchlist loans, our one risk ranked 5 loan represents 5% of the total loan portfolio carrying value, 11 loans equating to 15% of the total loan portfolio carrying value are risk rated for. This concludes our prepared remarks.

I definitely jumped in the transcript to get some of the details, Andy. But as you think about the watchlist loans as we move through the back half of the year, which of those 12 do you think are potential second half resolutions? And which ones do you think you continue to work through as you move into '25?

Now let me take that first, Stephen, it's Mike. I would say that out of the 12, the majority of them are in various stages of progress. We think, as we said in the prepared remarks, we'll make significant progress between now and the end of the back half of the year. I don't want to identify specific loans on the watchlist other than the fact that the largest one, the San Jose loan, is now in default on its interest payment. So we have started, and it's public, we started the foreclosure process on that property. So we are moving toward a resolution. It’s in the state of California, so that typically takes, call it, about 120 days, and we're into it for about approximately 30 days. So there's that's another example of something that we are clearly moving in the direction of resolution. I'd say a substantial number of the assets on the watchlist are in various states of play, and we're really looking for the second half of the year to give us significant progress.

Great. Appreciate the comments, Mike. As my follow-up question, I wanted to touch on your comment about you've got better visibility into your liquidity needs, you've reengaged discussions on new originations. Can you maybe talk about your pipeline of deploying capital and then how that balances against expected repayments in the second half of the year, kind of getting to an answer of net portfolio growth, net portfolio flat? Or do you think you see some shrinkage here in the back half before you get originations ramped back up?

No, we expect the portfolio to start growing. We have $152 million in cash on the balance sheet. As we continue to execute our plan for underlevered loans and unlevered REO or loans, the watchlist is going to generate more cash for reinvestment. We believe that, as mentioned in the prepared remarks, during the period of reinvestment and relevering from now through next year, there will be a steady flow of deployment. Currently, we have $152 million in cash, and the remainder will come from asset resolutions, which we are confident about given the visibility we have, along with the stability of the portfolio at this time. We do not foresee anything moving to the watchlist. We feel secure in redeploying. Moreover, we hope to accumulate enough by mid-2025 to carry out a 2025 CLO.

I am trying to understand the comments regarding Norway. On Page 5, there is a total impairment of $1.32, and on Page 6, a non-GAAP impairment of $0.98 is listed. Is the $0.98 solely related to Norway, with the difference representing other impairments and charges?

Sure, Steve. This is Frank. So $0.34 of that impairment came through as a GAAP-related impairment. And as you know, GAAP has certain rules requiring what you can take as far as impairment, and you can only impair down to GAAP value. The difference between the undepreciated book value and GAAP book value is the accumulated amortization and depreciation that gets added back to GAAP book value. So we're eliminating that and saying don't add that back from GAAP book value, and that equates to $0.98.

And then switching to new lending. Obviously, you're seeing some repayments. So the portfolio is shrinking near term. Could you just comment on where you stand with evaluating new loans? Do you actually have a pipeline at this time? I know you commented on the opportunity, Mike, when you were at Nareit, but just curious how close we are to actually issuing commitment letters and funding new loans.

Yes, we are actively evaluating products today. We hold meetings on investment committees and quote committees every week. Although nothing has been committed yet, we are fully engaged in this process and are conversing with mortgage bankers, brokers, and all our borrowing constituents in search of new products. As mentioned earlier, we are noticing considerable activity from regional banks. However, we do not anticipate any significant changes in that area or massive bulk sales unless some banks fail, which we do not foresee at this moment. We are observing that banks are allowing loans to run off, meaning for construction loans or mini-perms, they are not renewing these loans without a substantial pay down and borrowers are required to retain recourse on construction loans. These loans are beginning to enter the nonbank market. Following a Fed cut and as we transition into the fourth quarter, many borrowers will likely start refinancing away from the banks. Therefore, we remain optimistic about the flow from regional and community banks. We are actively engaged, but no commitments have been made yet.

It's encouraging. While the banks are hesitant to keep that paper on their books, it seems they are still more than willing to finance you through repo lines to carry the loans on your balance sheet.

Yes. These are regional and more community banks where you're seeing commercial real estate loan exposure at 300 times their Tier 1 capital or in excess of that and there could be hundreds of those. The money center banks are not in that position. The money center banks are probably somewhere as a fraction of loan exposure relative to their Tier 1 capital, and our money center banks to finance us on warehouse are very actively engaged in that. It's an asset class that's publicly been their best performing asset class in commercial real estate warehouse lending in terms of risk reward. I think they probably have suffered no or very little losses there. So we're very actively engaged with us, and we'd like to grow their exposure to us.

But thanks for the clarification between the regionals and the money centers. I know asset management is hand-to-hand combat, but it's the only way to get through it, right, and get to the end and get your portfolio and your balance sheet cleaned up. So all the best in.

Mike, just on the comments with the current loan portfolio, you feel pretty good about the status going forward. And then the general CECL that you took this quarter, the reserve, I mean I don't want to hold you to it, but is this it in terms of just an increase in general CECL, meaning where the core EPS now where the dividend is going to be? I mean, book value should be basically at a bottom or near bottom?

What I would say is that we feel pretty good that it's on the high side at 6% of the loan book and roughly 15% of the book value and with the fact that we think that we're going to make a lot of progress in the second half of this year. I think we're feeling that, that is on the high side. I also would underscore that part of that is due to the fact that we have a very low average loan balance and our loan concentrations are low, and we will not have any loans over $100 million after the resolution of the San Jose loan. So that's giving us more confidence as we look at what we have now in our existing portfolio. As we emphasize with the San Jose hotel loan, when that loan was reducing in balance last year by 30%, we maintained the CECL amount on that loan. We did not reduce the CECL on a pro-rata basis. So that's another reason why we're feeling like we're relatively conservative on our CECL reserves right now. In terms of the office portfolio, we have a number of office loans on the watchlist. We think that the office portfolio is probably going to shrink a little bit more over the course of the remaining part of the year and into next year. So that is giving us some confidence on our CECL reserves at the levels that they're at now. I also want to mention that we don't have any life science. I know that our peer group emphasizes that they have an office category in a life science category. We do not have any life science loans and we kind of view life science as office product that has three times the amount of loan per square foot for refrigeration and turbo HVAC, but we don't have that exposure here. We see that loan exposure in the office sector dropping over the course of the next 6 months and into next year as well. So overall, I'm not going to say never, but we are feeling that it is on the high side at 6% of the loan book.

When considering adjusted EPS, the dividend is now at $0.16, and we will run our models, but we expect to be in a position to cover it. There should be no issue with not covering it on a core basis.

Yes, we feel good about maintaining the dividend here. We feel it was right-sized primarily to prevent leakage. We looked at it from a negative coverage basis on cash flow, not just DE, but on actual cash flow of the book. We feel we'll get back into a positive comp on a cash flow basis and retained earnings as a result of executing on the build back to hopefully a $0.20 dividend in the future. So right now, we feel confident that we can maintain the dividend where it is.

I appreciate those comments. It's great to hear that you guys want to take it back up to $0.20 when you can do it. I figured I'd ask the question because, look, it's great to hear that you're back in the market. We all know the opportunity with nonbanks from the market and you guys being internally managed, being efficient, being out there with rate sheets, it's great to hear. But I want to ask the question. We've heard a lot of your peers talk about, 'You know what, hey, in the meantime, things aren't that busy.' They're busy, but they're not that busy going to buy AAA CMBS where we can get 20% yields and/or I'll take it to the other side. We could buy back stock here. If you think book is good at $9, you're trading at under $6, hey, why don't we buy back stock until we get things going?

We are currently considering a buyback, but we're also scaling back. When we examine loan origination and the possibility of executing a CLO, the return on equity looks quite attractive compared to the buyback. A buyback would be more appealing if we were planning a secondary equity offering soon, which would definitely change things. However, when it comes to deploying capital, we believe that focusing on loan origination and executing a CLO in 2025 will yield a better return on equity. Regarding the purchase of AAA securities, we have not engaged in that previously; others may be, but we believe that acquiring them at scale is not feasible. When you leverage those securities by 75% or 80% on a warehouse line, you're not committing a significant amount of equity. So, investing $10 million, $15 million, or $20 million in AAA securities and leveraging them by 80% does not create a substantial impact.

Right. That may seem important to get involved with. Could you provide an estimate of the size of the CLO? Are we talking about a deal larger than $400 million? What information can you share with us?

We're talking 2025. So I think we would look at what traditionally gets done. If you're looking at a CLO, you're probably trying to do something greater than $500 million, maybe shy of $1 billion, which is what we've done in our first 2 CLOs. When you look at the ROE that we have typically gotten after executing a CLO, you're probably adding several hundred basis points or maybe more to your returns on your loan book. So when we look at originating loans and executing the CLO versus a buyback of stock, as we move into 2025, we think that the CLO execution is something we prefer because, again, we really don't want to necessarily reduce our scale at this point. Right now, yes, we'll look at buybacks, but we think just executing on the business plan gives us as attractive or better returns.

So Mike, taking your few last answers regarding originations into account. We've heard a lot about new private capital coming into the space on the sidelines. So how are you thinking about the competitive environment going into year-end and beyond?

It's going to be competitive, no doubt. I'm still trying to understand what private credit means beyond leveraged finance. It definitely includes real estate. I assume it encompasses everything on the wholesale lending side of a bank that isn't consumer-related and that private credit groups want to engage in. We see significant demand for credit coming from that sector. However, we’ve also observed many banks executing commercial real estate loans over the past three to four years, where we didn't recognize many of these banks. It’s similar to observing executive leadership; it's hard to tell because all these banks are making loans and we aren’t seeing the same ones repeatedly. Now, after several banks have failed, it's evident that there are many banks with substantial commercial real estate exposure relative to their Tier 1 capital. We didn’t notice this trend over the last few years. We may have identified around ten banks or large New York banks that have failed, like Signature Bank and the issues at New York Community Bank. Beyond those banks, we really couldn’t detect that level of lending volume. We believe there will be a significant amount coming from regional and community banks that will meet the needs of our peer group in 2025 and 2026.

That's helpful color. And then I know we just discussed it only recently, maybe at Nareit, and you've only had them for a year, but do you have any update on the repositioning or the lease-up of that Long Island City asset?

We continue to work on that, and we are on, as we said in the past, not to hold on to REO for this protracted period of time. I think that based on how long we've held on to it. We feel like there's something there that's worth holding onto for. We should have something to report, as we said, the back half of this year we think, will be significant.

Maybe starting with Andy, you've made opportunistic investments in the past. Is there a chance BrightSpire could take a more direct position in the South Pasadena office land asset as the sponsor looks to refinance that project?

So right now, that particular asset is fully entitled. It's really an office building that's fully leased in a development site and the borrower is in the process of looking to either refinance or capitalize the development project. We've looked at it in a number of different ways and really don't think it fits our strategy and mandate moving forward. But we agree it's a tremendous project.

Makes total sense. Then maybe, Mike, I know you said you're confident in watchlist stability. But is there a potential scenario where a pickup in transaction activity, especially if we get the rate cuts, accelerates watchlist migration as price discovery drives certain sponsors to back away from assets sooner than would otherwise be expected?

Anything could happen. But when we look at that portfolio right now, we do not see anything migrating onto the watchlist in the near term. That's why I think we're comfortable with our CECL reserve at this point. Anything can happen over the course of next year, particularly around the office loans. But right now, as I said, we see that portfolio shrinking, and we don't see anything there that will migrate onto the watchlist in the next coming quarters. So I think the CECL reserve feels, as I said, on the high side, at 6% of book value. I would say that we feel very reasonable about where we are. Well, thank you all for joining us today, and thank you for your continued support. As always, we are available for one-on-ones as we press it. Otherwise, we will see you in November.

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